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2025 (1) TMI 1492 - AT - Income TaxIncome tax liability against company dissolved - Disallowance u/s 14A r.w.r.8D - HELD THAT - Section 14 of IBC Code is very clear on the aspect that once moratorium is drawn and the insolvency commencement date is declared any institution of suits or definition of pending suits or proceedings against the creditor debtor (in the present facts of the case of assessee before us) including the execution of any judgment decree or order in any Court of law Tribunal Arbitration Resolution Plan/Process has been accepted by the NCLT. We refer to the decision of Ghanshyam Manz Retails Pvt. Ltd. Mishra and Sons Pvt. Ltd. Vs. Edelweiss Asset Reconstruction Co. Ltd. 2021 (4) TMI 613 - SUPREME COURT wherein as considered a situation wherein the resolution plan was approved by the adjudicating authority under Section 31(1) of the IBC Code - once the resolution plan was drawn the claim as provided in the resolution plan stood frozen and will be binding on the corporate debtor its employee its members creditors Central Government and any State Government or legal authority guarantor and other stakeholders. We also note that in the present facts of the case the resolution plan is yet to be finalized. When we read the newly inserted provisions of Section 156A of the Act it is necessary to remand the appeal to the Ld. AO to take necessary steps/action as per Rules. Hence we deem it fit and proper to remand this appeal back to the file of Ld. Assessing Officer to take necessary steps as per Section 156A of the Act. Accordingly we allowed the appeal filed by the assessee.
ISSUES PRESENTED and CONSIDERED
The core legal issues considered in this judgment are: 1. Whether the disallowance under Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules, 1962, was correctly applied by the Commissioner of Income Tax (Appeals) [CIT(A)] in relation to the expenditure incurred for earning exempt dividend income. 2. Whether the CIT(A) erred in determining that investments in unquoted shares were made substantially from borrowed funds, and the implications of this finding on the disallowance under Section 14A. 3. The applicability of the Insolvency and Bankruptcy Code (IBC) provisions, particularly Section 14, in relation to the tax liability and the pending resolution plan before the National Company Law Tribunal (NCLT). ISSUE-WISE DETAILED ANALYSIS 1. Disallowance under Section 14A and Rule 8D - Legal Framework and Precedents: Section 14A of the Income Tax Act, 1961, provides for the disallowance of expenditure incurred in relation to income that does not form part of the total income. Rule 8D of the Income Tax Rules, 1962, prescribes the method for determining the amount of expenditure to be disallowed. - Court's Interpretation and Reasoning: The Tribunal examined whether the CIT(A) correctly applied the provisions of Section 14A and Rule 8D. The Tribunal noted the assessee's argument that the investments were made from internal accruals and equity, not borrowed funds, and that the CIT(A) failed to appreciate this distinction. - Key Evidence and Findings: The assessee contended that no expenditure was incurred for earning the exempt income and that the CIT(A) incorrectly computed the interest expenses and average value of total assets. - Application of Law to Facts: The Tribunal found that the CIT(A) did not adequately consider the assessee's claims regarding the source of funds for the investments and the nature of the expenses incurred. - Treatment of Competing Arguments: The Tribunal acknowledged the assessee's argument that the onus to prove the expenditure was incurred for taxable business operations, and not for earning exempt income, lies with the Revenue. - Conclusions: The Tribunal concluded that the CIT(A) erred in confirming the disallowance under Section 14A and Rule 8D without proper consideration of the facts and evidence presented by the assessee. 2. Application of IBC Provisions - Legal Framework and Precedents: Section 14 of the Insolvency and Bankruptcy Code (IBC) imposes a moratorium on the initiation or continuation of legal proceedings against a corporate debtor once an insolvency resolution process is initiated. - Court's Interpretation and Reasoning: The Tribunal referred to the Supreme Court's decision in Ghanshyam Manz Retails Pvt. Ltd. Mishra and Sons Pvt. Ltd. Vs. Edelweiss Asset Reconstruction Co. Ltd., which held that once a resolution plan is approved, claims are frozen and binding on all stakeholders. - Key Evidence and Findings: The Tribunal noted that the resolution plan for the assessee's case was yet to be finalized, and the moratorium under Section 14 of the IBC was in effect. - Application of Law to Facts: The Tribunal determined that, given the ongoing insolvency proceedings, it was necessary to remand the appeal to the Assessing Officer to take appropriate actions under the newly inserted provisions of Section 156A of the Income Tax Act. - Treatment of Competing Arguments: The Tribunal considered the Departmental Representative's submission that the Assessing Officer should be involved as a secured creditor in the NCLT proceedings. - Conclusions: The Tribunal decided to remand the appeal to the Assessing Officer to address the tax liability in accordance with the IBC provisions and Section 156A of the Income Tax Act. SIGNIFICANT HOLDINGS - The Tribunal held that the CIT(A) erred in confirming the disallowance under Section 14A without adequately considering the assessee's evidence regarding the source of investment funds and the nature of expenses. - The Tribunal emphasized the importance of the IBC's moratorium provisions and the need for the Assessing Officer to take necessary steps in light of the pending resolution plan. - The appeal was allowed for statistical purposes, with the matter remanded to the Assessing Officer for further action as per Section 156A of the Income Tax Act.
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