Case Law Details
Ghaziabad Containers Pvt. Ltd. Vs ACIT (ITAT Delhi)
The ITAT Delhi considered an appeal against the order of the CIT(A)-29, New Delhi dated 24.03.2025, which had confirmed an addition of ₹32,94,713 under Section 36(1)(iii) of the Income-tax Act, 1961 and an addition of ₹1,34,535 under Section 14A read with Rule 8D of the Income-tax Rules, 1962.
During the assessment proceedings, the Assessing Officer observed that the assessee had claimed deduction of interest on borrowed funds and had also made investments in shares and mutual funds. The Assessing Officer treated certain amounts as interest-free advances to sister concerns and made the additions under Section 36(1)(iii) and Section 14A read with Rule 8D. The CIT(A) dismissed the assessee’s challenge to the interest disallowance while restricting the Section 14A disallowance to the extent of exempt income earned.
Before the Tribunal, the assessee contended that the alleged interest-free advance of ₹6,20,95,039 was actually payment made through HDFC Bank against purchases from Shri Krishna Polymer Industries Pvt. Ltd., and that another amount represented payment relating to purchases from VAN Inks and Chemicals Pvt. Ltd. It was submitted that these payments had been inadvertently shown as loans in the balance sheet. The assessee also contended that no exempt income had been earned during the relevant assessment year and that the investment of ₹2,69,06,921 represented an opening balance rather than an investment made during the relevant year.
The Tribunal noted that the CIT(A) had rejected the explanation regarding the alleged advances on the grounds that the assessee had not furnished the explanation during the assessment proceedings and had not produced supporting documents such as orders, invoices, confirmations, and bank statements. Considering these facts and the submissions of both parties, the Tribunal held that the issue required fresh examination by the Assessing Officer after the assessee produced the necessary documents. Accordingly, the issue relating to the addition of ₹32,94,713 under Section 36(1)(iii), concerning the amount of ₹6,20,95,039, was restored to the Assessing Officer for fresh adjudication. If the documents and explanation were found to be correct, appropriate relief was directed to be granted.
On the disallowance under Section 14A read with Rule 8D, the Tribunal observed that the assessee had consistently claimed that no exempt income had been earned during the relevant assessment year and that there was no investment made during that year. The Tribunal further noted that the Revenue had not rebutted these submissions or brought any material on record to show that exempt income had been earned or that the investment had been made during the relevant financial year. It held that there was no legal justification for the disallowance of ₹1,34,535 under Section 14A read with Rule 8D and directed the Assessing Officer to delete the disallowance. The appeal was partly allowed for statistical purposes.
FULL TEXT OF THE ORDER OF ITAT DELHI
The appeal of the assessee is directed against the order dated 24.03.2025 of ld. CIT(A)-29, New Delhi passed u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) wherein the addition made u/s 36(1)(iii) of the Act of Rs.32,94,713/- alongwith addition of Rs.1,34,535/- u/s 14A r.w. Rule 8D of the Income Tax Rules, 1962 were confirmed and the appeal was dismissed.
2. Fact in brief as culled out from the authorities below are that the assessee is entered into the business of polystrophilum, adhesive and chemicals and has filed its return for the concern year declaring income of Rs.22,06,010/- o 03.10.2015 and revised the same on 06.06.2016 declaring total income at Rs.21,88,210/-. The case was selected for scrutiny under CASS by issuing notice u/s 143(2) dated 03.08.2016 followed by notice u/s 142(1) of the Act.
3. During the assessment proceedings, it was noticed that the assessee has claimed exemption of interest of Rs.1,25,76,266/- on the funds borrowed and interest paid allegedly used for the purpose of business of the assessee. It was further noticed that the assessee has also utilized the funds available for earning exempt income as it has invested sum of Rs.2,69,06,921/- as on 31.03.2015 in purchase of shares/mutual funds. Hence, after calculating the borrowed funds and short-term advances given to the sister concern, the Assessing Officer proposed to make addition of Rs. 32,94,713/-alongwith Rs.1,34,535/- on the investment made for earning exempt income. The reply submitted by the assessee did not find favour with the Assessing Officer who has passed the assessment order making the addition mentioned above.
4. Aggrieved by the additions made, the assessee filed appeal before the ld. CIT(A) who has dismissed the same and confirmed the additions.
5. We have heard the ld. AR who would submit that both the learned lower authorities had committed illegality in assuming that the assessee has advanced short-term loan of Rs.6,22,95,039/- to the sister concern and further that the assessee has invested available funds for earning exempt income. It is submitted that the alleged short-term loan was not an advance given to the sister concern but it was a payment of amount through HDFC Bank against the purchases made from Shri Krishna Polymer Industries Pvt. Ltd. Regarding the exempt income, it is submitted that no exempt income was earned in the year concerned and the amount which had been shown as investment in the assessment order amount of Rs.2,69,06,921/- allegedly shown as investment in share and mutual funds for earning exempt income was already shown in the P&L account as opening balance as it was invested in the previous year as on 31.03.2015 and does not pertains to the year concerned 2015-16.
