2021 (10) TMI 1455 - AT - Income Tax

Disallowance u/s 14A on account of interest expenditure - HELD THAT - Hon ble Supreme Court in the latest judgment in the case of South Indian Bank 2021 (9) TMI 566 - SUPREME COURT has reiterated the proposition that if the assessee is having mixed fund comprising of interest bearing and interest free funds then the investment in the shares and securities yielding tax free income will be considered out of interest free funds if the same are sufficient for making such investment. Even otherwise the assessee has given the details of the secured and unsecured loan which were taken for the specific purpose and acquiring assets as well as business purposes of the assessee and therefore the expenditure on account of interest cannot be held to be attributable for earning the dividend income. Accordingly when the assessee is having sufficient interest free own funds in the shape of reserve and surplus then no disallowance u/s 14A is called for on account of interest expenditure particularly when the assessee has not made any new investment except meager amount during the year under consideration that too in the subsidiary company which has not yielded any dividend income. Hence the disallowance made by the AO on account of interest expenditure u/s 14A is deleted. Disallowance of deduction u/s 10B - Tribunal has noted that the Revenue has accepted the miscellaneous income of compensation as part of eligible profit for the purpose of computing the deduction u/s 10B - the matter was set-aside to the record of the Assessing Officer for verification of the nature of income and then allow the claim. To maintain the rule of consistency we follow the earlier order of the Tribunal and set-aside the issue to the record of the Assessing Officer for computing the deduction u/s 10B of the Act in terms of directions as given by the Tribunal for AY 2007-08. Reduction of the export turnover on account of the amount have not received in foreign currency - We find that if any sum is reduced from export turnover then the same is also required to be reduced from total turnover because the total turnover comprises of export turnover and non-export turnover. Therefore following the decision of Genpact India 2011 (11) TMI 119 - DELHI HIGH COURT we direct the A.O. to recomputed the deduction u/s 10B of the Act by reducing the said amount from total turnover also. TDS u/s 195 - Disallowance made u/s 40(a)(i) towards payment made in foreign currency - HELD THAT - CIT (A) has granted part relief to the assessee in respect of expenditure incurred for bank charges spares parts and general charges. The rest of the disallowance was confirmed by the Ld. CIT (A) on the ground that the assessee has not able to substantiate its claim of nontaxability of these amounts in the hands of the recipient by producing supporting relevant details as to the residential status of the payee and the relevant provisions of DTAA. We find even before the Tribunal the assessee has not produced the relevant details of the residential status as well as the respective DTAA between India-UK and India-USA. Though it is contended by the assessee that in view of the Article-7 of the DTAA the income is not taxable in India in the hands of the recipient however nothing has been brought on record to point out how the income in the hand of the recipient is not taxable in India. Accordingly in the facts and circumstances of the case we do not find any reason to interfere with the impugned order of the Ld. CIT (A) qua this issue and the same is upheld. Disallowance towards proportionate interest on capital working in progress - HELD THAT - It is a matter of fact to be verified whether any unsecured loan is taken by the assessee for specific purpose being part of the capital working in progress. As regards the unsecured loans it is primary onus of the assessee to prove that the unsecured loan is not utilized for the expenditure incurred towards capital work in progress. In the absence of these specific details this issue cannot be decided conclusively - we set-aside the issue to the record of the Assessing Officer for verification of the facts. Disallowance of leave encashment - HELD THAT - There is no dispute that this expenditure on account of leave encashment has not been actually paid by the assessee to the employees during the year under consideration therefore in view of the judgment of Exide Industries Ltd. 2020 (4) TMI 792 - SUPREME COURT the same is allowable as deduction in the year of actually payment and not in the year when the provisions is made. Therefore this ground of the assessee s appeal stand dismissed.

2025 (3) TMI 32 - AT

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

Whether the disallowance of expenses under Section 14A of the Income Tax Act, 1961 for earning exempt income was justified.
Whether the deduction under Section 10B/10AA of the Act was correctly computed by excluding certain incomes and reducing export turnover.
Whether the disallowance under Section 40(a)(i) for payments made in foreign currency without TDS compliance was appropriate.
Whether the disallowance of proportionate interest on capital work in progress was justified.
Whether the disallowance of leave encashment was in line with the legal precedents.

