NETPLAST PVT.LTD.,KANPUR V. ACIT CIRCLE 2(3)(1), KANPUR

ITA 320/LKW/2024

AI Insights

The case involves M/s Netplast Pvt. Limited, which appealed against the additions made to its income by the Assessing Officer under sections 14A and 69C of the Income Tax Act, 1961. The primary contention was regarding the addition of Rs.84,00,000 under section 69C, which was treated as unexplained expenditure related to the purchase of land. The Assessing Officer had disbelieved the assessee's explanation and added this amount to the income. The Tribunal found that the assessee had provided sufficient evidence to substantiate the transaction and that the addition was not justified. On the other hand, the disallowance of Rs.34,518 under section 14A was upheld, as it was deemed that the assessee had incurred expenses related to earning exempt income.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 707167 (ITAT-LUCKNOW)
• Duration Of Justice: 1 year(s) 2 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-07-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2017-2018
• Appeal Filed On: 07-05-2024
• Other Referred Cases: ACIT vs. Eicher Ltd., Wimco Seedlings Ltd. vs. DCIT, Maxopp Investment Ltd. vs. CIT, Godrej Industries Ltd. v. DCIT, Godrej Agrovet Ltd vs. ACIT, Indiabulls Real Estate Ltd. vs. ACIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMIT KUMAR
• Assessee Lawyers: RAKESH GARG; PRODUCINGFURNISHING RELIABLE DOCUMENTARY; PRODUCINGFURNISHING RELIABLE DOCUMENTARY
• Keywords: Revised return; Unexplained expenditure; Cost of acquisition; Tax effect; Capital expenditure; Earning of tax free income; Rule 8D
• Section: 143(3); 69C; 14A

Judgement Text

"I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 1 IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH ‘A’, LUCKNOW BEFORE SHRI ANADEE NATH MISSHRA, ACCOUNTANT MEMBER AND SHRI SUBHASH MALGURIA, JUDICIAL MEMBER I.T.A. No.320/Lkw/2024 Assessment year:2017-18 M/s Netplast Pvt. Limited, 2 & 4 UPTRON Estate, Panki, Kanpur. PAN:AAACN5755E Vs. A.C.I.T., Circle-2(3)(1), Kanpur. (Appellant) (Respondent) O R D E R PER SUBHASH MALGURIA: J.M. (A) This appeal vide I.T.A. No.320/Lkw/2024 has been filed by the assessee for assessment year 2017-18 against impugned appellate order dated 18/03/2024 (DIN & Order No.ITBA/NFAC/S/250/2023- 24/1062855543(1) of Commissioner of Income Tax (Appeals) [“CIT(A)” for short]. (A.1) In this case assessment order dated 03/12/2019 was passed u/s 143(3) of the Income Tax Act, 1961 (“the Act” for short) wherein the assessee’s total income was determined at Rs.5,24,24,938/- (rounded off to Rs.5,24,24,940/-) as against returned income of Rs.4,39,90,420/-. In the aforesaid assessment order, an addition of Rs.34,518/- was made by making Appellant by Shri Rakesh Garg, Advocate Respondent by Shri Amit Kumar, Addl. CIT, D.R. I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 2 disallowance u/s 14A of the Act. Further an addition of Rs.84,00,000/- was made u/s 69C of the Act. Aggrieved, the assessee filed appeal in the office of the learned CIT(A). Vide impugned appellate order dated 18/03/2024, the assessee’s appeal was dismissed and the aforesaid additions of Rs.34,518/- and Rs.84,00,000/- were confirmed. Aggrieved again, the assessee has filed the present appeal in Income Tax Appellate Tribunal. (B) As regards the aforesaid addition of Rs.84,00,000/-, this issue is covered in grounds 1 to 6 of the present appeal before us. Regarding the remaining amount of Rs.34,518/-, this issue is covered in grounds 7 & 8 of the present appeal before us. In the course of appellate proceedings in Income Tax Appellate Tribunal, a paper book containing the following particulars was filed from the assessee’s side: I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 3 (B.1) As regards the aforesaid addition of Rs.84 lacs is concerned, the Assessing Officer noticed during the assessment proceedings that the assessee has shown addition worth Rs.84 lacs in fixed assets under the head ‘land’. The assessee was asked by the Assessing Officer to furnish the details in this regard. In response, the assessee furnished reply, which has been reproduced by the Assessing Officer in the assessment order. For the ease of reference, the assessee’s explanation is reproduced below: I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 4 I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 5 (B.1.1) The Assessing Officer disbelieved the explanation furnished by the assessee and held that the assessee had made unexplained capital expenditure in land. During the appellate proceedings in the office of the learned CIT(A), the assessee filed two separate written submissions, dated 20/08/2020 and 06/02/2024. These written submissions are reproduced below: “WRITTEN SUBMISSIONS DATED 06/02/2024 Sir, The above-mentioned appeal has been filed by the assessee against the orders of the ACIT, Circle 2(3)(1), Kanpur passed u/s.143(3) of I.T. Act, 1961 for the assessment year 2017-18. The following grounds of appeal have been taken: 1. Because the AO has erred on facts and in law in disbelieving the explanation furnished by the assessee and in adding a sum of Rs.84 lakhs under section 69C of the Act, on account of unexplained expenditure, which addition is contrary to facts, bad in law be deleted. 2. Because on a proper appreciation of facts and circumstances of the case, it would be found that there is no expenditure incurred far less unexplained by the company during the year, the AO was not justified in making the addition of Rs.84 lakhs under section 69C, the addition made be deleted. 3. Because on a proper consideration of facts and circumstances of the case, the provisions of section 115BBE are not applicable, in as much as, section 115BBE is applicable only when section 69C is applicable and when it is found that it is a case of unexplained expenditure whereas, on facts, it would be found that it is not a case of unexplained expenditure, the addition made and the tax levied under section 115BBE are both contrary to the provisions of law be deleted. 