TaxTMI 
TaxTMI 
2026 (9) TMI 694
X X X X Extracts X X X X
X X X X Extracts X X X X
....ficer proceeded to complete the assessment under section 144 of the Act on 31.03.2015 and assessed the loss at Rs.18,37,91,129/- after making various additions and disallowances. 3. During the course of assessment proceedings, the Assessing Officer first examined the gross profit disclosed by the assessee. The assessee had shown a GP rate of 8.39% on turnover of Rs.1,051.53 crores as against a GP rate of 15.43% on turnover of Rs.930.01 crores in the immediately preceding year. The Assessing Officer asked the assessee to furnish party-wise details of purchases and sales exceeding Rs.25,000/-, including names, addresses, PAN and VAT numbers, as well as purchase invoices, transport receipts, octroi and cess receipts, stock registers, details of receipt and sale of goods and evidence of payments through the bank. The assessee furnished only partial details and stated that the supporting books, bills and vouchers had been destroyed in a fire. The Assessing Officer did not accept the plea that the tax audit report alone was sufficient to establish the genuineness of purchases and sales.The Assessing Officer thereafter independently obtained addresses of some purchase and sale parties ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... did not furnish the cash book, details of customers, bills, invoices or other supporting evidence. The Assessing Officer therefore added a sum of Rs.1,37,08,823/- under section 68 of as "income from other sources". 7. The Assessing Officer further noticed that the assessee had made investments of Rs.24.49 crores in equity shares. The assessee had not made any disallowance under section 14A of the Act. The assessee submitted that no exempt income had been earned during the year and therefore section 14A of the Act did not apply. The Assessing Officer rejected this contention and held that expenditure could be disallowed even in the absence of exempt income. The Assessing Officer invoked Rule 8D and made a disallowance of Rs.1,64,19,025/-, comprising of interest expenditure of Rs.1,51,94,570/- under Rule 8D(2)(ii) and administrative expenditure of Rs.12,24,455/- under Rule 8D(2)(iii). 8. Aggrieved by the assessment order, the assessee carried the matter before the learned CIT(A). As regards the rejection of books and the GP addition, the learned CIT(A) agreed with the Assessing Officer that the books were not reliable. The learned CIT(A) found that the assessee had failed to f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat the assessee's turnover had increased by about 13% from Rs.930 crores to Rs.1,052 crores. The learned CIT(A) therefore held that the Assessing Officer had made the disallowance merely on an assumption and directed deletion of the entire interest disallowance of Rs.1,82,40,810/-. 11. As regards the cash deposits of Rs.1,37,08,823/-, the learned CIT(A) upheld the addition. The learned CIT(A) found that the assessee had not produced the cash book or any supporting evidence to establish that the deposits were from cash sales. The assessee had also failed to show that the relevant bank accounts were duly reflected in its Balance Sheet. The learned CIT(A) therefore held that the source of the deposits was unverified. However, the learned CIT(A) corrected the section under which the addition was sustainable and held that the cash deposits were taxable as unexplained money under section 69A of the Act, though the Assessing Officer had wrongly referred to section 68 of the Act. The learned CIT(A) accordingly confirmed the addition of Rs.1,37,08,823/- and dismissed Ground No. 3. 12. Finally, on the disallowance under section 14A, the learned CIT(A) found that the assessee had a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eriod of six months at 7% of Rs.26.06 crores, thereby making an ad hoc disallowance of Rs.1,82,40,810/-. 18. The learned CIT(A), however, examined the Balance Sheet and found that the assessee had working capital borrowings of Rs.252 crores as against closing inventory of Rs.212.88 crores and trade debtors of Rs.171.34 crores, aggregating to Rs.384.22 crores. The learned CIT(A) therefore found that the working capital borrowing was only about 65% of the current assets. The learned CIT(A) further observed that the Assessing Officer had not brought any material on record to establish that the assessee had diverted any part of the borrowed funds for non-business purposes or had advanced the borrowed money interest-free to sister concerns or related parties. The learned CIT(A) also noticed that the assessee's turnover had increased from about Rs.930 crores to Rs.1,052 crores during the year. On these facts, the learned CIT(A) held that the Assessing Officer had made the disallowance merely on an assumption and deleted the same. 19. We find no infirmity in the order of the learned CIT(A). The basic requirement for making a disallowance of interest on the ground of non-business....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rowed funds were utilised. The computation was therefore entirely on an estimation basis. 24. The learned CIT(A), on the other hand, examined the actual financial position and found that the assessee had current assets substantially exceeding the working capital borrowing and the turnover had also increased by about 13%. The learned CIT(A) further observed that the Assessing Officer had not demonstrated diversion of borrowed funds. We therefore find that the learned CIT(A) correctly appreciated the factual position and rightly deleted the ad hoc disallowance. 25. Accordingly, Ground No. 1 raised by the Department is dismissed. 26. Coming to Ground No. 2, the Department has challenged the deletion of the disallowance of Rs.1,64,19,025/- made by the Assessing Officer under section 14A read with Rule 8D. 27. The facts are not in dispute. The assessee had investments of Rs.24.49 crores in equity shares, but the assessee did not earn any exempt income during the relevant previous year. The Assessing Officer nevertheless invoked section 14A on the reasoning that the assessee would necessarily have incurred some expenditure in connection with the investments and that a disallo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....no occasion to make a disallowance under section 14A could arise. The Revenue's challenge to the order of the Tribunal deleting the disallowance was accordingly rejected. 32. The issue is still more directly covered by the judgment of the Hon'ble Bombay High Court in Principal CIT v. Kohinoor Project (P.) Ltd. [2020] 121 taxmann.com 177 (Bom.)/[2021] 276 Taxman 180/[2020] 425 ITR 700 (Bom.). In that case also, the assessee had made substantial investments in shares but had not earned any exempt income during the relevant previous year. The Assessing Officer made a disallowance under section 14A read with Rule 8D. The Hon'ble High Court, after considering the language of section 14A(1) and the decision of the Hon'ble Delhi High Court in Cheminvest Ltd. v. CIT [2015] 378 ITR 33 (Delhi), held that the expression "income which does not form part of the total income" contemplates the existence of actual exempt income during the relevant previous year. The Hon'ble High Court therefore held that section 14A would not apply where no exempt income was received or was receivable during the relevant previous year. The mere existence of investments which could potentiall....