2017 (1) TMI 671 - AT - Income Tax

Disallowance made under section 14A r.w.s. 8D.- Held that - The assessee has not claimed any exempt income in this year, therefore, no disallowance can be made - Decided in favour of assessee Disallowance of loss suffered in contract - Held that - The approach of the Revenue authorities is such that every business venture would only give profit. With this angle, if a transaction is being appreciated, then the circumstances and questions would only give rise to suspicion. On the other hand, stand of the assessee as a businessman is that in such type of projects where everything was depending on getting approval from the Government nothing concrete could be anticipated. To our mind, it is only difference of opinion in appreciating a transaction. After looking into the explanation of the assessee with all other attending circumstances, we are of the view that the assessee had entered into an agreement which was a business venture and suffered loss. It has made payment of contractual liability. Money has been paid through account payee cheque and it did not return to the assessee as pointed out by the ld.counsel for the assessee. In such situation, the AO was not justified to disallow claim of the assessee. - Decided in favour of assessee

Issues Involved:
1. Disallowance of loss in contract amounting to ?4.00 crores.
2. Disallowance under section 14A of the Income Tax Act, 1961 read with rule 8D of the Income Tax Rules, 1962 amounting to ?9,69,947/-.

Issue-wise Detailed Analysis:

1. Disallowance of Loss in Contract Amounting to ?4.00 Crores:
The assessee claimed a deduction of ?4.00 crores paid to M/s. Jay Construction as compensation for the cancellation of a contract. The AO disallowed this claim, suspecting the genuineness of the contract and considering it a step to avoid tax. The AO raised doubts about the execution and the intent behind the contract, noting that it was a colorable device designed to reduce taxable income. The CIT(A) concurred with the AO, emphasizing that neither the assessee nor Jay Construction had undertaken any real estate project before, and the land in question was agricultural, making construction legally impossible. The CIT(A) also pointed out inconsistencies in the contract details and the financial capacity of Jay Construction.

Upon appeal, the Tribunal examined the fundamental propositions of law under section 37(1) of the Income Tax Act, which requires that the expenditure must be laid out wholly and exclusively for business purposes. The Tribunal referred to authoritative pronouncements, including the Gujarat High Court's decision in Voltamp Transformer Pvt. Ltd. Vs. CIT and the Delhi High Court's decision in CIT Vs. Dalmia Cement Ltd., emphasizing that commercial expediency should be judged from a businessman's perspective, not the Revenue's.

The Tribunal scrutinized the agreement dated 27.6.2007 and the subsequent cancellation agreement dated 20.3.2008. It noted that the contract was legally valid, executed between competent entities, and the payment was made through account payee cheques without any immediate withdrawal or transfer back to the assessee. The Tribunal found that the AO's conclusions were based on inferences rather than concrete evidence, and the objections raised were peripheral, not addressing the core issue of whether the expenditure was genuinely incurred for business purposes.

The Tribunal concluded that the assessee had entered into a legitimate business venture and suffered a genuine loss. The payment of ?4.00 crores was a contractual liability, duly accounted for, and the AO's disallowance was not justified. Consequently, the Tribunal allowed the assessee's appeal and deleted the disallowance of ?4.00 crores.

2. Disallowance Under Section 14A Read with Rule 8D Amounting to ?9,69,947/-:
The AO disallowed ?9,69,947/- under section 14A read with rule 8D, comprising ?1,34,997/- of interest expenditure and ?8,34,950/- of administrative expenditure, on the grounds that the assessee had made significant investments in shares and securities but had not allocated any interest expenditure towards these investments.

The CIT(A) upheld the AO's disallowance. However, the assessee contended that no exempt income was claimed during the relevant assessment year, citing the Gujarat High Court's decision in CIT Vs. Corrtech Energy P. Ltd., which held that if no exempt income is claimed, section 14A cannot be applied.

The Tribunal considered the rival contentions and the relevant judicial precedents. It noted that the Gujarat High Court had clearly ruled that section 14A could not be invoked if the assessee did not claim any exempt income. Since the assessee had not claimed any exempt income in the relevant year, the Tribunal found that the disallowance under section 14A was not warranted.

Respectfully following the Gujarat High Court's judgment, the Tribunal allowed the assessee's appeal on this ground and deleted the disallowance of ?9,69,947/-.

Conclusion:
The Tribunal allowed the assessee's appeal on both grounds, deleting the disallowances of ?4.00 crores for the contractual loss and ?9,69,947/- under section 14A read with rule 8D. The decision emphasized the importance of assessing commercial expediency from a businessman's perspective and adhering to judicial precedents regarding the application of section 14A.

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