2022 (10) TMI 682 - AT - Income Tax

Tribunal decision on disallowance of expenses, assessment reopening quashed, restricted disallowance under Section 14A.

M/s PVP Ventures Ltd. Versus The Dy. Commissioner of Income Tax, Corporate Circle-5 (2) Chennai

The Tribunal upheld the disallowance of interest expenditure, depreciation on plant and machinery, and foreign travel expenses due to the lack of business ... Depreciation on plant & machinery - Disallowance on the ground that the assessee has not generated any business income for the impugned assessment years except other income being interest income - HELD THAT:- Merely for the simple reason that those assets were come into the books of accounts of the assessee on amalgamation, it cannot be said that the assessee has put to use those assets in its business. In this case, the assessee could not substantiate its claim of depreciation on plant & machinery in light of reasons given by the AO that there is no business carried out for the impugned assessment years. Therefore, we are of the considered view that the assessee is not entitled for depreciation on plant & machinery. The assessee has relied upon various case laws on the issue of depreciation on plant & machinery and we find that those case laws are not applicable to the assessee's case and thus, case laws relied upon by the assessee are rejected. We are of the considered view that the assessee is not entitled for depreciation on plant & machinery, and thus, we are inclined to uphold the findings of the Ld. CIT(A) and reject the ground taken by the assessee. Disallowance of foreign travel expenses - AO has disallowed foreign travel expenses on the ground that the assessee has failed to prove nexus between the expenditure for foreign travel and business purpose - HELD THAT:- As we find that the assessee could not justify foreign travel expenses with necessary evidence to prove that said expenditure has been incurred for the purpose of business of the assessee. If the assessee has incurred foreign travel expenses for the business of the parent company, then, the parent company should have incurred the cost of travel of the Director, but not the assessee company. Therefore, we are of the considered view that the assessee is not entitled for deduction towards foreign travel expenses and thus, we are inclined to uphold the findings of the Ld. CIT(A) and reject the ground taken by the assessee. Reopening of assessment u/s 147 - income chargeable to tax had been escaped assessment on account of assessment of other income under the head 'income from other sources' and also deduction allowed towards expenditure incurred by the assessee against other income without debiting to capital work-in-progress - HELD THAT:- In this case, on perusal of reasons recorded for re-opening of assessment, we find that the AO does not have any fresh tangible material to come to the conclusion that there is an escapement of income and further, the basis for reasonable belief of escapement of income is financial statements filed by the assessee for relevant assessment year and thus, we are of the considered view that re-opening of assessment in the given facts and circumstances of the case, is bad in law and liable to be quashed and hence, we quashed re-opening of assessment and consequent re-assessment order passed by the AO u/s. 143(3) r.w.s. 147 of the Act. - Decided in favour of assessee. Addition made u/s. 14A r.w.r. 8D - CIT-A directed the AO to disallow expenses under the head 'interest and finance charges' on account of non-commencement of business activities - HELD THAT:- Hon'ble Supreme Court in the case of Chettinad Logistics (P.) Limited [2018 (7) TMI 567 - SC ORDER] held that Sec. 14A of the Act, cannot be invoked where no exempt income earned by the assessee in relevant assessment year. In this case, there is no dispute with regard to the fact that the assessee has not earned any exempt income. Therefore, we are of the considered view that the AO is erred in disallowing expenditure u/s. 14A r.w.r. 8D(ii) of IT Rules 1962. The Ld. CIT(A) after considering relevant facts has rightly deleted the addition made u/s.14A r.w.r. 8D of IT Rules. Hence, we are inclined to uphold the findings of the Ld. CIT(A) and reject the ground taken by the Revenue. As regards enhancement of income by the Ld. CIT(A) towards disallowance of interest and finance charges for non-commencement of business - Assessee claims to have commenced its business activity of real estate in light of JDA with M/s. Unitech Cestos Realtors Pvt. Ltd., for development of 70 acres of land by virtue of JDA on 22.05.2008, but from the admission of the assessee itself income from operations in relation to real estate business has been commenced from AY 2013-14 onwards. Therefore, we are of the considered view that any expenditure incurred including interest and finance charges in connection with said business should be