2018 (4) TMI 799 - AT - Income Tax

Addition u/s 41 - Held that - In this case the addition has been made u/s 41(1) of the Act on the ground that it is an unclaimed loan. The presumption of the AO is that this loan will never be claimed. Such a presumption cannot be made. Respectfully following the proposition of law laid down by the Hon ble Delhi High Court in the case of CIT vs Shri Vardman Overseas Ltd (2011 (12) TMI 77 - DELHI HIGH COURT) and Glen Williams vs ACIT (2015 (8) TMI 974 - ITAT BANGALORE) delete this addition and allow this ground of the assessee. Disallowance made u/s 14A - Held that - The dividend earned by the assesse is only ₹ 5,280/-. The disallowance made by the AO is ₹ 4,73,913/-. The Hon ble Delhi High Court in the case of CIT v Shri Vardaman Overseas Ltd 2011 (12) TMI 77 - DELHI HIGH COURT held that the quantum of disallowance cannot exceed the dividend income which is exempt from tax. Hence restrict the disallowance to ₹ 5,280/- which is the exempted income in this case. The balance disallowance is hereby deleted.

Summary

Issues Involved:
1. Addition under Section 41(1) of the Income Tax Act, 1961.
2. Disallowance under Section 14A read with Rule 8D of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Addition under Section 41(1) of the Income Tax Act, 1961:

The first issue pertains to the addition of ?2,42,530/- under Section 41(1) of the Income Tax Act. The Assessing Officer (AO) held that the assessee had enjoyed the benefit of an unclaimed loan during regular business activity, noting that the loan was taken over twenty years ago and interest was charged initially. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this addition in a "cryptic manner."

The assessee argued that Section 41(1) could not be applied in this context, citing various decisions. The Tribunal referenced the Delhi High Court's ruling in "CIT vs Shri Vardman Overseas Ltd. (2012) 343 ITR 408," which established that no addition could be made for sundry creditors or loans carried forward from previous years solely because the assessee could not furnish the required details.

The Tribunal also cited the Bangalore Tribunal's decision in "Glen Williams vs ACIT," which clarified that for Section 41(1) to apply, there must be a remission or cessation of liability, which was not evident in this case. The Tribunal concluded that a unilateral presumption by the AO that the loan would never be claimed was insufficient to invoke Section 41(1). Consequently, the addition was deleted, and this ground of the assessee was allowed.

2. Disallowance under Section 14A read with Rule 8D of the Income Tax Act, 1961:

The second issue involved the disallowance under Section 14A read with Rule 8D. The assessee earned a dividend of ?5,280/-, while the AO made a disallowance of ?4,73,913/-. The Tribunal referenced the Delhi High Court's decision in "CIT v Shri Vardaman Overseas Ltd," which held that the quantum of disallowance under Section 14A cannot exceed the exempt dividend income.

Applying this principle, the Tribunal restricted the disallowance to ?5,280/-, which was the exempt income in this case, and deleted the balance disallowance.

Conclusion:

In conclusion, the appeal of the assessee was allowed in part. The addition under Section 41(1) was deleted, and the disallowance under Section 14A was restricted to the amount of exempt dividend income. The order was pronounced in court on 13.04.2018.