ITAT allows Electricity expenses which were disallowed on mere presumptions

Uma Rajendra Agarwal Vs ACIT (ITAT Mumbai)

Introduction: The case of Uma Rajendra Agarwal Vs ACIT was brought before the ITAT Mumbai. The dispute centered around an adhoc disallowance made by the Assessing Officer (AO) on electricity expenses incurred by the assessee. The AO assumed that the turnover represented textile trading, which was incorrect. The electricity expenses were actually related to job work undertaken in looms.

Detailed Subheading-wise Analysis:

1. Nature of Job Work and Turnover: The job work carried out by the assessee involved looms and job work charges. The AO mistakenly linked the turnover to textile trading, leading to incorrect assumptions.
2. Electricity Consumption Details: The assessee drew electricity from a shared connection with M/s. Donear Industries Limited, a sister concern. Detailed records of daily electricity consumption were maintained. M/s. Donear Industries Ltd. calculated average electricity charges based on actual bills from the Electricity Board and billed the assessee accordingly.
3. Scientific Basis for Electricity Payment: The average cost of electricity was scientifically determined. M/s. Donear Industries Ltd. declared the amount paid by the assessee as its income. The payment was made based on debit notes raised by M/s. Donear Industries Ltd.
4. Absence of Material to Support Disallowance: The AO failed to provide any evidence suggesting excessive electricity expenses. The job work required electricity consumption, which was distinct from trading activity.
5. Misconception Regarding Expenses: The AO incorrectly assumed that electricity expenses were related to trading, while they were actually incurred for job work conducted on looms.

Conclusion: The ITAT Mumbai ruled in favor of the assessee, deeming the adhoc disallowance on electricity expenses unjustified. The electricity expenses were scientifically determined and were directly linked to job work activities. The AO’s presumption of trading-related expenses was unfounded. The decision highlights the importance of accurately understanding the nature of expenses and their connection to the taxpayer’s business activities.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The assessee has filed this appeal challenging the order dated 22.2.2023 passed by the learned CIT(A)-National Faceless Appeal Centre, Delhi and it relates to A.Y. 2013-14. The assessee is aggrieved by the decision of the learned CIT(A) in confirming the following additions made by the Assessing Officer :-

a) Disallowance under section 14A of the Act – Rs.12,59,952/-

b) Adhoc disallowance out of Electricity expenses – Rs.3,11,856/-

2. The facts relating to the case are stated in brief. The assessee is engaged in the business of trading in textiles through her proprietary concern M/s. Lotus Fabrics. During the year under consideration, the assessee has also undertaken job works for weaving of textile in the looms. Besides the above, the assessee also makes investment in shares. The assessee has maintained separate books of account for her business and for personal activities including investment activities.

3. The first issue relates to disallowance made under section 14A of the Act. During the year under consideration the assessee has received dividend income of Rs. 8,46,531/- and long term capital gains of Rs. 6,31,075/-. The assessee claimed both the above said income as exempt. However, the assessee did not disallow any expenditure under section 14A of the Act. Hence, the Assessing Officer disallowed a sum of Rs.12,59,952/- under rule 8D read with section 14A of the Act. Breakup of the same is given below :

4. With regard to the disallowance of direct expenses under rule 8D(2)(i), the learned AR submitted that the assessee has maintained separate books of account for her business activities and for investment activities. All the direct expenses mentioned by the Assessing Officer, viz., Demat charges, STT expenses, professional fees and share transaction expenses have not been debited to the profit and loss account of the business concern. He submitted that these expenses have been debited to the Capital account of the assessee in her personal books. Since, the assessee has not claimed these expenses as deduction anywhere, the Ld A.R contended that there is no requirement of making any disallowance under rule 8D(2)(i) of the Rule.

5. We heard learned DR on this issue and perused the record. We noticed that the assessee has furnished copy of personal income and expenditure account, which included only personal transactions, at page No. 26 of the paper books. Out of the personal profit and loss account, the assessee has offered taxable portion of income fully in the Statement of Total income. We noticed that the assessee has not claimed these expenses as deduction against any income. Hence, there is merit in the contention of the assessee that the direct expenses aggregating to Rs. 1,26,993/- do not require disallowance as required under rule 8D(2)(i) of the Rule. Accordingly we set aside the order passed by the learned CIT(A) on this issue and direct the Assessing Officer to delete the disallowance of Rs. 1,26,993/- made under rule 8D(2)(i) of the I.T. Rules.

6. With regard to the interest expenses disallowed under rule 8D(2)(ii), learned AR submitted that the assessee has not claimed any interest expenditure against here investment activities. Referring to the personal balance sheet placed at page No. 25 of the paper book, the learned AR submitted that the assessee is having own funds of Rs. 17.80 crores whereas, the investment stands at Rs. 4.64 crores. He further submitted that the term loan availed by the assessee in her business purpose has been fully utilised for business purposes only and it has not been diverted to her investment/personal purposes. Accordingly, the learned AR contended that there was no requirement of making any disallowance out of interest expenditure also.

