2020 (11) TMI 492 - AT - Income Tax

Disallowance of expenditure u/s.14A r.w. Rule 8D - AO made disallowance on the ground that although the assessee has not earned any exempt income for the impugned assessment years but incurring of expenditure in relation to dividend bearing investments cannot be ruled out more particularly when the assessee had made huge investments in shares and securities which yield exempt income - HELD THAT - It is a settled position of law by the decisions of the Hon ble Supreme Court and other High Courts that when there is no exempt income for the year then disallowance contemplated U/s.14A of the Act cannot be made. Hon ble Supreme Court in the case of CIT vs. Chettinad Logistics Pvt. Ltd. 2017 (4) TMI 298 - MADRAS HIGH COURT has held that no disallowance u/s.14A of the Act can be made if there is no dividend income. A similar view has been expressed by the Hon ble Supreme Court in the case of Oil Industry Development Board 2019 (3) TMI 1571 - SC ORDER where the court while dismissing the SLP filed by the Revenue has confirmed the decision of the Hon ble High Court of Delhi which held that in the absence of any exempt income disallowance U/s.14A of the Act of any amount was not permissible. The Hon ble Supreme Court while arriving at a conclusion has followed its earlier decision in the case of Cheminvest Limited vs. CIT 2015 (9) TMI 238 - DELHI HIGH COURT where a similar view has been expressed by the court. In this case the assessee has filed all evidences to prove the fact that no exempt income is earned for the year. The assessee has also filed all evidences to prove that its own fund being share capital and reserves and surplus is over and above amount of investments. No disallowances could be made for any expenditure including interest expenses. Therefore we are of the considered view that the Ld.CIT(A) has rightly deleted additions expenditure including interest expenses. Therefore we are of the considered view that the Ld.CIT(A) has rightly deleted additions - Decided in favour of assessee. Disallowance of marketing expenditure and business promotion expenses - AO has disallowed 100% of marketing expenditure incurred in cash and 100% of marketing expenditure incurred in cheque but payment made without deduction of tax at source on the ground that the assessee has incurred huge marketing expenditure in cash but failed to file supporting bills and vouchers to justify said expenditure to establish that it was incurred wholly and exclusively for the purpose of business of the assessee - HELD THAT - No error in the findings of the Ld.CIT(A) as regards expenditure incurred in cash and hence we are inclined to uphold the findings of the Ld.CIT(A) and reject the ground taken by the Revenue. As regards the claim of the assessee that for the assessment year 2017-18 the Ld.AO has disallowed a sum of Rs. 28, 18, 994/- even though said expenditure has been incurred in cheque but for not furnishing supporting bills and vouchers we find that the Tribunal has given categorical finding for earlier assessment years that once expenditure is incurred in cheque through proper banking channels then there cannot be any disallowance even though there is no supporting bills and vouchers furnishes in support of said expenditure. Therefore we are of the considered view that to that extent the findings of the AO as well as CIT(A) deserves to be reversed. However facts are contradictory because there is no clarity from the orders of the authorities below in so far as the nature of payments under which these payments are made. Therefore for the limited purpose of ascertaining the fact with regard to the nature of payment we remit the issue back to the file of the AO for the assessment year 2017-18 and direct him to re-examine the issue in the light of the claim of the assessee that said expenditure has been incurred through proper banking channel. Unaccounted cash receipt - Addition on the basis of scribbling pad found during the course of search in the possession of Smt. Banusree Accountant of the assessee company - During the course of search incriminating documents in the form of scribbling pad was found and seized which contains the transactions in the form of cash received from various vendors and suppliers and the same has been used to make unaccounted cash expenditure - HELD THAT - Had it been the case of the AO that the alleged scribbling pad and its contents was tested by cross examining the parties as stated by the AO in his assessment order then obviously it would give raise to an occasion to the AO to rely on said documents to make additions. In this case the AO has not made any effort to verify the entries recorded in the scribbling pad by making further enquiries and cross examining the alleged persons or suppliers named in the said incriminating document - on perusal of incriminating documents found during the course of search we find that nothing was emanating regarding name and address of persons from whom said amount was received and the nature of expenditure for which said amount was paid. In absence of any effort from the AO by way of further enquiries merely on the basis of a dumb paper coupled with statement recorded during the course of search additions made towards undisclosed income cannot be sustained more particularly when said statement has no longer in operation. We find that when a statement was recorded from employee of assessee which was further vetted by the Managing Director then the earlier statement given by the employees are merged with the subsequent statement of a Managing Director because the person in charge of the affairs of the company is always Managing Director who is having knowledge of affairs of the company. Therefore even though the employees statement were not retracted the same cannot be considered as an evidence which can be used against the assessee when the Managing Director of the assessee company has retracted his statement along with sworn affidavit explaining the reasons. Therefore the arguments that the other two statements are sufficient enough to draw an adverse inference against the assessee cannot be accepted. CIT(A) without appreciating these facts has simply confirmed additions made by the AO towards undisclosed income on the basis of scribbling pad found during search. We therefore for above reasons reverse the findings of the Ld. CIT(A) and direct the AO to delete additions made towards undisclosed income on the basis of scribbling pad for the asst. years 2014-15 to 2017-18. Disallowance of deduction claimed u/s.32AC - HELD THAT - In this case the assessee has explained the process of manufacturing brewery as per which it is a continuous process plant where various stages of processing needs to be carried out for which different plant and machineries are required to be installed including malting kilning mailing mashing boiling of wort hops and fermentation and all these process requires different stages of setting up and construction. In so far as plant and machinery the assessee has acquired and installed the plant and machinery which is above the prescribed limit and such plant and machinery has been installed within the prescribed date provided U/s.32AC of the Act. Merely for the reason that the plant is not ready for use the amount spent for acquiring and installing plant and machinery the benefit of additional allowance provided under said section cannot be denied more particularly when the provision is a beneficial provision which needs to be liberally considered. In this case on perusal of facts the assessee has fulfilled all terms and conditions to get the benefit of additional deduction and said deduction is available for the impugned assessment year alone. In case the assessee did not avail the deduction for the impugned assessment year then it cannot claim the deduction for subsequent assessment year.AO as well as the CIT(A) were erred in not allowing the additional allowances claimed by the assessee U/s.32AC of the Act and hence we direct the AO to delete the additions made towards disallowance of deduction claimed U/s.32AC of the Act.

