2022 (2) TMI 1511 - AT - Income Tax

Assessee Wins: Interest Disallowance Deleted, No TDS under s.194A, s.14A Limited, s.68 Additions Negated as Funds Traced and Loans Established

ITO, Ward-1 (2), Jalgaon Versus Pramod Bhaichand Raisoni

ITAT PUNE - AT upheld the CIT(A)'s decisions in favor of the assessee: disallowance of interest on cash-in-hand was deleted since retained funds were used ... Addition on account of interest - AO made disallowance of interest at 12% on the ground that the assessee kept huge interest bearing funds idle in the form of cash in hand - CIT(A) deleted the addition - HELD THAT:- We are unable to comprehend the reasoning given by the AO for the obvious reason that retaining cash in hand during the course of business is the assessee’s prerogative. Disallowance of interest can be warranted if interest bearing funds are diverted for non-business purpose. If the funds are kept in the business itself, there can be no question of making any disallowance of interest on the cash in hand available with the assessee. We, therefore, approve the view taken by the ld. CIT(A). TDS u/s 194A - Disallowance of interest u/s.40(a)(ia) - AO observed that the assessee made interest payment to Multi State Co-operative Credit Society without deduction of tax at source -CIT(A) deleted the addition - HELD THAT:- The business of Co-operative Credit Society is banking. Section 194A(3)(iii)(a) provides that no deduction of tax at source is required in respect of interest paid to “any cooperative society engaged in carrying on the business of banking (including cooperative land mortgage bank)”. CIT(A) deleted the addition by relying on the judgment of SBI Staff Co-op. Society Ltd. [1997 (11) TMI 72 - MADRAS HIGH COURT] holding that : “A cooperative society which undertakes the business of banking, such as, lending money to its members or accepting deposits or raising loans from financial and banking institutions and advancing the same to its members is definitely engaged in the business of banking.” Also in Syndicate Bank Employees Co-op. Thrift and Credit Society [2005 (12) TMI 78 - MADRAS HIGH COURT] reiterating the same proposition. DR could not point out any direct decision on the point contrary to those considered and decided by the ld. CIT(A). Disallowance u/s.14A - AO invoked the provisions of Rule 8D and computed the disallowance - HELD THAT:- Hon'ble Delhi High Court in Cheminvest Ltd. [2015 (9) TMI 238 - DELHI HIGH COURT] has held that if there is no exempt income, there can be no question of making any disallowance u/s 14A of the Act. Similar view has been taken in CIT vs. Holcim India P. Ltd. [2014 (9) TMI 434 - DELHI HIGH COURT] More recently in Pr. CIT VS. Kohinoor Projects Pvt. Ltd. [2020 (1) TMI 1161 - BOMBAY HIGH COURT] has held that in the absence of any exempt income, there cannot be any disallowance of expenses u/s 14A of the Act. As the ld. CIT(A) in the instant case has restricted the disallowance to the amount of exempt income or disallowance suo motu offered by the assessee at Rs.51,363/-, whichever is higher, we hold that the same is in order and does not call for any interference. Addition u/s.68 - AO's objection was that the loan creditors did not furnish their securities - HELD THAT:- assessee received fresh loans during the year amounting to Rs.9.93 crore from six parties mentioned above. All these six parties had, in turn, taken loans from the BHR which were then advanced to the assessee. The AO has also not denied this factual scenario. His objection was that the loan creditors did not furnish their securities, which were actually provided by the assessee. All these facts amply indicate that the loans were obtained by the above six persons from BHR which were then advanced to the assessee. In view of these clear-cut findings, we do not see how section 68 comes to play. Once the identity of the unsecured lenders was established; there was no doubt that they took loans from BHR for giving further loans to the assessee; and that it was the same amount of loans taken by them, which was deposited in their respective bank accounts from which the loans were advanced to the assessee, we see no reason as to the applicability of section 68 to the facts of the extant case - Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether interest imputed on large cash-in-hand balances (Tijori/Cash) by deeming interest-bearing funds as idle is allowable or liable to disallowance under the Income-tax Act. 2. Whether interest paid to a cooperative society engaged in banking is liable to disallowance under section 40(a)(ia) for failure to deduct tax at source, i.e., whether section 194A(3)(iii)(a) exempts such payments from TDS obligations. 3. Scope and quantum of disallowance under section 14A read with Rule 8D where exempt income is minimal or absent - specifically whether disallowance can exceed the exempt income actually earned or the amount offered suo motu by the assessee. 4. Applicability of section 68 to unsecured loans received by the assessee where the alleged lenders themselves obtained loans from a cooperative society and advanced the same to the assessee (identity, capacity and genuineness of creditors and transactions). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Interest disallowance on cash-in-hand balances Legal framework: The power to disallow expenses arises where funds meant to earn interest are diverted or used for non-business purposes; imputing interest on idle interest-bearing funds requires a finding of diversion or non-business use. Precedent treatment: No contrary precedent cited in the order; analysis rests on general principle that retention of cash in business is within assessee's prerogative. Interpretation and reasoning: The AO applied a 12% rate to cash-in-hand balances on the premise that interest-bearing funds were kept idle and therefore interest should be disallowed. The Tribunal held that mere retention of cash in hand during the course of business does not amount to diversion of interest-bearing funds. Disallowance under the income-tax provisions is justified only when interest-bearing funds are diverted for non-business or non-productive use. Where funds remain within the business (i.e., held as cash for business requirements), imputation of interest is not warranted. Ratio vs. Obiter: Ratio - disallowance for imputed interest requires evidence of diversion/non-business use; mere holding of cash-in-hand is not sufficient. Observation that retaining cash is an assessee's prerogative is integral to the decision. Conclusion: Addition on account of imputed interest on cash-in-hand deleted; AO's disallowance upheld as unwarranted was rejected by The Court. Issue 2 - TDS applicability under section 40(a)(ia) / exemption under section 194A(3)(iii)(a) Legal framework: Section 40(a)(ia) disallows expenditure where tax is required to be deducted at source but not deducted/paid. Section 194A(3)(iii)(a) exempts deduction of tax at source in respect of interest paid to 'any cooperative society engaged in carrying on the business of banking (including cooperative land mortgage bank)'. Precedent treatment: The Court relied on High Court decisions holding that a cooperative society undertaking activities such as accepting deposits, raising loans and lending to its members is engaged in the business of banking. Tribunal orders cited by appellate authority were also relied upon; no contrary binding decision before the Court. Interpretation and reasoning: The assessee paid interest to a cooperative society whose business was found to be banking. Under section 194A(3)(iii)(a), such payments are not subject to TDS. The AO's disallowance under section 40(a)(ia) for failure to deduct TDS was therefore misplaced where the payee fell within the statutory exemption. Reliance on authoritative case law supporting the characterisation of the cooperative society as engaged in banking was determinative. Ratio vs. Obiter: Ratio - where the payee is a cooperative society engaged in banking, section 194A(3)(iii)(a) precludes TDS and therefore section 40(a)(ia) disallowance cannot be sustained. Observation that factual determination of payee's business is outcome-determinative is operative. Conclusion: Disallowance under section 40(a)(ia) deleted; exemption under section 194A(3)(iii)(a) applicable and deletion affirmed. Issue 3 - Scope of disallowance under section 14A and Rule 8D where exempt income is negligible Legal framework: Section 14A disallows expenditure in relation to exempt income; Rule 8D provides a method for computing such disallowance. Jurisprudence establishes that where there is no exempt income, section 14A disallowance cannot be made; further, the quantum of disallowance cannot exceed the exempt income actually earned or, in certain authorities, the amount offered by the assessee. Precedent treatment: The Court cited High Court authorities holding that in absence of exempt income there can be no disallowance under section 14A (Cheminvest Ltd.; Holcim India P. Ltd.; jurisdictional High Court decision in Pr. CIT vs. Kohinoor Projects Pvt. Ltd.). Interpretation and reasoning: The AO computed Rule 8D-based disallowance substantially higher than the exempt income and higher than the assessee's own suo motu disallowance. The appellate authority restricted disallowance to the higher of exempt income or assessee's offered disallowance. Given binding precedents that disallowance is inappropriate where no exempt income exists, and considering the minimal exempt income in this case, the restriction was upheld as reasonable and consistent with precedent. Ratio vs. Obiter: Ratio - disallowance under section 14A cannot exceed the exempt income actually earned (and in context limited by assessee's offered disallowance where appropriate); absent exempt income no disallowance is sustainable. This principle is applied to limit Rule 8D computation. Conclusion: AO's higher disallowance set aside; disallowance limited to the amount of exempt income or the assessee's suo motu disallowance (whichever higher), as directed by the appellate authority and affirmed by The Court. Issue 4 - Applicability of section 68 to unsecured loans where lenders borrowed from a cooperative society and advanced identical amounts to the assessee Legal framework: Section 68 casts on the assessee the onus of proving identity, creditworthiness (capacity), and genuineness of share application money/loans where source is unexplained. If identity/capacity/genuineness are satisfactorily established, section 68 cannot be invoked. Precedent treatment: The order applies settled principles requiring threefold proof (identity, capacity, genuineness) to rebut section 68. No contrary authority was cited to displace this framework. Interpretation and reasoning: The assessee produced account ledgers, confirmations and bank statements showing that six lenders advanced funds to the assessee and that those lenders themselves had obtained loans from the cooperative society (BHR) from their cash credit accounts. The AO's factual finding that many of those lenders furnished security by mortgaging the assessee's property for borrowings from BHR did not negate the documentary trail showing funds routed from BHR to lenders to the assessee. The Tribunal concluded that identity and capacity of the lenders and genuineness of transactions were established on record; the mere fact that the lenders had obtained loans from BHR and passed them to the assessee (even if irregular vis-à-vis society rules) did not render the receipts unexplained for purposes of section 68. Any collusion or violation of society rules gives rise to separate remedies but does not justify an addition under section 68 where the statutory ingredients are met. Ratio vs. Obiter: Ratio - where creditors' identity and capacity and the genuineness of loan transactions are established by contemporaneous bank records and confirmations showing flow of funds, section 68 addition is not sustainable even if the creditors had in turn borrowed from a third party to fund the advances. Observation that remedy for any collusion lies outside section 68 is an applied legal conclusion. Conclusion: Additions under section 68 deleted; receipts treated as loans from identified lenders whose capacity and genuineness were established by documentary evidence showing source of funds from the cooperative society to the lenders and then to the assessee.