TaxTMI 
TaxTMI 
2006 (1) TMI 614
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....in favour of the assessee. A copy of the order was also filed. A perusal of the assessment order for the year under appeal shows that the Assessing Officer disallowed the depreciation on the basis of the reasons given by him in the earlier years. The CIT(A) has brought on record the facts relating to the dispute. The assessee made additions to televisions, refrigerators, music systems etc., which were provided to its employees with an option given to them to purchase the same at the WDV after five years. This was in accordance with a scheme framed by the assessee in this regard. The reason for the disallowance of the depreciation as recorded by the CIT(A), is that these items have not been used for the purpose of the assessee's business. The CIT(A) following his predecessor's order for the assessment year 1997-98, deleted the disallowance. A perusal of the order of the Tribunal for the assessment year 1997-98 shows that it has followed the earlier order of the Tribunal in the assessee's own case for the assessment years 1993-94 & 1994-95. The issue is thus squarely covered by the orders of the Tribunal in the assessee's own case for the assessment years 1993-94, 1994-95 & 1997-98. ....
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....order, the Assessing Officer added back Rs. 2,21,32,285 being provision for bad and doubtful debts to the income shown in the return, while computing the book profit under section 115JA. The assessee took up the plea before the CIT(A) that book profit for the purpose of the section means the profit ascertained as per the P&L A/c. prepared by the assessee in accordance with Parts II & III of Schedule VI to the Companies Act, subject only to the adjustments specified in the Explanation below the section. It was pointed out that the clause (c) of the Explanation provides for adding back the provision, made for meeting liabilities other than ascertained liabilities and that a provision made for bad and doubtful debts is not a provision made for meeting any unascertained liability and, therefore, the said clause cannot be invoked to add back the provision for bad and doubtful debts. It was further pleaded that the provision in the present case has been made not ad hoc but in respect of specific and identified debts which had become bad or doubtful of recovery. It was, therefore, submitted that at any rate the provision cannot be considered as provision for un-ascertained liabilities so ....
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....ch the amount cannot be determined as substantial accuracy. The provision made by the assessee by taking into account specified and identified debts which were doubtful of recovery satisfies the above definition of a provision. It is not expected of the company to determine accurately the amount in respect of which it is allowable and it is sufficient that the liability is ascertained. Accordingly, the CIT(A) seems right in saying that the provision for doubtful debts is really in the nature of a provision for meeting an ascertained or known liability. 7. Before us, the Ld. Counsel for the assessee raised a plea that this is not a provision for meeting a liability at all. No doubt, this plea was not taken before the CIT(A), but having regard to the nature of the plea, which is purely a legal plea requiring no investigation into facts, we permit him to raise the same. A provision for bad and doubtful debts is made with the view to guarding against the non-recovery of certain debts which are considered by the company as bad or doubtful. It implies that monies receivable by the company may not be realised. Explanation (c) refers to amount set aside to provisions made "for meeting lia....
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....urred to earn the exempted income and that no disallowance can be made on estimate. 9. The CIT(A) agreed with the assessee's contention that no disallowance can be made under section 14A on estimate basis and that only those expenses which have been actually incurred to earn the exempted income can be disallowed. Notional or proportionate expenses cannot be disallowed in the absence of material on record to support the same. He accordingly deleted the disallowance of Rs. 5 lakhs. 10. Section 14(A) of the Income-tax Act is as under : "Expenditure incurred in relation to income not includible in total income. 14A. For the purposes of computing the total income under the Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act : Provided that nothing contained in this session shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before 1-4-2001." The section ....
