2018 (1) TMI 27 - AT - Income Tax

Assessee's Appeals Allowed: Disallowances Deleted, Own Funds Emphasized, Hypothetical Income Not Taxed

Shoppers Stop Ltd. Versus ACIT-29, Mumbai

The appeals filed by the assessee were allowed by the Tribunal, resulting in the deletion of disallowances and additions made by the AO and upheld by the ... Disallowance u/s 14A r.w. Rule 8D of the Income Tax Rules, 1962 - whether disallowance u/s 14A r.w. Rule 8D can be made in a case when there is no exempt income? - Held that: - similar issue decided in the case of Commissoner of Income Tax (Ii) Kanpur Versus M/s. Shivam Motors (P) Ltd. [2014 (5) TMI 592 - ALLAHABAD HIGH COURT], where it was held that in absence of any tax free income earned by the assessee, disallowance u/s 14A could not be made - disallowance made by AO deleted. Disallowance u/s 36(1)(iii)/ addition on account of notional income u/s 5 of the Act - Held that: - Gateway has neither provided for interest in its books of accounts nor paid any interest till date. The other condition of improbability of realization is also applicable here - the addition cannot be made even u/s 5 of the Act - the addition of ₹ 83,91,532/- made by the AO in AY 2009-10 and ₹ 3,22,04,906/- in AY 2010-11 deleted. Appeal allowed. Issues Involved:1. Disallowance u/s 14A r.w. Rule 8D of the Income Tax Rules, 1962.2. Disallowance u/s 36(1)(iii)/addition on account of notional income u/s 5 of the Income Tax Act, 1961.Detailed Analysis:Issue 1: Disallowance u/s 14A r.w. Rule 8DAssessment Year: 2009-10 (ITA No. 1361/MUM/2013)- The AO disallowed Rs. 3,69,33,354/- u/s 14A r.w. Rule 8D, citing that the assessee had significant investments and interest payments.- The assessee argued that it had sufficient interest-free funds and no exempt income was received from the investments.- The CIT(A) upheld the AO's disallowance, referring to the previous year's order.Assessment Year: 2010-11 (ITA No. 3248/MUM/2013)- The AO disallowed Rs. 3,79,86,618/- under similar grounds as AY 2009-10.- The CIT(A) confirmed the disallowance, following the same rationale as for AY 2009-10.Assessment Year: 2011-12 (ITA No. 6155/MUM/2014)- The AO disallowed Rs. 3,53,14,668/- under the same provisions.- The CIT(A) upheld the disallowance, consistent with the previous years.Tribunal's Findings:- The Tribunal noted that the assessee had sufficient own funds exceeding the investments.- It was observed that no dividend or exempt income was received in the relevant years.- Citing the Bombay High Court's decisions in HDFC Bank Ltd. and Reliance Utilities & Power Ltd., the Tribunal held that no disallowance u/s 14A r.w. Rule 8D is warranted if no exempt income is received.- The Tribunal deleted the disallowances for all three assessment years.Issue 2: Disallowance u/s 36(1)(iii)/Addition on Account of Notional Income u/s 5Assessment Year: 2009-10 (ITA No. 1361/MUM/2013)- The AO added Rs. 83,91,532/- u/s 36(1)(iii), noting that the assessee stopped charging interest on a loan to its subsidiary.- The CIT(A) directed the AO to tax the interest accrued for the balance three months.Assessment Year: 2010-11 (ITA No. 3248/MUM/2013)- The AO added Rs. 3,22,04,906/- for not charging interest on the loan to the subsidiary, despite partial repayment.- The CIT(A) confirmed the addition, following the same rationale as for AY 2009-10.Tribunal's Findings:- The Tribunal noted that the assessee had sufficient own funds to cover the loans.- It was found that the subsidiary did not provide for interest in its books and had not paid any interest.- Citing the Supreme Court's decision in Excel Industries Ltd., the Tribunal held that hypothetical income cannot be taxed.- The Tribunal deleted the additions for both assessment years.Conclusion:The appeals filed by the assessee were allowed, with the Tribunal deleting the disallowances and additions made by the AO and upheld by the CIT(A). The key rationale was the sufficiency of own funds, absence of exempt income, and the principle that hypothetical income cannot be taxed.