2020 (3) TMI 429 - AT - Income Tax

Tribunal rules on income, expenses, and disallowance under Sections 14A and 36(1)(iii) in appeal cases.

The Tribunal allowed the appeal in ITA No. 2286/Bang/18, as no exempt income was earned, leading to the deletion of the disallowance under Section 14A. In ... Disallowance u/s 14A - whether any expenditure incurred in earning income which does not form part of the total income shall be disallowed in computing total income? - HELD THAT:- Bangalore Bench of ITAT in the case of M/s UB Infrastructure Projects Ltd., Vs. DCIT. [2017 (12) TMI 1749 - ITAT BANGALORE] this Tribunal took the view that there can be no disallowance of expenses u/s 14A of the Act, if there is no exempt income earned during the relevant previous year as followed in Cheminvest Ltd. v. CIT [2015 (9) TMI 238 - DELHI HIGH COURT] - We are of the view that the disallowance of expenditure u/s 14A of the Act cannot be sustained and the same is directed to be deleted. Disallowance u/s. 14A in the present case should be restricted to the exempt income earned by the assessee. Disallowance of interest expenses u/s. 36(1)(iii) - HELD THAT:- What is Assessee’s interest in the project, whether Assessee intends to develop the project and why the payment is routed through Mysore Logistics Pvt.Ltd., and what is the connection between the project and Mysore Logistics Pvt.Ltd., are not explained. Therefore the business purpose, in our view was rightly not accepted by the CIT(A). As far as Primus Engineering Solutions Pvt. Ltd., is concerned, it is claimed that interest was charged on this loan and the CIT(A) has directed the AO to verify this aspect and allow relief. Hence, we need not examine the business purpose of this loan, as the loan is not interest free loan. What is now left for consideration is interest free loan to G.Susheela who is a director of the Assessee - The stand taken by the Assessee has not been established with credible evidence. There is no agreement between G.Susheela and the Assessee to substantiate the claim of the Assessee. There is no material brought on record to show any obligation on the part of G.Susheela to part with her rights over any property that she might acquire either as owner as agreement holder in favour of the Assessee. In such circumstances, the plea of the Assessee deserves to be rejected and was rightly rejected by the CIT(A). Issues Involved:1. Disallowance of expenses under Section 14A of the Income Tax Act.2. Disallowance of interest expenses under Section 36(1)(iii) of the Income Tax Act.Issue-wise Detailed Analysis:1. Disallowance of Expenses under Section 14A of the Income Tax Act:Assessment Year 2015-16 (ITA No. 2286/Bang/18):The primary issue was whether the revenue authorities were justified in disallowing expenses of Rs. 46,87,556 by invoking Section 14A of the Income Tax Act, 1961, which disallows any expenditure incurred in earning income that does not form part of the total income. The Assessee, engaged in the business of developing and maintaining real estate properties, did not earn any exempt income, such as dividend income, during the relevant year. The CIT(A) had incorrectly concluded that the Assessee earned share income from partnerships, which was exempt. The Tribunal, referencing the Bangalore Bench of ITAT in the case of M/s UB Infrastructure Projects Ltd. Vs. DCIT and the Hon’ble Delhi High Court in Cheminvest Ltd. Vs. CIT, held that no disallowance under Section 14A can be made if there is no exempt income earned during the relevant year. Consequently, the disallowance of expenditure under Section 14A was directed to be deleted, and the appeal was allowed.Assessment Year 2014-15 (ITA No. 2287/Bang/18):In this year, the Assessee earned exempt income in the form of a dividend of Rs. 1,51,694. The revenue authorities computed a disallowance of Rs. 2,83,23,833 under Section 14A. The Tribunal, referencing the Hon’ble Delhi High Court in Joint Investments (P) Ltd. v. CIT and CIT v. Holcim India Pvt. Ltd., held that disallowance under Section 14A cannot exceed the exempt income. Thus, the disallowance was restricted to the exempt income earned by the Assessee.2. Disallowance of Interest Expenses under Section 36(1)(iii) of the Income Tax Act:The Assessee claimed a deduction for interest paid on short-term and long-term borrowings totaling Rs. 23,68,16,255. The AO disallowed interest expenditure of Rs. 1,62,30,738, attributing it to interest-free loans given to related parties. The Assessee argued that it had sufficient own funds and that the loans were for business purposes. However, the Assessee failed to demonstrate this before the CIT(A) or the Tribunal.Specific Cases:- Primus Engineering Solutions, CBS Hi Tech Ventures Pvt. Ltd., and P.V. Line Pvt. Ltd.: The Assessee claimed interest was charged on these loans, and the AO was directed to verify and allow relief if the actual interest received was more than considered.- Bindu S. Chandra, Mysore International Pvt. Ltd., and Swiss Smile Dental Clinics India Pvt. Ltd.: No evidence was provided to show the business purpose of the loans, and the disallowance was upheld.- Global Biz Prop Ventures Pvt. Ltd.: The loan was given to maintain a minimum bank balance, but no business purpose was established, and the disallowance was upheld.- Mysore Logistics Pvt. Ltd.: The loan was claimed to be for paying fees for single window clearance for a logistic park project, but no credible evidence was provided, and the disallowance was upheld.- G. Susheela (Director): The loan was claimed to be for acquiring agricultural land for development, but no agreement or evidence was provided to substantiate this claim. The CIT(A) rejected the claim, and the Tribunal upheld this decision.Conclusion:- ITA No. 2286/Bang/18: Allowed.- ITA No. 2287/Bang/18: Partly allowed.Pronounced in the open court on this 6th day of March, 2020.