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2015 (4) TMI 884 - AT - Income TaxDis-allowance of interest paid on borrowings u/s 36 - Interest free advances given to various parties - Direct nexus between the interest bearing loan taken by the assessee and the interest free advance given - Dis-allowance of expenditure u/s 14A - No claim for exemption of any income from payment of tax - Levy of interest u/s 234 of Income Tax Act, 1961 - Issue of double taxation on account of prior period income - Addition u/s 41(1) of Income Tax Act, 1961 - Held that - In the instant case the CIT(A) has recorded a finding to the effect that in the assessment of Assessment Year 2005-06 the Assessing Officer has established a direct nexus between the interest bearing loan taken by the assessee and the interest free advance given by the assessee which was not for its business purposes. The CIT(A) has followed its own order passed in the case of the assessee in the Assessment Year 2005-06 for confirming the disallowance made in the year under appeal. The Authorized Representative of the assessee has brought no material to controvert the above findings of the CIT(A). The Departmental Representative also could not bring any material before us to show that the finding of the CIT(A) in the case of the assessee in the Assessment Year 2005-06 was reversed in an appeal by any higher authority. In the above circumstances, we do not find any good reason to interfere with the order of the CIT(A) which is hereby confirmed and this ground of the appeal of the assessee is dismissed. Dis-allowance of expenditure u/s 14A - The Authorized Representative of the assessee has pointed out from page nos. 11 to 13 of the paper-book for Assessment Year 2007-08 that the assessee had not claimed any income as exempt from tax. He has also pointed out from page nos. 27 and 28 of the paper-book for Assessment Year 2008-09 that no income was claimed as exempt by the assessee in its Return of Income. The Authorized Representative of the assessee has relied on the decision of the Hon ble Gujarat High Court in the case of Corrtech Energy (P) Ltd. 2014 (3) TMI 856 - GUJARAT HIGH COURT , wherein it has been held that where the assessee has not made any claim for exemption of any income from payment of tax, no disallowance could be made u/s 14A of the Act. The Departmental Representative has not disputed the submission of the assessee that during the assessment years under consideration the assessee has not claimed any income as exempt from tax in its Return of Income filed. Therefore, respectfully following the decision of Hon ble Gujarat High Court in the case of Corrtech Energy (P) Ltd. 2014 (3) TMI 856 - GUJARAT HIGH COURT , we delete the disallowance of expenditure made u/s 14A read with Rule 8D. Levy of interest u/s 234 - At the time of hearing, no submissions were made by the Authorized Representative of the assessee on this ground of appeal taken in the appeal. Therefore, we hold that charging of interest is consequential and accordingly dispose of this ground of appeal of the assessee. Issue of double taxation on account of prior period income - We find that it is not in dispute that ₹ 30,46,655/- was income of prior period. In our considered view, on the same analogy on which expenses of prior period is not allowable, the income of prior period also cannot be brought to tax for the year under consideration. The lower authorities in the garb of disallowance of gross amount of prior period expenses, has in fact brought to tax prior period income for the year under consideration. No material has been brought before us to show that how and why the prior period income of ₹ 30,46,655/- is taxable in the year under consideration, when the system of accounting of the assessee is mercantile. Therefore, in our considered view, when the gross amount of prior period expenses added to the income of the assessee, then lower authorities could have also reduced prior period income of ₹ 30,46,655/- for computing the total income of the year under consideration. We, therefore, delete the disallowance of ₹ 30,46,655/- and allow the grounds of the appeal of the assessee. Adhoc disallowance out of interest expenses - We find that the CIT(A) has confirmed the disallowance by following order of his predecessor passed in the case of the assessee itself in the immediately preceding year. The AR brought no material to controvert the above findings of the CIT(A) or to show that this order of the CIT(A) passed in the immediately preceding year was reversed by any higher authority. Therefore, we do not find any good reason to interfere with the order of the CIT(A), which is confirmed and the ground of the appeal of the assessee is dismissed. - In net decided partly in favour of assessee. Addition u/s 41(1) of Income Tax Act, 1961 - The DR simply relied upon the order of the AO and could not point out any error in the order of the CIT(A). In the absence of any material to show that the liability in question ceased to exist during the year under consideration or any benefit was received by the assessee during the year under consideration, we find no error in the order of the CIT(A), which is confirmed, and the ground appeal of the Revenue is dismissed. - Decided against the revenue.
Issues Involved:
1. Disallowance of interest paid on borrowings under Section 36(1)(iii) of the Income Tax Act. 2. Disallowance of expenditure under Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules. 3. Levy of interest under Section 234 of the Income Tax Act. 4. Addition of prior period income. 5. Adhoc disallowance of interest paid. 6. Addition under Section 41(1) of the Income Tax Act. Issue-Wise Detailed Analysis: 1. Disallowance of Interest Paid on Borrowings (Section 36(1)(iii)): The assessee's appeal for Assessment Year 2007-08 challenges the disallowance of Rs. 69,73,973/- out of interest paid on borrowings. The Assessing Officer (AO) observed that the assessee had advanced Rs. 5,07,00,000/- to various parties without charging interest. The assessee contended that it had sufficient own funds to cover these advances, citing precedents like Torrent Financiers vs. ACIT and Reliance Utilities and Power Ltd. However, the CIT(A) upheld the disallowance, noting a direct nexus between borrowed funds and interest-free advances from the Assessment Year 2005-06. The Tribunal found no material to overturn the CIT(A)'s findings and dismissed the assessee's appeal. 2. Disallowance of Expenditure (Section 14A read with Rule 8D): For Assessment Years 2007-08 and 2008-09, the AO disallowed expenditures of Rs. 1,60,45,775/- and Rs. 2,04,30,869/- respectively, under Section 14A read with Rule 8D, as the assessee had made investments generating exempt income. The CIT(A) upheld these disallowances. However, the assessee argued that no exempt income was claimed in these years, referencing the Gujarat High Court's decision in CIT vs. Corrtech Energy (P) Ltd. The Tribunal, agreeing with the assessee, deleted the disallowances, as no exempt income was claimed in the returns. 3. Levy of Interest (Section 234): The assessee's appeal against the levy of interest under Section 234 was not argued, and the Tribunal held that charging of interest is consequential, disposing of this ground. 4. Addition of Prior Period Income: For Assessment Year 2008-09, the AO added Rs. 30,46,655/- as prior period income, disallowing netting off prior period expenses against prior period income. The CIT(A) upheld this addition. The Tribunal found that while prior period expenses are not allowable, prior period income cannot be taxed in the current year under mercantile accounting. Thus, the Tribunal deleted the addition, allowing the assessee's appeal. 5. Adhoc Disallowance of Interest Paid: The AO disallowed Rs. 4,00,000/- out of interest paid, citing advances for non-business purposes. The CIT(A) upheld this disallowance, following a similar decision from the previous year. The Tribunal found no material to overturn the CIT(A)'s decision and dismissed the assessee's appeal. 6. Addition under Section 41(1): The AO added Rs. 73,623/- under Section 41(1), treating old outstanding sundry creditors as income. The CIT(A) deleted this addition, noting no evidence of cessation of liability or derived benefit. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal. Conclusion: The Tribunal partly allowed the assessee's appeals for Assessment Years 2007-08 and 2008-09, dismissing the Revenue's appeal and the Cross Objection of the assessee. The order was pronounced on March 27, 2015, at Ahmedabad.
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