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Facts
The Revenue appealed the CIT(A)'s order deleting additions made by the AO concerning disallowance of interest payments (Rs. 2,52,48,177) and disallowance under Section 14A (Rs. 77,57,69,043). The assessee had paid interest to NCRPB, and the AO treated a provision for this interest as not allowable. The AO also disallowed expenses under Section 14A, arguing it was attracted due to investments made from borrowed funds, despite no exempt income being earned.
Held
The Tribunal held that the interest paid was an actual and ascertained liability under the mercantile system of accounting, thus allowable. Regarding Section 14A, it was held that since the assessee earned no exempt income, the disallowance was not warranted, especially in light of previous decisions and the fact that no new investments were made in the relevant year.
Key Issues
Whether interest payments disallowed by AO were actual liabilities or provisions, and if disallowance under Section 14A is warranted when no exempt income is earned.
Sections Cited
147, 148, 143(3), 143(2), 142(1), 36, 194A, 40(a)(ia), 10(23C), 14A, 8D
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Order PER VIKRAM SINGH YADAV, A.M. : This is an appeal filed by the Revenue against the order of the Ld. CIT(A)- 3, Ludhiana dt. 22/08/2019 pertaining to Assessment Year 2008-09. 2. In the present appeal, the Revenue has taken the following grounds of appeal:
“i) Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is right in law in holding that there was no reason to form a belief with the Assessing Officer to assume jurisdiction in absence of any fresh tangible material that any income chargeable to tax escaped assessment? ii) Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is right in law in holding that re-appreciation of material already available on record amounts to true and full disclosure within the meaning Section 147 of the Income Tax Act, 1961, ignoring the Explanation 1 to Section 147 of the Income Tax Act, 1961 ? iii) Whether on the facts and circumstances of the case, the Ld. CIT(A) erred to allow the appeal of the assessee and delete the addition of Rs. 2,52,48,177/- on account of disallowance of interest p ay ments to NCRPB which is not as per law, because the same is not allowable to the assessee as per section 36 of the Income Tax Act, 1961. iv) Whether the Ld. CIT(A) is right in law in holding that disallowance under Section 14A, of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962 was not called for as the assessee has not earned any exempt income ignoring the legislative intent of the statue, further clarified vide Circular No. 5/2014 dated 11.02.2014 which provides for disallowance of expenditure even where the Assessee has not earned any exempt income in a particular year? v) Whether on the facts and circumstances of the case, the Ld. CIT(A) erred to allow the appeal of the assessee and delete the addition of Rs. 17,73,52,597/- on account of disallowance u/s 36(i)(iii) which is not correct as per law because the assessee has shown WIP amounting tc Rs, 543,22,40,378/- and on the other hand, the assessee claimed interest expenses of Rs. 197,80,77,388/ - vi) It is prayed that the order of the Ld. CIT(A) be set-aside and that of the AO he restored. vii) The appellant craves leave to add or amend the grounds of appeal before the appeal is heard and disposed off.
3. Briefly the facts of the case are that the assessment was originally completed under section 143(3) vide order dt. 30/11/2010. Thereafter notice under section 148 dt. 23/01/2013 was issued after recording reasons which were duly served on the assessee. In response to the notice, the assessee filed its return of income and thereafter notice under section 143(2) and 142(1) were issued, calling for necessary information documentation. Thereafter the assessment was completed under section 143(3) r.w.s 147 of the Act vide order dt. 31/12/2023 wherein the reassessed income was determined at Rs. 2,54,79,04,707/- as against original assessed income of Rs. 1,56,95,34,890/-. The assessee thereafter carried the matter in appeal before the Ld. CIT(A) who has since deleted the said addition and against the said findings, the Revenue is in appeal before us.
4. In Ground No. 3, the Revenue has challenged the deletion of addition of Rs. 2,52,48,177/- on account of disallowance of interest under section 36 of the Act.
5. In this regard, briefly the facts of the case are that during the year under consideration, the assessee has paid/credited interest to M/s NCRPB and as per the AO, the assessee has made provision of Rs. 2,52,48,177/- which is not allowable under section 36 of the Act. Further the assessee has not deducted TDS under section 194A of the Act. Hence, the provision so made was also held disallowable under section 40(a)(ia)of the Act and this was one of the reason recorded before issuance of notice under section 148 of the Act. Thereafter, during the reassessment proceedings, the AO accepted the submissions of the assessee that no tax was required to be deducted at source as the interest payment to M/s NCRPB which is established under Central Act is exempt under Sub Clause (iv) of the clause (23C) of Section 10 of the Act. However given the fact that out of total interest debited to P&L Account amounting to Rs. 6,57,87,192/-, Rs. 2,52,48,177/- is on account of provision for interest payment, the same was held not allowable under section 36 of the Act and same was brought to tax in the hands of the assessee.