Summary

Issues Involved:
1. Disallowance of expenditure under Section 14A read with Rule 8D of the Income Tax Rules, 1962.
2. Disallowance of marketing expenditure and business promotion expenses.
3. Addition towards unaccounted cash receipts based on a scribbling pad found during the search.
4. Disallowance of deduction claimed under Section 32AC of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Expenditure under Section 14A read with Rule 8D:
The Revenue appealed against the deletion of disallowance made under Section 14A, arguing that the assessee had borrowed interest-bearing funds for working capital while making investments generating exempt income. The CIT(A) had deleted the disallowance following the Supreme Court's decision in CIT vs. Chettinad Logistics Pvt. Ltd., which held that no disallowance under Section 14A can be made if no exempt income is earned. The Tribunal upheld the CIT(A)’s decision, noting the settled legal position that disallowance under Section 14A is not permissible in the absence of exempt income.

2. Disallowance of Marketing and Business Promotion Expenses:
The AO disallowed 100% of marketing expenses incurred in cash and by cheque without TDS deduction, citing lack of supporting bills and vouchers. The CIT(A) restricted the disallowance to 10% of cash expenses, following the ITAT’s earlier decision in the assessee’s case. The Tribunal upheld the CIT(A)’s decision, noting that genuine business expenses incurred through banking channels should not be disallowed merely for lack of supporting documents. The Tribunal remitted the issue of disallowance for the assessment year 2017-18 back to the AO for verification of expenses incurred through banking channels.

3. Addition Towards Unaccounted Cash Receipts Based on Scribbling Pad:
During the search, a scribbling pad detailing unaccounted cash receipts and payments was found. Statements recorded under Section 132(4) from key employees and the Managing Director initially admitted to unaccounted cash transactions. However, the Managing Director later retracted his statement, claiming it was made under duress. The AO made additions based on the scribbling pad and statements, which the CIT(A) upheld. The Tribunal, however, found the scribbling pad to be a "dumb document" lacking corroborative evidence and noted the absence of specific details about the sources and recipients of cash. The Tribunal emphasized that mere statements without supporting evidence cannot justify additions and directed the AO to delete the additions.

4. Disallowance of Deduction under Section 32AC:
The AO disallowed the deduction claimed under Section 32AC for new plant and machinery, arguing that the assets were not capitalized or ready for use. The CIT(A) upheld the disallowance. The Tribunal, however, noted that Section 32AC requires only the acquisition and installation of new assets, not their readiness for use, and found that the assessee had met these requirements. The Tribunal directed the AO to allow the deduction, emphasizing the beneficial nature of the provision and the absence of a requirement for the assets to be put to use within the specified period.

Conclusion:
The Tribunal dismissed the Revenue's appeals for the assessment years 2014-15, 2015-16, and 2016-17, allowed the assessee's appeals for the assessment years 2015-16 and 2016-17, and partly allowed the assessee's appeal for the assessment year 2017-18 for statistical purposes.