2025 (5) TMI 1946 - AT - Income Tax

ITAT dismisses revenue appeal on Section 14A disallowance and Section 68 addition for loan transactions

ITO, Ward-9 (1), Kolkata Versus Manish Company Pvt. Ltd.

The ITAT Kolkata dismissed the revenue's appeal in a case involving disallowance under section 14A read with Rule 8D and addition under section 68. The ... Disallowance made u/s 14A r/w rule 8D - expenses incurred in relation to exempt incoe - HELD THAT:- It is a fact that no exempt income earned by the assessee during the year under reference and it is further important to mention here that the transaction with the same loan party being a group concern of the assessee has already been accepted in the earlier assessment by the AO. CIT(A) has rightly held in its order that making addition u/s 14A by applying the Rule 8D is not justified. Addition u/s 68 - unexplained cash credit - HELD THAT:- identity of loaner has fully been established by the assessee by providing PAN card, copy of ITR etc. The creditworthiness of the DLL is also established from its audited balance sheet, profit and loss account and IT acknowledgment of every year. The genuineness of the transaction has been made through banking channel. It is also important to mention here that the loan taken from a sister concern was repaid during the year under reference through banking channel. CIT(A) has rightly held its order that the assessee company has discharged its onus proving the identity of the loan creditor, established the creditworthiness of DLL. Appeal filed by the revenue is dismissed. The core legal issues considered in this appeal relate primarily to the validity of additions made by the Assessing Officer (AO) under sections 68 and 14A of the Income Tax Act, 1961, and the condonation of delay in filing the appeal by the revenue. Specifically, the Tribunal examined:Whether the delay of 71 days in filing the appeal by the revenue should be condoned.The correctness of the AO's addition of Rs. 4,47,45,000 treated as unexplained cash credit under section 68 of the Act, concerning loans received from a related party.The validity of the disallowance of Rs. 18,79,636 made under section 14A read with Rule 8D of the Income Tax Rules, relating to expenses incurred in relation to exempt income.Regarding the delay in filing the appeal, the Tribunal considered the reasons advanced in the condonation petition, which highlighted non-communication of the CIT(A) order to the revenue, absence of alerts via SMS or email, and resource constraints leading to delayed retrieval of the order from the ITBA system. The Tribunal noted the absence of objection from the Departmental Representative and emphasized the judicial principle that cases should be decided on merits rather than technicalities. Consequently, the delay was condoned.On the issue of addition under section 14A, the relevant legal framework involves the provisions of section 14A of the Income Tax Act, which empowers the AO to disallow expenditure incurred in relation to income exempt from tax. Rule 8D prescribes a method for computing such disallowance. The Tribunal examined the CIT(A)'s order, which relied heavily on authoritative judicial precedents, including multiple Supreme Court decisions that have held no disallowance under section 14A can be made if the assessee has not earned any exempt income during the relevant year. The CIT(A) specifically referred to the Supreme Court's dismissal of Special Leave Petitions (SLPs) in cases such as PCIT vs. Oil Industry Development Board, Cheminvest Ltd. vs. CIT, and PCIT vs. GVK Project and Technical Services Ltd., which uniformly uphold this principle. Additionally, the Calcutta High Court's ruling in CIT vs. Ashika Global Securities Ltd. was cited, reinforcing that in the absence of exempt income, disallowance under section 14A and Rule 8D does not arise. The AO's reliance on Maxopp Investment Limited vs. CIT was distinguished on facts, as the AO himself acknowledged the factual dissimilarity. The CIT(A) noted that the assessee's investment opening and closing balances remained unchanged, indicating no transactions that would generate exempt income or related expenses. On these grounds, the disallowance under section 14A was deleted.Concerning the addition under section 68, the legal question centered on whether the loans received from M/s Dalmia Laminators Limited (DLL), a group concern, were genuine and whether the identity and creditworthiness of the lender were satisfactorily established. Section 68 requires that unexplained cash credits be added to income unless the assessee proves the identity, creditworthiness, and genuineness of the transaction. The AO had treated Rs. 4,47,45,000 as unexplained cash credit, questioning these factors. The Tribunal reviewed the documentary evidence submitted by the assessee, including:Bank statements confirming transactions through banking channels.Confirmation letters from DLL.Details of DLL's net worth, turnover, profit, and tax paid over three assessment years, demonstrating substantial financial standing.Copies of PAN and Income Tax Returns of DLL establishing identity and creditworthiness.The Tribunal observed that the transaction with DLL had been accepted in previous assessments, lending further credibility. The loan amount was fully repaid during the year under consideration, again through banking channels, supporting the genuineness of the transaction. The Tribunal found that the assessee discharged the onus imposed under section 68 by establishing the identity, creditworthiness, and genuineness of the loan transaction. The Tribunal upheld the CIT(A)'s deletion of the addition under section 68.In addressing competing arguments, the Tribunal gave due consideration to the revenue's reliance on the Apex Court's decision in PCIT vs. NRA Iron & Steel Pvt. Ltd., which emphasizes scrutiny of the identity and creditworthiness of creditors when unexplained cash credits are added. However, the Tribunal distinguished the present facts, noting the comprehensive documentary evidence and prior acceptance of similar transactions. The revenue's contention that the assessee failed to discharge the primary onus was rejected on the basis of the detailed evidence presented.The Tribunal concluded that the impugned order of the CIT(A), which deleted the additions under sections 14A and 68, was legally sound and factually justified. The appeal filed by the revenue was accordingly dismissed.Significant holdings from the judgment include the following verbatim excerpts elucidating the legal reasoning:'No disallowance could be made u/s14A when no exempt income is earned.''Following the decision stated by AO himself, the disallowance u/s 14A should be restricted to amount claimed as exempt i.e NIL.''Making addition u/s 14A by applying rule 8D seems not justified.''The identity of loaner has fully been established by the assessee by providing PAN card, copy of ITR etc. The creditworthiness of the DLL is also established from its audited balance sheet, profit and loss account and IT acknowledgment of every year.''The genuineness of the transaction has been made through banking channel.''The assessee company has discharged its onus proving the identity of the loan creditor, established the creditworthiness of DLL.'Core principles reinforced by this judgment include:The principle that appeals should be adjudicated on merits rather than procedural delays, subject to genuine reasons for delay.The established jurisprudence that disallowance under section 14A cannot be made if no exempt income is earned during the relevant assessment year.The burden on the assessee under section 68 to prove the identity, creditworthiness, and genuineness of unexplained cash credits, which can be discharged by credible documentary evidence and prior acceptance of similar transactions.The importance of banking channel transactions as evidence of genuineness.In final determinations, the Tribunal:Condoned the delay of 71 days in filing the appeal by the revenue.Upheld the deletion of the disallowance under section 14A, as no exempt income was earned.Confirmed that the addition under section 68 was not justified, as the assessee satisfactorily established the identity, creditworthiness, and genuineness of the loan from DLL.Dismissed the revenue's appeal against the CIT(A) order for AY 2018-19.