4. Because on a proper reading of section 69C, it would be found that the provisions of section 69C are applicable where there is no explanation about the source of such expenditure, or the I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 6 explanation furnished is not satisfactory, then only, the expenditure incurred is deemed to be the income of the assessee, in the entire order passed, it has nowhere been mentioned that no explanation was furnished, or the explanation furnished by the assessee is not true or correct, thereby, the addition made is bad in law and be deleted. 5. Because without prejudice to the above the transaction of purchase of agriculture land does not relate to the year under consideration but relates to F.Y. 2012-13, no addition can be made to the income for the year, the addition made is bad in law be deleted. 6. Because the AO has erred on facts and in law in making the addition of Rs.34,518/- under section 14A of the Act, which addition is contrary to the provisions of law, bad and be deleted. Fact of the case: The assessee is a Pvt. Ltd. Co. carrying on manufacturing of Automotive Components, e-filed its return declaring income of Rs.4,39,90,420/- on 29.09.2017. The assessment has been framed under section 143(3) on a total income of Rs.5,24,24,938/- after making an addition of Rs.34,510/- under section 14A and Rs.84,00,000/- under section 69C of the I.T. Act, 1961. Grounds No. 1 to 5 – relate to addition of Rs.84,00,000/- on account of unexplained expenditure. The AO has held as under: “Further, if the land was actually purchased for a consideration of Rs.1,20,00,000/-, stamp duty would have been paid on Rs.1,20,00,000/-. Stamp duty has been paid only on Rs.42,73,000/- which is the market value of the property. The alleged addition of Rs.84,00,000/- during the year under consideration in land by debiting land account and crediting Arpit Agarwal’s account is an afterthought just two show enhanced value of land. No documentary evidence was attached to show that Smt. Nirmala Devi had received Rs.84,00,000/- over and above of Rs.36,00,000/-. It is worthwhile to mention here that this exercise was done by the assessee because when land will be sold in future, cost of acquisition would be taken at I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 7 Rs.1,20,00,000/- and lesser amount of capital gain would be paid. Since the assessee could not substantiate the alleged capital expenditure of Rs.84,00,000/- claimed to have been made by Shri Arpit Agarwal in the land, which is lying in the books of the assessee by producing/furnishing reliable documentary evidences. Thus, the assessee failed to prove genuineness of the transaction. It is on record that during the year under consideration, the assessee has made expenditure in land worth Rs.84,00,000/-, which is unexplained expenditure in nature. The assessee by stating that this expenditure of Rs.84,00,000/- has been made by Shri Arpit Agarwal is nothing but is a colourable device to give it a legal shape so that payment of tax may be avoided. In view of the discussion made supra, it is clear that unexplained capital expenditure worth Rs.84,00,000/- has been found recorded in the books of account of the assessee and assessee failed to justify its contention by producing cogent documentary evidences. And in my opinion explanation offered by the assessee with regard to alleged expenditure made in land, is not satisfactory as the same is not corroborated by the acceptable documentary evidences. Therefore, addition of Rs.84,00,000/- on account of unexplained expenditure made in land during the year under consideration is being made u/s.69C of the Income Tax Act and added to the total income of the assessee. In view of the amended provisions of Section 115BBE of the Act, charge tax at the rate of 60% plus surcharge @25% on such tax and cess on the addition of Rs.84,00,000/- made u/s.69C of the Act. Addition: Rs.84,00,000/- Submissions: The assessee company through its director Shri Arpit Agarwal, duly authorised purchased an agricultural land admeasuring 1.2430 hectare situated at Gram Raipur, Tehsil Akbarpur, Distt. Kanpur Dehat from one Smt. Nirmala Devi vide purchase deed executed on 08.07.2013 and registered on 11.07.2013 relating to A.Y. 2014-15 for a total purchase consideration of Rs. one crore twenty lakhs. Out of the total consideration of Rs.1.20 crores, Rs.36,00,000/- was paid by cheques by the assessee company as detailed in the purchase deed and the balance Rs.84,00,000/- was paid in cash by the director Shri I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 8 Arpit Agarwal from his own account. Smt. Nirmala Devi on receipt of the sale proceeds deposited an amount of Rs. one crore nineteen lakhs in her bank account. On the basis of AIR issued in the case of Smt. Nirmala Devi by the INCI Wing, wherein her statement was also recorded, she admitted of having sold her agriculture land for Rs.1.20 crores and also depositing the cheque of Rs.36,00,000/- and cash of Rs.83,00,000/- (Rs. 1 lakh + 82 lakhs) received, in her bank account. Shri Arpit Agarwal director of the company admitting that Rs.84,00,000/- was paid by him surrendered the same before the INCI authorities and included the same in his return of income as income being investment made in property. He deposited the tax on the same in the Asstt. Year 2014- 15, itself (copy attached). To put the things in the correct prospective, the assessee company during the assessment year i.e. 2017-18, through journal entries credited the account of Shri Arpit Agarwal, Director by an amount of Rs.84,00,000/- and debited the same to the land account in its books of account. In this manner the value of the land purchased in the books of the company reflected the cost paid for. No cash was either received or deposited in the books of the company. The credit in the account of Shri Arpit Agarwal in the books of the assessee company was explained in writing, narrating the entire facts of purchase of land by the company and the details of payments made. These entries were made to regularise records. A matching exercise. The AO has disbelieved the same and has treated the amount of Rs.84,00,000/- as unexplained expenditure incurred u/s.69C of the Act 1961. He has applied the provisions of section 115BBE. It is undisputed fact that no land has been purchased during the year. The company has neither received any cash from the director nor has incurred any expenditure towards the land in cash during the year. The