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2016 (1) TMI 805 - ITAT KOLKATA

2016 (1) TMI 805 - ITAT KOLKATA - TMI - Disallowance u/s 14A read with Rule 8D - dividend income earned by the assessee - CIT(A) allowed the claim - Held that:- We hold that the Learned CIT(A) had given cogent reasons in his appellate order to disallow a sum of ₹ 25,000/- towards proportionate management expenses in terms of Rule 8D(2)(iii) of the IT Rules as the expenditure deemed to have incurred by the assessee for the purpose of earning dividend income of ₹ 180/-. The factual fin .....

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ome of the appellant chargeable in AY 2009-10. The AO shall however inform the assessing officer of Guru Mehar Construction regarding the fact that the borrower credited appellant's account with the entire arrear of interest in one year and claimed deduction for the same in one year which is contrary to law. The AO shall also inform the Assessing Officer of the borrower about default committed by the borrower of non deduction of Tax and its consequent effect u/s. 40(a)(ia) of the Act. These dire .....

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fference in opening balance of loan figure is to be brought to tax, it cannot be added as income in the Asst Year 2009-10 and it should be considered only in the year in which the difference, if any, arose. We find from the details submitted by the said party i.e Guru Mehar Construction, that he had not submitted the transaction details prior to Asst Year 2009-10 and hence it is not clearly discernible from the records as to in which year the difference had arose.In view of this and in view of e .....

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st the order of assessment passed by the Learned AO u/s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the 'Act'). 2. The first issue to be decided in this appeal is as to whether in the facts and in the circumstances of the case the Learned AO is right in making disallowance u/s 14A of the Act read with Rule 8D of the IT Rules to the tune of ₹ 10,21,245/- in respect of dividend income earned by the assessee to the extent of ₹ 180/-. 2.1. The brief facts of t .....

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he dividend income should not be disallowed u/s 14A of the Act read with Rule 8D of the Rules. In response to the said show cause notice, the assessee replied that the investment of ₹ 2,21,18,521/- was made by the assessee out of share capital and out of taxed accumulated profits over the years and no expenditure has been incurred on the investment which has been charged to profits of the assessee company as per profit and loss account. The Learned AO ignoring the submissions of the assess .....

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. He also found that no disallowance u/s 14A of the Act was made for earlier assessment years. He found that the Learned AO had directly embarked on applying Rule 8D(2) of the Rules without recording any satisfaction with cogent reasons in terms of Rule 8D(1) of the Rules as to why the submission of the assessee that no expenditure was incurred for earning dividend income is incorrect. He further held that the Learned AO had not brought any nexus between use of borrowed funds with acquisition of .....

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in law, the ld.CIT(A) erred in deleting the action of AO in disallowing a sum of ₹ 10,21,245/- invoking the provisions of section 14A r.w.r 8D." 2.2. The Learned DR argued that disallowance u/s 14A of the Act is mandatorily to be made and hence pleaded for restoration of order of the Learned AO. In response to this, the Learned AR vehemently supported the order of the Learned CIT(A). 2.3. We have heard the rival submissions. We hold that the Learned CIT(A) had given cogent reasons in .....

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warranted in terms of Rule 8D(2)(ii) of the Rules. In view of the aforesaid facts and circumstances , we do not find any infirmity in the order of the Learned CIT(A) and accordingly, the ground no.1 raised by the revenue is dismissed. 3. The next issue to be decided in this appeal is as to whether in the facts and in the circumstances of the case, the Learned AO is justified in making an addition of ₹ 1,23,56,247/- towards interest income on hire purchase loans advanced by the assessee. 3. .....

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ase account became non-performing asset (NPA) due to default in payment of installments. The assessee being a non- banking finance company is bound to comply with the prudential norms prescribed by the Reserve Bank of India in respect of income recognition , classification of assets and provision for NPA requirements in accordance with section 45IA and 45Q of Reserve Bank of India Act. The said prudential norms of RBI mandate the assessee to recognize interest income on NPA accounts only on rece .....

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56,247/- and based on this data, the Learned AO proceeded to make an addition for the same amount in the hands of the assessee as interest income from Guru Mehar Construction ignoring completely the submissions of the assessee as stated supra. On first appeal, the Learned CITA by relying on the decision of the Hon'ble Delhi High Court in the case of CIT vs Vasisth Chay Vyapar Ltd reported in 330 ITR 440 (Delhi) held that the prudential norms prescribed by RBI with regard to income recognitio .....

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ddition made by AO of ₹ 1,23,56,247/- as interest income in the hands of the assessee for year under consideration." 3.2. The Learned DR vehemently supported the order of the Learned AO and in response to this the Learned AR vehemently supported the order of the Learned CIT(A). 3.3. We have heard the rival submissions and perused the materials available on record. The facts stated hereinabove remain undisputed by both the parties and hence are not reiterated herein for the sake of bre .....

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case of CIT vs Vasisth Chay Vyapar Ltd reported in 330 ITR 440 (Delhi) wherein the relevant provisions of the IT Act, RBI Act, Accounting guidelines issued by RBI and ICAI Accounting Standards on Revenue Recognitioin have been duly considered and held that in case of NBFCs, the income recognition can only be done in conformity with revenue recognition norms laid down by RBI. The relevant operative portion of the Delhi High Court judgement is reproduced herein below:- "It was not in dispute .....