6. It is therefore submitted that the issue No. 1 with respect to the 1st addition of 32,94,713/- may be restored to the AO by giving an opportunity to the assessee to submit the necessary documents to prove that the said amount was not an advance to the sister concern but was paid against the purchase made from the identified parties with regard to the second addition made u/s 14A r.w. Rule 8D, it is submitted that there is no exempt income earned and said fact has already been noted by the ld. CIT(A) and the addition made on that account need to be deleted.
7. The ld. DR on the other hand placed reliance the order of the lower authorities and stated that the issue No. 1 may be restored to the AO by the Tribunal and with regard to the second issue i.e. disallowance made u/s 14A r.w. Rule 8D, the ld. CIT(A) has already granted relief in para 5.6 of the impugned order and the issue may be disposed off accordingly.
8. We have considered the rival submissions and examined the record. On perusal of para 4 of the impugned order, we have noticed that the assessee has explained to the ld. CIT(A) by making following submissions extracted below as under:
“4. During the course of appellate proceedings, notices were issued on various dates and the appellant was provided with the opportunity to furnish written submissions along with supporting evidences. The Appellant submitted its written submissions, the relevant portion of which is reproduced as under:
“Return declaring income of Rs 22,06,010/- was filed and AO while computing the assessment u/s 143(3), disallowed, a sum of Rs 32,94,713/- on account of interest free advances paid out of interest bearing funds. The AO further treated a sum of Rs 1, 34, 535/- as income u/s 14A.
The facts of the case are as under: –
The assessee is a trader of Poly films, papers and printing inks. It has raised loans from the bank on which the company had undisputedly paid interest of Rs 1,25,76,266/ – on the amount of loan of Rs 9,60,14,337/-.
The findings of the AO are that the assessee company had made interest free advances of Rs 6,69,05,033/-. On this account the AO made calculation of the interest free advance and consequently calculated the amount of interest of Rs 32,94,713/- which is to be considered part of Rs.1,25,76,266/- and therefore he disallowed this amount of Rs.32,94,713/- out of the total claim of the interest.
The assessing officer had relied on certain figures in the assessment order but without any source of these figures. With a view to submit our submission it is necessary that the source of the all these figures should be specifically brought out below to find out exact position of alleged interest free advance and the calculation of interest on such amount.
As per Page 2 of the assessment order the amount relied by the AO as interest free advance is Rs 6,69,05,53/-, its details are given on Schedule 16 of the balance sheet where the amount of loan to others is Rs. 6,50,80,439/-.
The other amount as per the assessment order on Page 4 is the average amount of the investment in the interest free loan and that is given as Rs 8,52,91,917/-. This figure has been calculated by him by taking the average of short-term loans of the last year and this year as per Schedule 16 of the balance sheet.
The other amount taken as per the assessment order is Rs 32,55,68,200/- which is average of total of the balance sheet of this year and last year. A copy of the audited balance sheet is enclosed.
By way of this formula the AO has calculated as per Page 4 of the assessment order the amount of interest attributable to interest free advances. So far, we have discussed the details of the assessment order and the main ground of the AO for disallowing part of the interest on account of interest free advances. We now proceed to explain the real position in as much as there is no interest free advance at all of any kind or any nature whatsoever. In fact, the entire amount of loan has been utilized for the purposes of the business that is for purchases. However, the figures have not been properly displayed in the balance sheet had resulted in such incorrect observation.
The amount of Rs 6,69,05,53/- consist of various small amounts and the loan to others is only Rs 6,50,80,439/-. Copy of the chart is enclosed. Again, this amount of Rs.6,50,80,439/- consists of two items of Rs.6,20,95,039/- on account of purchases made from Shri Krishna Polymer Industries Pvt. Ltd. and again a sum of Rs 29,85,400/- on account of purchases made from VAN Inks and Chemicals Pvt. Ltd.
The real position of Rs. 6,20,95,039/ – is not the loan but on account of payment against purchase made from Shri Krishna Polymer Industries Pvt. Ltd. In the entire year, purchases of this amount was made from this party and payment exactly of this amount has been made through our HDFC Bank Account and in this way, there was Nil Balance in this account at the close of the Financial Year. Instead of showing this amount as paid towards purchase, we have shown this amount as loan to Shri Krishna Polymer Industries Pvt. Ltd.
Similarly, the other amount included in Rs. 6,50,50,439/-is the amount of Rs. 29,85,400/- the position here is also exactly the same. We have made purchases from VAN Inks and Chemicals Pvt. Ltd. and instead of showing towards purchase we have shown this amount as loan. Copy of account is enclosed. It may be made absolutely clear that amount of Rs. 29,85,400/- was given to VAN Inks and Chemicals Pvt. Ltd. at the close of the accounting period but purchase made in the next year. But, in any case, this does not change any position since the payment for all purchase is on account of purchase.
