2018 (4) TMI 879 - AT - Income Tax

Assessee Wins Appeals on Speculation Loss, Bad Debts, Disallowances

The Tribunal allowed the assessee's appeals for certain assessment years, partially allowing for some and fully allowing for others. The appeals of the ... Nature of loss - Treatment of the loss as a speculation loss u/s 73 - disallowance of claim of trading loss on purchase and sale of shares - Held that:- consequent upon scheme of arrangement and demerger, the assessee company shall be deemed to be investment company and shall be registered as non-banking financial company as per the judgment of the Hon’ble High Court which was approved prior to the FY, therefore, registration granted to the assessee as NBFC would relate back to the date of application i.e. 09.03.2004 as such the assessee would be NBFC in FY under appeal. Since Ld.CIT(A) accepted the genuineness of the transactions of sale and purchase of shares in question and his findings have not been challenged by the Revenue in the Departmental appeal, therefore, we are of the view that the assessee would be entitled for deduction of loss. Thus, Ld.CIT(A) was unjustified to direct the AO to allow loss as speculation loss u/s 73 of the Act. We accordingly, set aside the orders of the authorities below and delete the entire addition. - Decided in favour of assessee Disallowance of bad debts u/s 36(1)(vii) r.w.section 36(2) - Held that:- interest amount that it is allowable under above provision and issue is covered by the judgement of Hon’ble Supreme Court in the case of TRF Ltd. (2010 (2) TMI 211 - SUPREME COURT). Since the assessee was an investment company and it was a principal business of the assessee to grant loan and advance which was also granted earlier, therefore, if the principal amount and interests is not recoverable from debtor company for last several years, the assessee correctly write off same in its books of account as irrecoverable. The claim of the assessee is supported by the balance sheet of the debtor company to show that they have accumulated losses. The decisions relied upon by Ld. Counsel for the assessee support the claim of bad debt on principal amount as well as on interests. The AO thus should not have rejected the claim of the assessee. The claim of the assessee thus allowable as bad debts as well as business loss. Addition u/s 14A - Held that:- In the absence of any satisfaction recorded by the AO, no disallowance should have been made by the authorities below. The assessee claimed that no expenses have been incurred for earning dividend income and investments were existing since 1998 and further admittedly no interest element is involved to earn dividend income would show that no borrowed funds have been used for making investment. If AO was not satisfied with the explanation of the assessee, he should have brought some material on record to disbelieve the explanation of the assessee. He should record his satisfaction as to how the explanation of the assessee was unreasonable and unsatisfactory. In the absence of any evidence on record, disallowance made by the AO is not sustainable. We, accordingly, set aside the orders of the authorities below and delete the addition. MAT - computing book profit u/s 115JB by adding a sum being diminition in value of investment and the exempt income - Held that:- We are of the view that the order of Ld.CIT(A) cannot be sustained since we have deleted the addition of ₹ 36,35,873/- made u/s 14A of the Act. Further, it could not be taken for computing book profit u/s 115JB of the Act. Further this issue is covered in favour of the assessee by order of ITAT, Special Bench in the case of ACIT vs Vireet Investment Pvt. Ltd. (2017 (6) TMI 1124 - ITAT DELHI), we accordingly set aside the orders below and delete the addition. Expenditure on fees paid for management consultancy - allowable busniss expenditure u/s 37 - Held that:- We are of the view that no inference is called for in the matter. When the assessee engaged consultants for the purpose of business of the assessee, it is revenue expenditure because it was incurred wholly and exclusively for the purpose of business. This ground of appeal of Revenue has no merit, the same is, therefore, dismissed Addition on account of imputed interest on Non performing assets - Held that:- The assessee is a NBFC, the assessee has to follow RBI Guidelines with regard to accounting of NPAs and interests income relating thereto. The assessee followed RBI Guidelines. Ld.CIT(A) in AY 2007-08 decided the same issue in favour of the assessee. Since recovery of the principal amount is in dispute and no amount of loans outstanding against these parties have been recovered in past, therefore, the assessee correctly did not account for interests in the books of accounts. Ld.CIT(A), therefore, correctly deleted the addition on accrual of interests in respect of M/s Nalwa Metal & Alloys Ltd. and M/s Gagan Trading Co.Ltd. There is no infirmity pointed in the order of Ld.CIT(A) in following his order for AY 2007- 08. These grounds of appeal of the Revenue are dismissed. Issues Involved:1. Speculation Loss under Section 732. Bad Debt Deduction under Section 36(1)(vii)3. Disallowance under Section 14A4. Addition to Book Profit under Section 115JB5. Capital Expenditure Deduction under Section 35D6. Business Expenditure Deduction under Section 37(1)7. Interest on Non-Performing AssetsIssue-wise Detailed Analysis:1. Speculation Loss under Section 73The assessee challenged the treatment of trading loss on shares as speculation loss. The AO disallowed the loss due to discrepancies in the transaction evidence, but the CIT(A) allowed it as speculation loss under Section 73. The Tribunal found the transactions genuine and held that the NBFC registration related back to the application date due to a court-approved scheme, thus allowing the deduction of the loss as a non-speculative business loss.2. Bad Debt Deduction under Section 36(1)(vii)The assessee claimed bad debt deductions for principal and interest amounts written off. The CIT(A) allowed the interest portion but disallowed the principal, stating the assessee was not an NBFC during the relevant year. The Tribunal found the NBFC registration related back to the application date and allowed the deduction for both principal and interest, supported by the debtor's financial statements showing accumulated losses.3. Disallowance under Section 14AThe AO disallowed expenses related to earning exempt income under Section 14A. The Tribunal noted the AO did not record satisfaction regarding the assessee's claim of no expenses incurred. The Tribunal deleted the disallowance, citing the absence of evidence and satisfaction from the AO, and the fact that investments were made long before the relevant year.4. Addition to Book Profit under Section 115JBThe AO added expenses related to earning exempt income to book profit under Section 115JB. The Tribunal deleted the addition, following the ITAT Special Bench decision in ACIT vs Vireet Investment Pvt. Ltd., which held that computation under Section 115JB should be made without resorting to Section 14A and Rule 8D.5. Capital Expenditure Deduction under Section 35DThe assessee did not press this ground, and it was dismissed as not pressed.6. Business Expenditure Deduction under Section 37(1)The AO disallowed fees paid for management consultancy as capital expenditure. The CIT(A) allowed it as revenue expenditure under Section 37(1), stating it was incurred wholly and exclusively for business purposes. The Tribunal upheld this decision, finding no merit in the Revenue's appeal.7. Interest on Non-Performing AssetsThe AO added interest on loans classified as non-performing assets (NPAs). The CIT(A) deleted the addition for two parties but upheld it for one related party, noting the loan was recovered. The Tribunal remanded the issue for verification, noting potential confusion due to amalgamation and name changes. For the other parties, the Tribunal upheld the deletion, recognizing the assessee's compliance with RBI guidelines and the improbability of recovery.Final Result:The appeals of the assessee for AYs 2005-06, 2006-07, 2008-09, and 2009-10 were partly allowed, while the appeals for AYs 2010-11 and 2011-12 were fully allowed. All departmental appeals were dismissed.