2023 (7) TMI 903 - AT - Income Tax

Addition u/s 14A - disallowance to be triggered in respect of expenses that shall eventually result in exempt income in future years - HELD THAT - There is no dispute to the fact that during the relevant previous year no exempt income was earned. CIT(A) has followed the judicial pronouncements wherein it held as settled proposition of law that where no exempt income is earned no disallowance u/s 14A r.w.r 8D can be made. CIT(A) relied the determination of issue in favour of assessee in assessee s own case. Ld. AR has also drawn support from orders in assessee s own case in similar circumstances in 2023 (2) TMI 1162 - ITAT DELHI where Revenue s appeal on that ground was disallowed and order of ld. CIT(A) was upheld. Bad debts u/s 36(l)(vii) or business expenditure u/s 37 - Addition in respect of the payment made by assessee company to YES Bank on account of a corporate guarantee - assessee in its Proflt Loss Account had recorded the entry as Debts Written Off - HELD THAT - The case of assessee is that in order to create dominant position in the retail market the joint venture was incorporated and being promoters the corporate guarantees were extended for the credit facilities received for the joint venture company. It appears that Ld. AO had fallen in error in not appreciating the fact that although, the joint venture was a separate entity it was promoted by the assessee along with his partners and they had direct interest in the sustenance and existence of that company. There is no allegation that the Joint Venture was any paper or sham transaction but the matter on record show it was a functional unit which ended into loss making. The credibility of assessee was directly on stake with the default of the joint venture company FMRIL. The dues of joint venture were paid on full settlement of the dues standing against the assessee on account of corporate guarantee. The same was certainly a business expenditure as the operations of joint venture was to expand the market of assessee with his partner of joint venture. In the instant case the expenditure was rightly held to be deductible u/s 37. The assessee incurred the expenditure to avoid any adverse effect on its reputation and avoid costs of litigation and in CIT vs. Delhi Safe Deposit Company Ltd 1982 (1) TMI 2 - SUPREME COURT has held such payments to be a valid business exigency. There is no error in the findings of ld. CIT(A) requiring interference. Decided in favour of assessee.

Summary

Issues Involved:
The judgment involves issues related to income tax assessment, including the treatment of interest liability, disallowance of expenses, and deduction of bad debts.

Interest Liability and Disallowed Expenses:
The appeal by the Revenue was against the order of the CIT(A) regarding the addition of interest liability on loans and the disallowance of an amount paid to a bank on behalf of a joint venture company. The AO had considered the interest liability and made an addition, which was later deleted by the CIT(A). The AO disallowed the payment made to the bank, considering it as capital expenditure and not wholly and exclusively for business purposes under Section 37 of the Income Tax Act. However, the CIT(A) deleted this addition, emphasizing the business expediency and legal liability under the corporate guarantee. The Tribunal upheld the CIT(A)'s decision, stating that the payment was deductible under Section 37 of the Act as a valid business expenditure.

Treatment of Bad Debts:
Another issue raised in the appeal was the addition made on account of written-off bad debts claimed as expenses under Section 37 of the Income Tax Act. The CIT(A) had deleted this addition, and the Revenue challenged this decision. The Tribunal considered the documents presented, including the joint venture agreement, corporate guarantee details, and correspondence with the bank. It was observed that the joint venture had the backing of the assessee and its partners, and the payment of dues was a business expenditure to protect the reputation and interests of the assessee. The Tribunal agreed with the CIT(A)'s findings, stating that the expenditure was deductible under Section 37 of the Act, and dismissed the appeal by the Revenue.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions regarding the interest liability, disallowed expenses, and bad debts, emphasizing the business expediency and legal obligations involved. The Tribunal ruled in favor of the assessee, stating that the expenses were deductible under Section 37 of the Income Tax Act. The appeal by the Revenue was dismissed, and the order was pronounced on 19th July 2023.