2021 (2) TMI 796 - AT - Income Tax

Disallowance u/s 14A - Suo moto disallowance by assessee - DR submitted that the main purpose for which the investment into shares is made by the assessee may not be relating as Section 14A applies irrespective of whether share are held to gain control or as stock-in-trade. Expenditure which is in relation to earning dividends can be disallowed u/s 14A and Rule 8D - HELD THAT - The investments were out of assessee s own funds and no borrowed funds were used to acquire investments. There was no interest expenditure which could be directly or indirectly attributable to the exempt income. CIT(A) further observed that the investments were strategic investment as per the assessee and the same should be excluded for calculating disallowance under Rule 8D. As per Rule 8D(2)(i), the assessee made disallowance of ₹ 16,05,000/- under the head strategic investment and has taken 20% of employee cost and 5% of administrative cost. Thus, the findings given by the CIT (A) is just and proper. Therefore, Ground No. 1 is dismissed. Disallowance of depreciation claimed a wind mills - CIT-A deleted the addition admitting fresh evidence in violation of Rules 46(3) of the Income Tax Rules - HELD THAT - As details were submitted by the assessee during the assessment proceedings as per the reply/submissions dated 11.12.2012 which is mentioned on page 1 of the Assessment Order itself. There was no new evidence brought on record by the assessee and after the verification of the evidence the CIT(A) has rightly deleted the addition. In fact, the Assessing Officer has totally ignored the reply dated 11.12.2012 submitted by the Assessee. CIT(A) has given a categorical finding that the assets were owned by the assessee and were put to use for the purposes of its business during the year. Hence, there is no need to interfere with the detailed findings of the CIT(A). Hence, Ground No. 2 is dismissed. Addition u/s 36(1)(3) by holding that the assessee had borrowed funds which was used for business purposes and was paying interest on these funds - HELD THAT - Assessee had borrowed funds which was used for business purposes and was paying interest on these funds and this fact was not controverted through any of the documents on the record by the Assessing Officer as well as by the Revenue at the time of hearing before us. Hence, the findings given by the CIT(A) is proper and there is no need to interfere with the findings of the CIT(A). Ground No. 3 is dismissed.

Summary

Issues:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance of depreciation claimed on Wind Mills.
3. Addition under Section 36(1)(iii) for borrowed funds used for business purposes.

Analysis:

Issue 1: Disallowance under Section 14A of the Income Tax Act
The Revenue appealed against the CIT(A)'s deletion of additions made under Section 14A of the Act. The Revenue argued that Section 14A provides for disallowance of expenditure related to income not included in total income. The Revenue cited various court decisions and Circular No. 5 of 2014 issued by the CBDT to support their position. The CIT(A) allowed the appeal on legal and merit grounds. However, the ITAT upheld the CIT(A)'s decision, stating that the investments were made from the assessee's own funds, not borrowed funds, and no interest expenditure was directly or indirectly linked to exempt income. The ITAT found the CIT(A)'s reasoning just and proper, dismissing Ground No. 1 of the Revenue's appeal.

Issue 2: Disallowance of depreciation claimed on Wind Mills
The Revenue contended that the CIT(A) erred in deleting the addition related to disallowance of depreciation claimed on Wind Mills by admitting fresh evidence, allegedly violating IT Rules. The ITAT, after reviewing the details submitted during assessment proceedings, found that no new evidence was presented by the assessee. The CIT(A) had rightly deleted the addition, as assets were owned by the assessee and used for business purposes. The ITAT upheld the CIT(A)'s decision, dismissing Ground No. 2 of the Revenue's appeal.

Issue 3: Addition under Section 36(1)(iii) for borrowed funds used for business purposes
The Revenue challenged the CIT(A)'s deletion of an addition made under Section 36(1)(iii), arguing that the assessee had borrowed funds for business purposes and was paying interest on these funds. The ITAT found that this fact was not disputed by the Assessing Officer or the Revenue during the proceedings. The ITAT upheld the CIT(A)'s decision, stating there was no need to interfere with the findings. Ground No. 3 of the Revenue's appeal was dismissed.

In conclusion, the ITAT dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all grounds. The judgment was pronounced on February 19, 2021, by the ITAT Delhi.