The point that could arise is when the purchases have been paid, but not shown, then the amount of the purchases should remain outstanding in the balance sheet. This is absolutely true. If reference is made to the balance sheet at Point No 4 it would emerge that we have shown a sum of Rs. 10,70,59,711/- on account of deposits. In fact, this is not a deposit and even the audited balance sheet does not speak or provide any name of such inter corporate deposits. This amount includes Rs. 6,20,95,039/- being the purchase made from Shri Krishna Polymer Industries Pvt. Ltd. Finally, in brief there is no loan and is no deposit. The amount shown as loan is in fact paid on account of purchases. Similarly, the other amount of Rs. 29,85,400/- is on account of purchases.
An addition on account of 14A has also been made but this is not permissible since there is no dividend income. In the absence of any dividend income there cannot be any disallowance u/s 14A as held by the Hon’ble Supreme Court in the case of Chettinad Logistics Pvt. Ltd. reported in 257 taxman 2.”
9. We have further noticed that the above submissions of the assessee has been dealt with from para 5.6 onwards extracted below as under:
“5.6 In view of the decision of the jurisdictional High Court, the disallowance u/s 14A of the Act is hereby restricted to the extent of exempt income that is earned by the appellant.
5.7 During the appellate proceedings, the appellant filed written submissions in response to hearing notices on various dates. I have perused the submission and placed them on record. It is noted by me that the appellant is a trader of poly films, papers and printing inks. On the first issue of granting interest free short-term advances, it is submitted by the appellant that it inadvertently shown the advance payment made for purchases related to business as loan to the respective parties in balance sheet, out of which major parties are Shri Krishna Polymer Industries Pvt. Ltd. and VAN Inks and Chemical Pvt. Ltd. However, this explanation offered is not acceptable due to two reasons, firstly why this fact could not be furnished during assessment proceedings where no explanation was offered by it for this amount and secondly, substantiating documents like proof of orders, bills, invoices, confirmation of parties, relevant bank statements for payment and how the transaction was arranged, etc. are not furnished by appellant.
5.8 In view of the same, I do not find any reasons to interfere with the addition made by the AO on this issue. Accordingly, these grounds of appeal are partly allowed.
6. In the result, the appeal of the appellant is partly allowed.”
10. It is thus evident from the above extract of the impugned order that the explanation offered by the assessee was not accepted for the two reasons i.e. the assessee could not furnish the relevant explanation and the evidence during the assessment proceedings as no explanation was offered with regard to the amount of Rs. 6,20,95,039/- to show that no interest has been charged on the said short-term advances given to various parties or that the said amount was paid to the said party on account of purchases made from them. It was further observed by the ld. CIT(A) that the assessee has failed to substantiate the said fact by filing documents like proof of orders, bills, invoices, confirmation of parties and relevant bank statements. Thus, in view of the submissions of both the parties and the above facts that the assessee has not offered the explanation during the assessment proceedings and has not filed the necessary document to show that the said amount was actually paid for purchases made and not paid as a short-term advance without interest to the said parties, the matter needs to be enquired and adjudicated upon by the AO on filing of the necessary proofs and documents with respect to the claim made by the assessee. Accordingly, the issue No. 1 with regard to the investment in interest-free loans to associate concerns to the extent of Rs. 6,20,95,039/- restored to the AO who shall examine the same afresh and in case the documents are found correct and the explanation is found true, shall accordingly grant relief to the assessee with respect to the addition of Rs.32,94,713/- made u/s 36(1)(iii) of the Act.
11. With regard to the second issue of disallowance u/s 14A of Rs.1,34,535/- being 0.5% of average investment of Rs.2,69,06,921/-, the ld. CIT(A) has already grated relief in para 5.6 by observing “In view of the decision of Hon’ble High Court, the disallowance u/s 14A of the Act is hereby restricted to the extent of exempt income i.e. earned by the appellant”. It has been claimed by the assessee that no exempt income has been earned and there has been no investment in the concerned year because the amount which has been considered as investment in the concerned year to the extent of Rs.2,69,06,921/- is shown having been invested on 31.03.2015, is an opening balance for the concerned year and there has been no investment done for earning exempt income and actually no exempt income has been earned in the concerned assessment year.
12. There is no rebuttal on the part of the Revenue to the said submissions and factual position brought before us and there is nothing brought on record during the assessment proceedings that the said amount was invested in the financial year relevant to A.Y. 2015-16 or that any exempt income has been earned by the assessee. Hence, there is no legal justification for the disallowance made of Rs.1,34,535/- u/s 14A r.w. Rule 8d of the Act.
13. In view of above discussion, the AO is directed to delete the said disallowance made in the assessment order and the impugned order to that extent is accordingly set aside. For the above discussion, the appeal of the assessee is partly allowed for statistical purpose
14. In the result, the appeal of the assessee is allowed for statistical purposes in the above terms.
Order Pronounced in the Open Court on 16/06/2026.
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