2023 (3) TMI 1434 - AT - Income Tax

Disallowance u/s 14A - expenditure incurred on earning exempt income - HELD THAT - There is no specific finding of the lower authorities indicating that the interest bearing funds have been applied for investment purposes on the basis of entries appearing in the books of accounts. Disallowance made by ld. AO is merely based on the average investments of the assessee. Hon'ble Supreme Court of India in the case of Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT affirmed the view taken by the Tribunal that if interest free funds available with the assessee are sufficient to meet its investment then it could be presumed that investments were made from the interest free funds available to the assessee. Applying this ratio on the issue in the instant appeal we find that the assessee had interest free funds in the form of share capital and reserve and surplus as on 31.03.2012 at Rs. 73.79 Cr approx. which is much more than investments in shares and mutual funds at Rs. 39.91 Cr. Therefore, it can be safely presumed that interest free funds have been applied for the purpose of making investments in shares and therefore, interest disallowance of Rs. 14,74,087/- is uncalled for and the same is deleted. Disallowance at the rate of 0.5% of the average investment made under Rule 8D(2)(iii) of the Rules the contention of the assessee taking shelter of the judgment of REI Agro Ltd. 2022 (3) TMI 1549 - CALCUTTA HIGH COURT is that such disallowance should be made only in relation to income which does not form part of total income and this can be done only taking into consideration the investment which has given rise to such income which does not form part of total income. In the instant case we notice that the exempt income is not only from dividend but also from long term capital gain from sale of equity shares. No specific details have been filed by the assessee in support of its contention and prayer is made to restore the issue to ld. AO which will keep the issue live. We, on perusal of the audited balance sheet noticed that the investments constitute investment in equity shares at Rs. 10.10 Cr, investment in mutual funds and venture capital funds at approx. 6 Cr and other investments in quoted and unquoted investments. So far as the investments in mutual funds are concerned the assessee is charged by such mutual fund companies for maintaining the investments. So, no additional expenditure needs to be incurred to keep the investments in the mutual funds. We, therefore, in order to end the litigation and taking into consideration the investments of the assessee company, sustain the disallowance at Rs. 6 lakh under Rule 8D(2)(iii) of the Act. Therefore, the grounds raised by the assessee against the disallowance made u/s 14A are partly allowed and disallowance is sustained at Rs. 6 lakh, and thus, the assessee gets a relief of Rs. 27,86,993/-. Disallowance u/s 14A added to the book profit for the purpose of computing the income u/s 115JB - HELD THAT - We are inclined to hold that so far as the disallowance u/s 14A of the Act which is to be considered for computing total income under the normal provision of Income Tax Act and it cannot be considered for the purpose of computing book profit u/s 115JB of the Act, however, taking note of Clause f to Explanation 1 of Section u/s 115JB of the Act which provides that for purpose of computing book profit the same should be increased by the amount or amounts of expenditure relatable to any income to which Section 10 (other than the provisions contained in clause (38) thereof) or Section 11 or Section 12 apply and therefore, for the purpose of Clause f to Explanation 1 of Section 115JB of the Act an ad-hoc disallowance is made at Rs. 3 lakh and the same should be added to the book profit for the purpose of Section 115JB of the Act. Therefore, ground raised by the assessee is partly allowed. Addition u/s 68 for unexplained share capital and share premium - HELD THAT - Considering the financial details referred of the alleged share subscribers as well as the assessee company and the mode of making investment and written compliance by the share subscribers directly to ld. AO and the assessee having discharged the initial onus casted upon it and ld. AO having failed to point out any defect thereto, we are inclined to hold that ld. CIT(A) erred in sustaining the addition u/s 68 of the Act and thus, reverse the finding of ld. CIT(A) and delete the additio and allow ground raised by the assessee. Unreconciled duty drawback - HELD THAT - As on perusal of the details filed by the assessee in the form of the paperbook as well as details of duty drawback on examining the complete details of the duty drawback found that the alleged sum was sanctioned by the appropriate authority in the subsequent year and has been offered to tax in the return of income for AY 2019-20. The details of income for AY 2019-20 have been filed before us and we, on perusal of the same find merit in the statement made by the assessee and are inclined to hold that the alleged sum of Rs. 2,03,823/- though was applied for duty drawback during AY 2018-19 but it was finally received by the assessee during AY 2019-20 after being sanctioned by the appropriate authority and the same has been duly offered to tax in the income for AY 2019-20. Therefore, no addition is called for unaccounted duty drawback. Therefore, ground raised by the assessee is allowed. Disallowance of bad debts claimed for alleged non-submission of the proof - HELD THAT - Since the sales have been duly accounted for and certain portions of the sundry debtors which could not be recovered have been claimed to be bad debts and this claim of the assessee is allowable in view of the ratio laid down in the case of TRF Limited 2010 (2) TMI 211 - SUPREME COURT - We are inclined to hold that the assessee has made a justified claim of bad debts u/s 36(1)(vii) of the Act and the same deserves to be allowed. Addition u/s 68 - unexplained unsecured loan taken from 7 body corporates and also disallowing the interest paid on such loans - HELD THAT - Assessee has successfully discharged its onus of proving the identity of the loan creditors which are body corporates in the instant case duly registered with Ministry of Corporate Affairs, having PAN and regularly filing the returns, further creditworthiness of the transaction is proved with the fact that they have been carried out through banking channel and sufficient funds in the form of share capital and reserve and surplus available with the loan creditors to explain the amount of loan given and the genuineness of the transaction is proved with the fact that the assessee company is carrying out regular business activity and huge turnover is achieved year by year and for business needs the said loan has been taken and the major portion of the unsecured loan has been repaid in the year itself and only a minor sum was paid in the subsequent year and all transactions were carried out through banking channel, interest paid on the loans and tax at source has been deducted and duly reflected by the alleged loan creditors in their income tax return and therefore, we fail to find any justification in the action of ld. AO invoking the provisions of Section 68 of the Act. We, thus, set aside the finding of ld. CIT(A) and delete the addition made u/s 68 and further hold that invoking the provisions of Section 115BBE of the Act was not justified and further, since provisions of Section 68 of the Act are held to be wrongly invoked and the alleged transaction is held to be genuine, the interest expenditure incurred on alleged loans is also allowable to the assessee. Thus, ground of the assessee s appeal are allowed. Deduction u/s 80G - CSR expenses incurred by the assessee already stands disallowed in the computation of income - HELD THAT - Tribunal in the case of M/s. JMS Mining Pvt. Ltd. 2021 (7) TMI 907 - ITAT KOLKATA has allowed the deduction u/s 80G of the Act on CSR expenses - Assessee appeal allowed.

