UKN Properties Pvt. Ltd Vs DCIT (ITAT Bangalore)
ITAT Bangalore held that no disallowance under section 14A of the Income Tax Act could be made if no exempt income was earned by the assessee.
Facts-
During the assessment proceedings, the AO noticed that the assessee has made huge investments in the equity shares of various concerns. The AO invoked the provisions of section 14A and called for details from the assessee. The assessee submitted that no expenditure relatable to exempt income was debited to the P&L Account and that the company has advanced money out of non-interest funds and hence disallowance u/s. 14A is not applicable. However, the AO proceeded to compute the disallowance u/s. 14A r.w. Rule 8D(2)(ii) and Rule 8D2(iii) and made a disallowance of Rs.84,78,588. Aggrieved, the assessee preferred an appeal before the CIT(Appeals).
Further, AO noticed from the Form 3CD report of the assessee that an amount of Rs.25,51,882 is shown as project expenses debited to the P& L account which is relating to prior period. The AO therefore disallowed the same for the reason that it is not allowable being a prior period expenditure.
Conclusion-
The Hon’ble Delhi High Court in the case of Era Infrastructure (India) Ltd., [2022] 141 taxmann.com 289 has considered the issue of disallowance u/s.14A when there is no exempt income and held that no disallowance under section 14A of the Act could be made if no exempt income was earned by the assessee.
The key issue that needs to be verified with regard to the addition made towards project expenses is, whether the said expenditure is debited to the P&L account as mentioned in Form 3CD or capitalized in work-in-progress account as contended by the assessee. We therefore remit this issue back to the AO to examine factually whether the project expenses are debited to the P&L account or kept in work-in-progress based on evidence and decide the allowability accordingly.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal by the assessee is against the order of CIT(Appeals)-7, Bangalore dated 18.3.2019 for the assessment year 2013-14.
2. The following issues arise out of the various grounds raised by the assessee:-
1. Disallowance us. 14A – Rs.84,78,588.
2. Addition towards prior period items – Rs.25,51,882.
3. Addition u/s. 56(2)(vii) – Rs.6,95,35,940.
3. The assessee is engaged in the business of real estate development . The assessee filed a return of income for the AY 2013-14 on 26.9.2013 by declaring total income of Rs.84,00,220. The case was selected for scrutiny and a notice u/s. 143(2) was duly served on the assessee. The assessment was concluded by making the above disallowances/additions. The assessee filed an appeal before the CIT(Appeals), who upheld the order of the AO. Aggrieved, the assessee is in appeal before the Tribunal.
Disallowance u/s. 14A r.w.s Rule 8D
4. During the assessment proceedings, the AO noticed that the assessee has made huge investments in the equity shares of various concerns. The AO invoked the provisions of section 14A and called for details from the assessee. The assessee submitted that no expenditure relatable to exempt income was debited to the P&L Account and that the company has advanced money out of non-interest funds and hence disallowance u/s. 14A is not applicable. However, the AO proceeded to compute the disallowance u/s. 14A r.w. Rule 8D(2)(ii) and Rule 8D2(iii) and made a disallowance of Rs.84,78,588. Aggrieved, the assessee preferred an appeal before the CIT(Appeals).
5. Before the CIT(Appeals), the assessee submitted that the interest debited to the P&L account is attributable entirely towards the purpose of business of the assessee. The assessee further submitted that the entire investment is out of the internal approvals the break-up of which is as given below:-
