2016 (3) TMI 1177 - AT - Income Tax

Assessee's Appeals Partly Allowed, AO's Dismissed. Tribunal Upheld FAA's Decisions.

The appeals filed by the assessee were partly allowed, and the appeals filed by the AO were dismissed. The Tribunal upheld the FAA's decisions on various ... Allowability of bad debts written off vis-a -vis provision for bad and doubtful debts - effect of CBDT Instruction No.17/2008 - carry forward and set off of capital losses - prospective operation of amended section 74 - attribution of expenditure to exempt dividend income under section 14A - lumpsum disallowance - allowability of deduction under section 54EC where capital gain is chargeable under section 50 - depreciation on assets given on lease - consequential directions/remand to Assessing Officer - allowability of club entrance and subscription feesAllowability of bad debts written off vis-a -vis provision for bad and doubtful debts - effect of CBDT Instruction No.17/2008 - Reduction of bad debts claim by the Assessing Officer and allowance of bad debts written off in excess of opening provision. - HELD THAT: - The Tribunal accepted the assessee's contention and the FAA's finding that there was no opening balance in the provision for bad and doubtful debts as on the relevant opening date and that, in terms of CBDT Instruction No.17/2008, the amount of bad debts to be allowed should be the amount by which debts written off exceed the opening credit balance in the provision account. The Tribunal respectfully followed the decisions cited by the assessee (including the Gujarat High Court decision considered in UTI Bank and related authorities) and held that the AO's reduction of the bad debts claim by reference to the current year provision was incorrect. Accordingly the FAA's order allowing the bad debts (to the extent claimed) was confirmed.Ground allowing bad debts (reduction disallowed by AO) decided for the assessee; FAA order confirmed.Carry forward and set off of capital losses - prospective operation of amended section 74 - Whether the amended provisions of section 74 (w.e.f. 1.4.2003) apply to carry forward and set off of capital losses incurred in assessment years prior to AY 2003-04. - HELD THAT: - The Tribunal followed the Special Bench decision and authorities relied upon which held that the amendment to section 74 applies prospectively from AY 2003-04 and does not alter the rights to carry forward or set off capital losses that had already accrued under the law as it stood prior to the amendment. Applying the rule against retrospective operation of statutes that would impair existing rights, the Tribunal held that the assessee was entitled to set off brought forward long-term capital losses relating to years prior to AY 2003-04 against short-term capital gains in the years under consideration.Set off of brought forward capital loss against short-term capital gain allowed in favour of the assessee.Attribution of expenditure to exempt dividend income under section 14A - lumpsum disallowance - Disallowance of administrative expenses attributable to exempt dividend income under section 14A and the appropriate lumpsum percentage. - HELD THAT: - On consideration of precedent relied upon by the parties and earlier orders in the group of cases, the Tribunal found no reason to interfere with the FAA's approach of restricting the disallowance to a modest lumpsum percentage of dividend income. The Tribunal noted that tribunals and High Courts have upheld a lumpsum disallowance (1%/2% in earlier decisions) and accordingly upheld the FAA's restriction of the disallowance.Disallowance under section 14A restricted as per FAA (lumpsum percentage) and confirmed.Allowability of club entrance and subscription fees - Disallowance of club entrance and subscription fees. - HELD THAT: - Both sides acknowledged that identical issues were earlier decided in favour of the assessee in the group and that the Bombay High Court had affirmed the Tribunal's order. On that basis the Tribunal decided the identical ground against the Assessing Officer.Disallowance of club entrance and subscription fees rejected; decision in favour of the assessee.Allowability of deduction under section 54EC where capital gain is chargeable under section 50 - Denial of exemption under section 54EC on the ground that the capital gain was chargeable as short-term under section 50. - HELD THAT: - The Tribunal followed the jurisdictional High Court decision in Ace Builders which held that even where capital gain is charged under section 50, the character of the asset as long-term is not lost and the provisions for exemption under section 54EC remain applicable. Applying that ratio, the Tribunal held the assessee entitled to the deduction claimed under section 54EC despite the gain being chargeable under section 50.Exemption under section 54EC allowed in favour of the