AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2015 (10) TMI 2019
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....sed by the Assessee and Revenue are adjudicated as under: 1. Ground No.1 of the assessee's appeal: The assessee has challenged the action of Ld. CIT(A) in upholding the action of the Assessing Officer ( hereinafter called as 'AO' ), in disallowing a sum of Rs. 14,51,00,000/- u/s 14A of the Income Tax Act 1961, out of interest expenditure, claimed as deduction by the assessee. 1.1. Brief facts, as culled out from the orders of the authorities below, are that the assessee company is a non banking finance company and merchant banker, carried out trading in shares and securities. During the course of assessment proceedings, the AO observed that the assessee company received huge amount of dividend and it was observed by him from the balance sheet of the assessee company that assessee had received dividend income on stock- in- trade amounting to Rs. 32.053 crores. It was further observed by him that entire dividend income was claimed as exempt in the return of income filed by the assessee company. He observed that the assessee company did not attribute any expense towards earning of such exempted income. In view of these circumstances, the AO, after examining accounts of the asses....
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.... Sr. No. Particulars F.Y.1999- 00 F.Y.2000- 01 F.Y.2001-02 A.Y.2000- 01 A.Y.2001- 02 A.Y.2002-03 Rs. In million Securities held as Stock in Trade 1 Taxable 15,068.65 11,140.73 18,214.70 2 Tax-free --- 144.23 186.60 644.72 Total 15,212.88 11,327.33 18,859.42 Securities held as investment 3 Taxable 184.61 469.06 481.42 4 Tax-free 45.02 45.02 45.01 5 Share Capital 2,030.03 2,030.03 2,030.03 6 Reserves & Surplus 525.04 701.51 1,161.85 Total Own Funds(5+6) 2,555.07 2,731.54 3,191.88 Total Tax-free investments (2+4) 189.25 231.62 689.73 Total Taxable investments (1+3) 15,253.26 11,609.79 18,696.1 7 Own Fu....
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....5.07 millions. Thus, apparently the amount of 'own funds' is in far excess of amount of 'tax free' investments of the assessee company. In other words, the assessee company has got sufficient amount of surplus funds. Further, our attention was also drawn to the balance sheet of the assessee company available at page no.1 to 10 of the paper book filed by the assesee company. We found that the figures shown in the aforesaid chart, submitted by the Ld. Counsel, duly tally with the figures shown in the balance sheet. Thus, claim of the assessee that amount of 'own funds' of the assessee company are in far excess of the amount of 'tax free' investment appear to be factually correct to us. Ld. DR also could not point out any mistake therein. 1.6. Having considered and examined these facts and under these circumstances, let us now analyse the latest position of law in this regard. Hon'ble jurisdictional High Court in the case of HDFC Bank Ltd., supra has held that where the assessee's own funds and other non-interest bearing funds were more than investment in tax free securities, then no disallowance was required to be made out of the interest expenses u/s 14A. Hon'ble High Court has r....
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....t securities, inter corporate deposits, and other deed instruments, income from which is taxable. After considering the submissions of the assessee, Ld. CIT(A) deleted the amount of Rs. 78,49,487/- being the amount of brokerage paid for the Government Securities, ICD & other debt instruments, but confirmed the disallowance out of the amount of brokerage paid for equity shares amounting to Rs. 78,600/- and the stamp duty of Rs. Rs. 3,46,250/-. The assessee has filed the appeal against the amount sustained by the Ld. CIT(A), whereas the revenue has accepted the order of Ld. CIT(A) on this issue. 2.3. Before us, Ld. Counsel has vehemently assailed the order of Ld. CIT(A) and contended that brokerage expenses are not incurred for earning dividend but for the purpose of acquiring investments. In support of his argument, he has relied upon following judgments: i.CIT vs. General Insurance Corporation (254 ITR 203) ii.CIT vs. Central Bank of India (130 Taxman 116) iii. CIT vs. Modem Terry Towers Ltd. (43s Taxmann.com 466)(2014) iv. CIT vs. United Collieries (203 ITR 857). He has placed copies of judgment and has read out the relevant portion of these judgments. On the other han....
