2017 (10) TMI 1337 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Held that - We find that no fresh investments have been made by the assessee company during the year and the subject investments are the investments which have been made by and taken over from the partnership firm M/s KGK Enterprises. On similar lines the AO has made a disallowance in the instant case. In case of KGK Enterprises for AY 2010-11 (2016 (8) TMI 1371 - ITAT JAIPUR) we have already taken a view that disallowance under the provisions of Section 14A are not warranted. Disallowance being 10% of the total expenses incurred on various expenses - Held that - On perusal of orders of the lower authorities we find that the disallowance has been made on a purely adhoc basis and such adhoc disallowance cannot be sustained in the eyes of law. In the result disallowance is hereby deleted - Assessee appeal allowed.

Summary

Issues involved:
- Disallowance under section 14A r.w.r. 8D
- Disallowance of interest expenses without recording satisfaction by AO
- Disallowance of business promotion expenses on an estimation basis

Issue 1: Disallowance under section 14A r.w.r. 8D

In the appeal for AY 2010-11, the assessee challenged the disallowance under section 14A r.w.r. 8D. The assessee argued that no disallowance should be made when interest-free funds exceeded investments for earning exempt income. The Tribunal referred to a similar case involving KGK Enterprises where it was held that disallowance under Section 14A was not warranted due to the availability of interest-free funds and specific end-use restrictions on secured loans. Relying on various court decisions, the Tribunal deleted the disallowance under section 14A for the assessee, as no fresh investments were made during the year and the investments were taken over from the partnership firm.

Issue 2: Disallowance of interest expenses without recording satisfaction by AO

The assessee contested the confirmation of interest expenses under Rule 8D without the AO recording satisfaction regarding the accounts. The Tribunal noted that the AO failed to establish a nexus between interest-bearing funds and investments made. Citing relevant case law, the Tribunal held that disallowance of interest expenditure would not be tenable without such a nexus. Consequently, the disallowance of interest expenses was deleted by the Tribunal.

Issue 3: Disallowance of business promotion expenses on an estimation basis

Regarding the disallowance of business promotion expenses on an estimation basis, the Tribunal found that the disallowance was made on an ad hoc basis without specific defects in the books of account or vouchers maintained by the assessee. As such, the Tribunal ruled that the ad hoc disallowance could not be sustained in law and deleted the disallowance of business promotion expenses. The Tribunal granted relief to the assessee on this issue as well.

In the appeal for AY 2011-12, similar issues were raised by the assessee regarding disallowances under section 14A, interest expenses, and business promotion expenses. The Tribunal applied its findings from a previous case to delete the disallowances under section 14A and upheld the deletion of business promotion expenses disallowance made on an estimation basis. The Tribunal provided detailed reasoning and cited relevant legal precedents to support its decision in favor of the assessee. Ultimately, both appeals filed by the assessee were allowed, and the orders were pronounced in the open court on 31/10/2017.