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 share capital and share premium.
3. Adjustment of disallowance under Section 14A for the purpose of computing book profit under Section 115JB.
4. Disallowance of Corporate Social Responsibility (CSR) expenses under Section 80G.
5. Addition for unreconciled duty drawback.
6. Disallowance of bad debts.

Summary of Judgment:

1. Disallowance under Section 14A:
- Facts: The assessee earned exempt income and the AO applied Rule 8D of the Income Tax Rules to disallow Rs. 33,86,993/-.
- Decision: The Tribunal found that the assessee had sufficient interest-free funds and following the Supreme Court's decision in CIT vs. Reliance Industries Ltd., deleted the interest disallowance. The disallowance under Rule 8D(2)(iii) was sustained at Rs. 6 lakh, giving the assessee a relief of Rs. 27,86,993/-.

2. Addition under Section 68 for Unexplained Share Capital and Share Premium:
- Facts: The AO made an addition of Rs. 1,62,80,000/- based on the failure of the principal officers of the share subscriber companies to appear.
- Decision: The Tribunal found that the assessee had provided sufficient documentary evidence to prove the identity, creditworthiness, and genuineness of the transactions. The addition was deleted as the AO did not provide an opportunity for cross-examination and relied on a statement that was retracted.

3. Adjustment of Disallowance under Section 14A for Book Profit under Section 115JB:
- Facts: The AO adjusted the disallowance under Section 14A for computing book profit under Section 115JB.
- Decision: Following the decision in DCIT vs. Adani Wilmar Ltd., the Tribunal held that disallowance under Section 14A should not be considered for Section 115JB computation. An ad-hoc disallowance of Rs. 3 lakh was made for book profit computation.

4. Disallowance of CSR Expenses under Section 80G:
- Facts: The AO disallowed CSR expenses of Rs. 17,50,000/- claimed under Section 80G.
- Decision: The Tribunal allowed the deduction under Section 80G, following the decision in M/s. JMS Mining Pvt. Ltd. vs. PCIT, as the donations were made to organizations approved under Section 80G.

5. Addition for Unreconciled Duty Drawback:
- Facts: The AO added Rs. 2,03,823/- for unreconciled duty drawback.
- Decision: The Tribunal found that the amount was sanctioned in the subsequent year and offered to tax in AY 2019-20. The addition was deleted.

6. Disallowance of Bad Debts:
- Facts: The AO disallowed bad debts of Rs. 27,90,726/- for lack of proof.
- Decision: The Tribunal allowed the claim, finding that the bad debts were on account of final account reconciliation and deductions/rebates given to buyers, following the Supreme Court's decision in TRF Limited.

Conclusion:
The appeals for AY 2012-13, 2017-18, and 2018-19 were allowed in favor of the assessee, with partial relief for AY 2012-13 on the disallowance under Section 14A.