2024 (2) TMI 278 - AT - Income Tax

Section 14A disallowance deleted, seized laptop documents lack evidentiary value, education cess not deductible, FPS receipts capital not revenue

M/s. RSWM Ltd. Versus DCIT, Central Circle-31, New Delhi And (Vice-Versa)

ITAT Delhi ruled on multiple issues: Section 14A disallowance under Rule 8D(2)(ii) was deleted, directing AO to compute only under Rule 8D(2)(iii) for ... Disallowance made u/s 14A r.w.Rule-8D - HELD THAT:- As disallowance under Rule-8D(2)(ii) of the IT Rules should not have made by the AO, thus, the disallowance made by the AO is hereby deleted. Further, we direct the AO to compute the disallowance u/s 14A r.w.Rule-8D(2)(iii) of the Rules by considering only investment from each exempt income is earned. Accordingly, ground No.1 of the Revenue and the assessee are disposed off. Unexplained investment - Additions on the basis of said loose paper - credibility of dumb documents - search was conducted on the assessee wherein an estimated working was seized from the Laptop of the employee of the assessee containing details of certain land which was registered in the name of the assessee - assessee submitted that, the assessee has not been provided with opportunity to cross examine the person from whose laptop the document has been seized - HELD THAT:- It is well settled law that the dumb documents having no evidentiary value cannot be taken as sole basis for determination of undisclosed income of the assessee. If the Department of Revenue wants to make use of dumb documents, then the onus on the Revenue Department to collect cogent corroborative evidences. The Hon’ble High Court of Allahabad in the case of Kumar Trading Co. [2007 (9) TMI 284 - HIGH COURT OF JUDICATURE AT ALLAHABAD] held that, it is settled principle of law that if the Revenue wants to rely upon the entries of the document, seized from the premises of third party, the burden lies upon the Revenue Authorities to prove the genuineness and authenticity of the said entries to connect the said entry with the dealer. Further, it is found that the person from who’s possession the seized document is recovered, was not subject to the cross examination of the assessee and no opportunity of cross examination has been given to the assessee. Therefore, for the detailed discussion made above, in our considered opinion, the Ld. AO as well as the Ld. CIT(A) have committed error in making the addition u/s 69 of the Act which deserves to be deleted. Accordingly, the ground No.2 of the assessee is allowed and the subject addition sustained by the Ld. CIT(A) is deleted. Allowability of claim of education Cess - assessee raised claim the education Cess as eligible business expenditure u/s 40(a)(ii) and contention of the assessee that prohibition contained in section 40(a)(ii) of the Act is only with reference to payment of Income Tax and same does not apply to claim of education Cess paid along with Income Tax - HELD THAT:- The issue regarding allowability of education Cess has been considered in the case of Kanoria Chemicals and Industries Ltd.[2021 (10) TMI 1153 - ITAT KOLKATA] wherein it is held that the Cess is not allowable deduction - thus we hold that the education Cess can’t be allowed as an allowable expense, accordingly, we find no merit in Ground No. 3 of the assessee and the Ground No. 3 of the assessee is dismissed. Nature of receipt - claim of FPS/FMS received as per foreign trade policy in computing the total income of the assessee - revenue or capital receipt - HELD THAT:- This issue of claim of FPS/FMS as capital receipt received as per foreign trade policy in computing total income has been dealt and decided by the Co-ordinate Bench of the Tribunal in Assessee’s own case for Assessment Year 2013-14 [2023 (7) TMI 1357 - ITAT DELHI] in favour of the assessee. Apart from the same, in the case of Nitin Spinners Ltd. vide [2019 (9) TMI 1154 - RAJASTHAN HIGH COURT] as affirmed by SC [2021 (9) TMI 430 - SC ORDER] as held that apparently the Central Government gave the subsidy to enhance Indian export potential in the international market. It was not granted to meet the cost of expenditure to meet the competition of the Indian textile market. The ITAT took note of judgment in Ponni Sugars & Chemicals Ltd. (2008 (9) TMI 14 - SUPREME COURT) and held that the amount was not an export incentive, but rather capital receipt and therefore, not taxable. Characterization of receipt - revenue or capital receipt - interest subsidy under TUFFS - HELD THAT:- The allow-ability of claim of interest subsidy under TUFFS and RIPS have been decided by the Hon'ble High Court of Rajasthan in the case of PCIT vs. Nitin Spinners Ltd.[2019 (9) TMI 1154 - RAJASTHAN HIGH COURT] concluding the amount was received as capital stream and therefore, not taxable. Issues Involved:1. Disallowance under Section 14A read with Rule 8D of the Income Tax Act, 1961.2. Addition under Section 69 on account of unexplained investment.3. Allowability of education cess as a deduction.4. Treatment of FPS/FMS subsidies as capital receipts.5. Treatment of interest subsidies under TUFS and RIPS as capital receipts.Summary:1. Disallowance under Section 14A read with Rule 8D:The Tribunal addressed the disallowance under Section 14A read with Rule 8D for both Assessment Years 2014-15 and 2015-16. The assessee argued that investments were made from interest-free funds, and no expenditure was incurred to earn exempt income. The Tribunal noted that the assessee's own interest-free reserves were higher than the investments, thus, no disallowance under Rule 8D(2)(ii) should be made. The Tribunal directed the AO to compute disallowance under Rule 8D(2)(iii) by considering only investments from which exempt income was earned. Consequently, the disallowance made by the AO was deleted, and the ground was disposed of.2. Addition under Section 69 on account of unexplained investment:The Tribunal examined the addition of Rs. 1,52,45,000/- made on account of unexplained investment. The addition was based on an estimated working seized from an employee's laptop, which the assessee claimed was a rough estimate for civil construction costs. The Tribunal found that the addition was not supported by corroborative evidence, and the seized document was a 'dumb document' with no evidentiary value. The Tribunal held that the addition under Section 69 was erroneous and deleted it.3. Allowability of education cess as a deduction:The Tribunal considered the allowability of education cess as a business expenditure. The assessee argued that education cess should be deductible under Section 37(1) of the Act. However, the Tribunal relied on the decision of the ITAT Kolkata and the amended Section 40(a)(ii) of the Act, which includes any surcharge or cess as part of income tax. Therefore, the Tribunal held that education cess is not an allowable expense and dismissed the ground.4. Treatment of FPS/FMS subsidies as capital receipts:The Tribunal addressed the claim of FPS/FMS subsidies as capital receipts. The Ld. CIT(A) had deleted the addition, relying on the judgment of the Rajasthan High Court in PCIT Vs. Nitin Spinners Ltd., which held that such subsidies are capital in nature and excludable from book profit under Section 115JB. The Tribunal found no merit in the Revenue's ground and dismissed it, following the precedent set by the High Court and the Supreme Court.5. Treatment of interest subsidies under TUFS and RIPS as capital receipts:The Tribunal considered the treatment of interest subsidies under TUFS and RIPS. The Ld. CIT(A) had deleted the additions, relying on the judgment of the Rajasthan High Court in PCIT Vs. Nitin Spinners Ltd., which treated these subsidies as capital receipts. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's grounds, and followed the consistent judicial precedent.Conclusion:The appeals filed by the assessee were partly allowed for statistical purposes, while the appeals filed by the Revenue were dismissed. The Tribunal's decision was pronounced in open court on 31st January 2024.