Loading judgment…
Facts
The assessee, engaged in civil and road construction, appealed against the disallowance of expenses under Section 14A, finance cost, and an addition to book profit under Section 115JB. The Assessing Officer disallowed Rs. 1,22,50,910 under Section 14A, Rs. 45,58,039 as finance cost, and added the Section 14A disallowance to book profit.
Held
The Tribunal held that no disallowance under Section 14A is required if no exempt income is earned, citing the Hon'ble Delhi High Court's decision on the prospective nature of the Finance Act, 2022 amendment. Regarding finance cost, it was held that since the assessee had sufficient own funds, the interest-free loan was presumed to be out of own funds. Finally, the addition to book profit under Section 115JB was deemed incorrect as the disallowance under Section 14A was not applicable and no exempt income was earned.
Key Issues
Whether disallowance under Section 14A is permissible without earning exempt income, whether interest-free advances from own funds attract disallowance, and if Section 14A disallowance can be added to book profit under Section 115JB.
Sections Cited
14A, 115JB
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, MUMBAI “A” BENCH : MUMBAI
Before: SHRI B.R. BASKARAN & SHRI NARENDER KUMAR CHOUDHRY
Assessee by : Shri Malav P. Sheth Revenue by : Shri Umesh Chandra Sinha, Sr. DR Date of Hearing : 27-02-2025 Date of Pronouncement : 28-02-2025 ORDER PER B.R. BASKARAN, A.M :
The assessee has filed this appeal challenging the order dated 21-11-2024 passed by the Ld CIT(A), NFAC, Delhi [Ld.CIT(A)] and it relates to the Assessment Year (AY.) 2017-18. Following issues are urged in this appeal:- (a) Disallowance made u/s 14A of the Act (b) Disallowance of finance cost. (c) Addition made to book profit u/s 115JB of the Act in respect of exempt income. 2. The assessee is engaged in the business of civil construction, road construction and allied activities.
The first issue relates to the disallowance made u/s 14A of the Act. The admitted fact would remain that the assessee did not earn any exempt income during the year under consideration. However, the AO invoked provisions of sec. 14A and disallowed a sum of Rs.1,22,50,910/- and the same was also confirmed by Ld CIT(A). 3.1. We heard the parties on this issue and perused the record. It is well settled proposition of law that the disallowance u/s 14A is not required to be made when the assessee did not earn any exempt income. However, the Ld D.R placed his reliance on the amendment brought into sec.14A by Finance Act, 2022, wherein it has been stated that the disallowance u/s 14A is required to be made, even if the assessee did not earn any exempt income. The Ld D.R submitted that the above said amendment has been brought with retrospective effect and accordingly, would apply to the year under consideration. 3.2. However, we notice that the said amendment has been held to be prospective in nature by Hon’ble Delhi High Court in the case of Era Infrastructure (2022)(141 taxmann.com 289). In the above said case, the Hon’ble Delhi High Court also held that no disallowance u/s 14A is required to be made if the assessee has not earned any exempt income. 3.3. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance made by him u/s 14A of the Act.
The next issue relates to the disallowance of finance cost on the reasoning that the assessee has given interest free advances to a related concern. The Ld A.R submitted that the AO identified a loan of Rs.3.64 crores given by the assessee to a related concern named M/s Atlanta Ropar Tollways P Ltd and disallowed interest expenses of Rs.45,58,039/-. The Ld CIT(A) also confirmed the same. He submitted that the own funds available with the assessee is in far excess of the above said loan and hence no disallowance of interest is called for, as the presumption is that the above said interest free loan has been given out of own funds. 4.1. We heard the parties on this issue and perused the record. From the Balance sheet of the assessee, we notice that the own funds available with the assessee was Rs.177.37 crores and Rs.196.07 crores as on 31.3.2017 and 31.3.2016 respectively. The interest free loan identified by the AO is only Rs.3.64 crores. Hence the presumption would be that the above said interest free loan has been given out of interest free funds available with the assessee, as held by Hon’ble Bombay High Court in the case of Reliance Utilities and Power Ltd (313 ITR 340)(Bom). Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance of interest expenditure, referred above.
The next issue relates to the addition of the disallowance computed u/s 14A of the Act to the net profit while computing book profit u/s 115JB of the Act. We noticed earlier that the AO had computed disallowance u/s 14A of the Act at Rs.1,22,50,910/-. He added the above said amount to the net profit under clause (f) of Explanation to sec.115JB of the Act for the purpose of computing book profit. The Ld CIT(A) also confirmed the same. 5.1. First of all, the AO is not correct in adopting the disallowance amount computed u/s 14A of the Act for the purpose of sec.115JB. It is so held by the Delhi Special Bench of ITAT in the case of Vireet Investments P Ltd (165 ITD 27)(SB). Secondly, there is no necessity to make any addition to the net profit under clause (f) of Explanation to sec. 115JB, since the assessee has not earned any exempt income. Hence, the AO was not correct in law in making the above said addition to the net profit u/s 115JB of the Act and accordingly, the Ld CIT(A) was not justified in confirming the addition so made by the AO. Accordingly, we set aside the order passed by the Ld CIT(A) on this issue and direct the AO to delete the addition of above said amount made to the net profit, while computing book profit u/s 115JB of the Act.
In the result, the appeal filed by the assessee is allowed.