assessee.Depreciation on assets given on lease - consequential directions/remand to Assessing Officer - Treatment of depreciation on premises or assets given on lease where the issue is consequential or governed by directions in earlier years. - HELD THAT: - Where the ground was consequential or not pressed, the Tribunal either dismissed it as not pressed or directed that the Assessing Officer follow the directions given by the Tribunal in earlier years. The Tribunal directed remand/consideration by the AO in accordance with the Tribunal's earlier findings rather than deciding the matter afresh on merits in the present proceedings.Grounds on depreciation on leased premises/assets either dismissed as not pressed or remitted to AO to follow earlier Tribunal directions.Final Conclusion: The Tribunal, following binding CBDT instruction and earlier precedents (including a Special Bench and jurisdictional High Court decisions), allowed key claims of the assessee (bad debts, set-off of pre-2003 capital losses, section 54EC exemption, club fees) and upheld the FAA's restricted approach to section 14A disallowance; certain depreciation issues were dismissed as not pressed or remitted to the Assessing Officer to implement directions made in earlier years. Appeals by the Assessing Officer were dismissed; assessee's appeals were partly allowed. Issues Involved: Disallowance of bad debts, disallowance of proportionate depreciation on premises given on rent/lease, denial of set off of brought forward capital loss against short term capital gain, depreciation on lease assets, administrative expenses disallowed u/s. 14A, disallowance of club entrance and subscription fee, disallowance of exemption claimed u/s. 54EC.1. Disallowance of Bad Debts:The first ground of appeal concerns the disallowance of bad debts. The Assessing Officer (AO) reduced bad debts from the provision for bad debts and allowed no bad debts, stating that bad debts were allowable only to the extent they exceeded the provision for bad debts. The assessee argued that there was no opening balance or provision for bad and doubtful debts, and it was entitled to claim the full amount. The First Appellate Authority (FAA) allowed the entire claim of the assessee, considering the opening balance as nil. The Tribunal upheld the FAA's order, referencing the case of UTI Bank Ltd. and CBDT Instruction No.17/2008, which clarified that the opening balance should be considered for allowing bad debts.2. Disallowance of Proportionate Depreciation on Premises Given on Rent/Lease:The first ground of appeal for the assessment year 2004-05 was not pressed by the assessee and hence dismissed.3. Denial of Set Off of Brought Forward Capital Loss Against Short Term Capital Gain:The AO denied the set off of brought forward capital loss against short term capital gain, stating that the provisions of section 74 were prospective. The FAA upheld this decision. However, the Tribunal referred to the Special Bench decision in Kotak Mahindra Capital Co. Ltd., which held that the amended provisions of section 74 apply only to unabsorbed capital loss for the assessment year 2003-04 and onwards. The Tribunal decided the issue in favor of the assessee, allowing the set off of brought forward capital loss against short term capital gain.4. Depreciation on Lease Assets:The issue of depreciation on lease assets was directed to be restored back to the file of the AO to follow the directions of the Tribunal given in earlier years' orders.5. Administrative Expenses Disallowed u/s. 14A:The AO disallowed 10% of the dividend income as administrative expenses u/s. 14A. The FAA restricted the disallowance to 1% of the dividend income. The Tribunal upheld the FAA's order, referencing previous decisions where a lump sum disallowance of 1%/2% of the dividend income was upheld.6. Disallowance of Club Entrance and Subscription Fee:The AO disallowed the club entrance and subscription fee. The FAA allowed the claim, referencing the Tribunal's order for the assessment year 2003-04, which was confirmed by the Hon’ble Bombay High Court. The Tribunal decided the issue against the AO.7. Disallowance of Exemption Claimed u/s. 54EC:The AO held that the capital gain under consideration was taxable as short term capital gain as per section 50C. The FAA allowed the claim, referencing the case of Ace Builders (P) Ltd., where it was held that section 50 treats capital gain arising on transfer of capital asset as short term capital gain, but the capital assets do not lose their character of being long term capital assets. The Tribunal upheld the FAA's order, allowing the exemption u/s. 54EC.Conclusion:In conclusion, the appeals filed by the assessee were partly allowed, and the appeals filed by the AO were dismissed. The Tribunal upheld the FAA's decisions on various issues, referencing relevant case laws and CBDT instructions.