2018 (2) TMI 44 - AT - Income Tax

Disallowance u/s 14A - interest free funds sufficient to meet the investment - Held that - Wherein interest free funds are much more than the impugned investment and therefore no disallowance of interest expenditure is called for u/s 14A of the Act. See CIT Versus Reliance Utilities 6, 25, 840/- is credited and offered to tax. The assessee has rightly claimed the business loss of 6, 25, 840/- and both the lower authorities erred in disallowing the same. We therefore delete the disallowance Disallowance of expenditure incurred towards payment of PF by the assessee - Held that - It has been consistently held that such type of statutory payments on account of employer s contribution are allowed as deduction if they are paid before the due date of filing the return of income as provided in section 43B. There is no dispute about the actual date of payment of the impugned amount is before the due date of filing the return of income. Therefore delete the impugned disallowance of 1, 03, 694/- wrongly disallowed u/s 36(1)(va) r.w.s. 2(24)(10) - Assessee appeal allowed.

Summary

Issues:
1. Disallowance u/s 14A for assessment years 2006-07 and 2007-08.
2. Denial of bad debt claim for assessment year 2007-08.
3. Disallowance of expenditure towards PF payment for assessment year 2007-08.

Analysis:

Issue 1 - Disallowance u/s 14A:
The Assessing Officer disallowed amounts for both assessment years under section 14A of the Income Tax Act, based on the premise that the assessee utilized interest-bearing borrowed funds for investments generating exempted income. The CIT(A) upheld these disallowances. However, upon review, it was found that the interest-free capital of the assessee significantly exceeded the investments made. Citing a relevant judgment by the Bombay High Court, it was concluded that no disallowance of interest expenditure under section 14A was warranted. Consequently, the appeals of the assessee for both assessment years were allowed.

Issue 2 - Denial of Bad Debt Claim:
In the case of the bad debt claim for assessment year 2007-08, the dispute arose from an employee's embezzlement leading to a loss for the assessee. The Assessing Officer disallowed this loss, a decision supported by the CIT(A). However, it was established that the amount in question was a business loss, and the subsequent recovery of this loss in a later assessment year was documented in the profit & loss account. Therefore, the disallowance of the claimed bad debt was deemed incorrect, and the amount was allowed as a legitimate business loss. Ground No. 2 of the assessee's appeal was upheld.

Issue 3 - Disallowance of PF Payment Expenditure:
Regarding the disallowance of expenditure towards PF payment for assessment year 2007-08, it was revealed that the assessee had made contributions towards EPF and ESI, deposited before the due date of filing the income tax return. As per established principles, such statutory payments made by the employer are deductible if paid before the return filing deadline. Since the actual payment date was before the stipulated due date, the disallowance under the relevant sections was deemed inappropriate. Consequently, the disallowance of the expenditure towards PF payment was deleted, and Ground No. 3 of the assessee's appeal was allowed.

In conclusion, all appeals of the assessee were allowed based on the detailed analysis and considerations outlined above.