Section 14A was inapplicable in absence of exempt income: ITAT Delhi

ACIT Vs Sahara India Financial Corporation Ltd (ITAT Delhi)

The case of ACIT (Assistant Commissioner of Income Tax) versus Sahara India Financial Corporation Ltd, adjudicated by the Income Tax Appellate Tribunal (ITAT) Delhi, pertains to the assessment year 2016-17. The appeal, lodged by the Revenue, challenges the order of the Commissioner of Income Tax (Appeals) [CIT(A)].

Grounds of Appeal

The Revenue has raised six grounds of appeal. These include issues related to disallowance of deduction under section 35AC of the Income-tax Act, 1961, addition of interest on loans and advances, disallowance under section 14A of the Act, and addition of interest income from Sahara India Commercial Corporation Ltd.

Disallowance of Deduction under Section 35AC

The Revenue contested the deletion of an addition pertaining to a claim of deduction under section 35AC of the Act. The Assessing Officer had disallowed the claim, alleging insufficient evidence. However, the CIT(A) found no such claim was made by the assessee. Upon examination, the Tribunal affirmed the CIT(A)’s decision, noting the absence of any factual errors.

Addition of Interest on Loans and Advances

Another contentious issue was the addition of interest on loans and advances. The Assessing Officer imputed interest at a rate of 12%, leading to a substantial addition. However, the CIT(A) ruled in favor of the assessee, highlighting the nature of transactions as business-related rather than loans and advances. The Tribunal upheld this decision, emphasizing the absence of evidence supporting the Revenue’s claim.

Disallowance under Section 14A

The Assessing Officer computed a disallowance under section 14A concerning non-current investments. However, the assessee had not claimed any exempt income. Citing relevant legal precedents, the Tribunal dismissed the disallowance, affirming that section 14A was inapplicable in the absence of exempt income.

Addition of Interest Income

A dispute arose regarding the addition of interest income from Sahara India Commercial Corporation Ltd. The Assessing Officer disregarded explanations provided by the assessee and made the impugned addition. However, the CIT(A), upon scrutinizing ledger accounts, ruled in favor of the assessee. The Tribunal concurred, noting the absence of factual errors in the CIT(A)’s findings.

Conclusion

In conclusion, the Tribunal dismissed the Revenue’s appeal, upholding the decisions of the CIT(A) on all grounds. The case underscores the importance of diligent assessment procedures and adherence to legal provisions in income tax matters.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal by the Revenue is preferred against the order of the CIT(A) – 23, New Delhi dated 12.07.2019 pertaining to A.Y. 2016-17.

2. The Revenue has raised as many as 6 grounds of appeal.

3. Ground No. 1 is of general in nature and needs no separate adjudication.

4. Ground No. 2 relates to the deletion of addition of Rs. 1,24,12,036/- on account of disallowance of claim of deduction u/s 35AC of the Income-tax Act, 1961 [the Act, for short].

5. While scrutinizing the return of income, the Assessing Officer noticed that the assessee has claimed deduction u/s 35AC of the Act amounting to Rs. 1,24,12,036/-. The Assessing Officer observed that the assessee has not brought on record details/necessary evidences for being eligible to claim such deduction. Therefore, the assessee was show caused to justify its claim of deduction.

6. The assessee filed detailed reply explaining the claim. But the reply of the assessee was simply dismissed by the Assessing Officer who made addition of Rs. 1,24,12,036/-.

7. The assessee carried the matter before the ld. CIT(A) and explained that no such claim of deduction has been made u/s 35AC of the Act. It was explained that the figure of Rs. 7,92,87,036/- consists of two figures, namely, provision no longer required on equity shares of Pipavav Defence & Offshore shares Rs. 6,68,75,000/- and provision no longer required on long term investments Rs. 1,24,12,036/-.

8. It was further explained that the amount of Rs. 1,24,12,036/- represented provisions made as per Prudential Norms Direction of RBI in earlier years which has been written back as the provision made on long term investment was as per the RBI guidelines and was never claimed as a deduction from the taxable income. Therefore, write back has not been offered to tax.

9. The ld. CIT(A), after verifying the facts, came to the conclusion that there is no claim of deduction u/s 35AC of the Act. Therefore, there is no question of any disallowance or addition.

10. Before us, the ld. DR could not bring any factual error or infirmity in the findings of the ld. CIT(A).

11. On appreciation of facts brought on record, we decline to interfere. Ground No. 2 is dismissed.

12. Ground No. 3 relates to the deletion of addition of Rs. 1,43,63,802/- being interest on loans and advances.

13. During the course of scrutiny assessment proceedings and referring to the following chart:

the Assessing Officer observed that the assessee has not shown interest income on the aforementioned loans and advances.

