2023 (5) TMI 914 - AT - Income Tax

Addition u/s 41(1) - additions in respect of six parties on the ground that as per the Limitation Act, the parties do not have legal remedy to enforce the outstanding demand and therefore the right to recovery of the said amount has become time-barred by limitation - HELD THAT - Since the assessee did not file any details whatsoever in support of the fact that the liability has been taken over by the bank and also did not file details of pending litigation before DRT in respect of recovery of the aforesaid amount by the banks, relief was not granted to the assessee by Ld. CIT(Appeals) with respect to the ground of appeal. In our considered view, we are principally in agreement with the contention of the assessee that if this liability has been taken over by the bank and the assessee is liable to pay such amount to the bank, then it is not a fit case for invocation of section 41(1). At the same time, if the assessee has not filed any supporting documents to show that this liability has been taken over by the banks and has also not filed any details before Ld. CIT(Appeals) regarding the recovery proceedings pending before DRT, in the interest of justice, this issue is being restored to the file of Ld. CIT(Appeals) to examine the records afresh to ascertain whether the assessee is liable to pay the aforesaid amounts the banks. The assessee may also file necessary supporting documents to substantiate that this amount is still liable to be paid to the banks and the recovery proceedings are pending before DRT. Disallowance of bad debts - write off with respect to international debtors - HELD THAT - Matter is being set aside to the file of Ld. CIT(Appeals) only with a view to confirm whether the aforesaid amount has been reflected in the computation of income by the assessee in any of the earlier years in view of the decision of Khyati Realtors supra - we are in agreement with the counsel for the assessee that no such disallowance is called for only on the basis whether the assessee has written of debt in excess of 10% of international debtors in view of RBI regulations. We are also in agreement with the argument for the counsel of the assessee that such a write-off of debts cannot be disturbed on the basis that the assessee had claimed deduction u/s 80 HHC with respect to the export proceeds offered to tax in any of the earlier previous years - issue is being restored to the file of Ld. CIT(Appeals) only to confirm whether the income with respect to which assessee has claimed write off of bad debts has been offered to tax by the assessee in any of the previous years in light of the decision of Khyati Realtors Khyati 2022 (8) TMI 1141 - SUPREME COURT . Write-off with respect to domestic debtors - We are in agreement with the argument of assessee that so far as trade advances are concerned which have been given during the course of business of the assessee, there is no scope for offering the same in the computation of income in any of the previous years. We are also in agreement with the arguments put forward by the Ld. DR (who is in appeal before us with respect of the balance amounts deleted by Ld. CIT(Appeals)) that it needs to be ascertained whether the assessee had offered the aforesaid amount in the computation of income in any of the previous years in light of the decision of honourable Supreme Court in the case of Khyati Realtors supra . Write off of bad debts with respect to domestic debtors is restored to the file of assessing officer only with a view to confirm whether the amount has been reflected in the computation of income by the assessee in any of the earlier previous years so as to be eligible to claim right of of such such amounts u/s 36(1)(vii) read with 36(2)(va) of the Act. Accordingly, this issue is being restored to the file of assessing officer with the aforesaid directions. Disallowance u/s 14A - HELD THAT - Assessee agreed that in the interest of justice, the disallowance may be restricted to the exempted income earned by the assessee during the impugned year under consideration. Accordingly, looking at the facts of instant case, the disallowance under section 14A is restricted to the amount of exempt income earned by the assessee. Additional depreciation in respect of windmill u/s 32(1)(ii) - assessee claimed additional depreciation @20% on 20 windmills installed and commissioned during the year under consideration - additional depreciation denied as assessee is not engaged in the business of production or manufacture of article and thing as contemplated u/s 32(1)(ii) - CIT-A deleted addition - HELD THAT - We observe that in the case of S.Srinivasaraghavan 2022 (5) TMI 1066 - MADRAS HIGH COURT held that generation of electricity by windmill should be equated to term manufacturing or production of article or thing , and, therefore, assessee was entitled to claim additional depreciation on windmill installed as per provision of section 32(1)(iia) The aforesaid decision was followed in assessee s own case for assessment year 2006-07 in DCIT v. Vishal Export Overseas Ltd 2022 (8) TMI 88 - ITAT AHMEDABAD , wherein