KRISHNA SHEETS PROCESSORS PRIVATE LIMITED,MUMBAI vs. DY. C.I.T - 4(3)(1), MUMBAI

The brief facts of the case are that the assessee is engaged in the business of wholesale and retail trading of iron, steel and other products. The assessee filed its return of income for the Assessment Year 2020-21 on 25.12.2020 declaring a total income of ₹16,41,45,620/-.

During the course of assessment proceedings, the Assessing Officer observed that the assessee had earned exempt dividend income of ₹6,18,346/- but had not made any disallowance under section 14A of the Act. The assessee contended that the assessee did not borrow funds for making investments the investments were made out of its own funds and, in the alternate, submitted that if any disallowance was to be made, it should be confined only to investments which had actually yielded exempt income during the year. The Assessing Officer accepted the alternative plea and restricted the computation only to the investments from which exempt income had actually been earned.

The Assessing Officer also examined the miscellaneous expenditure of ₹31,91,414/- debited to the Profit and Loss Account. According to the Ld. AO, despite repeated opportunities the assessee did not produce supporting bills, vouchers and documentary evidence to substantiate the nature and purpose of these expenses. The Assessing Officer made an ad hoc disallowance of 20% of the miscellaneous expenses amounting to ₹6,38,283/- under section 37(1) of the Act.

In appeal before CIT(Appeals), with regard to the disallowance under section 14A of the Act, the learned CIT(A) observed that the assessee had admittedly earned exempt dividend income during the relevant year and yet had not made any disallowance under section 14A of the Act. The learned CIT(A) observed that despite repeated notices, the assessee had failed to produce the monthly opening and closing investment figures before the Assessing Officer. Therefore, the Assessing Officer was justified in making disallowance under section 14A read with Rule 8D. In so far as the disallowance of miscellaneous expenditure is concerned, the learned CIT(A) was unable to establish the genuineness of expenses and also business nexus of the expenditure. Accordingly, CIT(Appeals) dismissed this Ground of Appeal of the assessee.

The assessee is in appeal before us against the order passed by CIT(Appeals) dismissing the appeal of the assessee.

We have heard the rival contentions and perused the material available on record.

Before us, the learned counsel for the assessee drew our attention to page 67 of the Paper Book and submitted that a detailed working of the disallowance under section 14A had in fact been prepared and was furnished before the Tax Authorities. We have carefully examined the assessment order as well as the impugned order of the learned CIT(A). We observed that the prima facie, neither the Assessing Officer nor CIT(Appeals) seemed to have examined any such working while adjudicating on the issue. On the contrary, both the authorities have observed that the requisite computation was not furnished by the assessee. In these circumstances, it would not be appropriate for us to undertake the factual exercise of examining the correctness of the computation for the first time at the appellate stage.

Considering the totality of the facts and in the interest of justice, we deem it appropriate to restore this issue to the file of the Assessing Officer for the limited purpose of examining the working of disallowance placed at page 67 of the Paper Book and any other supporting material that may be produced by the assessee. The Assessing Officer shall verify whether such working was furnished during the assessment proceedings and shall examine the correctness of the computation in accordance with the provisions of section 14A read with Rule 8D and the applicable judicial precedents.

Accordingly, Grounds No. 1 is allowed for statistical purposes.

The Assessing Officer disallowed 20% of the miscellaneous expenditure on the ground that the assessee did not produce supporting bills and vouchers. The learned CIT(A), while confirming the addition, has observed at paragraph 12 of the assessment order, that despite opportunities granted during the assessment proceedings, the assessee did not produce the supporting documents and aassessee’s attempt to furnish additional evidence under Rule 46A before ld. CIT(A) could not cure the deficiencies in the assessment proceedings.

While we appreciate the observations of the learned CIT(A) regarding the assessee's failure to substantiate its claim before the Assessing Officer, we are unable to sustain the addition on the basis adopted by the Assessing Officer. It is a well-settled principle of law that an ad hoc disallowance, without any cogent basis or objective criteria, cannot ordinarily be sustained, particularly where the books of account have not been rejected under section 145 of the Act. The Assessing Officer has neither pointed out any specific expenditure which was non-genuine or which was not incurred for the purposes of business, nor has the ld. AO given any finding that the books of account were liable to be rejected. More importantly, the Assessing Officer has not given any rational basis for arriving at the figure of disallowance of 20%.

It is undoubtedly the responsibility of the assessee to substantiate the expenditure claimed. At the same time, where the Assessing Officer chooses to make a disallowance, such disallowance must be based on some tangible material and cannot be based merely on estimates or surmises. In the absence of rejection of books of account or pointing out towards any specific non-business expenditure, the impugned ad hoc disallowance in our view, cannot be sustained merely because the Assessing Officer was of the view the supporting evidence was not adequate.

In view of the aforesaid discussion, we hold that the ad hoc disallowance of ₹6,38,283/- sustained by the learned CIT(A) is not legally sustainable.

Accordingly, Ground No. 2 raised by the assessee is allowed.