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itably bound to follow, were AS-9. [Para 16] Therefore, it could not be said that income in the form of interest, though not received, had still accrued to the assessee under the provisions of the Income-tax Act and was, therefore, exigible to tax. It was so for the reasons: (1) The assessee had not received any interest on the said ICDs placed with 'S' since the assessment year 1996-97 as it had become NPA in accordance with the Prudential Norms, which was entered in the books of accoun .....

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rious financial position of 'S'. What to talk of interest, even the principal amount itself had become doubtful to recover. In that scenario, it was legitimate move to infer that interest income thereupon had not 'accrued'. 3.3.1. We also find that the Hon'ble Supreme Court in the case of Southern Technologies Ltd reported in 320 ITR 577 (SC) had held as follows:- "It is well settled that accounting policy followed by a company can be changed unless the AO comes to the c .....

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legal proposition that in view of Sec 45Q of the RBI Act, the income recognition principles prescribed by the RBI act and directions there-under were having over riding effect in the assessments of the NBFCs and therefore no income in relation to loan assets qualified as NPA can be assets till its realization even though u/s. 145 of the I T Act such NBFC assesses followed mercantile system of accounting. In fact I note that no contrary provision exists contained in the I.T Act which is contrary .....

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of these judicial decisions I have no hesitation in holding that the appellant which was an NBFC was liable to follow Prudential Accounting Norms. In terms of the said RBI directions the appellant could not have recognized revenue in respect of the loans granted to Guru Mehar Construction since it had continuously defaulted on payment of interest for more than 6 months period and thereby classified as NPA. In the circumstances merely because the appellant followed the mercantile system of accou .....

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sed on such interest because in the books of the borrower it had accounted the interest expenditure and therefore the appellant could not escape the liability to pay tax on accrued interest by taking shelter of the theory of real income. In my considered opinion however merely on the basis of entries passed in the books of the borrower, tax liability of the lender could not be artificially determined. The confirmation issued by the borrower proved that except crediting interest to the appellant& .....

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ither by the AO or by the borrower which in any manner showed that as required by sec 194A, tax was deducted and paid to the credit of the Central Government in respect of the interest of ₹ 1,23,56,247/- allegedly credited by the borrower in its books to the account of the appellant. Rather the information furnished by Guru Mehar Construction showed that save and except furnishing alleged confirmation of interest credited, the borrower did not comply with statutory requirements of Sec. 194 .....

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ding principal sum. This fact also supports the appellant's plea that in reality no interest of ₹ 1,23,56,247/- had accrued to the appellant in the FY 2008-09. Considering the totality of the facts and circumstances of the case, therefore, I hold that the AO was not justified in assessing ₹ 1,23,56,247/- as interest income of the appellant chargeable in AY 2009-10. The AO shall however inform the assessing officer of Guru Mehar Construction regarding the fact that the borrower cr .....

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factual findings with related legal position on the impugned issue , we find no infirmity in the order of the Learned CITA on this ground. Hence the ground no.2 raised by the revenue is dismissed. 4. The last issue to be decided in this appeal is as to whether in the facts and in the circumstances of the case the Learned AO is justified in adding the difference in hire purchase loan balance as on 1.4.2008 (opening balance) as per confirmation obtained from M/s Guru Mehar Construction u/s 133(6) .....

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nexplained income of the assessee. On first appeal, the Learned CITA deleted the addition. Aggrieved, the revenue is in appeal before us on the following ground:- "3. That on the facts and circumstances of the case and in law, the ld.CIT(A) erred in deleting the addition of AO of ₹ 8,21,143/- being accounting difference in the opening balance in the books of the assessee." 4.2. The Learned DR vehemently supported the order of the Learned AO and in response to this the Learned AR .....

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e real difference in loan balance arose. In any case, he argued that there is no scope for making any addiiton in respect of opening balance difference and moreover, the Learned AO had not mentioned any section under which the said disallowance is contemplated by him. 4.3. We have heard the rival submissions and perused the materials available on record. We find that the Learned CITA had deleted the addition by making the following observations:- "5.3.1 I have considered the rival submissio .....

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the opening balance as on 01.04.2008 was the culmination of appellant's transactions with Guru Mehar conducted till 31.03.2008. It was not a case where the transactions with the borrower commenced only in FY 2008-09 and in relation to these transactions discrepancies were found. In the circumstances I find force that the alleged accounting discrepancy as on 01.04.2008 did not emanate out of financial transactions carried out during the FY 2008-09. Although the AO did not specify the section .....

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ng as at the beginning of the FY 2008-09. This balance was brought forward from 31.03.2008 meaning thereby the difference between the appellant's books and the books of Guru Mehar Construction persisted in the earlier year. The accounting difference as per appellant's books and as per borrower's books did not emanate out of appellant's transactions for the FY 2008-09. I also find force in the A/Rs submission that no information was gathered by the AO from Guru Mehar Construction .....

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per explanation for such accounting discrepancy yet I find that the AO himself did not obtain sufficient information from the borrower to enable the appellant to reconcile the difference in the opening balances. Considering the totality of the facts and having regard to language employed in Sec 69 of the I T Act. I find merit in the A/R's submissions that the accounting difference in the outstanding balance brought forward from the earlier year did not represent unexplained investment of the .....

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