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....um of Rs. 25.01 million being 5% of the indirect expenses aggregating to Rs. 500.33 million was required to be disallowed and accordingly the disallowance was made for the aforesaid proportionate amount. 3.1. The assessee contested the issue before the Ld. CIT(A). The Ld. CIT(A) discussed this issue at page 9 para 2.12 of the appellate order wherein the Ld. CIT(A) held as under: "2.12 As regards, the ad hoc disallowance of Rs. 2,50,10,0001-, I find that the-At) does not seems to have taken note of the suo moto disallowance of Rs. 18,23,39,510/-- made out of indirect expenses and has disallowed 5% of the total indirect expenses. This was the estimate of indirect expenses incurred for earning tax free income. This disallowance has resulted in double taxation to the extent of 5% of Rs. 18,23,39,5101-. There is substantial force in the Appellant's submission. Accordingly the AO is directed to delete the disallowance amounting 'to Rs. 91,16,975/- being 5% of Rs. 18,23,39,510/- out of aggregate disallowance of Rs. 2,50,10,000/- made by the AO. The Appellant gets part relief in regard to this component of disallowance also. In view of the foregoing, while the disallowance challenged....
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...., placed by the assessee, before him and any other, available with Ld. CIT(A), before passing of the appellate order. The Ld. CIT(A) shall take appropriate view keeping in view all the facts and circumstances of the case. Thus, Ground no.3 of assessee's appeal and Ground no.1 of revenue's appeal are allowed for statistical purposes. 4. Ground No.4 of the assessee's appeal deals with the action of Ld. CIT(A) in upholding the action of Ld. AO in disallowing bad debts written off amounting to Rs. 81,69,611/. The AO has dealt with this issue at page 14 to 18 of the assessment order. 4.1. The brief facts are that the assessee claimed write off of amount of Rs. 81,69,611/- being the amount of dues from various parties towards non-receipt of TDS certificates. The AO disallowed the said amount by observing as under: "From the above submissions, it is clear that the assessee has received the entire amount of interest from the respective parties. While paying the interest to the assessee company the respective parties have deducted tax under various sections of IT Act. As per the statute this amount which is withheld is nothing but payment of tax on behalf of the assessee company an....
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....ss/expenses. In support of this proposition, reliance was placed on the judgment of Hon'ble Punjab and Haryana High Court in the case of CIT vs. Shreyans Industries Ltd. 303 ITR 393. On the other hand, Ld. DR has relied upon the orders of authorities below. 4.4. We have heard both the parties and agree, in principle, with the arguments of Ld. Counsel. It is held that the assessee is eligible for the claim of deduction, both u/s 36(1)(vii) as well as u/s 37(1) of the Income Tax Act, 1961. The only constraint before us is that there is no clear finding, of either of the lower authorities, with regards to the facts that whether any credit for the TDS was claimed and granted to the assessee in the impugned year or in the subsequent years pertaining to those TDS certificates for which impugned amount of bad debts is being claimed. Therefore, we send this issue back to the file of the AO for the limited purpose of verification of the fact whether any claim has been granted to the assessee in this year or in any subsequent year with respect to these TDS certificates. If claim of assessee that no credit has been granted to the assessee, for want of these TDS certificates, is found to be....
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.... addition made by the AO, inter alia on the ground that situation of the assessee was not envisaged in the circular and therefore, it was not covered by this circular and therefore, on the basis of mercantile system of accounting, interest income was liable to be taxed in the year under consideration, and therefore the AO was justified in making addition, and same was rightly upheld by the Ld. CIT(A). 5.3. Before us, Ld. Counsel of the assessee made detailed submissions and reiterated the submissions made before the Ld. CIT(A). Our attention was also drawn on the aforesaid circular of the board dated 12.03.1996 available at page no.34 of the paper book. Relevant portion of the circular is reproduced herein below for ready reference: "It is clarified that the difference between the issue and the redemption price of Deep Discount Bonds will be treated as interest income assessable under the Income -tax Act. On transfer of Bonds before maturity, the difference between the sale consideration and issue price will be treated as Capital Gains/Loss if the assessee purchased them by way of investment. However, in the case of an assessee who deals in purchase and sale of Bonds, Securit....
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....um of Rs. 63,90,000/- was incurred by the assessee during the year as Y2K expenses and claimed this amount as deduction u/s 36(1)(xi). The AO was not satisfied with the claim of the assessee and disallowed the same by making the detailed discussion in para 5 of the assessment order. The main reason for disallowance given by the AO was that as per law, the assessee was obliged to furnish the Auditors Report in Form no.3BA, which was not enclosed by the assessee with the return of income filed by the assessee. However, after raising of query by the AO regarding claim of Y2K expenses, the assessee had filed the audit report in Form No.3BA dated 29.01.2003 before the AO during course of assessment proceedings, but the AO was not satisfied on the ground that the said audit report should have been filed along with return of income, and filing of the auditors' report during the course of assessment proceedings is not equivalent to making mandatory compliance of the statutory requirements of section 36(1)(xi). Accordingly the disallowance was made by the AO in the assessment order. 6.2. Before the Ld. CIT(A), the assessee contested this matter and submitted in detail that due compliance....
