Tribunal partially allows appeal, deletes balance from total income, remands disallowance issue for fresh consideration.

The tribunal partly allowed the appeal, ordering the deletion of the addition of the outstanding balance of Rs. 34,90,058/- to the total income under Section 41(1) of the Income-tax Act, 1961. The issue of disallowance of Rs. 2,64,062/- under Section 14A was remanded back to the AO for fresh consideration to determine the quantum of exempt income. The order was pronounced on 23.01.2018.

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Issues Involved:

1. Addition of outstanding balance of creditor M/s Badar Al Safran to the total income.
2. Disallowance under Section 14A of the Income-tax Act, 1961.

Detailed Analysis:

1. Addition of Outstanding Balance of Creditor M/s Badar Al Safran:

The primary issue in this case was whether the outstanding balance of Rs. 34,90,058/- payable to M/s Badar Al Safran should be added to the total income of the assessee under Section 41(1) of the Income-tax Act, 1961. The assessee, an engineering and designing services company, had an outstanding payable to M/s Badar Al Safran for more than 1460 days. The AO treated this liability as ceased to exist due to the lack of proof of any request for payment clearance from the creditor, thus adding it to the income under cessation of liability.

The assessee argued that the commission was payable to M/s Badar Al Safran based on the realization of sales proceeds from the customers procured through the agent. The total commission due was Rs. 1,31,61,824/-, out of which Rs. 96,71,766/- had been paid, leaving Rs. 34,90,058/- outstanding. The assessee contended that there was no remission or cessation of liability during the relevant assessment year, and the liability was still reflected in the books of accounts.

The CIT(A) dismissed the appeal, stating that the MOU with M/s Badar Al Safran was not enforceable as it was not on stamp paper and not registered. The CIT(A) also noted the high commission rate and the lack of correspondence from the creditor demanding payment, concluding that the liability was not genuine.

Upon appeal to the tribunal, it was observed that the MOU and ledger accounts were presented to the authorities, and the commission was payable on the realization of proceeds from debtors. The tribunal found that the revenue had not provided evidence to disprove the genuineness of the MOU or the commission liability. It was noted that the assessee acted in a manner consistent with commercial expediency by withholding the commission payment until the realization of proceeds. The tribunal ordered the deletion of the addition made by the AO and CIT(A).

2. Disallowance under Section 14A:

The second issue was the disallowance of Rs. 2,64,062/- under Section 14A of the Income-tax Act, 1961. The AO observed that the assessee had taken loans and invested in share application money and other investments that did not generate taxable income. The AO calculated the disallowance based on the average value of investments and total assets.

The assessee admitted to the addition before the CIT(A) and did not pursue this ground of appeal, leading to the dismissal of the ground by the CIT(A).

However, before the tribunal, the assessee argued that no exempt dividend income was received during the relevant year, citing the decisions of the Hon’ble Delhi High Court in Cheminvest Ltd. v. CIT and Joint Investments Private Ltd. v. CIT, which state that no disallowance should be made if no exempt income is earned.

The tribunal noted that it was not clear from the orders of the authorities whether any exempt dividend income was received. The tribunal found that the matter required further examination to determine the quantum of exempt income and the taxability of dividend income from foreign investments. The tribunal set aside the matter and restored it to the AO for de-novo determination, ensuring proper opportunity for the assessee to present their case.

Conclusion:

The appeal of the assessee was partly allowed. The tribunal ordered the deletion of the addition of the outstanding balance of Rs. 34,90,058/- and remanded the issue of disallowance under Section 14A back to the AO for fresh consideration. The order was pronounced in the open court on 23.01.2018.

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