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Judgment
Per Raj Kumar Chauhan, Judicial Member:
The appeal of the asse ssee is d irected against the order dated 24.03.2025 of ld. C IT(A)- 29, New Delhi passed u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) w herein the additio n made u/s 36(1)(iii) of the Act o f 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.
Fact in brief as culled out from the authorities below are that the asse ssee 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/- on 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.
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 p urpose 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 share s/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/-alo ngwith Rs.1 ,34,535/- on the investment made for earning exempt income. The reply sub mitted by the assessee did no t find favour w ith the Assessing Officer who has passed the assessment order making the addition me ntioned above.
Aggrieved by the additions made, the assessee filed appeal before the ld. CIT(A) who has d ismissed the same and confirmed the additions.
We have heard the ld. AR who w ould submit that both the learned lower authorities had co mmitted 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 availab le funds for earning exempt income. It is submitted that the alleged shor t-term loan was not an advance given to the sister co ncern but it w as 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 assessme nt order amount of Rs.2 ,69,06,921/- allegedly shown as investme nt 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.
It is there fore submitted that the issue No. 1 with respect s t to the 1 add itio n of 32,94,713/- may be restored to the AO by giving an opportunity to the assessee to submit the necessary docume nts to prove that the said amount was not an advance to the sister concern b ut was paid against the purchase made from the identified parties with r egard 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 no ted by the ld . CIT( A) and the addition made on that account need to be deleted.
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 relie f in para 5.6 of the impugned order and the issue may be disposed o ff accordingly .
We have considered the rival submissions and e xamined the record. On perusal of para 4 of the impug ned 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 c ours e of appellate proceedi ngs, notices were issued on vari ous dates and the appellant was provided wi th the op portunit y to furnis h writt en submissi ons alo ng wi th supporti ng evidences. The Appellant submitted its written s ubmissions, the r eleva nt porti on of which i s reproduc ed as under:
“R eturn declaring incom e of Rs 22,06,010/- was filed and AO whil e comp uti ng the assessment u/s 143(3), disal lowed, a s um of Rs 32,94,7 13/- on account of inte rest free advances paid out of i nter est beari ng funds. The AO furthe r treat ed a sum of Rs 1, 34, 535/- as income u/s 14A.
The facts of t he c ase ar e as under : -
The asse ss ee is a trader of Poly films, paper s and pri nti ng inks. It has r aise d loans from t he bank on which the company ha d undi sput edly paid interest of Rs 1,25,76,266/ - on the amount of lo an of Rs 9,60,14,337/-.
The fi ndings of the AO are t hat t he assessee company had made i nterest fr ee advances of Rs 6,69,05,033/-. On this account t he AO mad e calculation of the i nter est fr ee adv ance and c onsequentl y calculated the am ount of inte rest of R s 32,94,713/- which is to be co nsider ed part of Rs.1 ,25,76,266/- a nd t her efor e he disallowed this amo unt of Rs.32,94,713/- out of the tot al claim of the inte rest.
The assessi ng officer had relied on certai n fi gures i n t he assessment or der but wit hout any source of these figures. With a view to submit our s ubmission it is nec essary that the source of t he all these fi gures should be specifically brought out below t o fi nd o ut e xac t position of alleged i nterest fre e adv ance and the calculation of i nterest on suc h am ount.
As per Page 2 of the assessm ent order t he am ount r elied by the AO as i nterest free advance is Rs 6,69,05,53/-, i ts details are give n on Schedul e 16 of the balance sheet where t he a mount of l oan to ot hers is Rs. 6,50,80,439/-.
The othe r amo unt as p er t he ass essme nt order o n Page 4 is t he aver age amount of the invest ment i n the i nt erest free l oan and that is given as Rs 8,52,91,917/-. This figure has been calculated by him by taki ng the average of sho rt-term loans of the last year a nd this year as per Schedul e 16 of t he balanc e sheet.
The other amount taken as per the assessment orde r is Rs 32,55,68,200/- which is average of tot al of the balance sheet of this year and last year . A copy of t he audit ed balanc e s heet is enclosed.
By way of t his for mula the A O has calculat ed as per P age 4 of the assessment order the amount of i nteres t attributabl e to i nter est free advanc es . S o far, we ha ve discussed the detail s of t he assess ment order and t he mai n ground of the AO for disallowi ng part of the i nteres t on acc ount of interest fre e advances. We no w proc eed to explai n the r eal position in as much as there is no inte rest free advance at all of any ki nd or any nat ure whatsoever. In fact, the entire amo unt of loan has been utili zed for t he purpos es of the busi ness that is for purc has es . Howe ver, t he fi gures have not been properly displayed i n t he balanc e sheet had r esul ted i n suc h incorrect obs ervati on.
The amount of Rs 6,69,05,53/- c onsist of va rious small amo unts and the l oan to others is onl y Rs 6,50,80,439/-. Copy of the chart is enclosed. Again, this amount of Rs.6,50,80,439/- consist s of two items of Rs.6,20,95,039/- o n account of purchases made from Shri Krishna Polymer Industries Pvt . Ltd. and agai n a sum of Rs 29,85,400/- on account of purchases made from VAN Inks and Chemicals Pvt. Ltd.