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....sions on the statute, then, there should be an endeavor to ensure that the assesse is able to rightfully claim the benefits of the beneficial provisions. In our considered view, since the claim has been found genuine and the audit report was filed by the assessee, during the course of assessment proceedings and the same was examined by AO in which nothing wrong, has been found, thus, the assessee would be entitled for the benefits of the claim and Ld. CIT(A) is justified in granting relief to the assessee in this regard. We uphold the order of Ld. CIT(A) on this ground and accordingly Ground no.4 of Revenue's appeal is dismissed. So far as, Ground raised by the assessee with respect to disallowance of Rs. 8,80,000/- is concerned, made by the AO on the ground of prior period expenses, we have seen bills of expenses with the assistance of Ld. Counsel. It is noted by us that paper book pages no.44 and 48 are the bills with respect to impugned expenditure. It is seen from the bills that, in the preceding year, impugned amount was paid by the assessee on account of advance for an ongoing project. The final amount was payable on implementation or on delivery of the product. The undisp....
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....efore the AO to show that M/s. Nucent Finance Ltd., was facing financial problems and was not in a position to repay the amount. Accordingly, it was decided to write off the amount of Rs. 5,69,69,0001- in the Books of Accounts. My attention was drawn to the provisions of Sec. 36(1)(vii) which clearly lay down that for the purpose of claiming deduction of bad debts, it is a sufficient compliance if the amount is actually written off in the books. It is not necessary for the Appellant to establish that the debts has become bad. Merely because part of the debt was recovered subsequently; does not mean that the debt has not become bad. It was pointed out that the amount subsequently recovered has been offered to tax. The ld. Representative for' the Appellant drew support from the decision of Hon'ble ITAT, Mumbai in the case reported at 86 ITD 193(tm), wherein, it was held that it is not obligatory for the Assessee to place demonstrative proof for establishing the debt as bad and if he has taken steps to write off in the previous year, it is a sufficient compliance for claiming, debt as bad debt. Support has also been drawn from the decision reported at 152 CTR 119 (Guj) and the decisio....
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....f these two sets of provisions, would show that earlier (i.e. before 01.04.1989), the requirement of the law was that the assessee was obliged under the law to establish that the impugned amount of debt had become 'bad' and only thereafter the assessee could have claimed the same as bad debts in its profit and loss account. Thus, establishment of the amount as 'bad' debt was a mandatory condition to claim a deduction under this Act. Such a requirement of law led to enormous litigation. With a view to avoid this litigation and hardships to the assessee, the provision in this regard was simplified and now in the post amended law, the only requirement is that the impugned amount is to be written off as bad debt in the books of account of the assessee company and to be debited accordingly in the profit and loss account of the assessee. Thus, in other words, in the amended law there is no requirement of proving the impugned amount of debt as 'bad'. Further, it has been also been provided under the law that subsequently if any recovery is made out of the amounts claimed as bad debt, then the same would be included in the income of the assessee in the year in which recovery is made. Thus,....
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....ve and accordingly we uphold the order of Ld. CIT(A) in deleting the penalty on both these issues. With respect to the remaining disallowance, with regard to bad debts of Rs. 81,61,611/-, it is noted that this amount represented dues from various parties towards non-receipt of TDS certificates. This issue has been sent back by us to the file of the AO for re-deciding the same. Therefore, as on date, this addition does not survive. Consequently, the penalty order on this addition is also set aside. The AO shall be at liberty to initiate the penalty proceedings, if considered appropriate, after this issue is re-decided by the AO, as per law. 8.5. As a result thereof, penalty appeal of the Revenue is partly allowed. Assessee's appeal in ITA No.4152/Mum/2005 & Revenue's appeal in ITA No.4103/Mum/2005 for, Assessment Year 2001-02:- These cross appeals were filed by the Revenue and assessee against the order of Ld. CIT(A) dated 29.03.2005 for the assessment year 2001-02. 9. Ground No.1 of assessee's appeal: The assessee has challenged the action of Ld. CIT(A) in confirming the disallowance made by the AO on account of interest amounting to Rs. 1,61,23,300/-. 9.1. This grou....