fact remains that the land was purchased in the F.Y. 2013-14 relevant to assessment year 14-15 and not AY 2017-18. Since no expenditure has been incurred by the company towards land during the year (AY 2017-18), no addition can be made in hands of the company during the year. The other aspect is that the credit of Rs.84,00,000/- is directly relatable to the debit of Rs.84,00,000/- to the land account. The purchase consideration was met partly by the company itself and partly by its director. No amount has been paid by the director during the year. Whatever, amount was paid by the director; it was paid at the time of purchase of land, in the year 2013-14 only. The provisions of section I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 9 69C are not applicable. The AO has not considered the explanation and the submission filed. From the perusal of the facts it will be found, that no land was purchased during the year under consideration. At the same time, no payment was made to any person during the year. Since the land was purchased through the director, the money paid over and above the sale consideration as mentioned in the sale deed was regularized by passing journal entries in the books of account of the company. This too has also been done because the land had been purchased in the name of the company. By passing journal entries, now the actual amount for which the land was purchased has been debited under the head purchase of land and correspondingly the difference in the amount has been credited to the account of the director who had paid the balance of the amount from his own resources. To sum up, Rs.84,00,000/- has been credited to the director’s account and has been correspondingly debited to the land account. There is no actual flow of cash during the year in the company’s books of account. Since there is no actual cash flow, provisions of section 69C and 115BBE are not applicable. Section 69C is applicable only when the amount has been actually incurred in the financial year. Since, no amount has been actually incurred during the year, no addition can be made u/s 69C.The section 69C is not applicable. The section 69C is reproduced here under: Unexplained expenditure: “69C. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year: Provided that, notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income.” The present case, is case of book entry only, passed through journal entry. As explained above, there is no expenditure incurred. Whatever expenditure was incurred, the same incurred in the year 2013, when I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 10 the land was purchased and deed registered. As per section 69C the expenditure has to be incurred during the financial year. Since the expenditure for purchase of land has not been incurred during the financial year 2016-17 relevant to A.Y. 2017-18, section 69C would not be applicable. Likewise the provisions of section 115BBE would be not applicable, section 115BBE would be applicable only when the provisions of section69C are applicable. The addition made may kindly be deleted. Grounds No. 6 – relate to disallowance of Rs.34,518/- by applying the provisions of sec. 14A of the Income Tax Act. The AO has held as under: “The assessee’s case is squarely covered with the provisions as contained in section 14A(3) of the Act. The assessee’s claim that no expenditure was incurred in connection with the investment in equities/mutual funds is not correct as from the perusal of Balance Sheet, Profit & Loss account, etc., it is seen that the assessee has incurred expenses under the various heads of expenditure including the interest. No separate accounting with respect to exempt income and expenditure incurred for its earning has been maintained by the assessee, therefore, in its case provisions of section 14A of the Act are applicable. Further so far as assessee’s contention that since no income has been claimed exempt, provisions of section 14A of the Act are not applicable in its case is concerned, the Central Board of Direct Taxes vide Circular No. 5/2014, the Central Board of Direct Taxes has clarified that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration. Accordingly, inadmissible expenditure in this case is worked out in accordance with the section 14A of the Act r.s. Rule 8D(2)(ii) of the Income Tax Rules, 1962. As per this Rule, inadmissible amount is equal to one per cent of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income. As per the details furnished by the assessee, the monthly average of opening and closing balance of the value of investment is Rs.34,51,876/-, one percent of which comes to Rs.34,518/-. Accordingly, same is disallowed and added I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 11 to the total income of the assessee. Since assessee has under- reported its income.” Submissions The next ground relates to the addition of Rs. 34,518/- by applying the provisions of section 14A of the Act, 1961. A sum of Rs.25,00,000/- invested in the earlier years was brought forward and formed the opening balance. Further a sum of Rs.25,00,000/- was invested during the year. Total investment is Rs.50,00,000/-, besides investment of Rs.40,00,000/- in Tata Short Term Bond Fund income from which is taxable and has been taxed in the subsequent year. The assessee company has not incurred any expenditure to earn tax free income. The total Share Capital and the Reserves of the company are Rs.14.47 crores, whereas the investment in tax exempted investment is Rs.50,00,000/- only. The total sale during the year is Rs.42.75 crores. The investment in the mutual funds has been made out of own funds and internal accounts. No borrowed funds have been utilized for investment in the mutual funds. Further there is no repeated or regular exercise of investments. There is only one time investment; hence there is no question of man power deployment for the same. Likewise all dividend is credited to the bank account directly/thru ECS, hence there is no manual activity involved. The AO has no where demonstrated by facts or figures of the expenses incurred if any in earning the tax free income. The entire observation of the AO is general, which leads to only a presumptive assumption that the expenses might have been