2013 (8) TMI 827 - AT - Income Tax

Disallowance of expenditure on amount written off - Losses belong to JV / AOP or assessee - Held that - The expenses, which stand now written off, i.e., on the JV or the project owner being no longer interested in executing the projects/s, was, firstly, only and on behalf of the JV or the AOP aforesaid. The assessee was merely financing the expenditure for the time being as a promoter of a member of the said AOP. The amount represented only a claim receivable; that received from JPPL being the extent to which the project development stood, under the circumstances, financed by it; the position of JPPL being para materia with that of the assessee. The loss under reference is therefore of the AOP, and not the assessee s loss; the balance loss being borne by JPPL, its JV partner or associate. These amounts, were the project/s to be set up, recorded in the books of the JV or the project owner as toward project cost - there is no reference to written off amounts nor any details thereof, either in the assessment order or in the impugned order. Even no submissions in this regard were made before A.O. or by before Tribunal. Under the circumstances, therefore, there is no basis to modify the findings in respect of this amount, which stands added back similarly - Decided against assessee. Disallowance of interest - CIT confirmed disallowance - Held that - A bare reference to the balance-sheet, would show that the assessee-company is a profitable company - It is thus not understand as to how it could be said that the amount invested by the assessee in shares and securities, at the year-end, is out of borrowed funds, which, apart from secured loans, which are for fixed assets, are by way of unsecured loans - No case for disallowance, looking at the financials in any manner, is thus made out. The impugned disallowance is accordingly directed for deletion - Decided in favour of assessee. Disallowance under section 14A - Held that - Rule 8D, though not mandatory for the current year, yet cannot be said to be unreasonable, so that the same can only be said to be form a reasonable basis for the disallowance u/s. 14A(1). Having said that, how the Revenue could invoke r. 8D(2)(ii), disallowing interest expenditure there-under; having already disallowed the entire interest u/s. 36(1)(iii). In fact, we have found the entire of it as allowable as a business expense u/s. 36(1)(iii), considering the sources and application of funds, so that no disallowance qua interest expenditure u/r. 8D(2(ii) would arise in the facts and circumstances of the case - Decided in favour of assessee.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Disallowance of expenditure written off.
3. Disallowance of interest expenditure.
4. Disallowance under section 14A.

Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The appeal by the assessee was filed 22 days late. The delay was attributed to the appeal being inadvertently filed with the office of the Commissioner of Income Tax (Appeals) (CIT(A)) instead of the Tribunal. The Tribunal found the reasons reasonable and admitted the appeal.

2. Disallowance of Expenditure Written Off:
The assessee contested the disallowance of Rs. 49,65,446/- written off as irrecoverable expenditure. The bulk of this amount, Rs. 48,24,365/-, was related to expenses incurred on behalf of a joint venture (JV) with M/s. Jalkheri Power Pvt. Ltd. (JPPL) for developing power projects. The projects were abandoned due to unviable power sale rates, leading to the write-off.

The Tribunal observed that the assessee's claim lacked substantiation and found no merit in admitting additional evidence. It was noted that the expenses were capital in nature, incurred for project development, and thus not deductible as revenue expenditure. The Tribunal upheld the disallowance, citing that the loss was on capital account, referencing relevant case law such as Hasimara Industries Ltd. v. CIT.

3. Disallowance of Interest Expenditure:
The assessee's accounts showed an interest expenditure of Rs. 2,87,061/-. The Assessing Officer (A.O.) disallowed this amount, inferring that borrowed funds were used for investments yielding capital gains. The CIT(A) confirmed this disallowance.

However, the Tribunal found that the assessee had sufficient own funds to cover the investments, and the financials did not support the claim that borrowed funds were used for investments. The disallowance of interest expenditure was directed for deletion.

4. Disallowance Under Section 14A:
The A.O. disallowed Rs. 1,63,840/- under section 14A, applying Rule 8D, for earning dividend income of Rs. 2,95,810/-. The assessee argued that Rule 8D was not mandatory for the year in question.

The Tribunal acknowledged that while Rule 8D was not mandatory, it provided a reasonable basis for disallowance. However, since the entire interest expenditure was already found allowable under section 36(1)(iii), no disallowance under Rule 8D(2)(ii) was warranted. The Tribunal restricted the disallowance to the amount determined under Rule 8D(2)(iii) for indirect expenditure.

Conclusion:
The appeal was partly allowed. The Tribunal upheld the disallowance of the expenditure written off as capital in nature, directed the deletion of the interest expenditure disallowance, and restricted the disallowance under section 14A to indirect expenditure only.