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....rms of our direction as contained in our order for A.Y. 2000-01. We direct accordingly. 11.2. In the result, Ground No.3 of assessee's appeal and Ground No.1 of Revenue's appeal are allowed for statistical purposes. 12. In Ground No.4 of assessee's appeal, the assessee has challenged the action of Ld. CIT(A) in upholding the action of the AO in bringing to tax the interest on deep discount bonds amounting to Rs. 1,20,91,990/-. 12.1. It is noted by us that similar issue has already been decided by us in assessee's appeal in A.Y. 2000-01, as Ground No.5, wherein this addition has been deleted. The Ld. CIT(A) has followed the order for A.Y. 2000-01 to uphold the addition made by the AO. Thus, we find that admittedly facts are identical in this year as well. Thus, following our own order, we hold that the addition made by AO is not sustainable in law and therefore, the same is directed to be deleted. Consequently, Ground No.4 of assessee's appeal is allowed. 13. In Ground No.5 of assesseee's appeal; The assessee has challenged the action of Ld. CIT(A) in invoking provisions of section 94(7) of the Act and making an addition of Rs. 1,33,55,778/-. 13.1. It is seen that no ....
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....he case of Walfort Share and Stock Brokers (P) Ltd, 326 ITR 1 (SC), and submitted that the issue now stands covered with the judgment of Hon'ble Supreme Court and section 94(7) was not applicable during the year under consideration and therefore, the loss has been wrongly disallowed and the action of Ld. CIT(A) should be reversed. On the other hand, Ld. DR supported the order of Ld. CIT(A) on this issue. However, on our specific query to Ld. DR with respect to the order of Hon'ble Supreme Court in the case of Walfort Share and Stock Brokers (P) Ltd. (supra), Ld. DR had nothing to submit. 13.3. We have carefully considered the submissions made by both the sides. We find that this issue stands covered with the judgment of Hon'ble Supreme Court in the case of Walfort Share and Stock Brokers (P) Ltd. (supra). The relevant portion of the judgment as relied upon by the Ld. Counsel is reproduced hereunder: "Impact of section 94(7) The next point which arose for determination was whether the 'loss' pertaining to exempt income was deductible against the chargeable income. The real objection of the department appeared to be that the assessee was getting tax-free dividend and at the ....
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....eived will not be ignored under section 94(7). If the argument of the department was to be accepted, it would mean that before 1-4-2002, the entire loss would be disallowed as not genuine but, after 1-4-2002, a part of it would be allowable under section 94(7) which cannot be the object of section 94(7) which is inserted to curb tax avoidance by certain types of transactions in securities. There is one more way of answering this point. Sections 14A and 94(7) were simultaneously inserted by the same Finance Act, 2001. Section 14A was inserted with effect from 1-4-1962 whereas section 94(7) was inserted with effect from 1-4-2002. The reason is obvious, the Parliament realized that several public sector undertakings and public sector enterprises had invested huge amounts over last couple of years in the impugned dividend stripping transactions so also declaration of dividends by mutual fund are being vetted and regulated by the SEBI for last couple of years. If section 94(7) would have been brought into effect from 1-4-1962, as in the case of section 14A, it would have resulted in reversal of large number of transactions. This could be one reason why the Parliament intended to give ef....
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....has been discussed by the AO at para 2 of the assessment order, whereas Ld. CIT(A) has discussed this issue in para 5 to 5.4. During the course of assessment proceedings, the AO observed that the assessee company has written off bad debts aggregating sum of Rs. 1,85,14,205/-. This amount represented dues from various parties towards non-receipt of its fees. The AO has disallowed the claim of the assessee for the reasons summarized in the assessment order at page 12, as reproduced hereunder: 1. The assessee could not furnish steps taken by it to recover its dues from these parties. 2. The names of various parties cited above have never appeared as defaulter anywhere. 3. Had assessee taken appropriate legal action against these parties, by no stretch of imagination, it can be said that these parties would not have paid their dues." In nutshell, the AO held that the assessee failed to establish justification of its write off of the debts. As per AO for making claim, it was necessary for the assessee to establish that the assessee has utilized all sources of means available to it to recover its dues and its debts cannot be simply allowed because it has been written off in t....
