Facts of the Case

The assessee, Century Commotrade Private Limited, filed its return of income for Assessment Year 2013-14 on 26.09.2013 declaring total income of ₹17,08,950. The case was selected for scrutiny and notices under Sections 143(2) and 142(1) were issued. The Assessing Officer noted that the assessee had earned dividend income and had investments yielding exempt income. Interest expenditure of ₹64,00,000 on unsecured loans was debited during the year. Applying Section 14A read with Rule 8D, the Assessing Officer computed disallowance of ₹24,42,943. Further, the Assessing Officer disallowed 15 percent of general expenses of ₹18,93,337 amounting to ₹2,84,000 and 15 percent of travelling and conveyance expenses of ₹6,91,027 amounting to ₹1,03,654, on the ground that expenses were supported mainly by self-made vouchers. The assessment was completed under Section 143(3) at total income of ₹45,39,547.

Issues Involved

Whether disallowance under Section 14A read with Rule 8D was sustainable without proper examination of source of investments and interest nexus, whether ad-hoc disallowance of general expenses and travelling expenses based on percentage estimation was justified, and whether the assessee was afforded adequate opportunity to substantiate its claims.

Petitioner’s Arguments

The assessee contended that relevant documents and submissions were filed but were not properly considered by the Assessing Officer, resulting in an ex-parte-like assessment. It was argued that the CIT(A) merely upheld the action of the Assessing Officer on Section 14A and sustained ad-hoc disallowances by reducing the percentage from 15 percent to 10 percent without any rational basis. The assessee prayed for restoration of the matter to the Assessing Officer for fresh adjudication after proper consideration of evidences.

Respondent’s Arguments

The Revenue supported the order of the CIT(A), contending that the assessee failed to establish that investments were made out of interest-free funds and failed to produce complete supporting bills and vouchers for expenses. Reliance was placed on the Calcutta High Court decision in Dhanuka & Sons to justify proportionate disallowance under Section 14A.

Court Order / Findings

The ITAT Kolkata observed that the CIT(A) upheld the Section 14A disallowance by relying on the judgment of the Calcutta High Court in Dhanuka & Sons, but the factual aspect regarding source of investment and interest nexus required proper verification by the Assessing Officer. The Tribunal further observed that disallowance of general expenses and travelling expenses was made on an ad-hoc basis without clear reasoning. Considering that the assessee had placed documents before the Tribunal and in the interest of justice, the Tribunal set aside the orders of the lower authorities and remitted the entire matter to the file of the Assessing Officer. The Assessing Officer was directed to examine the documents, bills and vouchers and pass a detailed speaking order after providing one more opportunity of hearing to the assessee.

Important Clarification

The Tribunal clarified that while disallowance under Section 14A and estimation of expenses is permissible in law, such disallowance must be based on proper examination of facts and evidences. Ad-hoc disallowances without cogent reasoning or adequate opportunity to the assessee are unsustainable and liable to be set aside.

Final Outcome

The appeal filed by the assessee was partly allowed for statistical purposes. The order of the CIT(A) was set aside, and the matter relating to disallowance under Section 14A read with Rule 8D and disallowances of general and travelling expenses was restored to the file of the Assessing Officer for fresh adjudication in accordance with law after granting reasonable opportunity of hearing to the assessee.

 Source Link- https://itat.gov.in/public/files/upload/1767263186-kVcVF2-1-TO.pdf

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