Case Law Details
Prakash Udyog Limited Vs ITO (ITAT Mumbai)
In a recent ruling, the Income Tax Appellate Tribunal (ITAT) Mumbai has delivered a significant decision in the case of Prakash Udyog Limited vs. Income Tax Officer (ITO), addressing two key issues raised by the assessee for the assessment year 2016-17. The ruling focused on errors in the computation of total income and the applicability of Section 14A for disallowing expenses related to exempt income. In this case Assessee was represented by CA Milind Wadhwani.
Background of the Case
Prakash Udyog Limited, engaged in trading agro-commodities, filed an appeal challenging the order passed by the Commissioner of Income Tax (Appeals) at the National Faceless Appeal Centre (NFAC), Delhi, dated February 14, 2024. The case primarily involved two issues: a computation error in the total income calculation and the disallowance made under Section 14A of the Income Tax Act.
Issue 1: Error in Computation of Total Income
The first issue raised by the appellant involved an error in the assessment order related to the computation of total income. The assessee’s representative pointed out that the total income stated in the assessment order was Rs. 16,82,668, but the computation sheet listed it as Rs. 36,69,406. The error was not explained by the Assessing Officer (AO), leading the assessee to challenge the discrepancy.
The Tribunal examined the issue and found merit in the contention that there was a mismatch in the income figures in the assessment order and the computation sheet. As a result, the ITAT set aside the order of the CIT(A) and restored the issue to the AO for verification and correction.
Issue 2: Disallowance Under Section 14A
The second issue revolved around the disallowance of expenses under Section 14A, which governs the disallowance of expenses incurred to earn exempt income. In this case, Prakash Udyog had earned exempt income from share investments in a partnership firm but had not made any disallowance under Section 14A.
The AO, however, disallowed a portion of the interest expenditure under Rule 8D(2)(ii) of the Income Tax Rules, 1962, stating that the company had incurred interest expenses of Rs. 26,27,659. The AO also made a disallowance of Rs. 2,28,219 under Rule 8D(2)(iii), which corresponds to general expenses related to the investments.
The assessee argued that the funds used for the investments were long-standing and not sourced from the overdraft facility obtained in 2014. The overdraft, according to the assessee, was used for day-to-day working capital needs and had no connection with the older investments made in 2000-01. Additionally, the assessee argued that the interest-free funds available, including trade payables, were more than sufficient to cover the value of investments, thus negating the need for any interest disallowance.
Despite the arguments presented, the CIT(A) allowed partial relief, agreeing that the disallowance should be limited to the proportionate amount corresponding to the assessee’s own funds. However, the CIT(A) upheld the disallowance under Rule 8D(2)(iii), leading the assessee to approach the ITAT.
ITAT’s Ruling on Section 14A Disallowance
Upon hearing the case, the ITAT Mumbai observed that the overdraft facility was availed in November 2014, well after the investments had been made. The Tribunal found it reasonable that the overdraft, which was used for business purposes, could not have been utilized for making investments dating back to 2000-01. Referring to a similar case decided by the Gujarat High Court in CIT vs. Gujarat Narmada Valley Fertilizers Company Ltd., the Tribunal concluded that no disallowance should be made on the interest expenditure linked to the overdraft.
The ITAT, therefore, set aside the disallowance made under Rule 8D(2)(ii), agreeing with the assessee’s contention that the interest-free funds were adequate to cover the investments. However, the Tribunal also pointed out that there was an error in computing the average value of investments under Rule 8D(2)(iii), and directed the AO to re-examine this aspect. The matter was thus remitted back to the AO for further verification and correction.
Conclusion
The ITAT Mumbai’s decision in Prakash Udyog Limited vs. ITO offers valuable insights into the handling of computation errors in income tax assessments and the application of Section 14A concerning interest disallowance. The Tribunal’s ruling emphasized that interest-free funds must be considered when assessing the need for disallowances under Rule 8D, particularly when investments are made using older funds, and loans are utilized solely for business purposes.
The ruling also underlined the importance of accuracy in the computation of total income, where discrepancies in figures must be addressed and rectified appropriately by the concerned authorities. As a result, the case has been sent back to the AO for further evaluation and correction, particularly with regard to the computation errors and the disallowance under Rule 8D(2)(iii).
This ruling is a crucial reminder for taxpayers to maintain proper documentation and clarity on the usage of funds to avoid unnecessary disallowances, especially in cases involving older investments and overdraft facilities.
In conclusion, the appeal filed by Prakash Udyog Limited has been allowed by the ITAT Mumbai, with the matter being remitted to the AO for rectification of the issues discussed. The case sheds light on the proper application of Section 14A and Rule 8D, providing clarity on the treatment of interest disallowances and investment-related expenses.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The assessee has filed this appeal challenging the order dt.14-02-2024 passed by the Ld. Commissioner of Income Tax (Appeals)-National Faceless Appeal Centre (NFAC), Delhi [„Ld.CIT(A)‟] and it relates to AY. 2016-17. The following two issues are urged before us:-
a) Error committed in the assessment order while computing total income;
b) Addition made u/s. 14A of the Act;
2. The assessee-company is engaged in the business of trading in agro commodities. The assessment for the year under consideration was completed u/s. 143(3) of the Act. Since the AO has varied the total income, the assessee filed appeal before the Ld.CIT(A) and the same was partly allowed. Still aggrieved, the assessee has filed this appeal.
