2024 (6) TMI 214 - AT - Income Tax

Assessee wins on Section 14A disallowance with sufficient interest-free funds and Section 68 unexplained loan addition deleted

The Deputy Commissioner of Income Tax, Circle-3 (1), Raipur (C.G.) Versus M/s. Shanno Business India Pvt. Ltd.

ITAT Raipur dismissed revenue's appeal on multiple grounds. Regarding s.14A disallowance, the tribunal held no interest expenditure disallowance was ... Disallowance u/s. 14A r.w. Rule 8D(ii) - expenditure incurred on earning exempt income - as argued assessee company as per its 'balance sheet' had sufficient interest-free funds, i.e, share capital/reserves which would sufficiently explain the investment in the exempt income yielding shares therefore, no part of the interest expenditure was liable to be disallowed u/s.14A - HELD THAT:- As the interest-free funds available with the assessee company were more than sufficient to source its investment in exempt income-yielding shares, therefore, we concur with the view taken by the CIT(Appeals) that no disallowance of any part of the interest expenditure could have been made by the A.O by attributing the same to earning of the exempt income u/s. 14A r.w.r. 8D(2)(ii) of the Act. At this stage, we may herein observe that it is neither the case of the department nor a fact discernible from the record that the assessee company is found to have invested in the exempt income-yielding shares out of its interest-bearing funds. Also, we may herein observe that controversy as to whether disallowance of any part of the interest expenditure can be made in a case where the assessee has mixed funds, i.e. both interest-free funds and interest-bearing funds, in the absence of any supporting material which would establish that the exempt income yielding investment was sourced out of the interest-free funds, is no more res-integra in view of the judgment in the case of South Indian Bank Ltd [2021 (9) TMI 566 - SUPREME COURT] had held that if investment in exempt income yielding shares is made out of common funds, and the assessee had available non-interest bearing funds larger than the investments made in tax-free securities then in such cases, no disallowance u/s. 14A would be called for. Also, we find that a similar view is taken in the case of CIT vs. HDFC Bank Ltd. [2014 (8) TMI 119 - BOMBAY HIGH COURT] wherein as observed that where the assessee has more interest-free funds than tax-free investments, then a presumption would arise that tax-free investments would be out of the interest-free funds. We, thus, in terms of our aforesaid observations, concur with the view taken by the CIT(Appeals) that as the assessee company had sufficient interest-free funds, i.e. capital, reserves & surplus to source the investment in the exempt income-yielding shares, therefore, no part of the interest expenditure claimed by it could have been attributed to earning of the exempt income. Accordingly, the disallowance made by the A.O u/s. 14A r.w.r. 8D(2)(ii) is not warranted. Thus, the Ground of appeal No. 1 raised by the revenue is dismissed in terms of our aforesaid observations. Addition towards labor expenses, conveyance and vehicle running expenses, printing, and stationery expenses, etc.,- expenses booked under the aforesaid heads were incurred in cash and were merely supported by self-made vouchers and, thus, were not verifiable - CIT(Appeals) sustained the disallowance concerning the vehicle running expenses, for the reason that personal usage of vehicles could not be ruled out, but vacated the balance amount of addition/disallowance - HELD THAT:- As there is neither any justifiable reason given by the A.O for disallowing the assessee's claim for deduction of the aforementioned expenses u/s. 37 of the Act, therefore, finding no infirmity in the view taken by the CIT(Appeals), we uphold the same. Thus, the Ground of appeal No. 3 raised by the revenue is dismissed in terms of our aforesaid observations. Addition u/s 68 - Unexplained loan transaction - HELD THAT:- As ratio of the judgment of Lovely Exports Pvt. Ltd. [2008 (1) TMI 575 - SC ORDER] as been held that no addition can be made under section 68 of the Act where the assessee had furnished before the AO evidence proving the identity of the investors, thus, applied to the subject loan transaction as the assessee company had proved to the hilt the identity of the lender company, which, in fact had confirmed of having advanced the subject loan to the assessee company. Accordingly, if the A.O had any doubt as regards the creditworthiness of the aforementioned lender who had duly confirmed the loan transaction, then the proper recourse available to him was to proceed against the said lender company and not make any addition in the hands of the assessee company. We, thus, concur with the view taken by the CIT(Appeals) that the loan raised by the assessee company from the aforementioned lender company, viz. M/s. Hillview Agencies Pvt. Ltd., Kolkata could not have been held as unexplained cash credit u/s. 68 of the Act. Thus, the Ground of appeal raised by the revenue is dismissed. Issues Involved:1. Disallowance u/s 14A.2. Addition u/s 68 for unsecured loan.3. Ad-hoc disallowance of expenses.4. Validity of assessment proceedings.Summary:1. Disallowance u/s 14A:The CIT(A) deleted the disallowance of Rs. 4,00,502/- made by the AO u/s 14A of the Act. The CIT(A) observed that the assessee had sufficient interest-free funds (share capital and reserves of Rs. 16.49 crores) to explain the investment in exempt income-yielding shares of Rs. 1.40 crores. The AO failed to establish any nexus between borrowed funds and the investment. The Tribunal upheld the CIT(A)'s view, referencing the Supreme Court's judgment in South Indian Bank Ltd. Vs. CIT, which states that if interest-free funds exceed tax-free investments, no disallowance u/s 14A is warranted.2. Addition u/s 68 for Unsecured Loan:The AO added Rs. 2,41,79,159/- as unexplained cash credit u/s 68, doubting the creditworthiness and genuineness of the loan from M/s Hillview Agencies Pvt. Ltd. The CIT(A) found that the assessee had provided sufficient documentary evidence (return of income, balance sheet, bank statement, and confirmation) to substantiate the loan. The CIT(A) noted that the lender had sufficient funds and regular transactions with the assessee. The Tribunal concurred with the CIT(A), emphasizing that the AO did not disprove the documentary evidence provided by the assessee. The Tribunal also noted that the lender was an NBFC registered with the RBI and had sufficient funds to advance the loan.3. Ad-hoc Disallowance of Expenses:The AO made an ad-hoc disallowance of Rs. 50,000/- out of labor expenses, conveyance, vehicle running expenses, printing, and stationery expenses, citing unverifiable self-made vouchers. The CIT(A) deleted Rs. 40,000/- of the disallowance, sustaining Rs. 10,000/- for personal use of vehicles. The Tribunal upheld the CIT(A)'s decision, noting that the AO did not provide specific instances or material to justify the disallowance.4. Validity of Assessment Proceedings:The assessee contended that the notice u/s 143(2) was not issued within the prescribed time limit, rendering the assessment invalid. The Tribunal, having upheld the CIT(A)'s order vacating the additions, dismissed the cross-objection as academic and did not address the validity of the assessment proceedings.Conclusion:The Tribunal dismissed the revenue's appeal and the assessee's cross-objection, upholding the CIT(A)'s order in favor of the assessee on all contested issues.