2023 (1) TMI 163 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - expenses incurred for earning exempted income - HELD THAT - CIT(A) has himself observed that the A.O. is justified in disallowing the expenses and despite such observation, in the later part he has deleted the disallowance - Thus, it is manifest that the Ld. CIT(A) has made a drafting mistake in the order and mistakenly deleted the disallowance, though the preceding observations made by him clearly demonstrate that he was of the view that the disallowance was required in the situation and that he agreed with the disallowance made by Ld. AO. Being so, we hardly need to mention anything further, suffice it to say that we too agree that the impugned expenses are incurred for normal functioning of the company and therefore incurred for entire business consisting of agricultural as well as nonagricultural activities. Therefore, the Ld. AO is quite justified in making 40% disallowance while framing assessment. Upholding the same, we dismiss the Ground No. 1. Unexplained income u/s 68 - bogus cash credit - HELD THAT - There is a mis-match in the financial figures of RCSPL, which is the main basis to accept / reject the creditworthiness of RCSPL. Therefore, it is necessary to re-verify these material discrepancies in the orders of lower authorities. At this stage, finding no assistance from assessee, we are unable to rule out these discrepancies and ascertain the correct position. Therefore, in such circumstance, we are inclined to remit this ground to the file of Ld. CIT(A) who will take a call on these aspects and pass a reasoned order to settle the grievance of assessee involved in this ground. Needless to mention that the assessee shall be entitled to place before Ld. CIT(A) all evidences as may be in his possession for a proper adjudication of the issue involved in this ground. Thus, the Ground No. 2 is remanded back to Ld. CIT(A). Addition u/s 36(1) - disallowance of interest expenditure - HELD THAT - We note that the Ld. AO has given adequate findings for making this disallowance. On the other hand, the Ld. CIT(A) has given very summary and cryptic order and given relief to the assessee. A bare reading to the paragraph of Ld. CIT(A) indicates that he has stated It is accepted principle that if there is interest free fund available to the appellant sufficient to meet its investment and at the same time the appellant raised the loan, it can be presumed that the investment is from the interest free fund available. Thus, the Ld. CIT(A) has proceeded on presumption basis, whereas the Ld. AO has given concrete findings in his order. In this scenario, we are in agreement with the Ld. DR that the disallowance ought to be upheld. We therefore reverse the action of Ld. CIT(A) and uphold the disallowance. Thus, the Ground No. 3 is hereby dismissed.

Summary

Issues Involved
1. Deletion of disallowance under Section 14A of the Income Tax Act, 1961.
2. Deletion of addition under Section 68 of the Income Tax Act, 1961.
3. Deletion of disallowance under Section 36(1)(iii) of the Income Tax Act, 1961.

Detailed Analysis

Ground No. 1: Deletion of Disallowance under Section 14A

Issue: The Ld. CIT(A) deleted the disallowance of Rs. 1,30,279/- made by the AO under Section 14A read with Rule 8D for expenses incurred in earning exempted income.

Analysis: During the assessment proceedings, the AO found that the assessee had debited certain expenses related to both agricultural (exempt) and non-agricultural (taxable) activities to the P&L account of non-agricultural activity. The AO computed 40% of these expenses as attributable to agricultural activities and disallowed Rs. 1,30,279/-. The Ld. CIT(A) initially observed that the AO was justified in disallowing these expenses but later deleted the disallowance, which was identified as a drafting mistake. The tribunal upheld the AO's disallowance, agreeing that the expenses were incurred for the normal functioning of the company and thus should be proportionately disallowed.

Conclusion: The tribunal dismissed Ground No. 1, upholding the AO's disallowance.

Ground No. 2: Deletion of Addition under Section 68

Issue: The Ld. CIT(A) deleted the addition of Rs. 3,75,00,000/- made by the AO on account of unexplained cash credit under Section 68.

Analysis: The AO observed that the assessee had shown a short-term borrowing of Rs. 3,75,00,000/- from RCSPL under an unregistered agreement. Notices sent to RCSPL's addresses were returned unserved, and the company did not respond to summons. The AO concluded that RCSPL was a paper company and added the amount as unexplained cash credit. The Ld. CIT(A) deleted the addition, noting that the assessee had provided sufficient documentary evidence, including a JV agreement, bank statements, ITR, and financial statements of RCSPL. The tribunal, however, found discrepancies in the financial figures of RCSPL and noted that the Ld. CIT(A) had not adequately addressed these. The tribunal remanded the issue back to the Ld. CIT(A) for re-verification and a reasoned order.

Conclusion: The tribunal remanded Ground No. 2 back to the Ld. CIT(A) for further verification and a reasoned order.

Ground No. 3: Deletion of Disallowance under Section 36(1)(iii)

Issue: The Ld. CIT(A) deleted the disallowance of Rs. 4,65,031/- made by the AO under Section 36(1)(iii) for interest expenses.

Analysis: The AO disallowed the interest expenditure, noting that the assessee had advanced interest-free loans to various parties out of interest-bearing funds. The Ld. CIT(A) deleted the disallowance, stating that the assessee had sufficient interest-free funds to cover the advances and presumed that the advances were made from these funds. The tribunal found the Ld. CIT(A)'s order to be summary and based on presumption, whereas the AO had provided concrete findings. The tribunal reversed the Ld. CIT(A)'s decision and upheld the AO's disallowance.

Conclusion: The tribunal dismissed Ground No. 3, upholding the AO's disallowance.

Final Order
The appeal of the revenue is partly allowed. The tribunal upheld the disallowances under Grounds No. 1 and 3 and remanded Ground No. 2 back to the Ld. CIT(A) for further verification. The order was pronounced as per Rule 34 of I.T.A.T. Rules, 1963, on 20/12/2022.