2. ISSUE-WISE DETAILED ANALYSIS

Disallowance under Section 14A:

Relevant Legal Framework and Precedents: Section 14A of the Income Tax Act disallows expenses incurred in relation to earning exempt income. Rule 8D provides the method for computing such disallowance.
Court's Interpretation and Reasoning: The Court noted that the assessee had sufficient non-interest-bearing funds to cover the investments and relied on the Supreme Court's decision in South Indian Bank vs CIT, which held that investments should be considered from interest-free funds if they are sufficient.
Key Evidence and Findings: The assessee had reserves and surplus exceeding the investment amount, suggesting no need to use borrowed funds.
Application of Law to Facts: The Court found that the disallowance made by the Assessing Officer was not justified as the assessee had sufficient interest-free funds.
Treatment of Competing Arguments: The Revenue's argument that loans were used for investments was not substantiated with evidence.
Conclusions: The disallowance of Rs. 7,11,740/- on account of interest expenditure was deleted.

Deduction under Section 10B/10AA:

Relevant Legal Framework and Precedents: Sections 10B and 10AA provide deductions for profits from export-oriented units. The computation of such deductions involves determining export turnover and eligible profits.
Court's Interpretation and Reasoning: The Court followed the principle that if export turnover is reduced for non-receipt in foreign currency, the total turnover should also be reduced accordingly.
Key Evidence and Findings: The Tribunal previously accepted that miscellaneous income and compensation were part of eligible profits.
Application of Law to Facts: The Court remanded the matter to the Assessing Officer for verification in line with past decisions.
Treatment of Competing Arguments: The Court maintained consistency with previous rulings, emphasizing verification of facts.
Conclusions: The issue was remanded for verification, with directions to recompute deductions by reducing total turnover.

Disallowance under Section 40(a)(i):

Relevant Legal Framework and Precedents: Section 40(a)(i) disallows expenses on which tax was deductible at source but not deducted.
Court's Interpretation and Reasoning: The Court required evidence of the residential status of payees and applicability of DTAA provisions to determine tax liability.
Key Evidence and Findings: The assessee failed to provide necessary details to substantiate non-taxability claims.
Application of Law to Facts: Without evidence, the disallowance was upheld.
Treatment of Competing Arguments: The assessee's arguments were unsupported by evidence.
Conclusions: The disallowance was upheld due to lack of evidence.

Proportionate Interest on Capital Work in Progress:

Relevant Legal Framework and Precedents: Interest on loans used for capital work must be capitalized.
Court's Interpretation and Reasoning: The Court required verification of loan utilization for capital work.
Key Evidence and Findings: The assessee claimed loans were used for specific purposes, but details were lacking.
Application of Law to Facts: The matter was remanded for verification of loan utilization.
Treatment of Competing Arguments: The Court required factual verification to support claims.
Conclusions: The issue was remanded for verification.

Disallowance of Leave Encashment:

Relevant Legal Framework and Precedents: Leave encashment is allowable on actual payment as per the Supreme Court's decision in UOI vs Exide Industries.
Court's Interpretation and Reasoning: The Court followed the Supreme Court's ruling, allowing deduction only on actual payment.
Key Evidence and Findings: The leave encashment was not paid during the year.
Application of Law to Facts: The deduction was disallowed for the year, with directions for future consideration.
Treatment of Competing Arguments: The Court adhered to established legal precedent.
Conclusions: The disallowance was upheld for the year, with directions for future consideration.

3. SIGNIFICANT HOLDINGS

Disallowance under Section 14A: "If the assessee is having mixed fund comprising of interest bearing and interest free funds then the investment in the shares and securities yielding tax free income will be considered out of interest free funds if the same are sufficient for making such investment."
Deduction under Section 10B/10AA: The Court emphasized consistency with past decisions and required verification of facts for deduction computation.
Disallowance under Section 40(a)(i): The Court upheld the disallowance due to lack of evidence supporting non-taxability claims.
Proportionate Interest on Capital Work in Progress: The issue was remanded for verification of loan utilization.
Disallowance of Leave Encashment: The Court followed the Supreme Court's ruling, allowing deduction only on actual payment.