added back to project work-in-progress to be claimed in appropriate year. Therefore, we are of the considered view that there is no error in the reasons given by the Ld. CIT(A) in directing the AO to disallow interest and finance charges for non-commencement of business. Hence, we are inclined to uphold the findings of the Ld. CIT(A) and reject the ground taken by the Revenue. Disallowance of expenses u/s. 14A r.w.r. 8D in absence of exempt income - HELD THAT :- As disallowance contemplated u/s. 14A cannot exceed exempt income. In this case, the assessee has earned exempt income of Rs. 50,22,099/-, whereas the Assessing Officer has disallowed expenditure u/s. 14A of the Act, at Rs. 1,28,31,758/- contrary to settled law. Therefore, we direct the AO to restrict disallowance u/s. 14A of the Act, to the extent of exempt income earned for the year amounting to Rs. 50,22,099/-. Appeal of assessee partly allowed. Issues Involved:1. Disallowance of interest expenditure under Section 36(1)(iii) of the Income Tax Act.2. Disallowance of depreciation on plant and machinery.3. Disallowance of foreign travel expenses.4. Validity of re-opening of assessment under Section 147 of the Income Tax Act.5. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules.Issue-wise Detailed Analysis:1. Disallowance of Interest Expenditure under Section 36(1)(iii):The assessee borrowed Rs. 40 Crores from L&T Infrastructure Finance Ltd. and incurred interest expenditure of Rs. 13,31,08,289/-. The Assessing Officer (AO) disallowed the interest expenditure, stating that the borrowed funds were diverted to associate concerns and subsidiary companies for non-business purposes. The assessee argued that the loans were extended for business purposes, citing business expediency. However, the AO and the Commissioner of Income Tax (Appeals) [CIT(A)] found no evidence of business activity or commercial expediency. The Tribunal upheld the disallowance, noting the absence of business activity and supporting evidence for the claimed commercial expediency.2. Disallowance of Depreciation on Plant and Machinery:The AO disallowed depreciation on plant and machinery amounting to Rs. 3,29,95,364/- due to the lack of business income. The assessee argued that depreciation should be allowed even without business activity, as the assets were acquired through amalgamation. The Tribunal found that the assets were not put to use in the assessee's business, as there was no business activity during the assessment years. The Tribunal upheld the disallowance, stating that the assets from the amalgamated company were not useful for the assessee's business.3. Disallowance of Foreign Travel Expenses:The AO disallowed foreign travel expenses, citing the lack of evidence linking the expenses to the assessee's business. The assessee admitted that the travel was for the parent company's business. The Tribunal upheld the disallowance, stating that the parent company should have incurred the travel expenses if they were for its business.4. Validity of Re-opening of Assessment under Section 147:The AO re-opened the assessment for AY 2009-10 and AY 2010-11, citing the incorrect assessment of interest income and disallowance of expenses. The assessee argued that the re-opening was based on the same set of facts and materials without fresh tangible material, constituting a change of opinion. The Tribunal found that the AO did not have fresh tangible material and that the re-opening was based on the financial statements already available. The Tribunal quashed the re-opening of the assessment, citing the lack of fresh material and the principle of change of opinion.5. Disallowance under Section 14A read with Rule 8D:The AO disallowed Rs. 12,31,77,832/- under Section 14A read with Rule 8D, attributing expenses to exempt income. The CIT(A) deleted the disallowance but directed the AO to disallow interest and finance charges due to non-commencement of business. The Tribunal upheld the deletion of the disallowance under Section 14A, citing the absence of exempt income. The Tribunal also upheld the CIT(A)'s direction to disallow interest and finance charges, as the business activity had not commenced.In the case of AY 2012-13, the AO disallowed Rs. 1,28,31,758/- under Section 14A read with Rule 8D, while the assessee earned exempt income of Rs. 50,22,099/-. The Tribunal directed the AO to restrict the disallowance to the extent of exempt income earned, following the principle that disallowance under Section 14A cannot exceed the exempt income.Conclusion:The Tribunal upheld the disallowance of interest expenditure, depreciation on plant and machinery, and foreign travel expenses due to the lack of business activity and supporting evidence. The re-opening of assessment under Section 147 was quashed due to the absence of fresh tangible material. The disallowance under Section 14A read with Rule 8D was restricted to the extent of exempt income earned.