2016 (1) TMI 805 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - dividend income earned by the assessee - CIT(A) allowed the claim - Held that - We hold that the Learned CIT(A) had given cogent reasons in his appellate order to disallow a sum of ₹ 25,000/- towards proportionate management expenses in terms of Rule 8D(2)(iii) of the IT Rules as the expenditure deemed to have incurred by the assessee for the purpose of earning dividend income of ₹ 180/-. The factual findings given by the Learned CIT(A) with regard to the availability of own funds with the assessee for the purpose of making the investments have not been controverted by the Learned DR before us. Hence no disallowance is warranted in terms of Rule 8D(2)(ii) of the Rules. No infirmity in the order of the Learned CIT(A) - Decided against revenue Addition towards interest income on hire purchase loans advanced by the assessee - Held that - AO was not justified in assessing as interest income of the appellant chargeable in AY 2009-10. The AO shall however inform the assessing officer of Guru Mehar Construction regarding the fact that the borrower credited appellant s account with the entire arrear of interest in one year and claimed deduction for the same in one year which is contrary to law. The AO shall also inform the Assessing Officer of the borrower about default committed by the borrower of non deduction of Tax and its consequent effect u/s. 40(a)(ia) of the Act. These directions are issued to ensure that no leakage of revenue occurs as a consequence of the relief allowed to the appellant. - Decided against revenue Unexplained investment u/s. 69 - Addition on difference in hire purchase loan balance as per confirmation obtained from M/s Guru Mehar Construction u/s 133(6) vis a vis the balance as per the books of the assessee - CIT(A) deleted the addition - Held that - We find lot of force in the argument of the Learned AR that even assuming that the difference in opening balance of loan figure is to be brought to tax, it cannot be added as income in the Asst Year 2009-10 and it should be considered only in the year in which the difference, if any, arose. We find from the details submitted by the said party i.e Guru Mehar Construction, that he had not submitted the transaction details prior to Asst Year 2009-10 and hence it is not clearly discernible from the records as to in which year the difference had arose.In view of this and in view of elaborate findings recorded by the Learned CITA , we find no reason to interfere with - Decided against revenue

Summary

Issues Involved:

1. Disallowance under Section 14A of the Income Tax Act read with Rule 8D of the IT Rules.
2. Addition of interest income on non-performing assets (NPA).
3. Addition of difference in hire purchase loan balance.

Issue-Wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act read with Rule 8D of the IT Rules:

The first issue pertains to whether the Assessing Officer (AO) was correct in making a disallowance of Rs. 10,21,245/- under Section 14A of the Income Tax Act read with Rule 8D of the IT Rules concerning dividend income of Rs. 180/-. The assessee, a non-banking finance company, argued that the investments were made from share capital and taxed accumulated profits, and no expenditure was incurred for earning the dividend income. However, the AO applied Rule 8D directly without recording any satisfaction as to why the assessee's claim was incorrect. The Commissioner of Income Tax (Appeals) [CIT(A)] found that the AO did not establish any nexus between borrowed funds and the investments and directed a disallowance of Rs. 25,000/- for management expenses under Rule 8D(2)(iii). The tribunal upheld the CIT(A)'s order, noting the factual findings were not contested by the Departmental Representative (DR), and dismissed the revenue's appeal on this ground.

2. Addition of interest income on non-performing assets (NPA):

The second issue concerns the addition of Rs. 1,23,56,247/- towards interest income on hire purchase loans to M/s Guru Mehar Construction, which had become an NPA. The assessee, adhering to RBI's prudential norms, did not recognize interest income on an accrual basis due to non-receipt. The AO, based on information from M/s Guru Mehar Construction, added the interest income. The CIT(A), referencing the Delhi High Court's decision in CIT vs. Vasisth Chay Vyapar Ltd and the Supreme Court's ruling in Southern Technologies Ltd, held that income recognition must conform to RBI norms and deleted the addition. The tribunal concurred, emphasizing that the AO must follow RBI directions for NBFCs and dismissed the revenue's appeal on this ground.

3. Addition of difference in hire purchase loan balance:

The third issue involves the addition of Rs. 8,21,143/- due to a discrepancy in the opening balance of the hire purchase loan as confirmed by M/s Guru Mehar Construction. The AO added the difference as unexplained income. The CIT(A) deleted the addition, reasoning that the discrepancy in the opening balance did not arise from transactions in the financial year 2008-09 but from earlier years. The tribunal agreed, stating that any addition should be made in the year the discrepancy arose and noted that the AO did not obtain sufficient information from the borrower for earlier years. Consequently, the tribunal upheld the CIT(A)'s decision and dismissed the revenue's appeal on this ground.

Conclusion:

The tribunal dismissed the revenue's appeal on all grounds, upholding the CIT(A)'s orders regarding the disallowance under Section 14A, the addition of interest income on NPAs, and the addition of the difference in the hire purchase loan balance. The tribunal found no infirmity in the CIT(A)'s detailed and reasoned orders.