Disallowance Challenged in Limited Scrutiny: Scan Holdings Pvt. Ltd. vs. ACIT Circle-22(2), New Delhi (ITA 6168/DEL/2019)

Introduction

This article provides an in-depth analysis of ITA No. 6168/DEL/2019, a case where Scan Holdings Pvt. Ltd., New Delhi, contested the disallowances made by the Assistant Commissioner of Income Tax (ACIT), Circle-22(2), New Delhi. The case pertains to the assessment year 2016-17, with the final order pronounced on February 18, 2021. The primary issues in this appeal were the disallowance under Section 14A of the Income Tax Act, 1961, and the disallowance of car running expenses.

Case Background

The appellant, Scan Holdings Pvt. Ltd., is a private limited company based in New Delhi. The company filed an appeal against the order of the Commissioner of Income Tax (Appeals)-8, New Delhi, which upheld the disallowances made by the Assessing Officer (AO) under Section 14A of the Income Tax Act, 1961, and on account of car running and entertainment expenses.

Limited Scrutiny and Section 14A Disallowance

The case began as a limited scrutiny assessment under the Income Tax Department’s guidelines, which restricts the scope of examination to specific issues mentioned in the notice. However, the AO made a disallowance under Section 14A, which pertains to expenses incurred in relation to income that does not form part of the total income under the Act.

The appellant argued that the disallowance under Section 14A was beyond the scope of the limited scrutiny, as there was no record or evidence indicating that the limited scrutiny was converted into a full scrutiny with the approval of the Principal Commissioner of Income Tax (PCIT). The appellant contended that the AO acted without jurisdiction in making this disallowance, and therefore, the disallowance should be deleted.

Tribunal’s Observations on Section 14A

The Income Tax Appellate Tribunal (ITAT) examined the records and agreed with the appellant’s contention. The Tribunal noted that there was no proof on record to show that the limited scrutiny case had been converted into full scrutiny as per the procedures outlined by the Central Board of Direct Taxes (CBDT). As a result, the disallowance under Section 14A was deemed to be without jurisdiction, and the ITAT ordered the deletion of the addition made by the AO under this section.

Disallowance of Car Running and Entertainment Expenses

In addition to the Section 14A disallowance, the AO also disallowed Rs. 1,53,051/- on account of car running expenses and Rs. 24,657/- on account of entertainment expenses. The AO’s disallowance was based on the presumption that these expenses could be of a personal nature.

The appellant argued that in the case of a company, there could be no personal expenses, as the expenses are inherently related to the business. The appellant further contended that the disallowance was made on an ad-hoc basis, without any concrete evidence to support the AO’s claims.

ITAT’s Decision on Car Running and Entertainment Expenses

The Tribunal reviewed the appellant’s arguments and the records presented. It found that the Revenue had not provided any substantial evidence to prove that the car running expenses were of a personal nature. The Tribunal observed that the AO’s disallowance was made on an arbitrary basis, without sufficient justification. Consequently, the ITAT allowed the appellant’s claim regarding car running expenses, reversing the disallowance made by the AO.

However, regarding the entertainment expenses, the ITAT declined to admit the ground at this stage, as it involved a factual issue that had not been adequately addressed in the earlier proceedings.

Conclusion

The ITAT’s decision in ITA No. 6168/DEL/2019 represents a significant win for Scan Holdings Pvt. Ltd. The case highlights the importance of adhering to the scope of limited scrutiny and the necessity of providing concrete evidence when making disallowances. The Tribunal’s ruling emphasizes that disallowances made beyond the jurisdiction of the AO, as in the case of the Section 14A disallowance, cannot be sustained. Additionally, it reinforces the principle that in corporate assessments, disallowances for personal expenses must be backed by substantial evidence, failing which they are liable to be overturned.

In the final verdict, the appeal was partly allowed in favor of Scan Holdings Pvt. Ltd., with the Section 14A disallowance and the disallowance on car running expenses being deleted.

Disallowance Challenged in Limited Scrutiny: Scan Holdings Pvt. Ltd. vs. ACIT Circle-22(2), New Delhi (ITA 6168/DEL/2019)