incurred. The law on the subject is that the AO has to pin point the actual expenditure incurred for earning the tax free income. Expenditure that can be disallowed has to be incurred actually and not notionally. It has been held in the case of ACIT vs. Eicher Ltd. – 101 TTJ (Delhi) 369 and also in the case of Wimco Seedlings Ltd. vs. DCIT 107 ITD (Del)(TM) that the AO should be a position to pinpoint with an acceptable degree of accuracy, the expenditure which was incurred to produced non- taxable income. Ground that assessee ought not to have used own funds for tax-free investments is invalid. It is the prerogative of the assessee to use its own fund in the manner in which it considers proper and the Revenue cannot dictate how the funds should be used – CIT vs. Gujarat Power I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 12 Corporation Ltd. [2011-ITRV-HC-GUJ-066] – Godrej Industries Ltd. v. DCIT , [2011-ITRV-ITAT-MUM-096 ] – Godrej Agrovet Ltd vs. ACIT [2010-ITRV-ITAT-MUM-086] Maxopp Investment Ltd. vs. CIT decided on 14A read with Rule 8D[2011-ITRV-HC-DEL-253]. The expression “expenditure incurred” in s. 14A refers to actual expenditure and not to some imaginary expenditure. If no expenditure is incurred in relation to exempt income, no disallowance can be made u/s 14A. It was for the AO to establish that expenditure has been incurred to earn tax free income. The AO cannot proceed to determine the amount of expenditure incurred in relation to exempt income without recording a finding that he is not satisfied with the correctness of the accounts and claim of the assessee. This is a condition precedent. Unless and until the AO does the above exercise, it cannot be said that the accounts are not true and correct vis-a-vis the expenditure incurred, if any. There can be no satisfaction with respect to the same and whatever has been arrived at by the AO is without any basis. Satisfaction that the expenses have been incurred to earn tax free income has to be demonstrated and then only the provisions of section 14A would be applicable. The provisions of section 14A would not become operative merely there is tax free income. The books of account as maintained have been produced, details uploaded and examined. The AO has held in the order as under: “Further notice u/s.142(1) of the Act dated 12.09.2019 and 16.11.2019 along with detailed questionnaire was issued to the assessee. In response to these notices, the assessee furnished relevant details/explanations etc. from time to time, which have been looked into and verified from the Books of Accounts bills, vouchers produced during the course of examination of books of accounts and the documents uploaded by the assessee. From perusal of the details furnished by the assessee it is notice that during the year under consideration the assessee company was engaged in the business of manufacturing of automotive component supplied to automotive industries which includes customers like TATA Motors, Tata Johnsons, International I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 13 Tractors, Escorts, New Holand Fiet etc. From perusal of the investment details of the assessee as on 31.03.2017, it is notice that the assessee company has shown investment in Equity Shares and Mutual Fund to the tune of Rs.2,00,000/- and Rs.90,22,963/- respectively. The income accrues from these investment is exempt u/s.10 of the I.T. Act. Further, from the perusal of P & L A/c., it has been noticed that assessee has debited its P & L A/c by huge finance cost and various administrative expenses. On the other hand, computation of income of the assessee company was not showing any disallowance on account of application of Section 14A read with Rule 8D(2) substituted by the I.T. (Fourteenth Amdt.) Rule 2016 w.e.f. 02.06.2016. Hence, the assessee was required to furnish the following. Reference in this connection be made to the decision of ACIT vs. Indiabulls Real Estate Ltd., ITA No. 6602/Del/2016 Order dated 11.03.2020, ITAT Delhi Bench, New Delhi, has held as under:- “10. Having gone through the facts on record and applicability of the case laws quoted by the ld. DR to the case before us, we find that the cases referred are mostly where the revenue has gone through the books of accounts, not satisfied with the disallowance made by the Assessing Officer and the reasons of such non-satisfaction has been mentioned in detail in the orders, whereas in the instant case, the books of account have been produced before the Assessing Officer which have been examined on test check basis. (refer Assessing Officer above) While re-computing the disallowance , the Assessing Officer has not followed the provisions of Section 14A(2) of the Income Tax Act, 1961 wherein it is mandated that, if the Assessing Officer having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to which does not form part of the total income under the Act, then the Assessing Officer shall determine the amount of expenditure incurred in relation to such income. Further, the Act also mandates that such re- computation also applies in relation to a case where the assessee claims that no expenditure has been incurred by him in relation to the income which does not form part of the total income. From the reading of the judgment of the Hon’ble Apex Court in the case of Maxopp Investment Ltd. Vs CIT in CA Nos. 104-109 OF 2015, we find that having regard to the language I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 14 of Section 14A(2) of the Act, read with Rule 8D of the Rules, it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the accounts of the assessee suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment, in that eventuality, the Assessing Officer will have to record its satisfaction to this effect. 