2019 (8) TMI 334 - HC - Income Tax

High Court Upholds Tribunal's Decisions on Preliminary Expenses & Interest-Free Funds

THE PRINCIPAL COMMISSIONER OF INCOME TAX-1 Versus M/s CHIRIPAL INDUSTRIES LTD.

The High Court upheld the Tribunal's decisions on disallowing preliminary expenses under section 35D and interest-free funds under section 36(1)(iii). The ... Disallowance u/s 35D - HELD THAT:- Claim of the assessee as 1/5 related to expenses IPO F.Y. 2007-2008 and 2009-10, this deduction was allowed. We have also noticed that 1/5 expenses was allowed by the CIT(A) in assessment year 2008-2009 and 2009-10. Therefore, we justify the decision of learned CIT(A) to allow the claim of preliminary expenses to the amount of ₹ 20,11,387/- consisting of ₹ 11,11,226+9,00,161. After perusal of the above facts, we observed that claim of the assessee to the amount of ₹ 11,11,226/- was never disallowed in any of the earlier years and similarly for the assessment year 2008-09 abd 2010-11the learned CIT(A) had allowed the deduction of ₹ 900161/- in the light of the fact and findings reported int he decision of the learned CIT(A), we do not find any merit in the ground of appeal of the revenue therefore the same is dismissed. Disallowance u/s 36(1) - interest free funds given - assessee failed to prove that such funds were given for business purposes - HELD THAT:- During the course of assessment proceedings on perusal of the details of loan and advances the assessing officer noticed that assessee has shown ₹ 20 lacs as outstanding receivable from M/s Red Event India Pvt. Ltd. He observ4ed that during the assessment yea₹ 2008-09 and 2009-10 the assessing officer has given the findings that amount of advances to M/s Red Event Pvt. Ltd. was interest free advances and no purchases or services were obtained from the said party by the assessee. Accordingly the assessing officer has treated this amount advanced for non business purposes. Therefore, the assessing officer has charged interest @ 12% to the amount of ₹ 2,10,000/- on the said advances and added the same to the total income of the assessee Disallowance u/s 14A read with rule 8D - whether no exempt income is earned - HELD THAT:- Question proposed by the Revenue, is squarely covered by a decision of this Court in GREENLAND INFRACON P. LTD. [2019 (7) TMI 614 - GUJARAT HIGH COURT]. Issues involved:1. Disallowance of preliminary expenses under section 35D of the Income Tax Act, 1961.2. Disallowance of interest free funds under section 36(1)(iii) of the Act.3. Disallowance under section 14A of the Act read with rule 8D due to no exempt income earned.Analysis:1. Disallowance of preliminary expenses under section 35D:The Tribunal found that the assessing officer disallowed a portion of the preliminary expenses claimed by the assessee. The Tribunal noted that the assessee had incurred these expenses as IPO expenses, which were not allowed in previous assessment years. However, the Tribunal observed that a portion of the expenses claimed by the assessee had been allowed in earlier years. Based on this, the Tribunal upheld the decision of the CIT(A) to allow the claim of preliminary expenses to a certain amount, concluding that there was no merit in the revenue's appeal. The Tribunal dismissed the revenue's appeal on this issue.2. Disallowance of interest free funds under section 36(1)(iii):The assessing officer observed that the assessee had shown an outstanding receivable from a certain party as interest-free advances. The assessing officer treated this amount as advanced for non-business purposes and charged interest on the advances, adding it to the total income of the assessee. The Tribunal did not find any error of law in the impugned order passed by the assessing officer. Consequently, the Tribunal upheld the decision regarding the disallowance of interest-free funds, and the Tax Appeal on this issue failed and was dismissed.3. Disallowance under section 14A read with rule 8D:The third question raised by the Revenue was found to be covered by a previous decision of the Court. The Tribunal, after hearing the senior standing counsel for the Revenue and examining the records, concluded that the appeal was primarily based on facts rather than a question of law. The Tribunal did not find any error of law in the impugned order and dismissed the Tax Appeal on this ground as well.In conclusion, the High Court of Gujarat upheld the decisions of the Tribunal regarding the disallowance of preliminary expenses under section 35D and interest-free funds under section 36(1)(iii). The Court also found that the issue related to disallowance under section 14A was covered by a previous decision and dismissed the Tax Appeal on all grounds.