2017 (11) TMI 1601 - AT - Income Tax

Ingenuity of loss - reimbursement of the cost of short supply replenished to the buyer as deduction under the head Profits and Gains of the business - Held that - On appreciation of the evidences submitted by the assessee, such as the settlement deed, the high seas sale details, the income tax return of the buyer and debit notes, it is apparent that the adequate evidences to justify the loss incurred by the buyer, which was partly compensated by the assessee and claimed as a business loss cannot be disallowed. Furthermore, AO also verified that the buyer has accounted for this loss may be towards the reduction in the cost of the purchase of the fixed assets by the buyer, but that does not make any difference regarding the claim of the assessee. As the above loss has been incurred by the assessee during the course of the business and incurred during the year, hence, the assessee is entitled to get the deduction of the same. Regarding the genuineness of the claim, it is supported by the settlement deed and confirmation of the buyer who received the above sum by issuing the debit note. The ld CIT (A) has considered all the reasons given by the ld Assessing Officer for disallowance and after that has allowed the claim of the assessee. The ld Departmental Representative also could not point out any error in the order of the ld CIT (A). In view of this we confirm the finding of the ld CIT(A) in deleting the disallowance of ₹ 4.85 crores on account of reimbursement of the cost of short supply replenished to the buyer as deduction under the head Profits and Gains‖ of the business. In the result, the solitary ground of appeal of the revenue is dismissed. Disallowance u/s 14A - Held that - Admittedly, the assessee has earned exempt income of ₹ 55204/- as per page No. 7 of the assessment order. The above issue is squarely covered in favour of the assessee in case of Joint Investments Pvt. Ltd vs. CIT 2015 (3) TMI 155 - DELHI HIGH COURT wherein, in para No. 9 Hon ble High Court has held that disallowance cannot swallow the entire exempt income. Therefore, the disallowance u/s 14A confirmed by the ld CIT (A) of ₹ 1545259/- is restricted up to ₹ 55204/-.

Summary

Issues Involved:
1. Allowability of loss of ?4.85 crores claimed by the assessee due to short supply of goods.
2. Disallowance under section 14A of ?1,545,259/-.

Issue-wise Detailed Analysis:

1. Allowability of Loss of ?4.85 Crores Claimed by the Assessee Due to Short Supply of Goods:

The primary issue in this appeal was whether the loss of ?4.85 crores, partially reimbursed to the buyer due to short supply of goods, is allowable. The Assessing Officer (AO) disallowed this claim, whereas the Commissioner of Income Tax (Appeals) [CIT (A)] allowed it.

The assessee, engaged in trading various goods, imported CR Mill equipment and sold it on a high seas basis to a buyer. The buyer reported short supply of items valued at ?9.5 crores and incurred additional costs to make the project functional. A settlement deed was executed, and the assessee agreed to compensate ?4.85 crores. The AO disallowed the claim, doubting the genuineness and stating it was a capital expenditure for the buyer.

The CIT (A) deleted the addition, noting the AO's undue emphasis on terminology and failure to disprove the genuineness of the transaction. The CIT (A) emphasized that the transaction was supported by extensive documentation, including commercial invoices, bills of lading, settlement deeds, and debit notes. The CIT (A) criticized the AO's reliance on suspicion and theoretical constructs of evidence without substantial proof.

The Tribunal upheld the CIT (A)'s decision, noting that the AO did not specify what additional evidence was required and failed to reject the books of accounts. The Tribunal confirmed that the loss was incurred in the course of business and was adequately supported by evidence.

2. Disallowance Under Section 14A of ?1,545,259/-:

The assessee earned dividend income of ?55,204/-, which is exempt. The AO applied Rule 8D and disallowed ?1,445,259/- on account of interest expenditure and an additional ?100,000/-, totaling ?1,545,259/-. The CIT (A) confirmed this disallowance.

The Tribunal referred to the Delhi High Court's decision in Joint Investments Pvt. Ltd vs. CIT, which held that disallowance under section 14A cannot exceed the exempt income earned. Therefore, the Tribunal restricted the disallowance to ?55,204/-.

Conclusion:

The Tribunal dismissed the revenue's appeal regarding the ?4.85 crores disallowance, confirming it as a genuine business loss. The cross-objection by the assessee was allowed, restricting the disallowance under section 14A to the extent of the exempt income earned, i.e., ?55,204/-.