2022 (7) TMI 62 - AT - Income Tax

Disallowance being amount of State Value Added Tax (VAT) paid for earlier years - Deduction u/s 80IB claimed - HELD THAT - It is seen as an admitted position that the assessee separately maintained books of account for 80IB(10) projects and non-80IB(10) projects. Corresponding Profit and loss accounts were also drawn accordingly. There is no dispute that the amount of VAT was paid by the assessee during the year under consideration which pertained to earlier years. In fact, the question as to whether the VAT was payable by Builders was sub judice at the material time. Assessee became liable to pay VAT for earlier years - The assessee had not claimed any deduction on account of VAT in the computation of income for earlier years. It was only during the year under consideration that the assessee claimed such deduction on paying the VAT amount of earlier years. In that view of the matter, deduction of such VAT has to be allowed in this year itself. Whether the deduction of VAT should be allowed against profits from 80IB(10) projects or non-80IB(10) projects? - There is no question of claiming its deduction against non-80IB(10) projects notwithstanding the fact that there was no revenue from 80IB projects for the year under consideration. Non-availability of profits from 80IB projects would not per se make the assessee entitled to deduction against profits from non-80IB projects. It is, therefore, held that the VAT should be allowed as deduction only in the Profit and loss account of 80IB(10) projects which would lead to the corresponding increase in the closing work-in-progress thereof as there was no revenue under this stream for the year. Thus, the closing figure of work-in-progress in the 80IB(10) projects would increase by the sum on Rs.1.13 crore. However, income for the year under consideration from non-80IB(10) projects, which is otherwise chargeable to tax and not eligible for the deduction, would increase accordingly as the amount of VAT paid and claimed as deduction therein shall get disallowed on moving to the Profit and loss account of 80IB(10) projects. Whether Disallowance u/s.14A cannot be countenanced because deduction is admissible under 80IB(10) projects and the assessee admittedly did not have any income from such projects? - As the amount being, the VAT paid by the assessee during the year relating to 80IB(10) projects will not be allowed as deduction against the profit of non 80(IB(10) projects, which will consequently increase the total income for the current year; the closing figure of work-in-progress of the 80IB(10) projects will correspondingly increase; and no disallowance u/s.14A of the Act is called for on this score. Disallowance of interest - HELD THAT - As neither the assessee firm paid nor received any interest to/from the partners. If the amount of interest that ought to have been charged from Mr. S.K. Kotkar at Rs.13.54 lakh is considered as income on hypothetical basis, then the corresponding deduction on account of interest that ought to have been paid by the assessee to Ms. Jyoti Shamkant Kotkar on hypothetical basis comes at Rs.53.94 lakh. The net effect of both the interest hypothetically charged/paid would tend to reduce the income of the firm by Rs.40.40 lakh (interest of Rs.53.94 lakh payable to Ms. Jyoti Shamkant Kotkar minus interest of Rs.13.54 lakh receivable from Mr. S.K. Kotkar). As neither the firm has charged nor paid any interest to the partners and the partners in their individual capacities have also not shown any such hypothetical interest income or expenditure, there is no logic in sustaining the addition of Rs.13.54 lakh towards the amount of interest that ought to have been earned by the assessee, therefore, order to delete this addition.

Summary

Issues:
1. Disallowance of State Value Added Tax (VAT) paid for earlier years
2. Disallowance of interest amount

Issue 1: Disallowance of State Value Added Tax (VAT) paid for earlier years

The appeal concerns the disallowance of Rs.1,13,42,282/-, being the amount of State Value Added Tax (VAT) paid for earlier years. The assessee, engaged in the business as a promoter and developer, maintained separate books of accounts for projects eligible for deduction under section 80IB(10) and those not eligible. The VAT amount claimed as a deduction in the Profit and loss account of non-80IB(10) projects was found to pertain to 80IB(10) projects. The Assessing Officer disallowed the amount, citing it as an expenditure of a prior period. The Appellate Tribunal held that the VAT should be allowed as a deduction in the Profit and loss account of 80IB(10) projects, increasing the closing work-in-progress. The Tribunal also dismissed the invocation of section 14A for disallowance, as there was no exempt income earned by the assessee.

Issue 2: Disallowance of interest amount

The second issue revolves around the disallowance of interest amounting to Rs.13,54,461/-. The AO observed that the assessee paid advances without interest to partners and outsiders, leading to a disallowance of interest. The disallowance was calculated based on various advances given, including to a partner for the purchase of TDR. The CIT(A) modified the disallowance, considering it as interest income that should have been earned by the assessee-firm from the partner. The Tribunal analyzed the partnership deed clause regarding interest and concluded that no interest was charged or paid to partners. Therefore, the addition of Rs.13.54 lakh towards the interest that ought to have been earned by the assessee was deemed illogical, leading to the deletion of this addition.

In conclusion, the Appellate Tribunal allowed the appeal partly, ruling in favor of the assessee regarding the disallowance of VAT and interest amount. The judgment provided detailed reasoning based on legal provisions, partnership deed clauses, and precedents to support its decisions.