2024 (5) TMI 638 - AT - Income Tax

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

Alishan Steels Pvt. Ltd. Versus DCIT, Circle -1 (1), Kolkata

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 ... Set off of loss against income referred to in section 68 r/w.s115BBE - HELD THAT:- Issue is already held to be in favour of the assessee in the case of Vijaya Hospitality & Resorts Ltd. (2019 (11) TMI 1106 - KERALA HIGH COURT] wherein the amendment brought in section 115BBE(2) are effective from 01.04.2017. We also note that CBDT in its circular referred above has categorically allowed to claim the set off of loss against the income determined u/s. 115BBE after AY 2016-17. In the present case before us, the year under consideration is AY 2011-12 and 2015-16 in which the claim of set off of loss is permissible. Accordingly, in terms of the CBDT Circular and respectfully following the decision of (supra) we allow ground taken by the assessee in this respect. Addition made u/s. 40A(2)(b) for excess payment made to related party - HELD THAT:- AO has considered the purchase transaction of only one unrelated party to compare it with the purchases made by the assessee from the related party and arrived at the conclusion to make the disallowance. Contrary to this, assessee has furnished details of purchase transactions from several other unrelated parties which demonstrates that purchases have been made at higher rates from them as compared to the one from the related party. Also, it is undisputed that there is a loss scenario both, in the hands of the assessee and the one from whom purchases have been made which is a related party. Thus, from a tax advantage objective, there seems to be no incentive to inflate the purchase - We delete the addition made u/s. 40A(2)(b) - Decided in favour of assessee. Disallowance made u/s. 14A - As per AO assessee has held investment in shares of bodies corporate which were capable of yielding exempt income - HELD THAT:- We find that this issue is settled as no addition can be made u/s. 14A where assessee has not earned any exempt income in the year - As decided in M/S. ERA INFRASTRUCTURE (INDIA) LTD. [2022 (7) TMI 1093 - DELHI HIGH COURT] no disallowance is required to be made in the case of the assessee because it has not earned any tax-free income and allowed the appeal of the assessee by deleting the addition so made. Considering this, the disallowance made in this respect is deleted. Decided in favour of assessee. Addition for advance outstanding during the year under consideration - assessee contended that the amount received were returned back and out of the three parties, accounts of two parties were squared off during the year itself - HELD THAT:- The presumption made by the Ld. AO that advances have been booked for purchase of material and production thereof is not justified when the money received has been returned back within a year for two parties out of the three parties and even for the 3rd party the details are on record which show that only Rs. 32,89,807/- is outstanding out of total of Rs. 81,63,076/-, balance has been received through banking channel. Considering all these facts, we delete the addition made by the Ld. AO and allow this ground raised by the assessee. 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.