14. A show cause notice was issued to the assessee asking it to explain as to why interest @ 12% may not be imputed on the average of opening and closing loans outstanding against the aforementioned related parties.

15. The assessee filed detailed reply which did not find any favour with the Assessing Officer who proceeded by imputing interest @ 12% and made addition of Rs. 1,43,63,802/-.

16. When the matter was agitated before the ld. CIT(A), it was explained that the transactions mentioned in the chart are self explanatory and are business transactions entered into in normal course of business and are certainly not loans and advances.

17, After verifying the facts, the ld. CIT(A) was convinced with the nature of transactions resulting into outstanding balance under consideration were not loans. The ld. CIT(A) further observed that information contained in the said chart was supported by books of account and the Assessing Officer has not pointed out any defects in the books of account. The ld. CIT(A) further observed that the Assessing Officer further erred in making addition on an imaginary income which defies basic conception of “accrue or arise” and on proper appreciation of facts, the ld. CIT(A) deleted the impugned addition.

18. Before us, the ld. counsel for the assessee vehemently stated that the ld. DR could not bring any evidence to show that the impugned amounts are loans and advances given to the sister concern.

19. On the contrary, on proper appreciation of facts, we find that the outstanding balances are outcome of business transactions and certainly not loans and advances and further, the Assessing Officer has erred in imputing an imaginary income which neither accrued nor arose to the assessee. We, therefore, decline to interfere. Ground No. 3 stands dismissed.

20. Ground No. 4 relates to the deletion of addition of Rs.6,13,17,433/- on account of addition/disallowance u/s 14A of the Act.

21. While scrutinizing the return of income, the Assessing Officer noticed that there was huge investment under the head “Non-current investment”. Invoking the provisions of section 14A of the Act r.w.r. 8D of the ITAT Rules, the Assessing Officer computed disallowance at 6,13,17,433/-.

22. Before the ld. CIT(A), it was explained that the assessee was carrying on business of residuary non-banking company registered with RBI and in pursuance of RBI guidelines, ‘Directed Investments” are required to be made which are “business investments’. Whatever income is accruing from these investments, the same is being offered under the head “Profits and gains of business or profession”, meaning thereby, that there is no exempt income claimed by the assessee in its return of income.

23. Before us, the ld. DR vehemently supported the findings of the Assessing Officer and placed strong reliance on the CBDT Circular and referred to the amendment brought in the Act by Finance Act, 2022.

24. Per contra, the ld. counsel for the assessee reiterated that it has not claimed any exempt income.

25. We have carefully considered the orders of the authorities below. The undisputed fact is that the assessee has not claimed any exempt Income. Therefore, provisions of section 14A r.w.r 8D of the Rules are not at all applicable as held by the Hon’ble Jurisdictional High Court of Delhi in Cortech Energy 322 ITR 97.

26. In so far as applicability of amendment brought in the Statute by the Finance Act, 2022 is concerned, the Hon’ble High Court of Delhi in the case of Era Infrastructure [India] Ltd 448 ITR 674 has held that amendment by the Finance Act, 2022 to section 14A of the Act will take effect from 01.04.2022 and cannot be presumed to have retrospective effects.

27. Respectfully following the decision of the Hon’ble Jurisdictional High Court [supra], Ground No. 4 is dismissed.

28. Ground No. 5 relates to the deletion of addition of Rs. 2,72,76,707/- on account of interest income from Sahara India Commercial Corporation Ltd.

29. The basis for making this addition is that Sahara India Commercial Corporation Ltd. has shown to have paid interest of Rs. 17,36,68,046/- whereas the assessee has shown interest of Rs. 14,63,91 ,339/-. It was explained before the Assessing Officer that Sahara India Commercial Corporation Ltd. has shown an amount of Rs. 73 crores as prior period expenses and rest Rs. 14.63 crores pertains to the relevant F.Y which has been shown by the assessee as income.

30. This plea was rejected by the Assessing Officer who proceeded to make the impugned addition.

31. Before the ld. CIT(A), the assessee reiterated its claim.

32. After verifying the facts from the ledger account and after being satisfied with the entries/narrations, the ld. CIT(A) deleted the impugned addition.

33. Before us, the ld. DR could not bring any factual error in the findings of the ld. CIT(A).

34. After verifying the facts, we are of the considered view that the Assessing Officer has not properly appreciated the facts in true perspective and on proper appreciation of facts, we decline to interfere. Ground No. 5 is also dismissed.

35. In the result, the appeal of the Revenue in ITA No. 7805/DEL/2019 is dismissed.

The order is pronounced in the open court on 02.01.2024.