2017 (2) TMI 402 - AT - Income Tax

Disallowance of Payment of on-money for purchase of land - Held that - As during the survey an agreement of sale was found in the business premises of the assessee, as per which, M/s OMDPL proposed to buy land from 11 vendors. In the above company, the assessee is holding 35% of shares. In a separate search proceedings in Delhi, similar agreement of sale was found in the premises of M/s Shiv-vani group, which is having interest in M/s Metro Management Services Pvt. Ltd. (MMSPL). M/s MMSPL is holding 65% shares in M/s OMDPL. The AO brought to tax the on money payment which was made by M/s OMDPL to the land owners based on the shareholders in M/s OMDPL. AO failed to appreciate that company is an independent entity and distinct person. The action of the company will not have any bearing on the shareholders. AO has no jurisdiction to charge anything in the case of assessee over the dealings of any other person. It is brought on record that on money was paid in the dealings by M/s OMDPL towards the purchase of land, if at all any addition can be made, it can be in the hands of M/s OMDPL and not in the hands of the assessee. It is misconceived idea to charge payment of on money to the shareholders of the company, in which company entered in the transaction. We cannot accept and appreciate the action of the AO. - Decided against revenue Unexplained expenditure - Held that - AO has not brought any cogent material to prove that assessee has actually incurred these expenses except finding loose sheet in the premises in which such details were recorded. We are inclined to accept the findings of ld. CIT(A). Accordingly ground raised by the revenue is dismissed. - Decided against revenue Disallowance u/s 14A - Held that - As per the P&L account and balance sheet submitted before us, the assessee had not earned any exempt income. The provisions of section 14A will be applied to find the expenditure relating to exempt income. In the absence of such exempt income, no expenditure can be disallowed in relation to exempt income. Accordingly, we uphold the decision of CIT(A) and dismiss the ground raised by the revenue.- Decided against revenue

Summary

Issues Involved:
1. Disallowance of payment of on-money for purchase of land.
2. Disallowance of unexplained expenditure.
3. Disallowance under section 14A read with Rule 8D.

Issue-wise Detailed Analysis:

1. Disallowance of Payment of On-Money for Purchase of Land:
The Assessing Officer (AO) disallowed ?12,14,50,000 as payment of on-money for the purchase of land based on an agreement found during a survey. The agreement indicated that M/s Om Metal Developers Pvt Ltd. (OMDPL), in which the assessee holds a 35% share, was involved in purchasing land. The AO concluded that the assessee had made unaccounted investments in OMDPL. However, the CIT(A) observed that the AO's conclusion was not based on direct evidence linking the assessee to the payment of on-money. The CIT(A) noted that the material found during the survey did not directly incriminate the assessee and that the AO failed to verify the transaction with the actual parties involved. The CIT(A) directed the deletion of the addition, which was upheld by the Appellate Tribunal, stating that any addition should be made in the hands of OMDPL, not the assessee.

2. Disallowance of Unexplained Expenditure:
The AO disallowed ?29,90,050 under section 69C of the Act, referring to impounded material indicating payments for various provisions. The CIT(A) found that the AO did not establish a connection between the impounded material and the assessee, nor did the AO provide evidence that the assessee incurred such expenses. The CIT(A) directed the deletion of the addition, and the Appellate Tribunal upheld this decision, noting the lack of cogent material to prove the expenses were incurred by the assessee.

3. Disallowance under Section 14A Read with Rule 8D:
The AO disallowed ?3,78,875 under section 14A read with Rule 8D, claiming that the assessee invested in share capital from borrowed funds. The CIT(A) observed that the AO did not establish a nexus between the borrowed funds and the investments. Additionally, the assessee had substantial reserves, and there was no exempt income earned during the year. The CIT(A) directed the deletion of the disallowance, and the Appellate Tribunal upheld this decision, stating that in the absence of exempt income, no expenditure could be disallowed under section 14A.

Conclusion:
The appeal of the revenue was dismissed, and the decisions of the CIT(A) were upheld on all three issues. The Tribunal found that the AO's conclusions were not supported by sufficient evidence and that the disallowances were not justified.