7. The Learned DR, on the contrary, submitted that the assessee has taken term loan and hence a portion of interest expenditure is required to be disallowed.

8. Having heard the rival contentions, we are of the view that there is merit in the submissions of the assessee. Personal balance sheet placed at page No. 25 of the paper book would show that the assessee is having own capital at Rs.17.80 crores, while the investment made by the assessee stands at Rs. 4.65 crores. Thus own fund available with the assessee exceeds value of investment. Further the assessee has maintained separate books of account for her business concern and we notice that term loan taken by the assessee for business purposes has not been diverted to her investment/personal purposes. Hence, we agree with the Ld A.R that there is no requirement of making any disallowance out of interest expenses under section 8D(2)(ii) of the Rules. Since own funds exceeds the value of investments, there is no requirement of making any disallowance out of interest expenses as per the decision rendered by Hon’ble Jurisdictional High Court of Bombay in the case of HDFC Bank vs. DCIT (366 ITR 505). Accordingly we set aside the order passed by the learned CIT(A) on this issue and direct the Assessing Officer to disallow disallowance made under rule 8D(2)(ii) out of interest expenses.

9. The Next issue relates to the disallowance of expenses under rule 8D(2)(iii). The Assessing Officer had disallowed 0.5% of average value of investment. The Learned AR contended that the assessee has not incurred any expenditure which is required to be disallowed under rule 8D(2)(iii). Since the assessee has been carrying on business, it cannot be ruled out that the assessee would have utilised establishment and other facilities of the business for carrying out her investment activities. Hence we are of the view that the some expenses are required to be disallowed under section 14A of the Act. In our view the same is required to be estimated, since provision of rule 8D cannot be applied in the facts of the present case. Accordingly, we are of the view that disallowance of Rs. 50,000/- on estimated basis would meet the requirement of sec. 14A of the Act. Accordingly, we set aside the order passed by the learned CIT(A) on this issue and direct the Assessing Officer to restrict the disallowance under section 14A to Rs. 50,000/-.

10. The next issue relates to adhoc disallowance made out of Electricity expenses. During the year under consideration the assessee has purchased certain looms and has carried out job work. The looms have been installed in the premises belonging to a sister concern named M/s Donear Industries Ltd. It was noticed by the AO that the electricity was provided to the assessee from a common electricity connection obtained by M/s. Donear Industries Ltd. It is the submission of the assessee that a sub-meter was provided to the area allocated to the assessee. Based on the reading of sub-meter, M/s Donear Industries Ltd had raised debit notes and the assessee had paid electricity charges of Rs. 15,69,280/- during the year under consideration. It is pertinent to note that the assessee has also paid lease rent for the premises occupied by it.

11. The Assessing Officer took the view that the assessee has not furnished any bank proof to support the payments. Further he took the view that electricity expense of Rs. 15,59,280/- claimed by the assessee is disproportionate to total turnover of Rs.78,94,803/-. Accordingly, he disallowed 20% of the electricity expenses under section 37(1) of the Act, which worked out to Rs. 3,11,856/-. The learned CIT(A) also confirmed the same.

12. We heard the parties on this issue and perused the record. We noticed earlier that the assessee has carried on job work in the looms purchased by it and the aggregate amount of job work charges received by it during the year under consideration was Rs. 78,94,803/-. There should not be any dispute that the main expenditure with regard to job work charges are labour charges and electricity charges. We notice that the AO has assumed that the above said turnover represents turn over of textile trading, which is factually incorrect. We noticed earlier that the assessee has drawn electricity from a common electricity connection obtained by the sister concern M/s. Donear Industries Limited. We notice that the assessee has maintained details of daily consumption of electricity and the same is placed at page No. 71 of the paper book. The Learned AR submitted that M/s. Donear Industries Ltd, would ascertain average electricity charges on the basis of bills received by it from the Electricity Board and accordingly raise a debit note upon the assessee for the monthly electricity units consumed by the assessee. It was submitted that the assessee has made payment on the basis of the debit note so raised. The Ld A.R also took us through the paper book and explained as to how the average cost of electricity is arrived at by M/s Donear Industries Ltd. He also submitted that the sister concern M/s. Donear Industries Ltd. has declared amount of Rs.15,59,280/-paid by the assessee as its income. Thus we notice that the assessee has maintained details of consumption of electricity and payment thereof on scientific basis and the billing for electricity has been made on actual basis. When all these details could not be controverted by the AO, we are of the view that there is no requirement of making any disallowance out of electricity expenses. We also noticed that the Assessing Officer has not brought on record any material to show that the electricity expenses claimed by the assessee are excessive in nature. We are of the view that the Assessing Officer erroneously presumed that the electricity expenses have been incurred for trading activity, while the fact remains that it has been consumed for job work undertaken in the looms. In view of the above said discussion, we are of the view that there is no requirement of making any disallowance out of electricity expenses. Accordingly we set aside the order passed by the learned CIT(A) on this issue and direct the Assessing Officer to delete the disallowance made out of electricity expenses.

12. In the result, appeal filed by the assessee is partly allowed.

Pronounced in the open court on 19.7.2023.