During the appellate proceedings, the ld AR submitted that the issue regarding interest payment to NCR Planning Board was taken up during the original assessment proceedings and notice was issued by the AO and thereafter after considering the written submission and other details filed by the assessee, no addition was made in the hands of the assessee. It was further submitted that the amount represents the interest on the installment which accrued the till last date of the F.Y. However, the due date of which falls in the subsequent year and since the assessee following mercantile system of accounting, the interest charged in the account is an actual liability of the assessee ad not a provision on the basis of which the addition has been made by the AO and detail of interest working and the calculation was submitted before the Ld. CIT(A). Thereafter the Ld. CIT(A) considering the submission and documentation filed by the assessee recorded her finding wherein she has stated that it is an undisputed fact that the appellant has been following mercantile system of accounting and from the submission alongwith the basis of calculation filed by the appellant, it is observed that the interest amount under consideration represents the interest on installment which accrues till the last date of the F.Y. However the due date of which falls in the subsequent year therefore the interest expenses booked by the assessee is an actual and ascertained liability of the assessee corporation. It was held by the ld CIT(A) that since the amount represents the actual and ascertained liability, the addition made by the AO was deleted.
During the course of hearing the Ld. CIT DR relied on the findings of the AO whereas the Ld. AR reiterated the submissions made before the Ld. CIT(A) and supported her findings.
After hearing both the parties and considering the material available on the record, we find that the findings of the Ld. CIT(A) wherein she has stated that the amount represents the actual and ascertained liability and not the provision remains unrebutted before us. Therefore in light of the same we do not see any infirmity in the findings of the Ld. CIT(A) wherein she has allowed the necessary deduction towards the liability in respect of the interest which has accrued during the financial year relevant to the impugned assessment year.
In the result ground of appeal
so taken by the Revenue is dismissed.
10. In Ground No. 4, the Revenue has challenged the sustenance of disallowance made by the AO under section 14A amounting to Rs. 77,57,69,043/-.
11. From the perusal of the records, it is noted that it was also one of the grounds for which the case of the assessee was reopened by the AO. In the reasons so recorded, the AO has stated that the assessee company had made investment to the tune of Rs. 13,44,45,61,571/- in share of its subsidiary company like UHBVNL, DHBVNL, HPGCL, BBMB and IPGCL and the company has raised secured / unsecured loans and ,an amount of Rs. 1,97,80,77,388/- has been debited in the P&L Account and in such circumstances the provision of Section 14A are attracted. It has further been stated by the AO that though the assessee has not received any dividend on this investment, the provision of Section 14A are still attracted and the amount of disallowance under section 14A comes to Rs. 77,57,69,043/-.
12. During the course of reassessment proceedings, after taking into consideration the submissions filed by the assessee wherein it has been stated that the interest liability towards loans taken from the various banks and the financial institution and no loans has been raised for the purpose of making investment and no interest income has been earned by the assessee, the AO went ahead and made the disallowance of Rs. 77,57,69,043/- reiterating the position as taken while reopening the assessment by invoking the provision of Section 14A of the Act.
13. During the appellate proceedings, the assessee submitted that no loans has been raised by the assessee for making investment as loans has been raised for specific purposes and utilization for those purposes only. It was further submitted that investment in UHBVNL and DHBVNL have been transferred to assessee from erstwhile HSEB and thus question of investments from borrowed funds does not arise for consideration. It was further submitted that no exempt / tax free has been derived by the assessee from the investment made in its subsidiary company rather an amount of Rs. 166.75 crores has been derived by the assessee from investment made in BBMB and IP stations which forms part of taxable income. Lastly it was submitted that no new investment has been made during the year under consideration. The submissions so filed by the assessee were considered and the Ld. CIT(A) deleted the addition. As per the Ld. CIT(A), it is an undisputed fact that the assessee has not derived any exempt income from its investment with Uttar Haryana, Dakshin Haryana, BBMB and IPGCL. Since no exempt income has been derived by the appellant, no disallowance under section 14A r.w. Rule 8 D is warranted. The Ld. CIT(A) also referred to the decision of Jurisdictional Punjab and Haryana High Court in the case of CIT Vs. Lakhani Marketing (2014(7) TMI 44 Punjab and Haryana High Court, decision of Coordinate Chandigarh Bench in case of M/s Oasis Merchants Private Limited Vs, The ACIT, Circle 7, Ludhiana 2017 (7) TMI 356 and also the fact that the AO while completing the assessment under section 147 r.w.s 143 for A.Y 2010-11 and 2011-12 has accepted the contention of the assessee that the provision of Section 14A are not applicable and no disallowance is called for. It was further held by the Ld. CIT(A) that since no new investment have been made and the facts and circumstances of the case are same as far as A.Y 2010-11, 2011-12, the addition made by the AO by ignoring the past precedence and the findings of jurisdictional High Court and Chandigarh Benches, is not warranted and the disallowance of Rs. 77,57,69,043/- so made by the AO was deleted.
