2016 (5) TMI 815 - AT - Income Tax

Disallowance u/s 14A - Held that - For the purpose of disallowance of other expenses, we do not find any satisfaction recorded by the Assessing Officer in his order explicitly or implicitly to the fact that the claim of the assessee that no expenses have been incurred for earning exempt income is wrong. Reliance on the judgment of Punjab & Haryana High Court in the case of CIT Vs. Deepak Mittal (2013 (9) TMI 764 - PUNJAB & HARYANA HIGH COURT ), whereby it has been held that in the absence of any satisfaction recorded by the Assessing Officer, no disallowance of administrative expenses under section 14A can be made. As regards the act of the learned CIT (Appeals) in upholding the disallowance to the extent of ₹ 10 lacs, we do not find any substance in such an act on the part of the learned CIT (Appeals) since we are in agreement with the submissions of the learned D.R. that to the extent that if any disallowance has to be made under section 14A of the Act, the same has to be calculated as per Rule 8D w.e.f. assessment year 2008-09. However, as per the facts of the present case, we have already held that there is no occasion to make disallowance under section 14A of the Act - Decided in favour of assessee Disallowance of bad debt/business loss being the amount forfeited by BHEL on account of termination of contract - Held that - The enduring benefit derived at by the assessee at the time of foregoing the buying agreement. In our opinion, no such benefit of enduring nature has been derived by assessee at the time of suffering losses on account of forfeiture of advance money. The decision of course, was taken by the assessee in a way only to relieve itself from the huge amount of money to be paid for a machinery of lesser capacity in comparison to a machinery of higher capacity available to it at a lower cost. The assessee probably came to terms with the occasion of suffering such losses in wake of the fact of saving itself from incurring further huge losses. This act goes further to prove that the losses are incurred on a decision of prudence taken for the business. Since no capital asset came into existence, the loss is allowable as a business loss.- Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance under section 14A of the Income Tax Act, 1961.
2. Disallowance of ?2.51 Crores claimed as bad debt/business loss due to forfeiture by BHEL.

Issue-wise Detailed Analysis:

1. Disallowance under section 14A of the Income Tax Act, 1961:
The primary issue pertains to the disallowance under section 14A of the Income Tax Act, read with Rule 8D of the Income Tax Rules. The Assessing Officer disallowed ?55,55,801/- due to the application of these provisions, while the assessee argued that the investments were made from its own funds, not borrowed funds. The CIT (Appeals) restricted the disallowance to ?10 lacs for administrative and other expenses related to exempt income, giving relief of ?45,55,801/- to the assessee.

Both the assessee and the Department appealed against this decision. The assessee contested the ?10 lacs disallowance, while the Department challenged the relief granted. The Tribunal observed that the assessee had sufficient own funds far exceeding the investments, allowing for the presumption that investments were made from owned funds. Consequently, no disallowance on account of interest was warranted. Furthermore, the Tribunal noted the absence of satisfaction recorded by the Assessing Officer regarding the assessee’s claim that no expenses were incurred for earning exempt income, referencing the judgment in CIT Vs. Deepak Mittal (2014) 361 ITR 131 (P&H). The Tribunal concluded that no disallowance under section 14A was necessary, thus allowing the assessee's appeal and dismissing the Department's appeal.

2. Disallowance of ?2.51 Crores claimed as bad debt/business loss due to forfeiture by BHEL:
The second issue involved the disallowance of ?2.51 crores claimed as a bad debt/business loss due to forfeiture by BHEL. The assessee had entered into a contract with BHEL for the supply of a turbine, paying an advance of ?2.51 crores. The contract was terminated as the assessee found a cheaper supplier, leading to the forfeiture of the advance. The Assessing Officer treated this as a capital expenditure, relying on the judgment in Swadeshi Cotton Mills Co. Ltd. Vs. CIT (1967) 63 ITR 65.

The CIT (Appeals) upheld this view, categorizing the loss as a capital loss. The Tribunal, however, distinguished the present case from Swadeshi Cotton Mills, noting that the forfeiture resulted from a business decision to avoid further losses and acquire a higher capacity power plant at a lower cost. The Tribunal emphasized that the loss occurred due to business prudence and no capital asset came into existence. Hence, the loss was deemed a business loss, not a capital loss, and the assessee's appeal was allowed.

Conclusion:
The Tribunal allowed the assessee's appeal regarding the disallowance under section 14A and the ?2.51 crores forfeiture loss, while dismissing the Department's appeal. The judgment emphasized the principles of business prudence and the proper application of legal provisions and precedents.