NAMDEO INDARRAO GORE,PUNE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-7, PUNE

This appeal by the assessee arises out of the order dated 25-01-2023 passed by the CIT(A) in National Faceless Appeal Centre, Delhi u/s.250 of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) in relation to the assessment year 2014-15.

The first issue raised in this appeal is against the confirmation of addition of Rs.5,30,186/- in respect of opening balances of the trade creditors, namely, M/s. P.M. Engineers and Contractors, Nanded and M/s. Ganesh Bansode, Pune.

Briefly stated, the facts, as discussed on page 2 onwards of the assessment order, are that the assessee had shown balance of Rs.1,12,96,751/- payable as on 01-04-2013 to M/s. P.M. Engineers and Contractors. The AO made disallowance of Rs.49,28,990/- in his order for the A.Y. 2013-14. During the course of assessment proceedings for the year under consideration, the AO observed that the balance shown as receivable by M/s. P.M. Engineers and Contractors was at Rs.56,47,534/-. He, therefore, made further addition of Rs.3,99,173/- [Rs.1,09,76,237 (opening balance on 1.4.2014 – Rs.49,28,990 (addition made in the last year) – Rs.56,47,534 (balance shown by the creditor)]. Similarly, as regards the other creditor, namely, M/s Ganesh Bansode, the opening and closing balance for the preceding year, namely, as on 01-04-2013 and 31.3.2014, as appearing in the books of account of the assessee stood at Rs.1,30,504/-. The AO observed that the addition made in the preceding year due to non-reconciliation in this account was Rs.4,42,663/-. He made further addition of Rs.1,30,473/- towards difference in the opening balance as was not added in the preceding year. These two amounts totalled up to Rs.5,30,186/-, which became the subject matter of the addition. The ld. CIT(A) countenanced the additions, against which the assessee has approached the Tribunal.

Having heard the rival submissions and gone through the relevant material on record, it is seen that the AO made these two additions by treating the opening balances as unexplained. He made partial additions in the preceding year and the remaining amounts in the current year towards the closing balance of the last year. Once there is a difference in the account in the opening balance and there is no further transaction for the year, then no addition can be made on that score. If the AO was not satisfied with the correctness of the balances appearing in the last year, then he ought to have made addition for the full difference in the preceding year. Having not made full addition due to non-reconciliation of the balances in the preceding year, and there being no fresh transactions, the AO cannot be allowed to make addition in the current year towards opening balances. I, therefore, order to delete the addition.

The only other ground is against the confirmation of disallowance u/s.14A of the Act.

Briefly stated, the facts of the case are that the AO computed disallowance u/s.14A r.w. Rule 8D(2)(ii) at Rs.92,108/- and under Rule 8D(2)(iii) at Rs.33,978/-. The ld. CIT(A) sustained the disallowances made by the AO, against which the assessee has come up in appeal before the Tribunal.

Having heard both the sides and perused the relevant material on record, it is seen that the latter component of Rs.33,978/- is the amount of disallowance u/s.14A r.w.r 8D(2)(iii), which has been rightly computed at 0.5% of the average value of investments towards expenses.

Coming to the first component of Rs.92,108/-, being, the disallowance made towards interest expenses u/s.14A r.w.r 8D(2)(ii), it is seen from the AO’s table drawn on page 6 that the total of investments yielding exempt income stands at Rs.67,95,634/. As against that, the assessee’s capital is Rs.1.64 crore. The Hon'ble Bombay High Court in CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom), has held that where an assessee possessed sufficient interest free funds of its own which were generated in the course of relevant financial year, apart from substantial shareholders’ funds, presumption gets established that the investments in sister concerns were made by the assessee out of interest free funds and, therefore, no part of interest on borrowings can be disallowed on the basis that the investments were made out of interest bearing funds. In reaching this conclusion, the Hon’ble High Court relied on the judgment of the Hon’ble Supreme Court in the case of East India Pharmaceutical Works Ltd. Vs. CIT (1997) 224 ITR 627 (SC).

When we examine the amount of Investments at Rs.67.95 lakh lakh as against the availability of Share Capital and Reserves at Rs.1.64 crore, it becomes evident that the amount of such Investments is less than the amount of the assessee’s capital. We, therefore, order to delete the disallowance of Rs.92,108/-.

In the result, the appeal is partly allowed. Order pronounced in the Open Court on 08th June, 2023.