3. The first issue relates to error in the computation of total income in the Computation Sheet attached with the assessment order. The Ld.AR invited our attention to pg. No. 4 of the assessment order, wherein the total income was determined by the AO at Rs. 16,82,668/-. However, in the computation sheet, the total income was taken by the AO at Rs.36,69,406/-. The Ld.AR submitted that the Ld.CIT(A) did not give relief with regard to the above said error made in the computation sheet.
4. We heard the parties and perused the record. We notice from the assessment order that the total income was determined by the AO at Rs. 16,82,668/-. However, in the computation sheet, the total income has been taken as Rs.36,69,410/-. We also find that the AO has not given any explanation for the income so adopted in the computation sheet. Hence, there is some merit in the submission of the Ld.AR that there was an error in adopting the figure of total income by the AO in the computation sheet. However, we are of the view that this plea of the assessee requires verification at the end of AO. Accordingly, we set aside the order passed by the Ld.CIT(A) on this issue and restore the same to the file of AO for examining this plea of the assessee. If it is an error as pointed out by the assessee, then the AO may correct the same.
5. The next issue relates to addition made u/s. 14A of the Act. The assessee had earned share income from partnership firm and claimed same as exempt. However, the assessee did not make any disallowance u/s. 14A of the Act. The AO noticed that the assessee has incurred interest expenditure of Rs. 26,27,659/-. Accordingly, he disallowed a sum of Rs. 14,42,073/- under Rule 8D(2)(ii) of the Income Tax Rules, 1962 („the Rules‟). The AO also added a sum of Rs. 2,28,219/- under Rule 8D(2)(iii) of the Rules out of expenses, which was computed at 0.5% of the average value of the investment. Accordingly, he disallowed a sum of Rs. 16,70,192/- in aggregate u/s. 14A of the Act.
5.1. In the appellate proceedings, the assessee submitted before the Ld.CIT(A) that the interest free funds available with the assessee is more than the value of the investment and hence, no disallowance out of interest is called for. It was also submitted that the assessee has availed bank Over Draft for meeting its day-to-day working capital requirements and the said amount was not utilized for making investments. It was also submitted that the loan was availed from the bank in the year 2014; whereas investments were made by the assessee much earlier i.e., in the year 2000-01 and accordingly no part of loan could have been used for making investments. The Ld CIT(A) did not accept these contentions of the assessee. With regard to the claim of availability of interest free funds, the Ld.CIT(A) noticed that the own funds available with the assessee was around Rs. 2.82 crores and the assessee has included net trade payables also as interest free funds. The Ld.CIT(A) took the view that the relief can be granted to the extent of own funds available with the assessee. Accordingly, he directed the AO to reduce the interest disallowance proportionate to the own funds available with the assessee. The Ld.CIT(A) did not disturb the disallowance made under Rule 8D(2)(iii) out of general expenses. Accordingly, he granted partial relief to the assessee.
5.2. We heard the parties and perused the record on this issue. The Ld.AR submitted that the investments in partnership firm and certain other companies have been made in the year 2000-01; whereas the Over Draft facility has been availed from ICICI bank only in November, 2014. Thus, we notice that the assessee has availed Over Draft facility almost after 14 years from the date of investment. The Ld.AR submitted that the Over Draft facility has been used for day-to-day funds requirements and the said funds could not have been utilized for making investments in the year 2000-01. Accordingly, by placing reliance on the decision rendered by the Hon’ble Gujarat High Court in the case of CIT vs. Gujarat Narmada Valley Fertilizers Company Ltd., [221 TAXMAN 479], the Ld.AR submitted that the disallowance out of interest expenditure is not required to be made. Alternatively, the Ld.AR submitted that the interest free funds available with the assessee consisting of own funds and net trade payable is in excess of the value of investment and hence with that count also no disallowance out of in interest expenditure is called-for.
5.3. With regard to disallowance made under Rule 8D(2)(iii), the Ld.AR submitted that there is mistake in the computation of average value of investment by the AO and if the said mistake is corrected, the disallowance would come down to Rs. 1,98,699/-.
5.4. We heard Ld.DR on this issue and perused the record. We notice that the investment have been made by the assessee in the year 200001 and Over Draft facility has been obtained from ICICI Bank in November, 2014. Hence, there is merit in the contentions of the Ld A.R that the assessee could not have utilized loan funds for making investments. It is also stated that the overdraft facility availed from ICICI Bank was used for day to day activities. Hence, as per the decision rendered by the Hon’ble Gujarat High Court in the case of Gujarat Narmada Valley Fertilizers Company Ltd., (supra), no disallowance out of interest expenditure is called-for. Accordingly, we set aside the order of the Ld.CIT(A) on this issue and direct the AO to delete the disallowance made under Rule 8D(2)(ii).
5.5. With regard to the disallowance made under Rule 8D(2)(iii), the Ld.AR submitted that there is an error in computing average value of investment. Since this plea of the assessee requires verification, we restore this issue to the file of the AO for examining the same afresh. After affording adequate opportunity of being heard to the assessee, the AO may take appropriate decision in accordance with law.
6. In the result, the appeal of the assessee is treated as allowed.
Order pronounced in the open court on 14-11-2024
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