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Facts
The assessee, engaged in manufacturing PP, FIBC bags, and fabrics, filed its return and later revised it. The case was selected for scrutiny. The AO disallowed a portion of the fire loss claim and made a disallowance under Section 14A. The CIT(A) dismissed the assessee's appeal.
Held
The Tribunal allowed the appeal on the issue of disallowance under Section 14A, stating no exempt income was earned. The disallowance on account of fire loss was allowed as expenditure under Section 37(1). The issue regarding disallowance of Rs.17,06,204 was remitted back to the AO.
Key Issues
Whether the disallowance under Section 14A is justified when no exempt income was earned, and whether the entire fire loss claim should be allowed.
Sections Cited
14A, 8D, 37(1)
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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI LAXMI PRASAD SAHU & SHRI SOUNDARARAJAN K.
Per Laxmi Prasad Sahu, Accountant Member
This appeal filed by the assessee is against the order passed by the ld. Addl./JCIT(A)-1, Jaipur, dated 27.9.2024 having DIN ITBA/APL/S/250/2024-25/1069194164(1) for the AY 2017-18 on the following grounds:- 1 The Order of the Authorities below, in so far as these are against the assessee, is opposed to law, weight of the - evidence, probabilities, facts and circumstances of the Appellant's case.
2 The appellant denies himself to be liable to be assessed on a total income of Rs. 15,07,47,533/- as against returned - income of Rs. 14,88,21,030/- as per the facts and circumstances of the case. 3 A. The learned authorities have erred in disallowing Rs. Rs. 81,538/- 2,08,898/- being the difference between the actual fire loss incurred by the appellant and the loss estimated by the insurance company. B. The learned authorities failed to appreciate that the appellant's premises were partially damaged by fire, and the loss incurred was an actual, real loss borne by the appellant, which should be allowed in full.
C. The learned Authorities have erred in relying solely on the insurer's estimate without considering the appellant's actual loss since the insurance company considers depreciation rates and salvage value differently than the accounting methods followed by the appellant.
D. The learned Authorities below failed to discharge the burden of proof by not bringing on record any evidence to substantiate that the actual loss claimed by the appellant was inflated or excessive.
4. A. The learned authorities erred in disallowing Rs. 4,450/- Rs.11,400/- under section 14A of the Income Tax Act read with Rule 8D, without considering the fact that no exempt income (i.e., dividends) was earned by the appellant during the impugned year. B. The learned authorities failed to consider that the disallowance under section 14A r.w.r 8D is unwarranted as no interest expenses were incurred in connection with the investment. C. The learned Assessing Officer mechanically applied the provisions of Rule 8D without examining the facts of the case. The appellant submits that Rule 8D cannot be invoked in a blanket manner, especially in a case where no exempt income was earned and no expenditure was incurred. The learned Assessing Officer's failure to analyze the facts and records properly has resulted in an erroneous disallowance.
5. A. The learned authorities erred in disallowing Rs. Rs. 6,65,973/- 17,06,204/- on account of belated remittance of Employees' contribution towards ESI and PF. B. The learned authorities did not make up their mind as to what exactly the disallowance of Rs. 17,06,204/- pertains to since it is mentioned that it pertains to interest on delayed payment of taxes while discussing the disallowance and then belated remittance of Employees' contribution towards ESI and PF in the disallowance table. C. The learned authorities failed to appreciate that none of the expenditure claimed is in the nature of penalty and interest on delay, if any, is compensatory in nature.
6. For the above and other grounds to be urged during the hearing of the appeal the Appellant prays that the appeal be allowed, and the addition made by the Assessing Officer and sustained by the Commissioner of Income Tax (Appeals) be deleted in the interest of equity and justice. 2. The brief facts of the case are that assessee filed its return of income on 13.10.2017 declaring income of Rs.14,93,27,250. Subsequently return was revised by the assessee on 22.08.2019 declaring total income of Rs.14,88,21,030. The case was selected for scrutiny and statutory notices issued to the assessee. 3. The assessee is in the business of manufacturing of PP, FIBC bags, fabrics, etc. During the course of assessment proceedings the assessee responded to the notices issued by the AO. From the submissions the AO noted that assessee has claimed a sum of Rs.76,08,989 on account of fire loss as per insurance claim shown under exceptional item in the Profit & Loss account for the year under consideration, whereas the loss assessed by the insurance company is Rs.74 lakhs only. Therefore, the excess loss of Rs.2,08,898 was disallowed and brought to tax. Further the AO noted that there is an investment of Rs.22 lakhs as investment in equity, whereas in the previous year it was Rs.80,000. Therefore the average was Rs.11,40,000 and AO as per section 14A disallowed 1% of the monthly average investment, resultantly there is disallowance of Rs.11,400. Further, it was observed that assessee has claimed interest on delayed payment of taxes / prior period taxes of Rs.80,06,802 and out of the above the assessee has itself disallowed Rs.41,81,745. But the assessee has not disallowed the interest on delayed payments. Further it was also noted that a sum of Rs.70,06,204 includes interest on delayed payment of taxes, VAT write off pertaining to prior period. Hence these are not allowable in the current year as per section 37 of the Act. Accordingly there was a total disallowance of Rs.19,26,502 and assessment was completed. Aggrieved from the above order, the assessee filed appeal before the CIT(Appeals).
