2015 (10) TMI 2779 - AT - Income Tax

Tribunal rules in favor of assessee on disallowance issues

M/s. Next Media Works Ltd. (Formerly known as Midday Multimedia Ltd.) Versus The DCIT-5 (2) Mumbai

M/s. Next Media Works Ltd. (Formerly known as Midday Multimedia Ltd.) Versus The DCIT-5 (2) Mumbai - TMI Issues Involved:1. Disallowance under Section 14A read with Rule 8D of the Income Tax Act.2. Disallowance under Section 40(a)(ia) of the Income Tax Act.3. Disallowance of bad debts.4. Taxing provision for doubtful debts and service tax payable written back.5. Disallowance of interest.Detailed Analysis:1. Disallowance under Section 14A read with Rule 8D of the Income Tax Act:The first ground of appeal concerns the disallowance under Section 14A read with Rule 8D, amounting to Rs. 1.02 crores. The Assessing Officer (AO) noted that the assessee's investment in shares and securities had increased, and it had received a dividend income of Rs. 1.06 lakhs. The AO held that expenses related to earning exempt income were not allowable and made a disallowance of Rs. 1,02,31,580/-. The First Appellate Authority (FAA) upheld this disallowance, stating that the assessee could not establish a clear nexus between the funds and the investments. The assessee argued that most investments were strategic and funded by non-interest-bearing funds. The Tribunal found that the AO and FAA did not consider the arguments regarding strategic investments and availability of funds. Citing the HDFC Bank Ltd. case, the Tribunal held that if investments were not made from borrowed funds, disallowance of interest expenditure was unjustified. Thus, the Tribunal decided this ground in favor of the assessee.2. Disallowance under Section 40(a)(ia) of the Income Tax Act:The second issue involves the disallowance of Rs. 2.70 lakhs under Section 40(a)(ia) for non-deduction of tax on directors' sitting fees. The AO and FAA held that sitting fees were professional fees requiring tax deduction under Section 194J. The assessee argued that the amendment to Section 194J was effective from 1.5.2012 and not applicable for the relevant year. The Tribunal referred to the Bharat Forge Ltd. case, which held that sitting fees did not fall under professional services as per Section 194J. The Tribunal ruled in favor of the assessee, stating no tax deduction was required for the assessment year in question.3. Disallowance of bad debts:The third issue pertains to the disallowance of bad debts amounting to Rs. 57.73 lakhs. The AO disallowed the claim, citing that the debts were deposits and advances, not receivables. The FAA confirmed this, subject to verification to avoid double taxation. The assessee argued that the bad debts were written off in accordance with Section 36(2) and should be allowed as business loss. The Tribunal found that the assessee had indeed written off the bad debts in its books and cited the Supreme Court's decision in the TRF Ltd. case, which held that writing off bad debts in the accounts was sufficient for deduction. The Tribunal reversed the FAA's order and decided this ground in favor of the assessee.4. Taxing provision for doubtful debts and service tax payable written back:The fourth issue involves taxing provisions for doubtful debts (Rs. 7.17 lakhs) and service tax payable (Rs. 5.91 lakhs) written back. The assessee argued that these amounts were not deductible under Section 36(1)(vii) and should not be taxed upon being written back. The Tribunal found that these sums had already been added back by the assessee, resulting in double taxation. The Tribunal reversed the FAA's order and decided this ground in favor of the assessee.5. Disallowance of interest:The final issue concerns the disallowance of interest amounting to Rs. 38.44 lakhs. The AO disallowed the interest, stating that the assessee had advanced interest-free loans while having borrowed funds. The FAA upheld this disallowance. The assessee argued that the advance was for purchasing shares and not an interest-free loan. The Tribunal found that the advance was indeed for buying shares and could not be termed as an interest-free loan. The Tribunal reversed the FAA's order and decided this ground in favor of the assessee.Conclusion:The appeal filed by the assessee was partly allowed, with the Tribunal ruling in favor of the assessee on several grounds, including disallowance under Section 14A, bad debts, provisions for doubtful debts, and interest disallowance.