11. In the instant case, we find that no such satisfaction has been recorded by the A.O to come to the conclusion to invoke the provisions of Section 14A(2). Hence, we decline to interfere with the order of the ld. CIT (A) and the disallowance is directed to be deleted.” In view of the above facts and circumstances of the case, it is prayed that the disallowance made by the Assessing Officer may kindly be deleted. The appeal filed by the assessee be allowed. In case any further information is required the same may kindly be communicated the same shall be provided forthwith. A hearing thru video conferencing may kindly be provided if any further clarification is required.” WRITTEN SUBMISSIONS DATED 20/08/2020 Sir, The above mentioned appeal has been filed by the assessee against the orders of the ACIT, Circle 2(3)(1), Kanpur passed u/s.143(3) of I.T. Act, 1961 for the assessment year 2017-18. The following grounds of appeal have been taken: 7. Because the AO has erred on facts and in law in disbelieving the explanation furnished by the assessee and in adding a sum of Rs.84 lakhs under section 69C of the Act, on account of unexplained expenditure, which addition is contrary to facts, bad in law be deleted. I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 15 8. Because on a proper appreciation of facts and circumstances of the case, it would be found that there is no expenditure incurred far less unexplained by the company during the year, the AO was not justified in making the addition of Rs.84 lakhs under section 69C, the addition made be deleted. 9. Because on a proper consideration of facts and circumstances of the case, the provisions of section 115BBE are not applicable, in as much as, section 115BBE is applicable only when section 69C is applicable and when it is found that it is a case of unexplained expenditure whereas, on facts, it would be found that it is not a case of unexplained expenditure, the addition made and the tax levied under section 115BBE are both contrary to the provisions of law be deleted. 10. Because on a proper reading of section 69C, it would be found that the provisions of section 69C are applicable where there is no explanation about the source of such expenditure, or the explanation furnished is not satisfactory, then only, the expenditure incurred is deemed to be the income of the assessee, in the entire order passed, it has nowhere been mentioned that no explanation was furnished, or the explanation furnished by the assessee is not true or correct, thereby, the addition made is bad in law and be deleted. 11. Because without prejudice to the above the transaction of purchase of agriculture land does not relate to the year under consideration but relates to F.Y. 2012-13, no addition can be made to the income for the year, the addition made is bad in law be deleted. 12. Because the AO has erred on facts and in law in making the addition of Rs.34,518/- under section 14A of the Act, which addition is contrary to the provisions of law, bad and be deleted. Fact of the case: The assessee is a Pvt. Ltd. Co. carrying on manufacturing of Automotive Components, e-filed its return declaring income of Rs.4,39,90,420/- on 29.09.2017. The assessment has been framed under section 143(3) on a total income of Rs.5,24,24,938/- after I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 16 making an addition of Rs.34,510/- under section 14A and Rs.84,00,000/- under section 69C of the I.T. Act, 1961. Grounds No. 1 to 5 – relate to addition of Rs.84,00,000/- on account of unexplained expenditure. The AO has held as under: “Further, if the land was actually purchased for a consideration of Rs.1,20,00,000/-, stamp duty would have been paid on Rs.1,20,00,000/-. Stamp duty has been paid only on Rs.42,73,000/- which is the market value of the property. The alleged addition of Rs.84,00,000/- during the year under consideration in land by debiting land account and crediting Arpit Agarwal’s account is an afterthought just two show enhanced value of land. No documentary evidence was attached to show that Smt. Nirmala Devi had received Rs.84,00,000/- over and above of Rs.36,00,000/-. It is worthwhile to mention here that this exercise was done by the assessee because when land will be sold in future, cost of acquisition would be taken at Rs.1,20,00,000/- and lesser amount of capital gain would be paid. Since the assessee could not substantiate the alleged capital expenditure of Rs.84,00,000/- claimed to have been made by Shri Arpit Agarwal in the land, which is lying in the books of the assessee by producing/furnishing reliable documentary evidences. Thus, the assessee failed to prove genuineness of the transaction. It is on record that during the year under consideration, the assessee has made expenditure in land worth Rs.84,00,000/-, which is unexplained expenditure in nature. The assessee by stating that this expenditure of Rs.84,00,000/- has been made by Shri Arpit Agarwal is nothing but is a colourable device to give it a legal shape so that payment of tax may be avoided. In view of the discussion made supra, it is clear that unexplained capital expenditure worth Rs.84,00,000/- has been found recorded in the books of account of the assessee and assessee failed to justify its contention by producing cogent documentary evidences. And in my opinion explanation offered by the assessee with regard to alleged expenditure made in land, is not satisfactory as the same is not corroborated by the acceptable documentary evidences. Therefore, addition of Rs.84,00,000/- on account of unexplained expenditure made in land during the year I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 17 under consideration is being made u/s.69C of the Income Tax Act and added to the total income of the assessee. In view of the amended provisions of Section 115BBE of the Act, charge tax at the rate of 60% plus surcharge @25% on such tax and cess on the addition of Rs.84,00,000/- made u/s.69C of the Act. Addition: Rs.84,00,000/-“ Submissions: The assessee company through its director Shri Arpit Agarwal purchased an agricultural land admeasuring 1.2430 hectare situated at Gram Raipur, Tehsil Akbarpur, Distt. Kanpur Dehat from one Smt. Nirmala Devi vide purchase deed executed on 08.07.2013 and registered on 11.07.2013 relating to A.Y. 2014-15 for a total purchase consideration of Rs. one crore twenty lakhs. Out of the total consideration of Rs.1.20 crores, Rs.36,00,000/- was paid by cheques by the assessee company as detailed in the purchase deed and the balance Rs.84,00,000/- was paid in cash by the director Shri Arpit Agarwal from his own account. Smt. Nirmala Devi on receipt of the sale proceeds deposited an amount of Rs. one crore nineteen lakhs in her bank account. On the basis of AIR issued in the case of Smt. Nirmala Devi by the