The ld. CIT(Appeals) after considering the detailed submissions dismissed the appeal of the assessee. Aggrieved from the above order, the assessee is in appeal before the ITAT.
The ld. AR reiterated the submissions made before the lower authorities and further submitted that the insurance company has not accepted the entire claim of assessee for other loss in consequence of the fire i.e., repair, maintenance, renovation and reinstallation. Further after the fire, the business was also disturbed which has not been considered by the lower authorities. During the course of assessment proceedings, the entire vouchers were produced but the AO has ignored and accepted only the loss accepted by the insurance authority.
However, the CIT(A) has wrongly noted that the assessee has not submitted any documents on the basis of which the appellant has estimated the loss as claimed which is completely wrong and he referred to Paperbook in this regard. Further in respect of disallowance u/s. 14A, the assessee submitted that during the impugned assessment year assessee has not received any exempt income, therefore no disallowance should be made as per formula provided under Rule 8D. Further in respect of disallowance of prior period expenditure, he submitted that this matter may be sent back to the AO for verification. The ld. CIT(A) has also noted that disallowance is related to delayed payment of ESI & PF which is wrong. As per reconciliation how the AO has calculated disallowance of Rs.17,06,2024 is not ascertainable.
On the other hand, the ld. DR relied on the order of the lower authorities and submitted that in respect of insurance loss the assessee is unable to produce requisite details for the difference amount claimed as a loss. Therefore, the lower authorities have restricted the claim as approved by the insurance authority. Further in the case of disallowance u/s. 14A, the ld. DR submitted that the amendment made in section 14A r.w. CBDT Circular No.5/2014 is applicable to the assessee and in support of the argument she relied on the judgment of Hon’ble Apex Court in the case of Sree Shankaracharya University of Sanskrit v. Dr. Manu in C.A. No.3752 of 2023 dated 16.5.2023 and further submitted that the ratio of this judgment is very much applicable to the present facts of the assessee’s case. Further, in respect of the third issue in respect of disallowance of Rs.17,06,204, the ld. DR relied on the order of lower authorities.
Considering the rival submissions, we note that in respect of excess claimed by the assessee of Rs.2,08,898 details were submitted during the course of assessment proceedings. On going through the same, we note that this expenditure was necessary to set up the business after fire for repair/maintenance, renovation, reinstallation, etc. The AO has not doubted the genuineness of the expenditure claimed. Only the AO has restricted the claim upto Rs.74 lakhs as accepted by the insurance authority. There is no doubt that after the fire, there was discontinuance in the business of the assessee and assessee has to incur some expenditure which are necessary for setting up the business. The percentage of disallowance of expenditure is approx. 2.8%. It is also known fact that the entire expenditure is not accepted by the insurance authority. Considering the quantum, Rs.2,08,898 is allowed as expenditure u/s. 37(1) of the Act.
The AO has disallowed 1% of the monthly average of investment u/s. 14A of the Act. However, we note that there is no any exempt income received by the assessee during the impugned year. Similar issue has been decided by the Hon’ble jurisdictional High Court in the case of Delhi International Airport Ltd. v. PCIT reported in [2022] 138 taxmann.com 541 (Kar) and during the course of hearing it was brought to notice of both the parties. The ld. DR has relied on the judgment of Hon’ble Apex Court in the case of Sree Shankaracharya University of Sanskrit (supra) which is not on the issue of disallowance u/s. 14A of the Act. Therefore relying on the Hon’ble jurisdictional High Court (supra) we allow this ground of the assessee.
Further in respect of disallowance of Rs.17,06,204 it contains various disallowances as per details submitted by the assessee. However, the ld. CIT(A) has considered it as delayed deposit of ESI & PF and the observation of the AO is also not reconciled with the details submitted by the assessee. Therefore, considering the facts of the case, we remit this issue back to the AO for fresh consideration and decision as per law.