Disallowance u/s 14A for computation of income against investments

The Income Tax Appellate Tribunal has ruled on a disallowance made under Section 14A of the Income Tax Act. The assessee argued that no disallowance should be made as no exempt income was earned during the assessment year. The tribunal also considered an ad-hoc disallowance on labour charges, finding that the assessee's books were audited and accepted in previous years, and the increased expenditure was explained by a change in manufacturing patterns. Consequently, the tribunal deleted the ad-hoc disallowance.

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, MUMBAI

BEFORE HON’BLE SHRI VIKAS AWASTHY, JM AND HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM

(Hearing through Video Conferencing Mode)

I.T.A. No. 679/Mum/2020

Assessment Year: 2013-14

M/s Lotus Ornaments Pvt. Ltd. Unit No. 78, SDF-III, SEEPZ SEZ, Andheri(E), Mumbai-400 096

vs

ACIT – 10(2)(1) Aaykar Bhavan M. K. Road Mumbai-400 020

Assessee by: Shri Gaurav Bansal – Ld. AR
Revenue by: Shri Brajendra Kumar – Ld. DR

Date of Hearing: 28/09/2021

Date of Pronouncement: 01/10/2021

O R D E R

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.

2. 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.

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.

4. The appeal stand partly allowed in terms of our above order. Order pronounced on 1st October, 2021.

Please find attached the enclosed file for the full judgement