ACIT, CENTRAL CIRCLE- 27 , NEW DELHI vs. A.R. LEASING PVT. LTD., NEW DELHI

During the course of assessment proceedings, AO noticed that assessee had received unsecured loans from various companies including Rs.5,54,00,000/- from Paramic Goods Pvt. Ltd. AO on perusing the Balance Sheet of Paramic Goods Pvt. Ltd. noticed that it had shown loan to companies of Uflex Group of companies amounting to Rs.65.84 crore (rounded off) and that although it had shown income of Rs.3.90 crore but no activity was carried out by it other than giving loan to Uflex Group of companies. AO also noticed that the bank statement of that company showed that the money received on the same day was transferred to Uflex Group of companies. AO asked the assessee to show-cause as to why the loan received by it be not treated as income u/s 68 of the Act as genuineness was not proved. To the query of AO assessee inter alia submitted that the Balance Sheet, profit and loss account and their income tax return shows that they have net worth have taxable income and its source of the source was also visible from the bank statement. It was further submitted that assessee had taken loan from those companies at an interest rate of 10% p.a.; that interest on such loan was paid and TDS was also deducted. The submissions of the assessee was not found acceptable to AO. AO noted that the major part of the net worth of the lending company consists of share premium received during the earlier years received and the amount has been lent out as loan or shares to its group companies. For the reasons noted in the order AO concluded that the company do not have enough capacity to lend money to the assessee. He thereafter, concluded that it lacks the capacity to give the high value loans to the assessee and assessee merely routes money through its bank account to make bank transaction appear genuine. He thereafter, by relying on the decisions cited in his order, held the amount received by the assessee of Rs.5,54,00,000/- to be unexplained income and made its addition u/s 68 of the Act. AO also made addition of the other loans received from other companies and he, thus, made total addition of Rs.6,03,00,000/-.

Aggrieved by the order of AO, assessee carried the matter before CIT(A) who after considering the submissions made by assessee deleted the addition. Aggrieved by the order of CIT(A), Revenue is now in appeal before us.

Before us, Learned DR took us through the findings of AO and supported the order of AO.

Learned AR on the other hand reiterated the submissions made before AO and CIT(A) and further submitted that AO had made addition w.r.t unsecured loan received from two parties namely; Manmohak Commotrade Pvt. Ltd. at Rs.49,00,000/- and Paramic Goods Pvt. Ltd. at Rs.5,54,00,000/-. He submitted that the CIT(A) had deleted the additions made with respect to both the aforesaid parties but however Revenue has filed the present ground only with respect to Paramic Goods Pvt. Ltd. meaning thereby it had accepted the deletion of addition with respect to the Manmohak Commotrade Pvt. Ltd. He, thereafter, submitted that the Paramic Goods Pvt. Ltd. is a company belonging to Uflex Group of companies of which assessee is also a part and it is not an outsider. He stated that Paramic Goods Pvt. Ltd. has been regularly filing its return of income and for the year under consideration, it had declared an income of Rs.3.26 crore on which the taxes of Rs.1.13 crore has been paid and its net worth is Rs.59.03 crore. He further submitted that the loan to the assessee are through banking channels and assessee has paid interest @ 10% p.a. by deducting TDS on payment of interest. He further submitted that the interest paid by the assessee has not been disallowed by AO. All the aforesaid facts go to justify the identity, genuineness and creditworthiness of Paramic Goods Pvt. Ltd. He pointed to the submissions made before CIT(A) which are reproduced by CIT(A) at page 11 of the order and from that he pointed out that the total income declared by it in A.Ys. 2014-15 to 2016-17 are in excess of Rs.3 crore. He thereafter, submitted that CIT(A) after considering the submissions of the assessee has deleted the addition. He thus supported the order of CIT(A).

We have heard the rival submissions and perused the material available on record. The issue in the present ground is with respect to the deletion of addition made by the AO of Rs.5.54 crore u/s 68 of the Act. We find that CIT(A) while deleting the addition has given a finding that the return of income on Paramic Goods Pvt. Ltd. shows income of Rs.3.90 crore and the source of funds in its hands are Reserve and Surplus of Rs.53.60 crore. He has further given a finding that the perusal of audited financial accounts and bank statement shows that it has substantial net worth, Profit and Loss account and bank statement reflects regular business activities and it had disclosed huge profits in the return of income. With respect to the AO’s observation that the impugned source of loan given to the assessee was loan from Group companies, he has given a finding that the source of funds was the refund of loan given by Paramic Goods Pvt. Ltd. to other group companies who were also regularly assessed to tax and in their cases the transactions has been accepted by the Revenue Department. He, thereafter after placing reliance on certain case laws cited in his order has given a finding that considering the totality of the facts the identity, capacity of Paramic Goods Pvt. Ltd. and the genuineness of the loan transaction cannot be doubted. He accordingly deleted the addition. Before us, Revenue has not pointed to any fallacy in the findings of CIT(A). In such a situation, we find no reason to interfere with the order of CIT(A) and thus the ground of Revenue is dismissed.

