2014 (12) TMI 178 - HC - Income Tax

Court affirms Tribunal decision, clarifies income accrual rules & disallowance criteria.

The High Court upheld the Tribunal's decisions in both issues, dismissing the appeal of the appellant. The court emphasized that income cannot be ... Claim of retention money disallowed – Held that:- In Director of Income-tax ( International Taxation) Versus Ballast Nedam International [2013 (7) TMI 421 - GUJARAT HIGH COURT] it has been held that unless and until a debt is created in favour of the assessee, which is due by somebody, it cannot be said that the assessee has acquired a right to receive the income or that the income has accrued to him - A debt must have come into existence and the assessee must have acquired a right to receive the payment - assessee did not get any right to receive the sum which could have been retained in pursuance of the contract - One has to look at the contract and not at the entries made in the books of account - the Tribunal rightly upheld the order of the CIT(A) wherein it has been held that the retention of 10% money of total sales was due to specific terms and conditions for final payment mentioned in the customer purchase order - the assessee - company had been following this system of accounting for the last several years and was accepted by the department – the order of the Tribunal is upheld – Decided against revenue. Disallowance on interest and administrative expenses u/s 14A - onus to prove the nexus of interest free funds utilized for the purpose of making investments earning exempt income discharged or not – Held that:- The Tribunal has taken note of the fact that the matter had initially been restored to the file of the CIT(A) with a specific direction to bring out clearly as to whether the borrowed fund had indeed been utilized in investment in shares/mutual funds for earning exempt income - the Tribunal observed that no disallowance u/s 14A of the Act can be made of interest expenses until there is finding of AO that borrowed funds were utilized by assessee to earn exempt income - the assessee had sufficient surplus funds at its disposal for making any investment in share and for business purpose and therefore, there was no nexus that could be established with the expenditure incurred by the assessee for earning the exempt income – thus, the order of the Tribunal is upheld – Decided against revenue. Issues:1. Disallowance of claim on account of retention money2. Disallowance under section 14A of the Income Tax ActIssue 1: Disallowance of Claim on Account of Retention MoneyThe appellant, challenging the order of the Income Tax Appellate Tribunal, argued that the unrealized sale amount was part of the sale consideration and should be accounted for in the current year under the mercantile system of accounting. However, the court referred to a previous judgment where it was held that income cannot be considered accrued unless there is a real right to receive payment. The court emphasized that the mere accounting entry does not establish the accrual of income. In this case, the court concluded that the retention money did not represent accrued income to the assessee, as there was no vested right to receive the amount. The court upheld the Tribunal's decision in favor of the assessee, dismissing the appeal.Issue 2: Disallowance under Section 14A of the Income Tax ActRegarding the disallowance under section 14A of the Act, the Tribunal found that the borrowed funds were not utilized for earning exempt income, based on the Commissioner (Appeals)'s analysis of the financial summary of the assessee. The Tribunal held that no disallowance can be made under section 14A without a finding that borrowed funds were used to earn exempt income. The Tribunal, relying on the Commissioner (Appeals)'s findings, concluded that there was no nexus between the expenditure incurred by the assessee and the earning of exempt income. The court noted that the Tribunal's decision was based on factual findings and evidence on record, with no indication of perversity. As there was no substantial question of law raised, the appeal was summarily dismissed.In conclusion, the High Court upheld the Tribunal's decisions in both issues, dismissing the appeal of the appellant, and emphasizing the importance of real income accrual and nexus between borrowed funds and exempt income for disallowances under the Income Tax Act.