ITAT allows set-off of losses against section 68 income, deletes additions under sections 40A(2)(b) and 14A

The ITAT Kolkata ruled in favor of the assessee on multiple grounds. The tribunal allowed set-off of losses against income under section 68 read with section 115BBE for assessment years 2011-12 and 2015-16, following Kerala HC precedent and CBDT circular. The addition under section 40A(2)(b) for excess payment to related parties was deleted after the assessee demonstrated comparable transactions with unrelated parties at higher rates. Disallowance under section 14A was removed as no exempt income was earned during the year, following Delhi HC precedent. Addition for outstanding advances was deleted since amounts were returned within the year and properly documented through banking channels.

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Issues Involved:

1. Set off of business loss against income determined and added u/s. 68 of the Income-tax Act, 1961.
2. Addition of Rs. 66,61,440/- as excess payment to related party u/s. 40A(2)(b).
3. Addition of Rs. 1,39,218/- under section 14A.
4. Addition of Rs. 2,58,64,275/- for advances outstanding during the previous financial year.

Summary:

1. Set off of Business Loss Against Income Determined and Added u/s. 68:

The common ground in both appeals was the set off of business loss against income added u/s. 68. The assessee filed returns reporting losses, but the Assessing Officer (AO) treated certain credits as unexplained u/s. 68 and denied set off against business loss, relying on the Gujarat High Court decision in Fakir Mohmed Haji Hassam Vs. CIT. The assessee argued that amendments to section 115BBE by the Finance Act, 2016, effective from 01.04.2017, allowed set off of losses till AY 2016-17. The Tribunal, following the Kerala High Court decision in Vijaya Hospitality & Resorts Ltd. Vs. CIT and CBDT Circular No. 11/2019, held that set off of losses was permissible for AYs 2011-12 and 2015-16, thus allowing the assessee's appeal on this ground.

2. Addition of Rs. 66,61,440/- as Excess Payment to Related Party u/s. 40A(2)(b):

For AY 2015-16, the AO disallowed Rs. 66,61,440/- u/s. 40A(2)(b) for excess payment to a related party, comparing it with purchases from an unrelated party. The assessee contended that there was no profit shifting as both parties incurred losses, and the AO's comparison was flawed. The Tribunal noted that purchases from other unrelated parties were at higher rates and there was no tax advantage in inflating purchases. Thus, the addition was deleted, and the assessee's claim was allowed.

3. Addition of Rs. 1,39,218/- under Section 14A:

The AO made a disallowance u/s. 14A for investments capable of yielding exempt income, despite the assessee not earning any exempt income during the year. The Tribunal, citing the Delhi High Court decision in PCIT Vs. Era Infrastructure (India) Ltd. and ITAT Kolkata's decision in Babul Fiscal Services (P) Ltd v. ACIT, held that no disallowance u/s. 14A is required if no exempt income is earned. Therefore, the disallowance was deleted, and the assessee's appeal on this ground was allowed.

4. Addition of Rs. 2,58,64,275/- for Advances Outstanding:

The AO added Rs. 2,58,64,275/- for advances deemed to be used for out-of-books production. The assessee argued that the advances were returned, and transactions were through banking channels. The Tribunal found the AO's presumption unjustified as most advances were returned within a year, and the remaining amount was accounted for. Consequently, the addition was deleted, and the assessee's appeal on this ground was allowed.

Conclusion:

Both appeals of the assessee were partly allowed, with the Tribunal ruling in favor of the assessee on all contested grounds. The order was pronounced in the open court on 01.01.2024.

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