INCI Wing, wherein her statement was also recorded, she admitted of having sold her agriculture land for Rs.1.20 crores and also depositing the cheque of Rs.36,00,000/- and cash of Rs.83,00,000/- (Rs. 1 lakh + 82 lakhs) received, in her bank account. Shri Arpit Agarwal director of the company admitting that Rs.84,00,000/- was paid by him surrendered the same before the INCI authorities and included the same in his return of income as income invested in property. He paid tax on the same in the Asstt. Year 2014-15, itself (copy attached). To put the things in the correct prospective, the assessee company during the assessment year i.e. 2017-18, through journal entries credited the account of Shri Arpit Agarwal, Director by an amount of Rs.84,00,000/- and debited the same to the land account in its books of account. In this manner the value of the land purchased in the books of the company reflected the cost paid for. No cash was either received or deposited in the books of the company. The credit in the account of Shri Arpit Agarwal in the books of the assessee company was explained in writing, narrating the entire facts of purchase of land by the company and the details of payments made. These entries were made to regularise records. A matching exercise. The AO has disbelieved the same and has treated the amount of Rs.84,00,000/- I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 18 as unexplained expenditure incurred u/s.69C of the Act 1961. He has applied the provisions of section 115BBE. It is undisputed fact that no land has been purchased during the year. The company has neither received any cash from the director nor has incurred any expenditure towards the land in cash during the year. The fact remains that the land was purchased in the F.Y. 2013-14. Since no expenditure has been incurred by the company towards land during the year, no addition can be made in hands of the company during the year. The other aspect is that the credit of Rs.84,00,000/- is directly relatable to the debit of Rs.84,00,000/- to the land account. The purchase consideration was met partly by the company itself and partly by its director. No amount has been paid by the director during the year. Whatever, amount was paid by the director; it was paid at the time of purchase of land, in the year 2013-14 only. The provisions of section 69C are not applicable. The AO has not considered the explanation and the submission filed. From the perusal of the facts it will be found, that no land was purchased during the year under consideration. At the same time, no payment was made to any person during the year. Since the land was purchased through the director, the money paid over and above the sale consideration as mentioned in the sale deed was regularized by passing journal entries in the books of account of the company. This too has also been done because the land had been purchased in the name of the company. By passing journal entries, now the actual amount for which the land was purchased has been debited under the head purchase of land and correspondingly the difference in the amount has been credited to the account of the director who had paid the amount from his own resources. To sum up, Rs. 84,00,000/- has been credited to the director’s account and has been correspondingly debited to the land account. There is no actual flow of cash during the year in the company’s books of account. Since there is no actual cash flow, provisions of section 115BBE and 69C are not applicable. Section 69C is applicable only when the amount has been actually incurred in the year. Since, no amount has been actually incurred during the year, no addition can be made u/s 69C. The addition made may kindly be deleted. Grounds No. 6 – relate to disallowance of Rs.34,518/- by applying the provisions of sec. 14A of the Income Tax Act. The AO has held as under: I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 19 “The assessee’s case is squarely covered with the provisions as contained in section 14A(3) of the Act. The assessee’s claim that no expenditure was incurred in connection with the investment in equities/mutual funds is not correct as from the perusal of Balance Sheet, Profit & Loss account, etc., it is seen that the assessee has incurred expenses under the various heads of expenditure including the interest. No separate accounting with respect to exempt income and expenditure incurred for its earning has been maintained by the assessee, therefore, in its case provisions of section 14A of the Act are applicable. Further so far as assessee’s contention that since no income has been claimed exempt, provisions of section 14A of the Act are not applicable in its case is concerned, the Central Board of Direct Taxes vide Circular No. 5/2014, the Central Board of Direct Taxes has clarified that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration. Accordingly, inadmissible expenditure in this case is worked out in accordance with the section 14A of the Act r.s. Rule 8D(2)(ii) of the Income Tax Rules, 1962. As per this Rule, inadmissible amount is equal to one per cent of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income. As per the details furnished by the assessee, the monthly average of opening and closing balance of the value of investment is Rs.34,51,876/-, one percent of which comes to Rs.34,518/-. Accordingly, same is disallowed and added to the total income of the assessee. Since assessee has under- reported its income.” Submissions The next ground relates to the addition of Rs. 34,518/- by applying the provisions of section 14A of the Act, 1961. A sum of Rs.25,00,000/- invested in the earlier years was brought forward and formed the opening balance. Further a sum of Rs.25,00,000/- was invested during the year. Total investment is Rs.50,00,000/-, besides investment of Rs.40,00,000/- in Tata Short Term Bond Fund income from which is taxable and has been taxed in the subsequent year. I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 20 The assessee company has not incurred any expenditure to earn tax free income. The total Share Capital and the Reserves of the company are Rs.14.47 crores, whereas the investment in tax exempted investment is Rs.50,00,000/- only. The total sale during the year is Rs.42.75 crores. The