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....f the appellate order, wherein disallowance made by the AO has been partly confirmed, following the appeal orders of preceding assessment years in assessee's own case for assessment years 2000-01 & 2001-02. 15.3. Before us, the Ld. Counsel has relied upon his submissions made in A.Y. 2000-01 and 2001-02 and also drew our attention towards the facts and figures as contained in the working sheet submitted by him to impress upon the point that own funds were far in excess of investment made in these securities. In addition to the above, Ld. Counsel also drew our attention upon the judgment of Hon'ble Supreme Court in the case of SA Builders vs. CIT 288 ITR 1 (SC). On the other hand, the Ld. DR relied upon the orders of Ld. CIT(A) and the AO. 15.4 We have heard both the sides. It is seen by us that facts in the preceding years are identical. In addition to the above, it is further observed that Hon'ble Supreme Court in the case of SA Builders Ltd.,supra, had observed that even if expenditure may not have been incurred under any legal obligation, yet it is allowable as business expenditure if it was incurred on the grounds of commercial expediency. Thus keeping in view the aforesa....
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....ue has been sent back to the file of CIT(A), and following the same in this year also, this issue is sent back to the file of the CIT(A), in terms with the same directions as in A.Ys. 2000-01 & 2001-02. Thus, Ground no.4 of the assessee's appeal is allowed for statistical purposes. 17.3 In Ground No.5 of the assessee's appeal, the assessee has challenged the action of Ld. CIT(A) in confirming the disallowance made by the AO amounting to Rs. 6,88,820/- on account of bad debts made by the AO on the ground that the assessee has not established that debt has become 'bad'. This issue has already been decided in favour of the assessee in earlier years. Thus following the orders of earlier years, we decide this issue in favour of the assessee. Ground No 5 of assesse's appeal is allowed. 17.4. Ground No.6 of assessee's appeal: The assessee company is aggrieved against the action of Ld. CIT(A) in confirming the action of the AO in treating the loss of Rs. 20,77,919/- arising from the sale of shares of South Indian Bank as 'speculative loss', which was claimed by the assessee as 'business loss'. The assessee is also aggrieved against the action of the AO in not allowing the Long Term C....
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....squarely covers this issue. Our attention has been drawn on paras 2.1 to 2.3 of the said order and the same are reproduced hereunder: "2.1.We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee is a share broker and trader in shares/investor. During the year under consideration, the assessee received brokerage of Rs. 26,61,904/- and also loss on account of trading in shares amounting to Rs. 1,72,33,233/-, which was treated as deemed speculation. The assessee carried forward the loss on account of alleged speculative income and Rs. 30,54,731/-. Pursuant to a notice by the Assessing Officer, the assessee vide letter dated 05/10/2011 filed statement of short term capital loss and long term capital gains. The reply of the assessee is reproduced hereunder:- "In this context it is submitted that the assessee decided to carry on share investment activity. With that intention the assessee bout the shares and held them as investments in the books of accounts. The memorandum and article of association also authorize the company to make investment in the shares and securities of other companies. Your honour....
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....ness of the assessee as has been asserted by the Revenue. In such a situation, even if, it is held to be speculative transaction, the losses expected to be set off against profit. No positive income is available for taxation for the current year, therefore, the profit of Rs. 41,24,261/- (Capital gains) is adjustable against other losses during the year itself. As per section 73(2) of the Act where for any assessment year, any loss is computed in respect of speculation business, which has not been wholly set off under sub-section (1), so much of the loss is not to be set off are whole loss, where the assessee has no income from any other speculation business, shall, subject to the other provisions of this chapter, be carried forward to the following assessment years and (i) It shall be set off against the profit and gains, if any, of any speculation business carried on by him assessable for that assessment year and M/s Mother India Securities Pvt. Ltd. (ii) If the loss cannot be wholly set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on. Thus, we find no infirmity in the conclusion of the ld. Commissioner of Income ....
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.... expenses incurred on the software were of capital nature: PARTY PARTICULARS AMOUNT ICICI Infotech IRS Program 6,45,000 Goldmine software Purchase of Software- EQ Research 2,76,000 Aptech System Inc. Purchase of GAUSS Software 4,18,843 Fineng Solutions Ltd. Website Development 15,00,000 ICICI Infotech Oracle License 11,45,580 In response to the query of the Ld. AO, the assessee submitted as under: 1. Any software package is not long lasting and does not result in any benefit of enduring nature, in view of better and more efficient technologies being developed and introduced continuously; 2. In the fast changing business techniques, these expenses are incurred frequently for keeping up with constant modernization and hence they do not fall within the ambit of capital expenditure; 3. The computer software expenses are wholly and exclusively incurred for the purpose of business; 4. These expenses enable the management to carry on the business more efficiently and profitably; 5. The life cycle of such software is computer technology and obsolescence rate is also high; The AO was not satisfied ....