held that activity of generating electricity by windmill would be manufacturing in nature, thus, assessee would be eligible to claim additional depreciation with respect to windmill installed during relevant year. CIT(Appeals) has not erred in fact and law allowing the appeal of the assessee on this issue. Additions u/s 40(a)(ia) on the basis of observations made in the Tax Audit Report in Form 3CD - Scope of second proviso to section 40(a)(ia) - HELD THAT - We observe that in the case of Ansal Land Mark Township (P.) Ltd 2015 (9) TMI 79 - DELHI HIGH COURT held that second proviso to section 40(a)(ia) is declaratory and curative and it has retrospective effect from 1-4-2005.Therefore, where assessee made interest payments without deducting tax at source under section 194J, since payee had filed return and offered sum received from assessee to tax, impugned disallowance made under section 40(a)(ia) deserved to be deleted. Also in Esaote India (NS) Ltd 2018 (8) TMI 1183 - ITAT AHMEDABAD it was held that second proviso to section 40(a)(ia) has retrospective effect from 1-4-2005 and therefore, where recipient/deductee had already paid tax on impugned amount of interest under section 194A received from assessee by filing return of income, such interest payment could not be disallowed in assessee's hands under section 40(a)(ia). We are in agreement with the counsel for the assessee that there is no requirement to deduct tax at source on interest payments to banking institutions. Loss on sale of the Hateshwari shares - AO in the impugned assessment order considered that assessee included capital loss on sale of Hateshwari shares as business loss and as per the provisions of section 71(3) of the Act, such loss cannot be set off against income under the heads - HELD THAT - As assessee submitted before us that apparently on a perusal of the return of income or the Investment Schedule to the Balance Sheet, there is no such item appearing in the assessee s records. Accordingly, in the interest of justice request that the issue may be restored to the file of AO for re-examination accepted. Computation of total loss wrongly taken - HELD THAT - The computation should begin with the correct figure of loss as per return of income. Apparently, the assessing officer has taken the amount of depreciation of ₹ 1.7 crores instead of amount of total loss of the ₹ 147.48 crores. Accordingly, the counsel for this is submitted that the matter may be set aside to the file of the AO for carrying out the necessary rectification. Addition u/s 68 - Unsecured loans with respect to 3 parties, being the director and promoter of the group -confirmation was signed by the authorised signatory and not the parties themselves - HELD THAT - On going through the contents of the order passed by Ld. CIT(Appeals), we observe that there is no infirmity in the facts recorded by Ld. CIT(Appeals) and has correctly allowed the appeal of the assessee on this issue by observing that in instant facts all the three ingredients viz identity, genuineness and creditworthiness of the parties was not doubted by the assessing officer and the only reason for confirming the addition in the hands of the assessee was that the confirmation was signed by the authorised signatory and not the parties themselves. In the case of Neotech Education Foundation 2023 (1) TMI 671 - GUJARAT HIGH COURT held that where assessee received loan for purchase of land for construction of an educational campus, in view of fact that though initial burden of proof was not discharged at level of AO but assessee produced relevant documents to prove identity and creditworthiness of creditor and genuineness of transaction before Commissioner (Appeals) and, further, transaction was made through proper banking channel, impugned addition made under section 68 on account of said loan amount received by assessee was unjustified. Accordingly Department s appeal is dismissed. Unexplained cash deposit in Kalupur commercial cooperative bank - AO rejected the reconciliation and details submitted by the assessee on the ground that assessee cannot have cash in hand or cannot withdraw cash from bank for its import-export businesses - CIT-A deleted addition - HELD THAT - CIT-A correctly held in view of reconciliation of cash deposit out of cash in hand available and as evidenced by audited cash book as well as withdrawal from bank account, the A.O. cannot reject such explanation on the presumption that appellant cannot have such cash in hand in the business of Import Export of Agri. Commodities. In normal business activities, cash is withdrawn from bank to meet out daily expenses or specific expenses but at the same time surplus cash is deposited or such cash withdrawn if not used is re-deposited. Therefore, except the withdrawal of cash duly accounted for in cash book and audited bank accounts, no other conclusive proof can be given by appellant. see case of Moongipa Investment Ltd. 2011 (8) TMI 1067 - ITAT DELHI as squarely applicable to the facts of appellants. It is therefore, such addition is neither justified nor sustainable in law. Decided against revenue.

