Tribunal upholds CIT(A)'s decision on Income Tax Act deletions

DCIT Circle 16 (2) New Delhi Versus Meyer Apparel Ltd.

DCIT Circle 16 (2) New Delhi Versus Meyer Apparel Ltd. - TMI Issues Involved:
1. Deletion of addition under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962.
2. Deletion of addition on account of undisclosed sources in the form of trade creditors.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962:

The Revenue challenged the deletion of Rs. 8,44,022 added by the Assessing Officer (AO) by invoking Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962. The AO had made this addition on the grounds that the assessee had invested in shares for long-term capital gains. However, the assessee argued that no exempt income was earned during the year, thus making the invocation of Section 14A read with Rule 8D unjustified.

The Commissioner of Income Tax (Appeals) [CIT(A)] followed the jurisdictional High Court's decision in Cheminvest Ltd vs. CIT (2015) and other similar decisions, concluding that no disallowance under Section 14A was warranted in the absence of exempt income. The CIT(A) also referred to the application before the Board for Industrial and Financial Reconstruction (BIFR), which detailed the status of foreign advances, confirming the genuineness and creditworthiness of the creditors.

The Revenue contended that the CIT(A) failed to consider the legislative intent of Section 14A as clarified by CBDT Circular No. 5/2014 and the Supreme Court's decision in Rajendra Prasad Moody. However, the Tribunal upheld the CIT(A)'s findings, emphasizing that Section 14A cannot be invoked when no exempt income is earned, as supported by various High Court decisions, including CIT vs. Holcim India Pvt. Ltd. and PCIT vs. IL & FS Energy Development Company Ltd.

The Tribunal concluded that the CIT(A) was justified in deleting the addition under Section 14A, as no exempt income was earned during the year, and dismissed the Revenue's grounds on this issue.

2. Deletion of Addition on Account of Undisclosed Sources in the Form of Trade Creditors:

The AO had added Rs. 6,77,24,250 to the assessee's income, suspecting the static creditors shown since 2008 as fictitious liabilities. The assessee provided explanations and confirmation letters from the creditors, detailing the circumstances leading to the outstanding amounts, including cancelled export orders and financial constraints preventing refunds.

The CIT(A) examined the details and documents related to these creditors and concluded that the liabilities were genuine and not fictitious. The CIT(A) referred to the jurisdictional High Court's decision in CIT vs. Velocient Technologies Ltd, which held that Section 41(1) of the Act applies only when there is an irrevocable cessation of liability. The CIT(A) also noted that unpaid liabilities cannot be added as income under Section 41(1) merely because they remained unpaid for a long time, as established in CIT vs. Vardhaman Overseas.

The Tribunal agreed with the CIT(A)'s application of the law, emphasizing that the mere passage of time without payment does not constitute an irrevocable cessation of liability. The Tribunal upheld the CIT(A)'s conclusion that the liabilities were genuine and dismissed the Revenue's grounds on this issue.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s deletion of additions under Section 14A and on account of undisclosed sources in the form of trade creditors. The Tribunal found no legal infirmity in the CIT(A)'s findings and emphasized the necessity of exempt income for invoking Section 14A and the requirement of an irrevocable cessation of liability for applying Section 41(1).