The real positi on of Rs. 6,20,95,039/ - is not the loan but on account of payment agai nst purchase made fr om S hri Krishna Polymer Indus tri es Pvt. Ltd. In the entire year, purc has es of this amount wa s made from t his party and pay ment exactly o f this amount has been made t hr ough our HDFC Ba nk A ccount and in thi s way, t here was Nil Balanc e in this account at the close of the Fina ncial Year. Instea d of s howing this amount as paid towards purc has e, we have s hown this amount as l oan to Shri Krishna Polymer Indus tri es Pvt. Ltd.
Similarly, the other amount i ncluded in Rs . 6,50,50,439/-is the am ount of R s. 29,85,400/- the position here is al so exactly the same. We have made purc hases fr om VAN Inks a nd C hemicals Pvt. Ltd. and instead of s howing to wards purc hase we hav e s hown thi s amount as loan. Copy of acc ount is enclosed. It ma y be made abs olutely clear that amo unt of Rs. 29,85,400/- was give n to V AN Inks and Chemicals Pvt. Ltd. at the clos e of t he acco unti ng peri od but purchas e m ade i n the next year. B ut, in any case , t his does not cha nge any positi on sinc e the payment for al l purchas e is on account of purchase.
The poi nt t hat could ari se is when the purchases have bee n paid, but not shown, then t he amount of t he purc has es s hould remai n outstanding in the balanc e sheet. This is abso lutely true . If referenc e i s made to the balance s heet at Poi nt No 4 it woul d emerge tha t we ha ve shown a s um of Rs. 10,70,59,711/- on ac count of deposits. In fact, t his is not a deposit and even the audit ed balance s heet does not speak or pro vide any name of such inter corporat e deposits. This amo unt incl udes Rs. 6,20,95,039/- b ei ng t he p urchase made from Shri Krishna Polymer Industries Pvt. Lt d. Fi nally, i n brief there is no l oan and is no d eposit. The amo unt s hown as loan is i n fact paid on acc ount of purc hases. Similarly, the o ther amo unt of Rs. 29,85,400/- is on acc ount of purc has es .
An addition on account of 14A has also been made but this is not permissible sinc e there is no di vidend i nc ome. In the absence of any dividend i ncome t here ca nnot be any disallowanc e u/s 14A as held by the Ho n'bl e Supre me Court in t he cas e of Chetti nad Logistics Pvt. Ltd. repor ted in 257 taxman 2.”
We have further noticed that the above submissions o f the assessee has been dealt with from para 5.6 onwards extracted below as under:
“5 .6 In vie w o f the decision of the j urisdictio nal Hi gh Court, t he disallowance u/s 14A o f the Act is hereby res tricted to t he ext ent of exempt inc ome that is ear ned by the appellant.
5.7During the appel late proc eedings, the appella nt filed written s ubmissions in respons e to hearing notices on various dates . I have perused the submission and placed them on record. It is noted by m e that t he appellant is a tra der of poly films, pap ers and pri nting inks. On t he first i ssue of granti ng interes t f ree short-te rm advances, it is submitted by t he app ellant that it inadvertently s hown t he advance paym ent made for purc has es related to busi ness as l oan t o t he respective parties i n balance s heet , out of whi ch major parties are Shri Kris hna Polymer Indus tri es Pvt. Ltd. and VAN Inks and Chemical Pvt. Ltd. H oweve r, t his explanation offered is not acceptable due to two reas ons, firstly why this fac t could not be furni shed duri ng ass essment proceedings where no expla nation was offered by it for this amo unt and secondly, s ubstantiating doc uments like pr oof of orders, bills, inv oi ces, confir mation of parties , rel eva nt bank statements f or paym ent and how the t ransaction was arranged , etc . are not furnished by app ellant.
5.8In vi ew of t he same, I do no t find any reasons to inte rfer e wit h the additi on made by t he A O on this issue. Accordi ngly, thes e grounds of appeal ar e partly allowed .
6.In t he res ul t, the appeal of the appellant is partly allowed.”
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 shor t-term advances given to various parties or that the said amount w as paid to the said party on account o f pur chases made from them. It was further observed by the ld. C IT(A) that the assessee has failed to substantiate the said fact by filing documents like proof of orders, bills, invoices, confirmation of parties and re levant bank state ments. Thus, in view of the submissions of both the parties and the above facts that the assessee has no t offered the explanatio n during the assessment proceedings and has no t filed the necessary document to show that the said amount was actually paid for purchases made and no t paid as a short-term advance without interest to the said parties, the matter needs to be enquired and adjud icated 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 co ncerns 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 tr ue, shall accordingly grant relief to the asse ssee with respect to the additio n of Rs.32,94,713/- made u/s 36(1)(iii) of the Act.
With regard to the second issue of disallowance u/s 14A of Rs.1 ,34,535/- being 0 .5% of average inv estment of Rs.2 ,69,06,921/-, the ld. CIT( A) has already grated relief in para 5.6 by observing “In view of the deci sion of Hon’ble High Cour t, the disallowance u/s 14A of the Act is hereby restricted to the extent of exempt inco me 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 b ecause the amount which has bee n considered as investme nt 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.
There is no rebuttal on the part of the Revenue to the said submissions and factual position brought before us and there is nothing broug ht on record during the assessme nt proceedings that the said amount was investe d 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.
In view of above discussio n, the AO is directed to delete the said disallowance made in the asse ssment 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 pur pose
In the result, the appeal of the assessee is allowed for statistical purposes in the above terms.