2013 (11) TMI 1593 - AT - Income Tax

Addition u/s 14A - Held that - We find that as per the provisions of Section 14A, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income, which does not form part of the total income under this Act. Meaning thereby the basic condition precedent for invoking the provisions of section 14A is that there should be income, which does not form part of the total income under this Act. Thus, wherever the assessee earned the interest free income, the corresponding expenditure incurred in earning that income is to be disallowed. In the absence of any interest free income, there cannot be any disallowance as no corresponding expenditures were incurred to earn a particular tax free income. Therefore, the CIT(A) has rightly held that in the absence of tax free income, no disallowance u/s 14A is permissible. Since we do not find any infirmity in the order of CIT(A), we confirm his order. Claim of interest - Held that - In the instant case the liability was not statutory liability. Admittedly it was a contractual liability. Though it accrued at the time of execution of first agreement through which loan was obtained by the assessee but that liability was disputed by the assessee by raising a dispute with regard to rate of interest through various correspondences and auditors notes attached to the balance sheet. Finally the dispute was resolved in the impugned assessment year through a supplementary agreement through which the rate of interest was reduced from 12% to 6% per annum besides other terms of payments. Therefore, the contractual liability is finally accrued on its crystallization in the impugned assessment year, and on the basis of the said agreement the assessee has made debit entry to the profit & loss account. Since the contractual liability has been crystallized in the impugned assessment year, the entries passed by the assessee in its accounts is in accordance with law and no disallowance can be made on the ground that the assessee has been following mercantile system of accounting and the debit entries are to made in corresponding assessment years. We have carefully examined the order of CIT(A) and we find that he has adjudicated the issue in right perspective following the judicial pronouncements rendered on the subject. Since we find no infirmity in his order, we confirm the order of CIT(A).

Summary

Issues Involved:
1. Deletion of addition made under Section 14A of the Income Tax Act, 1961.
2. Deletion of addition of interest paid to Nishkalp Energy Limited and Tata Motors Ltd.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made Under Section 14A of the Income Tax Act, 1961:

Facts and Arguments:
The Assessing Officer (AO) made an addition of Rs. 2,03,752/- under Section 14A, which was contested by the assessee on the grounds that no exempt income was earned in the assessment year. The assessee argued that sufficient surplus funds were available and no borrowed funds were used for investments. The CIT(A) deleted the addition, accepting the assessee's contention that Section 14A applies only if exempt income is part of the total income.

Tribunal's Findings:
The Tribunal upheld the CIT(A)'s decision, stating that Section 14A disallows expenditure only if it is incurred to earn exempt income. Since the assessee did not earn any tax-free income in the relevant assessment year, no disallowance under Section 14A was warranted. The Tribunal referenced the Chennai Bench's judgment in the case of Siva Industries & Holdings Ltd. vs. ACIT, affirming that in the absence of exempt income, no disallowance can be made under Section 14A.

Conclusion:
The Tribunal confirmed the CIT(A)'s order, emphasizing that without tax-free income, there can be no corresponding disallowance under Section 14A.

2. Deletion of Addition of Interest Paid to Nishkalp Energy Limited and Tata Motors Ltd.:

Facts and Arguments:
The AO disallowed the interest claim of Rs. 1,72,78,000/- on the grounds that the liability should have been accounted for in the relevant assessment years under the mercantile system of accounting. The assessee argued that the liability was crystallized in the assessment year 2008-2009 due to a fresh agreement reducing the interest rate from 12% to 6%, and that the interest was never paid or provided in earlier years due to disputes.

Tribunal's Findings:
The Tribunal noted that the financial arrangement was made at the behest of Tata Motors Ltd. (TML) and that the entire loan was used to settle outstanding dues with TML. The Tribunal found that the assessee had consistently disputed the higher interest rate, as evidenced by auditors' notes and correspondences. The liability was crystallized in the assessment year 2008-2009 through a supplementary agreement, which resolved the dispute by reducing the interest rate and outlining payment terms.

The Tribunal referenced several judicial pronouncements, including CIT vs. Raj Motors and CIT vs. Oriental Motor Car Co. Pvt. Ltd., which state that contractual liabilities are recognized upon final settlement. The Tribunal concluded that the liability was contractual and crystallized in the impugned assessment year, thus the interest claim was allowable.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the disallowance, affirming that the interest liability crystallized in the assessment year 2008-2009 and was correctly debited to the profit and loss account.

Final Judgment:
The appeal by the Revenue was dismissed, and the order of the CIT(A) was confirmed in its entirety. The Tribunal found no infirmity in the CIT(A)'s decisions regarding both issues.