During the course of hearing, the Ld. CIT/DR couldn’t rebut the factual position that no exempt income has been earned by the assessee. At the same time, the ld. CIT/DR relied on the Circular No. 5/2014 dt. 11/02/2014 which provides for disallowance of expenditure even where the assessee has not earned any exempt income in a particular year. Further he relied on the explanation inserted by the Finance Act.
Per contra the assessee reiterated the submissions made before the Ld. CIT(A) and supported her findings. It was further submitted that the matter is squarely covered by the decision of the Coordinate Bench in assessee’s own case for A.Y 2013-14 where the disallowance was deleted.
We have heard the rival contentions and perused the material available on the record. Admittedly, the assessee has not earned any exempt income during the financial year relevant to impugned assessment year 2017-18, in such a situation, the question of disallowance of any expenditure under section 14A r.w. Rule 8D does not arise for consideration. The matter is squarely covered by the decisions of Hon’ble Jurisdictional High Court as referred supra. In light of the same, the addition so made and upheld by the Ld. CIT(A) is hereby directed to be deleted.
In Ground No. 5, Revenue has challenged the deletion of addition of Rs. 17,73,52,597/- on account of disallowance under section 36(i)(iii) of the Act.
In this regard, briefly the facts of the case are that the AO observed that the assessee has shown capital work in progress for an amount of Rs. 5,43,22,40,378/- and has also debited a sum of Rs. 1,97,80,77,388/- in the P&L Account on account of interest on loans and since the capital has not been put to use by the assessee during the year under consideration, the proportionate interest amounting to Rs. 43,42,84,338/- should have been capitalized. However the assessee has only capitalized a sum of Rs. 25,69,31,741/-, hence the difference amount of Rs. 17,73,52,597/- was disallowed under section 36(1)(iii) of the Act.
During the appellate proceedings, the assessee submitted that the interest of Rs. 2,23,50,09,129/- being total interest charged was on account of various loans including working capital loans and the amount of interest paid on borrowings for acquisition of fixed assets in respect of the interest falling due during the construction period amounting to Rs. 25,69,31,741/- has been duly capitalized. It was submitted that the amount of interest so capitalized has been done after carrying out the calculation on scientific basis following the well accepted accounting policy which is in consonance with the provision of Section 36(1)(iii) of the Act. It was submitted that the accounts of the assessee have been audited by the Statutory Auditors as well as C&AG and no observations were raised on the working or calculation of interest so capitalized in respect of fixed assets and it was also submitted that similar issue was raised while reopening of the assessment for A.Y 2010-11 and after considering the submissions of the assessee, the same has been accepted by the AO. The submissions so filed by the assessee were considered by the Ld. CIT(A) and she has deleted the addition so made by the AO. The Ld. CIT(A) in her findings stated that the assessee have been following accounting policy where the interest on borrowed funds attributable to acquisition / construction of fixed assets till commissioning of such assets is capitalized. The accounting policy followed by the assessee is n consonance with the provisions of Section 36(1)(iii) of the Act. Further from the working submitted by the assessee, it is seen that the assessee itself has capitalized the interest attributable to capital work in progress and thereafter referring to the proceedings initiated by the AO under section 147 for A.Y. 2010-11 wherein no addition has been ultimately made and the submissions of the assessee has been accepted, the Ld. CIT(A) hold that in the facts and circumstances of the case and considering the past precedence the addition of Rs. 17,73,52,597/- made by the AO on proportionate basis is deleted.
During the course of hearing, the Ld. CIT DR relied on the findings of the AO.
Per contra, the Ld. AR reiterated the submissions made before the Ld. CIT(A) and supported her findings. Further our reference was drawn to the working wherein the interest of Rs. 256931741/- has been determined and which has already been capitalized. It was submitted that the AO has not find any fault in the said working and arbitrarily determined the interest amount which has been rightly set-aside by the ld CIT(A).
We have heard the rival contentions and pursued the material available on record. Nothing has been brought on record to rebut the findings of the ld CIT(A) who has rightly taken into consideration the accounting policy so adopted by the assessee in terms of allocation of interest expenditure, the actual expenditure so allocated by the assessee and further, there is nothing on record to demonstrate the basis of allocation as so determined by the AO which is clearly arbitrary and without any sound basis. In the result, we upheld the findings of the ld CIT(A) and the ground of appeal
so taken by the Revenue is dismissed.
23. In light of above, where we have upheld the findings of the ld CIT(A) on merits of the additions as rightly deleted by him, Ground No. 1 & 2 the Revenue appeal wherein it has challenged the action of the Ld. CIT(A) wherein she has set aside the reopening of the assessment under section 147 of the Act have become academic in nature and we donot deem it necessary to adjudicate the same and the same are thus left open.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open Court on 28/02/2025. परेश म. जोशी िव"म िसंह यादव (PARESH M. JOSHI) ( VIKRAM SINGH YADAV) "ाियक सद" / JUDICIAL MEMBER लेखा सद"/ ACCOUNTANT MEMBER