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....ed for the purchase of the Mysore Government securities. Before the Supreme Court, it was pointed out on behalf of the assessee that since profits or losses on the disallowance in the Mysore Government securities were assessed under the head "Business", no part of the interest could be disallowed as interest attributable to borrowings made for producing exempted income. The Supreme Court accepted this contention, but also proceeded also to examine the validity of the action of the Assessing Officer as to whether a part of the expenditure attributable to the exempted income can at all be disallowed. It was held by the Supreme Court as under: "We are concerned with the interpretation of section 10. Let us then look at the language employed. Sub-section (1) directs that an assessee be taxed in respect of the profits and gains of business earned on by him. What is the business of the assessee must first be looked at. Does he carry on one business or two businesses or along with the business carried on by him some activity which is not a business ? If he is carrying on an activity which is not business, we must leave out of account the receipts of that activity. That is the first step....
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.... Court held as under : "What was urged on behalf of the department is that the assessee's business consisted of two parts, namely, (1) cultivation of sugarcane and (2) the manufacture of sugar. The former part being agricultural operation, the income therefrom is not exigible to tax and therefore any expenditure incurred in respect of that activity is not deductible. This contention proceeds on the basis that only expenditure incurred in respect of a business activity giving rise to income, profit or gains taxable under the Act can be given deduction to and not otherwise. We see no basis for this contention. To find out whether a deduction claimed is permissible under the Act or not, all that we have to do is to examine the relevant provisions of the Act. Equitable considerations are wholly out of place in construing the provisions of a taxing statute. We have to take the provisions of the statute as they stand. If the allowance claimed is permissible under the Act then the same has to be deducted from the gross profit. If it is not permissible under the Act, it has to be rejected. As mentioned earlier, it is not disputed that the cultivation of sugarcane and the manufacture of s....
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....s, etc., and income from one or more items alone is taxable whereas income from the other item is exempt under the Act, the entire permissible expenditure in earning the income from that head is deductible; and (iii)in computing "profits and gains of business or profession" when an assessee is carrying on business in various ventures and some among them yield taxable income and the others do not, the question of allowability of the expenditure under section 37 of the Act will depend on : (a)fulfillment of requirements of that provision noted above; and (b)on the fact whether all the ventures carried on by him constituted one indivisible business or not; if they do, the entire expenditure will be a permissible deduction, but if they do not, the principle of apportionment of the expenditure will apply because there will be no nexus between the expenditure attributable to the venture not forming an integral part of the business and the expenditure sought to be deducted as the business expenditure of the assessee". Since the finding was that the exempted income and taxable income were earned form one individual business, the court held that the apportionment of....
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....n of the Assessing Officer, incurred in relation to the exempted income. The words "in relation to" income which is exempt under the Act, no doubt, appear to be broad at first impression, but on deeper examination, and read in conjunction with the word "incurred", it seems to us that these are restrictive words, restricting the power of the Assessing Officer to estimate a part of the expenditure incurred by the assessee as relatable to the exempted income. It seems to us that implicit in the expression "in relation to" is the concept that the Assessing Officer should be in a position to pin point, with an acceptable degree of accuracy, the expenditure which was incurred by the assessee to produce non-taxable income. The word "incurred" signifies that the expenditure must have been actually incurred, not notionally. 15. Reading both the abovementioned expressions together, the conclusion seems inescapable that the expenditure which the Assessing Officer seeks to disallow under section 14A should be actually incurred and so incurred with a view to producing non-taxable income. If this much is clear from the section, it follows that it is the duty of the Assessing Officer to pin poin....
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....d by the judgment of the Supreme Court in the case CIT v. South Indian Co. Ltd. [1963] 59 ITR 763 as also the decision of the Bombay High Court in CIT v. Industrial Investment Trust Co. Ltd. [1968] 67 ITR 436 . Before the Bombay High Court, an argument was advanced on behalf of the department that the question in respect of which the High Court had issued the rule can be said to deal with one of the aspects of the legal contention urged before the Tribunal and in this connection reliance was made on the amendment placed to section 80M by section 10 of the Finance Act, 1968. The High Court examined the contention with reference to the statement of Objects & Reasons and the Notes on Clauses of the Finance Bill and found that the reason for omitting certain words from the section was different from what wag sought to be urged on behalf of the department. Therefore, ultimately, the Bombay High Court discharged the rule with costs. 17. The CIT took up the matter in appeal before the Supreme Court and it is the judgment of the Supreme Court which is reported in United General Trust Ltd. (supra). Before the Supreme Court, both Counsel for the revenue and the assessee agreed that the ques....