Ground Nos.2 & 3 are interconnected and are with respect to the disallowance u/s 14A of the Act and its adjustment while working out book profit u/s 115JB of the Act.

During the course of assessment proceedings, AO noticed that assessee had earned a dividend of Rs.1,27,44,628/-. Assessee was asked to show-cause as to why the disallowance u/s 14A of the Act not be made, to which assessee made submissions which were not found acceptable to AO. AO thereafter by applying the provision of Rule 8D r.w.s 14A of the Act worked out the disallowance u/s 14A of the Act at Rs.1,84,93,976/- and disallowed the same. AO was further of the view that the disallowance u/s 14A of the Act also needs to be added back to the book profits to work out the book profit u/s 115JB of the Act. He, therefore, made adjustment of the same while working out the book profit.

Aggrieved by the order of AO, assessee carried the matter before CIT(A). CIT(A) after considering the submissions of the assessee and for the reasons detailed in his order had in principle upheld the disallowance u/s 14A of the Act but however, on the merits of addition, he by relying on the Special Bench decision of the Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. (2017) 58 ITR (Trib) 313 (Del) (SB) held that only investment made in companies which has resulted into exempt income should be considered for the purpose of disallowance u/s 14A r.w.r 8D of the Rules. With respect to the disallowance of administrative expenses at 0.5% of the average value of investments, he has given a finding that AO had disallowed the sum of Rs.37,08,516/- which are more than the total expenses debited in Profit and Loss account. He thereafter, by relying on the decisions cited in his order has held that statutory expenses, depreciation as well as deduction u/s 35D of the Act cannot be considered for the purpose of disallowance for the reason that the bare minimum statutory expenses required for keeping the corporate entity functioning cannot be disallowed. He accordingly directed the AO to exclude statutory expenses from the total expenses claimed in Profit and Loss account and thereafter, re-compute the disallowance u/s 14A of the Act after considering the average value of investment only in the companies which has resulted into dividend income during the year. On the issue of adjustment of disallowance u/s 14A of the Act for the purpose of computing book profits u/s 115JB of the Act, CIT(A) after relying on the decision of Special Bench of Tribunal in the case of Vireet Investment Pvt. Ltd. (supra) held that disallowance made u/s 14A cannot be added to book profits u/s 115JB of the Act. Aggrieved by the order of CIT(A), Revenue is now in appeal before us.

Before us, Learned DR took us through the order of AO and pointed to the findings of AO. He further submitted that disallowance made u/s 14A r.w.r 8D of the Income Tax Rules, 1962 can be added to compute book profits u/s 115JB(2) of the Act and to support his contentions he placed reliance on the decision of Kolkata Bench of Tribunal in the case of IMC Ltd vs. DCIT in & 781/Kol/2009 order dated 18.01.2017 and the decision of Mumbai Bench of Tribunal in the case of DCIT vs. Viraj Profiles Ltd. in ITA No.4439/Del/2013 order dated 21.10.2015. He thus supported the order of AO.

Learned AR on the other hand supported the order of CIT(A) and further submitted that CIT(A) while deciding the issue in favour of the assessee has followed the Special Bench’s decision in the case of Vireet Investment Pvt. Ltd.(supra) which was rendered on 16.06.2017 whereas the decisions relied upon by Revenue are prior to the Special Bench decision in the case of Vireet Investment Pvt. Ltd. (supra) and therefore, the reliance placed on those decisions by Revenue is misplaced. He further submitted that the decision of Special Bench of Tribunal takes precedence over other Tribunal decisions.

We have heard the rival submissions and perused the material available on record. The issue in the present ground is with respect to the disallowance u/s 14A and the adjustment of disallowance u/s 14A for the purpose of computing book profits u/s 115JB of the Act. We find that the Special Bench of Tribunal in the case of Vireet Investment Pvt. Ltd. (supra) has held that the computation under Clause (f) of Explanation 1 to Section 115JB(2) is to be made without resorting to the computation contemplated u/s 14A r.w.r. 8D of the Income Tax Rules, 1962. It has been further held that only those investments are to be considered for computing average value of investment which yielded exempt income during the year. Before us, Revenue has placed reliance on two decisions of Tribunal cited in para 12 hereinabove. We find that the decisions of Tribunal relied upon by Revenue were rendered prior to the date of decision of Special Bench of Tribunal. Further, it is a settled law that Special Bench decisions of Tribunal takes precedence over other Tribunal decisions and therefore, Special Bench decision has a binding force on this Division Bench. We further find that Hon’ble Supreme Court in the case of PCIT vs. Atria Power Corporation Ltd. (2022) 142 Taxmann.com 413 (SC) had dismissed the SLP against the High Court ruling that the disallowance made u/s 14A could not be added to the income for the purpose of computation of income u/s 115JB of the Act. In view of the aforesaid facts, we find no reason to interfere with the order of CIT(A) on this issue and thus the ground of Revenue is dismissed.

In the result, appeal of the Revenue is dismissed.