2025 (1) TMI 365 - AT - Income Tax

Limited scrutiny assessment - additions on account of unexplained receipt - HELD THAT - Assessee has duly demonstrated that the assessee had duly replied and furnished the relevant documents. As explained that the aforesaid amount of Rs. 1 Crore was out of the earlier security deposits which were received back in the year under consideration. Assessee's balance sheet as on 31.03.2017, wherein, short-term loans and advances as on 31.03.2016 have been mentioned at Rs. 1,00,25,000/- whereas, the same were at Rs. 25,000/- as on 31.03.2017. Assessee invited our attention to Note-9 containing details of the short-term loans and advances wherein also, the same figures have been mentioned. Copy of the bank account of HMP Ltd. reflecting the transaction of Rs. 1 Crore on 22.07.2016 and paperbook showing the corresponding receipt/deposits of Rs. 1 Crore in the bank account of the assessee. The ld. AO thus, totally ignored the aforesaid factual evidence on the file produced by the assessee. CIT(A) has merely paraphrased the findings of the ld. AO without making any effort to appreciate the reply and evidences furnished by the assessee.Thus, addition made by the lower authorities on this issue is not sustainable. Addition u/s 14A - addition on account of estimated income from investments - Assessee has demonstrated that the assessee during the year did not earn any tax exempt dividend income out of the investments made. Therefore, as per the law laid down by various Courts of the country, no disallowance u/s 14A of the Act is attracted. Thus, as Cheminvest Ltd 2015 (9) TMI 238 - DELHI HIGH COURT and Shivam Motors (P.) Ltd. 2014 (5) TMI 592 - ALLAHABAD HIGH COURT if the assessee during the year has not earned any tax exempt income, no disallowance u/s 14A of the Act will be warranted. Appeal of assessee allowed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the addition of Rs. 1 Crore as unexplained receipt by the Assessing Officer (AO) was justified.
Whether the disallowance of Rs. 16,74,712/- under Section 14A of the Income Tax Act, 1961 for expenses incurred to earn exempt income was appropriate.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Addition of Rs. 1 Crore as Unexplained Receipt

Relevant legal framework and precedents: The assessment was conducted under Section 144 of the Income Tax Act, 1961, due to alleged non-compliance with notice under Section 142(1). The scrutiny was based on the criteria of low income compared to high loans/advances and investments.
Court's interpretation and reasoning: The Tribunal found that the assessee had provided adequate documentary evidence indicating that the Rs. 1 Crore was a refund of a security deposit from a previous year and not an unexplained receipt.
Key evidence and findings: The assessee submitted the balance sheet, bank statements, and a letter from Hemraj Mahabir Prasad Ltd. confirming the refund of the security deposit. These documents were ignored by the AO and CIT(A).
Application of law to facts: The Tribunal noted that the AO and CIT(A) failed to consider the evidence provided by the assessee, which clearly demonstrated the nature of the Rs. 1 Crore transaction.
Treatment of competing arguments: The Department argued that the order under Section 144 was justified due to non-compliance. However, the Tribunal found that the assessee had indeed complied and provided necessary evidence.
Conclusions: The Tribunal concluded that the addition of Rs. 1 Crore was not sustainable and ordered its deletion.

Issue 2: Disallowance under Section 14A for Exempt Income

Relevant legal framework and precedents: Section 14A disallows expenses incurred to earn exempt income. The Tribunal referenced various precedents where disallowance under Section 14A was not warranted if no exempt income was earned during the year.
Court's interpretation and reasoning: The Tribunal agreed with the assessee's contention that no exempt income was earned during the relevant assessment year, thus disallowance under Section 14A was unwarranted.
Key evidence and findings: The assessee demonstrated that no tax-exempt dividend income was earned during the year, supported by the balance sheet and financial statements.
Application of law to facts: The Tribunal applied the legal principle that disallowance under Section 14A is not applicable if no exempt income is earned, as established in various High Court rulings.
Treatment of competing arguments: The Department did not provide any evidence to counter the assessee's claim of not earning exempt income. The Tribunal relied on established case law to support its decision.
Conclusions: The Tribunal concluded that the disallowance under Section 14A was not justified and ordered its deletion.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: The Tribunal emphasized that "the addition made by the lower authorities on this issue is not sustainable" regarding the Rs. 1 Crore addition, and "no disallowance u/s 14A of the Act will be warranted" when no exempt income is earned.
Core principles established: The judgment reinforced the principle that documentary evidence must be duly considered by tax authorities, and disallowance under Section 14A is not applicable if no exempt income is earned.
Final determinations on each issue: The Tribunal ordered the deletion of both the Rs. 1 Crore addition and the disallowance under Section 14A, allowing the appeal filed by the assessee.

Overall, the Tribunal's decision underscores the importance of proper consideration of evidence in tax assessments and adherence to established legal principles regarding disallowance of expenses related to exempt income.

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