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....ss amount of the dividend, so that the deduction could be worked out only on the net dividend, as it was on the pure question of law as to whether the deduction was available to an assessee on the gross amount of the dividend or the net amount of dividend. It was this pure question of law that was decided by the Supreme Court and not the question whether a particular type of expenditure could or could not be deducted from the gross dividend or whether the Assessing Officer did or did not have the power, in the absence of any material on record, to estimate a part of the expenditure incurred by the assessee as having been incurred for the purpose of earning the dividend income and proceed to deduct the same from the gross amount of the dividend in order to calculate the deduction available to the assessee. In our humble understanding of the judgment of the Supreme Court, read along with the judgment of the Bombay High Court from which the appeal arose, these controversies were not before the Supreme Court. 19. Section 80AA introduced by the Finance (No. 2) Act, 1980 with retrospective effect from 1-4-1968 as well as section 80AB which was inserted by the same Finance Act, but with ....
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....oversy which involved an important principle of law. Once the controversy was settled both judicially as well as statutorily, there is no scope for re-agitating the matter. 20. Section 14A does not seek to touch upon the above controversy at all. In fact, it cannot, because the controversy has been settled in favour of the revenue both judicially as well as statutorily as noted above. Now, section 14A, as explained by the memorandum explaining the provisions of the Finance Bill, 2001, which we have already quoted above, seeks to nullify the effect of certain judgments in which it has been held that in the case of an indivisible business, no part of the expenditure incurred by the assessee can be disallowed as relating to the exempted income. Obviously, the decisions of the Finance Bill sought to nullify are those in the cases of Indian Bank (supra), Maharashtra Sugars (supra) and Rajasthan State Warehousing Corporation Ltd. (supra). Both the memorandum explaining the Finance Bill and the section as enacted say that only where the expenditure has been actually incurred by the assessee in relation to the exempt income, can the Assessing Officer refuse to allow deduction in respect o....
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....notional expenditure can be taken into consideration for the purpose of deduction while calculating the income from dividend or only expenditure actually incurred by an assessee can be taken into consideration while calculating the deduction claimed under section 80M. In our considered opinion, there lies a distinction between what we call notinal expenditure and actual expenditure. If it is proved to be a case of actual expenditure incurred by an assessee while earning/depositing the dividend then certainly the amount actually incurred by way of expenditure has got to be deducted in accordance with the procedure prescribed under the Act. But when there is nothing on record to show that any expenditure is incurred by an assessee while earning/deposting the dividend then it is difficult for us to hold that some hypothetical and/or notional expenditure can be made basis for deduction. In other words, we have not been able to notice any provision which may entitle the taxing authorities to work out by way of expenditure any notional figure for the purpose of section 80M though, in fact it has not been so incurred by an assessee while encashing the dividend." Having held as above, the....
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....tributed to the earning of the dividend income since the shares were acquired from the own funds in the earlier years and not from borrowed funds, is factually incorrect. In these circumstances, we have to agree with the assessee that there is no material on the basis of which the Assessing Officer would estimate and disallow a sum of Rs. 5 lakhs by invoking section 14A. We, therefore, agree with the decision of the CIT(A), affirm the same and dismiss the Ground No. 3. 22. In the course of the arguments, reference was made to the order of the Delhi Bench of the Tribunal in the case of Maruti Udyog Ltd. v. Dy. CIT [2005] 92 ITD 119 in winch a question of disallowance under section 14A arose and was considered. A perusal of the order of the Tribunal shows that the purely legal aspect of the matter has been discussed in paras 59-61 of the order. The question before the Tribunal was whether any part of the interest paid by the assessee on borrowed funds can be disallowed under section 14A on the ground that the assessee had received dividend income exempt under section 10(33). It appears to have been contended before the Tribunal that section 14A does not override the provisions of se....