2025 (3) TMI 32 - AT - Income Tax

Disallowance u/s 14A - assessee is having interest free income in the shape of dividend capital gain etc which did not form part of the total income and therefore he invoked the provisions of Section 14A of the Act read with Rule 8D - HELD THAT - We find that the assessee has made fresh investment in the year under appeal as against which it has sufficient own interest free funds in the shape of reserve and capital. Therefore respectfully following the judgment of the Tribunal in the case of the assessee for preceding year 2019 (1) TMI 36 - ITAT DELHI we direct the AO to delete the addition. However since the assessee has made suo moto disallowance of Rs. 6, 30, 937/- therefore the disallowance to this extent be restricted. Disallowance made towards exemption u/s 10B and exemption u/s 10AA by not treating the other income (misc income compensation profit on exchange gain) earned from export activities - HELD THAT -This Tribunal in the case of assessee for AY 2007-08 2019 (1) TMI 36 - ITAT DELHI and such order was followed by the Tribunal further in Assessee s won case for AY 2010-11 to 2012-13 2021 (10) TMI 1455 - ITAT DELHI wherein considered the fact that with respect to the miscellaneous income and compensation being part of eligible profit for the purpose of computing the deduction u/s 10B and revenue has already accepted this issue. Tribunal has set aside the matter to the file of AO for verification of the nature of income and then allow the claim. Thus by following the principle of consistency in this year also we set aside the issue to the file of the AO for making verification of the nature of income and compute the deduction u/s 10B of the Act in terms of directions given by tribunal for Ay 2007-08. Reduction in export turnover towards the amounts which have been received in foreign currency AO has reduced such amount from the export turnover however the same is also required to be reduced from the total turnover because the total turnover comprises of export turnover and legal turnover. The Tribunal in its order for AY 2010-11 to 2012-13 following the judgment in case of CIT Vs. Genpact India 2011 (11) TMI 119 - DELHI HIGH COURT has directed the AO to recomputed the exemptions u/s 10B of the Act by reducing the said amount from the total turnover also. The facts in this year are identical. Therefore we direct the ld AO accordingly. As a result this ground of appeal are allowed for statistical purposes as per the direction given herein above. Disallowance of bad debts - HELD THAT - We find that during the year under appeal the assessee has claimed expenses on account of provision for doubtful debt and no deduction on account of amount written off out of such provision is claimed in the profit and loss account. Under these circumstances no disallowance could be made for the expenses on account of bad debt which was not claimed in Profit and loss Account and was adjusted against the provisions made. It is further relevant to state that when the assessee itself has added back the provision for bad and doubtful debt to the total income as per the computation of income therefore any disallowance made may lead to double taxation of income. Disallowance of payment made in foreign currency without deducting tax at source as provided u/s 195(2) read with Section 40(a)(ia) - HELD THAT - The facts for the year under appeal are similar to the facts in earlier year 2021 (10) TMI 1455 - ITAT DELHI where the Tribunal has confirmed the addition and assessee has also not controvert such finding before us. Thus by respectfully following the observation made by the Tribunal supra the disallowance made in this year is hereby confirmed. Disallowance of interest related to funds involved the capital work in progress - HELD THAT - Tribunal vide its common order for AY 2010-11 to 2012-13 2021 (10) TMI 1455 - ITAT DELHI has decided the issue and sent the matter back to the file of the AO for making verification of secured and unsecured loans and further verified whether any part of the loan were utilized in respect of expenses forming part of capital work in progress. After considering the facts we find that there is no quarrel about the facts which was similar to the earlier years. Disallowance towards leave encashment u/s 43B(f) - HELD THAT - We direct the AO to allow the claim of the assessee in the year when actual payment is made towards the leave encashment.

1. ISSUES PRESENTED and CONSIDERED

The legal judgment addresses several core issues:

Disallowance under Section 14A of the Income Tax Act related to investments yielding tax-free income.
Disallowance of exemptions under Sections 10B and 10AA concerning export turnover and other incomes.
Disallowance of bad debts written off against provisions for doubtful debts.
Disallowance related to payments made in foreign currency without deducting tax at source as per Section 195(2) read with Section 40(a)(i).
Disallowance of interest on capital work in progress.
Disallowance of leave encashment under Section 43B(f).

2. ISSUE-WISE DETAILED ANALYSIS

Disallowance under Section 14A:

Legal Framework: Section 14A of the Income Tax Act disallows expenses incurred in relation to income not forming part of total income. Rule 8D provides the method for such disallowance.
Court's Interpretation: The Tribunal noted that the assessee had sufficient interest-free funds and followed its previous rulings in the assessee's own case. The court directed the Assessing Officer (AO) to delete the additional disallowance, restricting it to the amount already disallowed by the assessee.
Key Evidence: The assessee had made a fresh investment of Rs. 4 lakhs, and it was argued that sufficient reserves were available to cover this.
Conclusion: The Tribunal directed the deletion of the additional disallowance, limiting it to the amount the assessee had already disallowed.

Disallowance of Exemptions under Sections 10B and 10AA:

Legal Framework: Sections 10B and 10AA provide exemptions for profits from export activities.
Court's Interpretation: The Tribunal referenced its prior decisions, emphasizing consistency in treating miscellaneous income and compensation as part of eligible profits. It set aside the issue to the AO for verification.
Key Evidence: The Tribunal noted past acceptance of similar claims by the Revenue.
Conclusion: The issue was remanded to the AO for verification, with directions to recompute deductions in line with previous rulings.

Disallowance of Bad Debts:

Legal Framework: The Income Tax Act allows for the deduction of bad debts written off in the accounts.
Court's Interpretation: The Tribunal found that the provision for doubtful debts had been added back to the total income, and the written-off amount was not claimed in the profit and loss account.
Conclusion: The Tribunal directed the deletion of the disallowance to prevent double taxation.

Disallowance Related to Foreign Currency Payments:

Legal Framework: Section 195(2) and Section 40(a)(i) require tax deduction at source for certain payments.
Court's Interpretation: The Tribunal upheld the disallowance, citing a lack of evidence regarding the non-taxability of payments in the recipient's hands.
Conclusion: The disallowance was confirmed, following the Tribunal's earlier decision.

Disallowance of Interest on Capital Work in Progress:

Legal Framework: Interest related to funds used for capital work in progress may be disallowed unless properly accounted for.
Court's Interpretation: The Tribunal remanded the issue to the AO to verify the purpose of loans and their application.
Conclusion: The issue was set aside for verification, following the Tribunal's prior directions.

Disallowance of Leave Encashment:

Legal Framework: Section 43B(f) of the Income Tax Act pertains to deductions for leave encashment.
Court's Interpretation: The Tribunal followed the Supreme Court's ruling that deductions are allowable in the year of actual payment.
Conclusion: The AO was directed to allow the deduction in the year of actual payment.

3. SIGNIFICANT HOLDINGS

The Tribunal emphasized the principle of consistency, particularly in relation to the treatment of income under Sections 10B and 10AA.
The court reiterated that disallowance under Section 14A should not exceed the amount already disallowed by the assessee when sufficient interest-free funds are available.
The Tribunal upheld the requirement for tax deduction at source for foreign currency payments, confirming disallowance in the absence of evidence regarding non-taxability.
The Tribunal directed verification of the purpose and application of loans related to capital work in progress, emphasizing the need for factual clarity.
The court followed the Supreme Court's directive on leave encashment, allowing deductions in the year of actual payment.

← Previous Next →