The Income Tax Appellate Tribunal (ITAT) of Delhi Bench “A”, comprising Shri Kul Bharat, Judicial Member, and Shri M. Balaganesh, Accountant Member, adjudicated on the case between Deputy Commissioner of Income Tax, Central Circle-1, New Delhi (Appellant) and Sahara Prime City Ltd., Lucknow (Respondent) for the assessment year 2016-17. The appeal, numbered ITA No. 6455/DEL/2019, was filed by the Revenue on 1st August 2019, challenging the order passed by the Commissioner of Income Tax (Appeals) [CIT(A)], New Delhi, on 31st May 2019. The final tribunal order was pronounced on 31st October 2023, wherein the Tribunal upheld the deletion of the disallowance made under Section 14A of the Income-tax Act, 1961, as well as the deletion of an addition related to interest-free loans to group concerns.
Sahara Prime City Ltd. is engaged in the business of development, construction, and sale of residential and commercial properties. For the assessment year 2016-17, the company filed its return of income declaring total income. The case was selected for scrutiny assessment under Section 143(3) of the Income-tax Act, 1961. The Assessing Officer (AO) made several additions to the income, including disallowances under Section 14A of the Act and an addition related to interest-free loans provided to group concerns. The AO invoked Rule 8D of the Income Tax Rules, 1962, to compute the disallowance under Section 14A, resulting in an addition of Rs. 13,38,20,650/-. Additionally, the AO made an addition of Rs. 8,83,89,764/- on account of interest-free loans given to group concerns, asserting that the assessee had failed to provide sufficient documentary evidence justifying the purpose and business expediency of the loans.
The assessee, Sahara Prime City Ltd., contested these additions before the CIT(A), who, after examining the details, deleted the disallowances made by the AO. The CIT(A) held that the disallowance under Section 14A was unwarranted as the assessee had not claimed any exempt income during the relevant year, and applying Rule 8D was incorrect. Regarding the interest-free loans, the CIT(A) found that the loans were advanced for business purposes and that the AO’s disallowance lacked substantive grounds.
In the appeal before the ITAT, the Revenue, represented by Sh. Zafarul Haque Tanweer, CIT(DR), argued that the CIT(A) had erred in law by deleting the disallowance under Section 14A and the addition related to interest-free loans. The CIT(DR) contended that the disallowance was justified given the substantial investments made by the assessee, which, even if not generating exempt income during the assessment year, were liable to attract disallowance under the provisions of Rule 8D. Furthermore, the CIT(DR) argued that the interest-free loans provided to group concerns lacked sufficient documentation to establish business expediency and, therefore, should be treated as non-business expenses, justifying the addition made by the AO.
On the other hand, the assessee’s counsel, represented by Sh. Ajay Vohra, Sr. Advocate, along with Ms. Shaily Gupta, CA, and Sh. Archit Kawra, Advocate, defended the CIT(A)’s order. The counsel argued that the assessee had not claimed any exempt income in the assessment year 2016-17, and therefore, the invocation of Section 14A was unwarranted. They cited precedents where similar disallowances were struck down due to the absence of exempt income. Additionally, the counsel argued that the interest-free loans provided to group concerns were for business purposes and were adequately documented, emphasizing that the AO’s addition was based on assumptions rather than concrete evidence.
After considering the submissions from both parties, the ITAT upheld the CIT(A)’s decision to delete the disallowances made under Section 14A and the addition related to interest-free loans. The Tribunal noted that the CIT(A) had provided a well-reasoned order, particularly emphasizing the fact that the assessee did not claim any exempt income during the relevant year. The ITAT reiterated that disallowances under Section 14A are not applicable in cases where no exempt income has been earned, aligning with the precedents cited by the assessee’s counsel.
Regarding the interest-free loans, the ITAT observed that the CIT(A) had rightly concluded that the loans were advanced for business purposes. The Tribunal found that the AO had failed to establish a clear nexus between the borrowed funds and the interest-free advances, which would warrant a disallowance. The ITAT concluded that the AO’s approach was speculative and lacked a solid foundation, justifying the deletion of the addition by the CIT(A).
In conclusion, the ITAT dismissed the Revenue’s appeal, affirming the CIT(A)’s order in favor of Sahara Prime City Ltd. The Tribunal’s ruling underscored the importance of substantiating disallowances with concrete evidence and reiterated that Section 14A disallowances are not applicable in the absence of exempt income. The decision also highlighted the need for the Revenue to provide clear and documented evidence when challenging the business purpose of interest-free loans, rather than relying on assumptions or speculative grounds.
Order Pronounced in the Open Court on 31st October 2023
Signed by:
Judicial Member: Shri Kul Bharat
Accountant Member: Shri M. Balaganesh
Date of Pronouncement: 31st October 2023
Manage the increasing number of hearings effortlessly by leveraging the legal AI revolution We are India's Leading revolutionary AI-powered legal platform where you can get enough insights into top cases and judgements.
Research Platform