Summary

Issues Involved:
1. Addition under section 41(1) of the Act.
2. Disallowance of bad debts.
3. Disallowance under section 14A.
4. Disallowance of additional depreciation in respect of windmill.
5. Disallowance under section 40(a)(ia) of the Act.
6. Addition under section 68.
7. Loss on sale of shares.
8. Computation of total loss.

Summary of Judgment:

Issue 1: Addition under section 41(1) of the Act
- Assessee's Grounds 1-3: The Assessing Officer (AO) made additions under section 41(1) for liabilities that were outstanding for more than three years, considering them time-barred. The CIT(A) confirmed these additions. The Tribunal held that mere expiry of the limitation period does not justify invoking section 41(1) without evidence of cessation or remission of liability. Specific additions were deleted except for one party (Presidential Trading FZC), which was remanded back to CIT(A) for further verification.
- Department's Grounds 1-6: The CIT(A) deleted most of the additions made by the AO under section 41(1). The Tribunal remanded the issue back to CIT(A) for re-examination, ensuring compliance with Rule 46A regarding additional evidence.

Issue 2: Disallowance of bad debts
- Assessee's Grounds 4-6 & Department's Ground 1: CIT(A) partly allowed the assessee's claim for bad debts. The Tribunal remanded the issue back to CIT(A) to verify if the amounts written off were offered as income in earlier years, as per the Supreme Court's decision in Khyati Realtors.

Issue 3: Disallowance under section 14A
- Department's Ground 2: The AO made a disallowance under section 14A, which CIT(A) restricted to Rs. 1 lakh. The Tribunal further restricted the disallowance to the exempt income earned by the assessee during the year, i.e., Rs. 2,85,000.

Issue 4: Disallowance of additional depreciation in respect of windmill
- Department's Ground 3: The AO disallowed additional depreciation on windmills, which CIT(A) allowed. The Tribunal upheld CIT(A)'s decision, citing precedents that generation of electricity qualifies as manufacturing.

Issue 5: Disallowance under section 40(a)(ia) of the Act
- Department's Grounds 4-5: The AO made additions under section 40(a)(ia) for non-deduction of TDS, which CIT(A) deleted. The Tribunal upheld CIT(A)'s decision, referencing judicial precedents that support non-deduction of TDS on interest payments to banks.

Issue 6: Addition under section 68
- Department's Ground 7: The AO made additions under section 68 for unsecured loans from directors and promoters. CIT(A) deleted these additions, which the Tribunal upheld, noting that the identity, genuineness, and creditworthiness of the parties were not doubted.

Issue 7: Loss on sale of shares
- Assessee's Ground 5: The AO treated the loss on sale of shares as a short-term capital loss. The Tribunal remanded the issue back to the AO for re-examination.

Issue 8: Computation of total loss
- Assessee's Ground 6: The assessee claimed a typographical error in computing the total loss. The Tribunal remanded the issue back to the AO for rectification.

Conclusion:
The appeals filed by both the Assessee and the Department for the assessment years 2007-08 and 2008-09 are partly allowed for statistical purposes, with several issues remanded back to CIT(A) and AO for further verification and compliance with legal precedents and procedural rules.