investment in the mutual funds has been made out of own funds and internal accounts. No borrowed funds have been utilized for investment in the mutual funds. Further there is no repeated or regular exercise of investments. There is only one time investment; hence there is no question of man power deployment for the same. Likewise all dividend is credited to the bank account directly/thru ECS, hence there is no manual activity involved. The AO has no where demonstrated by facts or figures of the expenses incurred if any in earning the tax free income. The entire observation of the AO is general, which leads to only a presumptive assumption that the expenses might have been incurred. The law on the subject is that the AO has to pin point the actual expenditure incurred for earning the tax free income. Expenditure that can be disallowed has to be incurred actually and not notionally. It has been held in the case of ACIT vs. Eicher Ltd. – 101 TTJ (Delhi) 369 and also in the case of Wimco Seedlings Ltd. vs. DCIT 107 ITD (Del)(TM) that the AO should be a position to pinpoint with an acceptable degree of accuracy, the expenditure which was incurred to produced non- taxable income. Ground that assessee ought not to have used own funds for tax-free investments is invalid. It is the prerogative of the assessee to use its own fund in the manner in which it considers proper and the Revenue cannot dictate how the funds should be used – CIT vs. Gujarat Power Corporation Ltd. [2011-ITRV-HC-GUJ-066] – Godrej Industries Ltd. v. DCIT , [2011-ITRV-ITAT-MUM-096 ] – Godrej Agrovet Ltd vs. ACIT [2010-ITRV-ITAT-MUM-086] Maxopp Investment Ltd. vs. CIT decided on 14A read with Rule 8D[2011-ITRV-HC-DEL-253]. The expression “expenditure incurred” in s. 14A refers to actual expenditure and not to some imagined expenditure. If no expenditure is incurred in relation to exempt income, no disallowance can be made u/s 14A. The AO cannot proceed to determine the amount of expenditure incurred in relation to exempt income without recording a finding that I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 21 he is not satisfied with the correctness of the claim of the assessee. This is a condition precedent. Unless and until the AO does the above exercise, it cannot be said that the accounts are not true and correct vis-a-vis the expenditure incurred for earning the tax free income. There can be no satisfaction with respect to the same and whatever has been arrived at by the AO is without any basis. Satisfaction that the expenses have been incurred to earn tax free income has to be demonstrated and then only the provisions of section 14A would be applicable. The provisions of section 14A would not become operative merely there is tax free income. The books of account as maintained have been produced, details uploaded and examined. The AO has held in the order as under: “Further notice u/s.142(1) of the Act dated 12.09.2019 and 16.11.2019 along with detailed questionnaire was issued to the assessee. In response to these notices, the assessee furnished relevant details/explanations etc. from time to time, which have been looked into and verified from the Books of Accounts bills, vouchers produced during the course of examination of books of accounts and the documents uploaded by the assessee. From perusal of the details furnished by the assessee it is notice that during the year under consideration the assessee company was engaged in the business of manufacturing of automotive component supplied to automotive industries which includes customers like TATA Motors, Tata Johnsons, International Tractors, Escorts, New Holand Fiet etc. From perusal of the investment details of the assessee as on 31.03.2017, it is notice that the assessee company has shown investment in Equity Shares and Mutual Fund to the tune of Rs.2,00,000/- and Rs.90,22,963/- respectively. The income accrues from these investment is exempt u/s.10 of the I.T. Act. Further, from the perusal of P & L A/c., it has been notic4ed that assessee has debited its P & L A/c by huge finance cost and various administrative expenses. On the other hand, computation of income of the assessee company was not showing any disallowance on account of application of Section 14A read with Rule 8D(2) substituted by the I.T. (Fourteenth Amdt.) Rule 2016 w.e.f. 02.06.2016. Hence, the assessee was required to furnish the following. I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 22 Reference in this connection be made to the decision of ACIT vs. Indiabulls Real Estate Ltd., ITA No. 6602/Del/2016 Order dated 11.03.2020, ITAT Delhi Bench, New Delhi, has held as under:- “10. Having gone through the facts on record and applicability of the case laws quoted by the ld. DR to the case before us, we find that the cases referred are mostly where the revenue has gone through the books of accounts, not satisfied with the disallowance made by the Assessing Officer and the reasons of such non-satisfaction has been mentioned in detail in the orders, whereas in the instant case, the books of account have been produced before the Assessing Officer which have been examined on test check basis. (refer Assessing Officer above) While re-computing the disallowance , the Assessing Officer has not followed the provisions o f Section 14A(2) o f the Income Tax Act, 1961 wherein it is mandated that, if the Assessing Officer having regard to the accounts o f the assessee is not satisfied with the correctness o f the claim of the assessee in respect o fsuch expenditure in relation to which does not form part o f the total income under the Act, then the Assessing Officer shall determine the amount of expenditure incurred in relation to such income. Further, the Act also mandates that such recomputation also applies in relation to a case where the assessee claims that no expenditure has been incurred by him in relation to the income which does not form part o f the total income. From the reading of the judgment o f the Hon’ble Apex Court in the case of Maxopp Investment Ltd. Vs CIT in CA Nos. 104-109 OF 2015, we find that having regard to the language of Section 14A(2) of the Act, read with Rule 8D o f the Rules, it clear that before applying the theory o f apportionment, the AO needs to record satisfaction that having regard to the accounts of the assessee suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment, in that eventuality, the Assessing Officer will have to record its satisfaction to this effect. 