2020 (12) TMI 440 - AT - Income Tax

Addition u/s. 14A r.w.r. 8D(2)(iii) - HELD THAT - Opinion of the assessing officer in the latter part of Section 14A(2) is to be based upon an appraisal of objective material relating to the assessee's voluntary disallowance of amount/amounts. Not only that, if in the course of assessment, the AO enquires from the assessee about the amounts spent, which are to be disallowed, and the assessee in fact discloses a larger amount (than the one given in the return), it is still incumbent upon the AO to enquire into such larger amounts and determine whether it has nexus with expenditure relatable to exempt income to attract Section 14A(1). Section 14A would be reduced to a mere formality which it appears to have become in the circumstances of the case. Holding this the Hon'ble Jurisdictional Court has dismissed the appeal of the revenue wherein the non-satisfaction as required u/s. 14A has not been drawn/specified. Matter has been fairly brought to the notice of the AO who however failed to draw any dissatisfaction as to how the voluntarily disallowance was unreasonable and non-satisfactory with regard to the correctness of the claim of the assessee. Hence, we hereby hold that the disallowance which has been made in contravention with the prescribed mode, methodology and steps for calculation envisaged u/s. 14A(2) is liable to be deleted. Loss transaction with regard to NSEL - Deduction under two specific section namely Section 28 and Section 36 and 37 - HELD THAT - Assessee paid amount to Philip Commodities India Pvt. Ltd. in the month of June 2013 of ₹ 1,50,66,407/- and also got the amounts till March 2014 and could not receive money of ₹ 47,58,533/- owing to crash of NSEL. This gives rise to a situation where the assessee incurred business loss owing to his transaction with M/s. Philip Commodities India Pvt. Ltd. Hence, the loss will have to be allowable at loss incidental to the business while computing the income u/s. 28. It is not an expenditure, the provisions u/s. 30 to 37 are not attracted in this case. We hold that loss must be during the course or of incidental to business. It is the nexus with the business which is more relevant to claim the loss (CIT Vs. Textool Co. Ltd. - 1981 (9) TMI 92 - MADRAS HIGH COURT ) . The loss must have a direct and proximate nexus with the business operations and the loss is incidental to it, then such loss is deductible as, without business operations, no profit can be earned. If profit is earned in such an endeavour it is to be taxed and if loss is earned it is to be allowed. Without going into the grammatical issue of debt or bad debts or receivables, since the facts clearly prove that the assessee has incurred loss by the way of his business with M/s. Philip Commodities India Pvt. Ltd. and the loss has been in the current year itself, in the peculiar facts and circumstances of the case, such loss incurred in such transaction with regard to NSEL is allowable. Any subsequent recovery needs to be taken into consideration in computation of total income. Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Disallowance under Section 37 of the Income Tax Act, 1961.

Detailed Analysis:

Disallowance under Section 14A:

The primary issue raised by the assessee was that the Commissioner of Income Tax (Appeals) [CIT(A)] erred in holding that the Assessing Officer (AO) had recorded satisfaction under Section 14A(2) of the Income Tax Act, 1961 before making disallowances under Rule 8D. The assessee argued that the AO had provided an extensive commentary on Section 14A and Rule 8D but failed to record satisfaction regarding the correctness of the suo moto disallowances made by the assessee.

The AO observed that the assessee incurred interest expenditure of ?3.59 crores on investments in mutual funds and equity shares amounting to ?145.70 crores. The assessee had disallowed ?14,00,000 on account of earnings of exempt income on different dates, which included part salaries of the Director and other officials, and administrative expenses.

During the hearing, the assessee's representative argued that the AO did not record the required non-satisfaction under Section 14A(2) with reference to the assessee's accounts. The Department's representative countered that the AO had detailed the dissatisfaction from pages 3 to 12 of the assessment order and completed the disallowances according to Rule 8D(2).

Upon reviewing the arguments and the assessment order, it was found that while the AO disallowed ?1.51 crores under Section 14A, the CIT(A) reduced this amount to ?47.07 lakhs based on the ITAT's judgment in ACIT Vs. Vireet Investments Pvt. Ltd. However, the AO failed to follow the procedural aspects of invoking Section 14A(2), which is essential for re-computation of the disallowance. The AO did not specify how they were dissatisfied with the assessee's claim, and the CIT(A) did not consider this aspect while re-computing the disallowance.

The provision of Section 14A is a taxing exception for tax-exempt income. Section 14A(2) prescribes the methodology for disallowance, which should be followed if the AO is not satisfied with the assessee's claim. The AO must express an opinion rejecting the assessee's methodology and the figure offered at the time of assessment. This opinion should be based on an appraisal of objective material relating to the assessee's voluntary disallowance. The AO's failure to draw dissatisfaction regarding the voluntary disallowance was highlighted, leading to the deletion of the disallowance made in contravention of the prescribed mode and methodology under Section 14A(2).

Disallowance under Section 37:

The assessee had invested ?1,50,66,407 with NSEL in July 2013 and lost the amount due to a scam, writing off ?49,01,320 in the Profit & Loss account. The AO held that since this amount was not considered while calculating the income in the previous year, the deduction under Section 36(2) was not allowable.

Before the CIT(A), the assessee argued that the amount was allowable under Section 36(2)(ii) or Section 28 of the Income Tax Act, 1961. The CIT(A) held that since the amount was not previously offered to tax, it could not be considered under Section 36(2)(ii). The CIT(A) also did not allow the loss as a capital loss, stating that no capital asset existed.

During the hearing, the assessee argued that if the amount was not allowable under Section 36(2)(ii), it should be allowable under Section 28 as the amount was invested and lost in the same year. The Department's representative contended that the primary intention of the assessee was investment, and at most, it could be allowed as a capital loss.

The issue involved deductions under Sections 28, 36, and 37. Business loss arises from regular business operations, while business expenditure is a conscious charge to earn income. Sections 30 to 36 deal with specific expenditures allowable in computing taxable income, and Section 37 is a general provision for allowing deductions of expenditures related to the business. The Supreme Court held that Explanation II to Section 37 applies to business expenditure, not business loss.

In this case, the assessee incurred a business loss due to transactions with M/s. Philip Commodities India Pvt. Ltd., leading to a loss of ?47,58,533 owing to the NSEL crash. The loss was incidental to the business and allowable under Section 28. The loss must have a direct and proximate nexus with business operations to be deductible. Since the loss was incurred in the current year, it was allowed, and any subsequent recovery would be considered in the computation of total income.

Conclusion:

The appeal of the assessee was allowed, resulting in the deletion of disallowances under Section 14A and the allowance of the business loss under Section 28.