LOTUS ORNAMENTS PVT LTD.,MUMBAI vs. ASST CIT 10(2)(1), MUMBAI
What did the Tribunal hold?
The tribunal deleted the disallowance under Section 14A, stating it was not sustainable as no exempt income was earned and investments were likely funded by own funds. The ad-hoc disallowance of labour/assortment charges was also deleted as the books were not rejected and no specific defects were pointed out.
What were the facts?
The assessee claimed labour/assortment charges, and the AO made an ad-hoc disallowance of 10% due to issues with supporting documents. The assessee also challenged a disallowance under Section 14A, arguing no exempt income was earned.
What were the issues?
Whether disallowance under Section 14A is sustainable when no exempt income is earned, and whether an ad-hoc disallowance of labour charges is justified without rejecting the books of accounts.
Which sections of the Income-tax Act were involved?
AI-generated summary — verify with the full judgment below
Cases cited in this judgment(5)Show listHide list
Detected automatically from the text. Citations are also linked where they appear in the judgment. The count shows how many other judgments on BharatTax rely on the same authority.
- National Thermal Power Co. Ltd. v. CIT5,834 citing229 ITR 383 · 1998 · SC
- CIT v. Chettinad Logistics (P.) Ltd.421 citing95 Taxmann.com 250 · 2018 · SC
- PCIT v. Oil Industry Development Board120 citing103 Taxmann.com 326 · 2019 · SC
- PCIT v. R.G. Buildwell Engineers Ltd.11 citing99 Taxmann.com 283 · 2018 · HC · Read judgment
- Principal Commissioner of Income Tax v. R.G. Buildwell Engineers Ltd.11 citing259 Taxmann 370 · 2018 · SC
Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: HON’BLE SHRI VIKAS AWASTHY, JM & HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM
O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeal by assessee for Assessment Year (AY) 2013-14 arises out of the order of learned Commissioner of Income-Tax (Appeals)-10, Mumbai [CIT(A)], dated 11/12/2019 in the matter of assessment framed by learned Assessing Officer (AO) u/s 143(3) on 25/03/2016. The impugned order has confirmed disallowance u/s 14A as well as adhoc disallowance of labour / assortment charges as made by Ld. AO in the assessment order. Ground No.1 has not been pressed before us and therefore, the same stand dismissed as being not pressed. In ground no.2, the assessee has contested the confirmation of 10% adhoc disallowance of labour / assortment charges.
The assessee, vide letter dated 15/09/2021, has filed an additional ground challenging the disallowance made u/s 14A. Since the same arises out of the assessment order, it is admitted in term of the decision of Hon’ble Apex Court in National Thermal Power Corporation Ltd. V/s CIT (1998; 229 ITR 383). The assessee seeks deletion of disallowance u/s 14A in terms of the decision of Hon’ble Apex Court in Pr. CIT V/s Oil Industry Development Board (2019; 103 Taxmann.com 326) as well as CIT V/s Chettinad Logistics (P) Ltd. (2018; 95 Taxmann.com 250) on the ground that no exempt income was earned by the assessee during the year.
Having heard rival submissions and after careful consideration of material on record, our adjudication to the subject matter of appeal would be as given in succeeding paragraphs. Disallowances u/s 14A 4.1 The assessee offered suo-moto disallowance u/s 14A for Rs.0.63 Lacs in the computation of income against investments made by the assessee. However, Ld. AO computed additional disallowance of interest u/r 8D(2)(ii) for Rs.4.60 Lacs and added the same to the income of the assessee. It is undisputed fact that the assessee has not earned any exempt income during the year. The assessee did not contest this issue during appellate proceedings. However, the assessee has assailed the disallowance before us. 4.2 Upon perusal of assessee’s financial statements, it could be gathered that assessee’s own funds in the shape of share capital and free reserves far exceeds the investment made by the assessee and therefore, a presumption would run in assessee’s favor that the investments were funded out of own funds. Secondly, the assessee has not earned any exempt income during the year. Therefore, the additional interest disallowance is not sustainable in law as per the cited judicial pronouncements. Therefore, by deleting the disallowance of Rs.4.60 Lacs, we allow this ground of appeal. Adhoc disallowance of Labor / Assortment Charges 5.1 The assessee claimed assortment / labour charges for Rs.777.80 Lacs. Upon perusal of sample supporting bills, vouchers etc., it was noted by Ld. AO that the nature and particulars could not be verified, few documents were not affixed with revenue stamps and in some cases, the payees could not be verified. Accordingly, Ld. AO estimated an adhoc disallowance of 10% against the same. The Ld. CIT(A) confirmed the same since the assessee did not appear during appellate proceedings. 5.2 The Ld. AR assailed the disallowance by submitting that the Books of Accounts have not been rejected and the adhoc disallowance thus made would not be sustainable in law as per the decision of Hon’ble Delhi High Court in PCIT V/s R.G. Buildwell Engineers Ltd. (99 Taxmann.com 283; SLP dismissed which is reported at 259 Taxman 370). The Ld. AR submitted that the nature of expenditure was duly explained before Ld. AO and ledgers were produced along with vouchers. No specific defect has been pointed out in the documents furnished by the assessee. The Ld. AR also submitted that similar expenditure was incurred in AYs 2012-13 & 2014-15 wherein no disallowance has been made by Ld. AO in scrutiny assessment proceedings u/s 143(3). The copies of the orders have been placed on record. Lastly, it is the submission of Ld. AR that assessee’s books of accounts were duly audited under the Companies Act, 2013 as well as under Income Tax Act and no adverse findings have been reported by the Auditors. The Ld. DR, on the other hand, submitted that the facts of the case justify the disallowance. 5.3 After going through material facts, it could be gathered that the books of accounts have not been rejected by Ld. AO. The books were duly audited under The Companies Act as well as under Income Tax Act and no adverse findings have been rendered by Auditors, in this regard. Except for general observations, no specific defects have been pointed out by Ld. AO in sample documents produced by the assessee. Similar expenditure incurred by the assessee in AYs 2012-13 & 2014-15 has been accepted. The complete details of the expenditure along with relevant ledgers were furnished by the assessee during assessment proceedings (page nos. 18 to 133 of Paper Book). There is no dispute about genuineness and admissibility of claim of expenses. Regarding the observation of Ld. AO that there was drastic increase in such expenses during the year, the same stood explained by assessee’s reply dated 19/01/2016 wherein it was submitted that the expenditure increased due to change in manufacturing pattern of the assessee which was necessitated due to customers requirements since the assessee diversified into small pieces for which higher labour charges were paid by the assessee. The net profit reflected by the assessee is 2.43% which is quite similar to net profit of 2.48% reflected in the earlier year. Thus, in terms of the cited decision of Hon’ble Delhi High Court and considering the facts of the case, we are inclined to delete the adhoc disallowance as made by Ld. AO. This ground stand allowed.
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