11. In the instant case, we find that no such satisfaction has been recorded by the A.O to come to the conclusion to invoke the provisions of Section 14A(2). Hence, we decline to interfere with the order of the ld. CIT (A) and the disallowance is directed to be deleted.” I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 23 In view of the above facts and circumstances of the case, it is prayed that the disallowance made by the Assessing Officer may kindly be deleted. The appeal filed by the assessee be allowed. In case any further information is required the same may kindly be communicated the same shall be provided forthwith.” (B.2) The learned CIT(A) was not convinced by the explanation furnished by the appellant assessee. He upheld the aforesaid addition of Rs.84 lacs. (C) At the time of hearing before us, the learned Counsel for the assessee placed reliance on the submissions made by the appellant assessee before the learned CIT(A) during appellate proceedings in the office of the learned CIT(A), which has already been reproduced in foregoing paragraph (B.1.1) of this order. He also placed reliance on the submissions made before the Assessing Officer during assessment proceedings, which has been reproduced in paragraph No. (B.1) of this order. The learned D.R. placed reliance on the impugned order of the learned CIT(A) and on the assessment order. (D) We have heard both sides. We have perused the materials on record. The relevant facts, which are not in dispute, have been noted by the learned CIT(A) in paragraphs 5.3.1 to 5.3.3 of the impugned appellate order, which are reproduced as under: I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 24 I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 25 To summarise, the explanation furnished by the assessee has been disbelieved by the Assessing Officer and by the learned CIT(A) for two fold reasons; firstly, according to them the income in the hands of Arpit Agarwal, the Director of the assessee company, to account for the aforesaid payment of Rs.84 lacs was not reflected in the original return of income of Arpit Agarwal for financial year 2013-14 relevant to assessment year 2014-15 and secondly, it is the case of Revenue that the assessee could not provide any I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 26 documentary evidence to prove that the company had authorized its Director Aprit Agarwal to enter into transaction for purchase of land with the seller. However, these grounds do not make a case for the addition. Firstly, the Director Arpit Agarwal revised his return of income and in the revised return of income, the source for payment of Rs.84lacs was included. The Director has already paid tax on the income as per revised return. Secondly, the internal mechanism of the company is not for Revenue to decide. The Director of the company can enter into transaction for purchase of land even if there is no specific documentary evidence to show that the Director was authorized to purchase land from the seller. Thirdly, during the year under consideration i.e. financial year 2016-17 relevant to assessment year 2017-18, there has been no monetary transaction either by the Director Arpit Agarwal or the assessee company with the seller. In this year only journal entries have been passed for crediting the Director who made the payment for purchase of land and for debiting land account to enhance the value of land by corresponding amount. The actual transaction with the seller took place in financial year 2013-14. Revenue has failed to make a case as to why any adverse inference should be taken in assessment year 2017-18, if at all, instead of assessment year 2013-14. In view of the foregoing, the explanation furnished by the assessee is found to be acceptable and it is held that no case has been made by Revenue to make the aforesaid addition of Rs.84 lacs. Accordingly, the aforesaid addition of Rs.84 lacs is hereby deleted. (E) The second issue, regarding disallowance u/s 14A of the Act is covered in ground No. 6 & 8 of the appeal in the present appeal before us. Relevant part of the assessment order is reproduced as under: I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 27 I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 28 I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 29 (E.1) The assessee filed appeal in the office of learned CIT(A) and vide impugned appellate order dated 18/03/2024, the learned CIT(A) confirmed the aforesaid disallowance u/s 14A of the Act. The relevant portion of the order of the learned CIT(A) is reproduced below: I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 30 I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 31 I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 32 I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 33 I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 34 I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 35 (E.2) At the time of hearing before us, learned Counsel for the assessee submitted that the issue regarding disallowance u/s 14A of the Act was not pressed due to smallness of tax effect in this year. However, he submitted that the assessee’s case on merit for other assessment years should not be I.T.A. No.320/Lkw/2024 Assessment Year:2017-18 36 prejudiced because of the grounds relating to disallowance u/s 14A of the Act being not pressed. As the assessee has not pressed the ground No. 6 & 7 pertaining to disallowance u/s 14A of the Act, these grounds are dismissed. Hence, addition by way of disallowance u/s 14A is upheld. We however clarify by way of abundant caution that this order, as far as disallowance u/s 14A is concerned, is specific to this year. We are not passing any order on this issue in respect of any other year. (F) In the result, the appeal of the assessee is partly allowed. (Order pronounced in the open court on 10/07/2025) Sd/. Sd/. (ANADEE NATH MISSHRA) (SUBHASH MALGURIA) Accountant Member Judicial Member Dated:10/07/2025 *Singh Copy of the order forwarded to : 1. The Appellant 2. The Respondent. 3. Concerned CIT 4. D.R., I.T.A.T., Lucknow "