2022 (4) TMI 1272 - AT - Income Tax

Tribunal decision: partial appeal success, deductions allowed, disallowances remanded for verification.

Ratna Commercial Enterprises P. Ltd. Versus DCIT, Circle-20 (1), New Delhi.

The Tribunal partly allowed the appeal, remanding the issues to the AO for further verification and re-adjudication. The disallowance of deduction for ... Disallowing the deduction of irrecoverable advances which turned bad and written off in the books of accounts - assessee is an NBFC and is in the business of financing, investment and in real-estate development - HELD THAT:- We find, while the assessee is stating that the advances made by the assessee to Bhayana Interiors & Furniture Pvt. Ltd. and Wig Brothers Projects Pvt. Ltd. were in relation to the development of Goa property which is in trading account forming part of its business, the ld.CIT(A) has given a finding that these advances given to the above two parties were capital in nature as they were given for the construction of business assets in Goa. Thus, there is a contradiction between the statement made by the assessee that it is on account of trading account forming part of its business whereas the CIT(A) has given a finding that it is capital in nature being given for construction of business assets in Goa. Under these circumstances, we deem it proper to restore the issue to the file of the AO with a direction to verify the past records and decide the issue as per fact and law including the claim of the assessee to allow the same as business loss after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The ground of appeal No.1 raised by the assessee is accordingly allowed for statistical purposes. Disallowing long term capital loss which arose from permanent write off share capital - AO was not satisfied with the arguments advanced by the assessee on the ground that written off amounts of investments so made in the books of account are not a transfer in the eye of law u/s 2(47) of the IT Act and it is a notional loss as the shares remained with the assessee - HELD THAT:- It is the submission of the ld. Counsel for the assessee that since the value of investment in the shares had extinguished, therefore, it amounts to transfer and, accordingly, the capital loss so incurred by the assessee deserves to be allowed along with its indexation. It is also his argument that in the alternative, it should be allowed as business loss. Further, it is also the contention of the ld. Counsel that in the FY 2020-21, relevant to AY 2021- 22, the assessee had recovered a part of the amount invested in Sanskar Homes Pvt. Ltd. by way of transfer of shares for a consideration of ₹ 2,30,00,000/- against the amount invested of ₹ 1,00,00,000/- and such recovered amount has been credited in the miscellaneous income of the assessee and has been offered for taxation purpose. In our opinion, the issue needs re-adjudication at the level of the AO in view of the fact that has emerged subsequent to the assessment and appeal proceedings that assessee had offered such sale proceeds to taxation in the year of sale. We, therefore, deem it proper to restore the issue to the file of the AO with a direction to adjudicate the issue afresh and in accordance with the law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. Ground No.2 raised by the assessee is accordingly allowed for statistical purposes. Disallowance u/s 14A r.w.r. 8D - Mandation of recording satisfaction - HELD THAT:- Since the AO, in the instant case has also not recorded any satisfaction before making the disallowance, therefore, respectfully following the order of the Tribunal in assessee’s own case for AY 2014-15, we set aside the order of CIT(A) and direct the AO to delete the addition. The ground raised by the assessee is accordingly allowed. Issues Involved:1. Disallowance of deduction for irrecoverable advances written off.2. Disallowance of long-term capital loss from permanent write-off of share capital.3. Disallowance under Section 14A for expenditure related to earning tax-free income.Detailed Analysis:1. Disallowance of Deduction for Irrecoverable Advances Written Off:The assessee, an NBFC engaged in financing, investment, and real-estate development, filed its return of income declaring a total income of Rs. 10,64,38,586 under normal provisions and a long-term loss of Rs. 8,49,05,424 for carry forward. The assessee claimed a deduction of Rs. 1,63,62,782 for irrecoverable advances written off. The AO disallowed this deduction, citing a previous disallowance in AY 2010-11, and added the amount back to the total income. The CIT(A) partially upheld this disallowance, allowing only Rs. 37.84 lakhs out of Rs. 1.63 crores, as the advances to four individuals were considered business losses under Section 37(1), while the advances to Bhayana Interiors & Furniture Pvt. Ltd. and Wig Brothers Projects Pvt. Ltd. were deemed capital in nature and thus not allowable under Section 37(1).The Tribunal found a contradiction between the assessee's claim that the advances were for trading purposes and the CIT(A)'s finding that they were capital in nature. Consequently, the issue was remanded to the AO for verification and re-adjudication, including the assessee's claim for business loss.2. Disallowance of Long-Term Capital Loss from Permanent Write-Off of Share Capital:The AO disallowed the assessee's claim of Rs. 8,49,05,423 as long-term capital loss on written-off investments, arguing that such write-offs do not constitute a transfer under Section 2(47) of the IT Act. The CIT(A) upheld this disallowance, stating that no capital loss can be claimed without an actual transfer of assets and that indexation benefits are not allowable in such cases.The Tribunal noted the assessee's argument that the investment's worth had extinguished, constituting a transfer, and thus the loss should be allowed. Alternatively, the assessee argued for the loss to be treated as a business loss under Section 28. Given new facts that emerged, such as the recovery of some investment in a subsequent year, the Tribunal remanded the issue to the AO for re-adjudication.3. Disallowance under Section 14A for Expenditure Related to Earning Tax-Free Income:The AO disallowed Rs. 58,75,714 under Section 14A r.w. Rule 8D, asserting that the majority of the expenses were related to earning tax-free dividend income. The CIT(A) upheld this disallowance, reasoning that the assessee's major income was tax-free and that the expenses were incurred to earn this income.The Tribunal found that the AO had not recorded any satisfaction regarding the correctness of the assessee's computation of disallowance. Citing the decision in the assessee's own case for AY 2014-15, the Tribunal set aside the CIT(A)'s order and directed the AO to delete the addition, emphasizing the necessity of recording satisfaction before making such disallowances.Conclusion:The appeal was partly allowed for statistical purposes, with issues remanded to the AO for further verification and re-adjudication. The Tribunal emphasized the need for proper verification and satisfaction recording by the AO in disallowance cases.