2014 (8) TMI 835 - AT - Income Tax

Disallowance u/s 14A r.w. Rule 8D Held that - The assessee is having net interest income as is apparent from the figures of the P & L - assessee had received a net interest income against which he has incurred an expenditure - the assessee had a net positive income of bank interest - the investment in associated companies is never made with the purpose of earning dividend but these investments are made for strategic purpose and similarly, investments in mutual funds also do not involve much cost as compared to making investment in direct equity shares relying upon Commissioner of Income Tax-II Versus M/s Hero Cycles Ltd. 2009 (11) TMI 33 - PUNJAB AND HARYANA HIGH COURT - both the AO and CIT(A) have held that some amount must have been incurred for earning exempt income, ignoring the important fact that no new investment was made and significant part of investment was in associate companies and moreover there is no nexus between the borrowed funds and investments - the assessee has earned net interest income meaning thereby that no net interest expenditure was incurred - the disallowance u/s 14A is not sustainable Decided in favour of assessee. Unexplained cash credit u/s 68 Held that - The opinion of the AO for not accepting the explanation offered by the assessee as not satisfactory is required to be based on proper appreciation of material and other attending circumstances available on the record - The burden is on the assessee to rebut the same, and, if he fails to rebut it, it can be held against the assess1e that it was receipt of an income nature - assessees received foreign gifts from one common donor - The payments were made to them by instruments issued by foreign banks and credited to the respective account of the essessees by negotiation through a bank in India assessee has been unable to explain the creditworthiness of the persons who have made this investment - As the explanation offered by the assessee about the nature and source of the sums found credited in the books was not satisfactory there was, prima facie, evidence against the assessee, viz., the receipt of money. The burden was on the assessee to rebut the same, and, it failed to rebut it, it can therefore be held against the assessee that it was a receipt of an income nature - assessee has failed to discharge its onus to produce legal acceptable evidence of creditworthiness of the persons - The expression the assessee offers no explanation means the assessee offers no proper, reasonable and acceptable explanation as regards the sums found credited in the books maintained by the assessee - the appellant has offered no creditable explanation about the amounts credited in his books, the receipt of ₹ 12,00,000/- therefore, cannot be treated as explained - CIT(A) has elaborately dealt with the issue and also rightly upheld the addition there was no infirmity in the same - the AO had not lawfully reopened the assessment by not supplying the copy of reasons recorded, no specific ground has been taken by the assessee in the grounds of appeal and neither the assessee had filed any application for admission of additional ground and moreover Decided against Assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Addition under Section 68 of the Income Tax Act for unexplained cash credit.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:

The assessee contested the disallowance of Rs. 7,53,689/- under Section 14A, arguing that no expenditure was incurred for earning exempt income. The CIT(A) upheld the Assessing Officer's (AO) disallowance, which was made in accordance with Rule 8D, without recording any specific findings about the expenditure incurred. The assessee cited several legal precedents, including Maxopp Investment Ltd. vs. CIT and Hero Cycles Ltd. vs. CIT, arguing that the AO must determine the actual expenditure incurred and provide cogent reasons for rejecting the assessee's claim of no expenditure. The assessee also highlighted that no new investments were made during the relevant financial year, and surplus funds were placed in fixed deposits, generating a net positive interest income.

The Tribunal found that the assessee had net interest income and no new investments were made during the year under consideration. Investments were primarily in associated companies and mutual funds, which do not typically involve significant costs. The AO did not identify any specific expenditure incurred for earning exempt income. The Tribunal relied on the judgment in Hero Cycles Ltd. vs. CIT, which held that disallowance under Section 14A requires a finding of actual expenditure incurred. Since no such expenditure was identified, the Tribunal concluded that the disallowance under Section 14A was not warranted and allowed the appeal.

2. Addition under Section 68 of the Income Tax Act for unexplained cash credit:

The assessee challenged the addition of Rs. 12 lakhs as unexplained cash credit under Section 68. The AO reopened the assessment based on an investigation report indicating that the assessee received accommodation entries from entry operators. The assessee provided various documents, including bank statements and income tax returns, but did not produce the shareholders. The AO issued summons under Section 131, which were either unserved or unresponded, leading to the addition under Section 68.

The CIT(A) upheld the addition, noting that the assessee failed to establish the creditworthiness of the shareholders and the genuineness of the transactions. The CIT(A) referenced several judicial pronouncements, including CIT vs. India Terminal Connector Systems Ltd., which supported the reopening of assessments based on information from the investigation wing. The CIT(A) also cited the Supreme Court's judgment in Sumiti Dayal vs. CIT, emphasizing that the genuineness of transactions must be examined based on surrounding circumstances and human probabilities.

The Tribunal agreed with the CIT(A)'s findings, noting that the assessee did not provide credible evidence of the shareholders' creditworthiness. The Tribunal found no infirmity in the CIT(A)'s decision and dismissed the appeal. Additionally, the Tribunal addressed the assessee's argument regarding the reopening of the assessment without providing the reasons recorded, noting that no specific ground was raised in the appeal, and the CIT(A) had already adjudicated the issue.

Conclusion:

The appeal related to the disallowance under Section 14A (I.T.A.No. 137/Del/2013) was allowed, while the appeal concerning the addition under Section 68 (I.T.A.No. 138/Del/2013) was dismissed. The order was pronounced in the open court on 31st July 2014.