2015 (9) TMI 1535 - AT - Income Tax

Disallowance u/s. 14A - Held that - No disallowance u/s. 14A can be made in a year in which no exempt income has been earned or received by the assessee. See Cheminvest Limited Versus Commissioner of Income Tax-VI 2015 (9) TMI 238 - DELHI HIGH COURT - Decided in favour of assessee Disallowance u/s. 41(1) - Held that - As gone through Annexure XIII of the statement of account, which is details of Sundry Creditors Unmoved. We find force in the contention of the learned counsel. The balance outstanding in the name of Acquatech Proflow Pipe Lining Pvt. Ltd, is not ₹ 19,84,908/- but ₹ 9,67,180/- and as per the list of sundry debtors, Tolani Fabricators is debtor and not creditor. Therefore, atleast to this extent i.e. balance of Tolani Fabricators cannot be added u/s. 41(1) of the Act. We accordingly, direct the AO to delete the addition of ₹ 10,08,641/-. In so far as the balances of other creditors are concerned, in our considered opinion, the claim of the assessee needs to be verified at the assessment stage. We, therefore, restore the issue to the file of the AO. The assessee is directed to demonstrate that the impugned creditors have been written back in the subsequent years to the satisfaction of the AO and the AO is directed to verify the same and if the claim of the assessee is found correct the additions should not be made.

Summary

Issues:
1. Disallowance under section 14A read with Rule 8D for earning exempt income.
2. Disallowance under section 41(1) of the Act regarding outstanding creditors.

Issue 1: Disallowance under section 14A read with Rule 8D for earning exempt income:
The appeal was against the disallowance of &8377; 11,73,666 made under section 14A read with Rule 8D. The assessee argued that since no exempt income was earned, no disallowance should be made. The AO disagreed and computed the disallowance. However, citing a decision by the Delhi High Court, the Tribunal ruled that no disallowance can be made when no exempt income is earned. Consequently, the addition of &8377; 11,73,666 was directed to be deleted, allowing Ground No.1.

Issue 2: Disallowance under section 41(1) of the Act regarding outstanding creditors:
The disallowance of &8377; 31,92,089 under section 41(1) was challenged. The AO found discrepancies in the details of sundry creditors provided by the assessee. The Tribunal noted factual errors in the AO's findings, correcting the outstanding amount for one creditor and identifying another as a debtor, not a creditor. The Tribunal directed the AO to delete the addition related to the debtor and to verify the claims regarding other creditors at the assessment stage. The issue was restored to the AO for further examination. The Tribunal allowed the appeal partly for statistical purposes, directing the AO to make additions only if the claims of the assessee are not satisfactorily demonstrated. Ground No.2 was treated as allowed for statistical purposes.

In conclusion, the Tribunal ruled in favor of the assessee on both issues. The disallowance under section 14A was deleted as no exempt income was earned, following a decision by the Delhi High Court. For the disallowance under section 41(1), corrections were made to outstanding creditor details, and further verification was directed at the assessment stage. The appeal was partly allowed for statistical purposes, emphasizing the need for thorough verification before making any additions.