2024 (8) TMI 1177 - AT - Income Tax

Addition u/s 68 - unsecured loans - disallowance of interest payment under section 69C - CIT(A) deleted addition - HELD THAT - In the present case, it is discernible from the record that the assessee filed documentary evidence including PAN, address and other details of the lenders like extract of bank statement, ledger confirmation, ITR V, and financial statements to prove the identity, genuineness and creditworthiness of each loan lender separately. We find that these documents also form part of the assessee s paper book - even though during the assessment proceedings, these documents do not form part of the record, however, during the appellate proceedings before the learned CIT(A) no remand report was filed by the jurisdictional AO despite multiple opportunities, as noted by the learned CIT(A). Even during the hearing before us, the Revenue could not bring any material on record to doubt the identity and creditworthiness of the loan lenders and the genuineness of the transaction. Therefore find no infirmity in the impugned order deleting the addition made under section 68 on account of unsecured loans taken by the assessee. Consequently, the disallowance of interest payment under section 69C also does not have any basis, and therefore the same is also rightly deleted by the learned CIT(A). Decided against revenue. Disallowance u/s 14A r.w.r. 8D - absence of tax-free income - CIT(A) deleted addition - HELD THAT - We find that during the year the assessee earned a net gain on the sale of investments and there is no receipt of exempt income u/s 10 - Further from the ledger of the short-term capital gain, we find that the total gain on the sale of investments. Therefore, we find merit in the submission of the assessee that the amount considered as exempt income by the AO is in fact the gains earned by the assessee from the investments. The Revenue could not bring any material to controvert the aforesaid factual position. We find that in Cheminvest Ltd. 2015 (9) TMI 238 - DELHI HIGH COURT held that section 14A will not apply if no exempt income is received or receivable during the relevant previous year. We further find that in Pr.CIT v/s Kohinoor Project (P) Ltd. 2020 (1) TMI 1161 - BOMBAY HIGH COURT rendered similar findings and dismissed the Revenue s appeal on a similar issue. Since, in the present case, the assessee has not earned any dividend income, therefore, respectfully following the aforesaid judicial pronouncements, disallowance of expenditure under section 14A read with Rule 8D is not sustainable. Scope of amendment by the Finance Act, 2022 - The non-obstante clause and explanation were inserted in section 14A of the Act to the effect that the section shall apply even if no exempt income has accrued or arisen or has been received during the year. We find that while dealing with the issue of whether the aforesaid amendment by the Finance Act, 2022 is prospective or retrospective in operation, in PCIT vs M/s Era infrastructure (India) Ltd, 2022 (7) TMI 1093 - DELHI HIGH COURT held that the amendment by Finance Act, 2022 in section 14A is prospective and will apply in relation to the assessment year 2022 23 and subsequent assessment years. Thus, even in view of the aforesaid amendment also, the disallowance under section 14A read with Rule 8D is not permissible in the present case. Disallowance computed under section 14A read with Rule 8D has rightly been deleted by the learned CIT(A). Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition on account of unsecured loans under section 68 and interest paid thereon under section 69C of the Income Tax Act, 1961.
2. Deletion of disallowance under section 14A of the Income Tax Act, 1961.

Issue 1: Deletion of Addition on Account of Unsecured Loans Under Section 68 and Interest Paid Thereon Under Section 69C of the Income Tax Act, 1961

The Revenue challenged the deletion of addition on account of unsecured loans and interest paid thereon. The brief facts are that the assessee, engaged in the business of builders and developers, filed its return of income declaring Rs. 9,22,450. During scrutiny, the assessee provided partial details of unsecured loans from various parties, but the Assessing Officer (AO) found discrepancies and added Rs. 6,15,52,696 as unsecured loans under section 68 and disallowed Rs. 24,08,659 as interest under section 69C due to lack of conclusive proof of creditworthiness and genuineness.

During appellate proceedings, the assessee submitted additional evidence, including PAN, addresses, bank statements, and loan confirmations for each lender. The learned Commissioner of Income Tax (Appeals) [CIT(A)] sought a remand report from the AO, who failed to respond. Based on the available material, the CIT(A) held that the assessee had fulfilled its onus to prove the identity, genuineness, and creditworthiness of the lenders. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's grounds, upholding the deletion of the addition and disallowance.

Issue 2: Deletion of Disallowance Under Section 14A of the Income Tax Act, 1961

The second issue pertained to the deletion of disallowance under section 14A. The AO observed that the assessee had made significant investments and received Rs. 25,60,370 as exempt income but did not disallow any expenditure under section 14A read with Rule 8D. The AO computed a disallowance of Rs. 69,26,663. The assessee filed an application under section 154, stating that the amount considered as exempt income was actually capital gains, but the AO rejected this application.

The CIT(A) held that in the absence of tax-free income, the corresponding expenditure could not be disallowed. The Tribunal found that the assessee had earned a net gain on the sale of investments, not exempt income. The Tribunal relied on the Delhi High Court's decision in Cheminvest Ltd. v. CIT and the Bombay High Court's decision in Pr.CIT v/s Kohinoor Project (P) Ltd., which held that section 14A does not apply if no exempt income is received or receivable. The Tribunal also noted that the amendment to section 14A by the Finance Act, 2022 is prospective and does not apply to the relevant assessment year. Thus, the Tribunal upheld the deletion of the disallowance under section 14A.

Conclusion

The Tribunal dismissed the Revenue's appeals on both issues, upholding the CIT(A)'s orders on the deletion of addition on account of unsecured loans and interest, as well as the deletion of disallowance under section 14A. The orders pronounced were in favor of the assessee, with the Tribunal finding no basis for the Revenue's grounds.