2022 (5) TMI 297 - AT - Income Tax

Disallowance of interest - AO observed that the assessee had withdrawn certain amounts through journal entries from the firms in which deduction under section 80IB was claimed, which were invested, again through journal entries, to the firms in which no deduction u/s 80IB was available - assessee had made transfers by withdrawal from a firm M/s. Eisha Properties (eligible for section 80IB deduction) on different dates during the year and the same was transferred to firms Eisha Realtors; Eisha Vastu Construction; Eisha Asset Developers; and Eisha Concord Realtors etc. (none eligible for deduction u/s 80IB) - HELD THAT - Assessee passed transfer entries by crediting Eisha Properties (the firm claiming deduction u/s 80IB) and debiting other firms (not having the benefit of deduction u/s 80IB). In this way, payment of interest by the assessee amounting to Rs.1.13 crore created income in the hands of Eisha Properties and expenditure in the hands of the assessee. In the like manner, the assessee received interest amounting to Rs.35,12,686 from various firms not having benefit of deduction u/s 80IB. By doing this exercise, interest income was created in the hands of Eisha Properties whose income was otherwise eligible for deduction u/s 80IB. This is how, the assessee created excess debit interest of Rs.78.56 lakhs in his hands for adjusting the same with the income earned from construction work in his proprietorship concern, M/s. Sohal Construction. As the transactions of withdrawals and investments were routed through transfer entries, there was a direct nexus between the amounts transferred from Eisha Properties through journal entries to other firms, such as, Eisha Asset Developers. The journal entries were passed with a view to create loss in the hands of the assessee by means of excess payment of interest without any corresponding liability of paying tax on interest in the hands of Eisha Properties. It is not even a case of mixed pool of funds in the hands of the assessee. Rather it is a straight transfer from one firm s account to another thereby ingraining direct nexus between the two. Obviously, such an amount of interest paid for extra commercial considerations cannot be allowed as deduction. On an earlier occasion, a report was called for from the concerned AO on the correct amount of excess interest. Such report dated 23.02.2022 has been placed on record, in which the AO has tabulated the amount of interest received at Rs.66,31,094 from certain concerns and interest paid at Rs.1.13 crore with differential excess amount of interest at Rs.47,38,541. We, therefore, uphold the disallowance at Rs.47,38,541 as against Rs.78.56 lakhs confirmed in the first appeal. This ground is partly allowed. Disallowance u/s 14A r.w.r. 8D - HELD THAT - It is seen as an admitted position that the assessee was having exempt income and no disallowance was offered u/s 14A. The ld. CIT(A) was reasonable in making disallowance at 0.5% of average investments under rule 8D(2)(iii). Such a disallowance, being, in conformity with the relevant provision, is hereby confirmed.

Summary

Issues:
1. Disallowance of interest amount
2. Addition under section 14A of the Income-tax Act

Analysis:

Issue 1: Disallowance of Interest Amount
The first issue revolves around the disallowance of interest amounting to Rs.78,56,948. The Assessing Officer (AO) observed that the assessee made certain withdrawals from firms eligible for deduction under section 80IB of the Income-tax Act and invested these amounts in firms not eligible for the same deduction. This led to a situation where interest earned and paid by the assessee created an artificial loss of Rs.78,56,948. The AO concluded that this loss could not be allowed as it was a result of manipulative transactions without any commercial basis. The ld. CIT(A) upheld this disallowance. Upon review, the Tribunal found that the transactions were structured in a manner to create excess debit interest in the assessee's hands for offsetting against income from construction work. The Tribunal noted a direct nexus between the withdrawals and investments, leading to the creation of artificial interest income. The Tribunal ultimately reduced the disallowance amount to Rs.47,38,541 based on a revised calculation provided by the AO.

Issue 2: Addition under Section 14A of the Act
The second issue pertains to the addition of Rs.2,95,996 under section 14A of the Act. Initially, no such addition was made by the AO. However, the ld. CIT(A) observed that despite having exempt income, the assessee did not offer any disallowance under section 14A. Subsequently, the ld. CIT(A) made a disallowance of Rs.2,95,996 under rule 8D(2)(iii) of the Income-tax Rules at 0.5% of average investments. The Tribunal, after considering the submissions and relevant material, confirmed this disallowance as it was in line with the provisions of the Act.

In conclusion, the Tribunal partially allowed the appeal by reducing the disallowance of interest amount and confirming the addition under section 14A of the Income-tax Act. The judgment was pronounced on 4th May 2022 by the Appellate Tribunal ITAT Pune, with detailed analysis provided for each issue raised in the appeal.