TaxTMI 
TaxTMI 
2019 (6) TMI 1119
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....he appellant company to M/s Refractory Specialities (India) Ltd. against supply of refractory materials in ordinary course of its business which subsequently became irrecoverable on account of liquidation of the supplier company and hence constituted loss incidental to business and thus ought to be allowed as deduction while computing profits & gains from business. 2a) That the ld. CIT(A) erred in partly upholding the disallowance of Rs. 30,698/- made by the ld. A.O. u/s 14A r.w. Rule 8D(ii) & 8D(iii) of the Income Tax Rules, 1962 although no expenses were incurred or claimed by the assessee in respect of exempt-income bearing investments and accordingly, no disallowance was called for u/s 14A of the Act. 2b) That the ld. CIT(A) failed to appreciate that no part of the interest bearing loans was utilized in exempt-income bearing investments and as such, no disallowance was called for under Rule 8D(ii) of the Income Tax Rules, 1962. 2c) That without prejudice to the above, the ld. CIT(A) further erred in overlooking the fact that strategic investments in group companies and investments which did not yield any exempt income were erroneously included by the ....
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....e of businessof manufacturing and trading of refractory materials and being unable to recover the said sum was written off. Thus, the assessee has fulfilled the ingredients of Section 36(2)of the Act. Hence, the appellant is entitled toa deduction equivalent to the amount of write off debt.Therefore, ld Counsel prayed the Bench that the addition of Rs. 10,55,360/-, is liable to be deleted. 7. On the other hand, the ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity. 8. We have heard both the parties and perused the material available on record. We note that in the course of assessment proceedings, the Assessing Officer noted that for the year under consideration the Assesee had written off Rs. 10,55,360/- as irrecoverable in its Profit & Loss Account under the head exceptional items. The Assessee explained that the said amount represented advance of Rs. 10,00,000/- paid by the Assessee company to M/s. Refractory Specialities (India) Ltd. against supply of refractory materials in the normal course of its business of trading and man....
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....d materials as per the contract and undertook to repay the entire advance along with interest in the near future. (iv). That accordingly, the Assessee reflected the said impugned outstanding advances under Loans and Advances and charged interest receivable thereon amounting to Rs. 55,360/-. However, later on since the recovery of principal amount of the advance appeared doubtful, the Assessee stopped charging interest on the said advance. (v).That subsequently, the said Refractory Specialities (India) Ltd. on account of its continuously deteriorating financial position became sick and went into liquidation. (vi). That the Assessee lost all hopes of recovery and after waiting for a considerable period of time finally wrote off the entire amount of Rs. 10,55,360/- as irrecoverable in the F.Y. 2011-12. (vii).That since the said trade advance was made during the ordinary course of its business by the Assessee, any loss on account of its non-recoverability would be a loss incidental to business and hence allowable as deduction as a regular trading loss under section 28 of the Act. We note that the Hon'ble Supreme Court in the case of BadridasDa....
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....on must be allowed, provided of course there is no prohibition against it, express or implied, in the Act. 7. Theses being the governing principles, in deciding whether loss resulting from embezzlement by an employee in a business is admissible from embezzlement by an employee in a business is admissible a deduction under S. 10(1) what has to be considered is whether it arises out of the carrying on of the business and is in incidental to it. Viewing the question as a businessman would, it seems difficult to maintain that it does not. A business especially such as is calculated to yield taxable profits has to be carried on through agents, cashiers, clerk and peons. Salary and remuneration paid to them are admissible under s. 10(2)(xv) as expenses incurred for the purpose of the business. If employment of agents is incidental to the carrying on of business, it must logically follow that losses which are incidental to such employment are also incidental to the carrying on of the business. Human nature being what it is, it is impossible to rule out the possibility of an employee taking advantage of his position as such employee and misappropriating the funds of his employer a....
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....hat from the perusal of assessee's balance sheet, it was noticed by assessing officer that an investment of Rs. 13,33,012/- has been made by the assessee in the unquoted / quoted equity shares. The AO further noted that the said expenditure was incurred to earn dividend income, which is exempt from tax, but the assessee has not made any disallowances u/s 14A of the I.T. Act, 1961 in its computation. The assessee was asked to explain why proportionate disallowance u/s 14A of the I.T. Act should not be made. In response, the assessee has furnished the following explanation: "The assessee has admitted that disallowance u/s 14A read with Rule 8D is applicable in their case." The assessing officer perused the reply of the assessee and observed that the assessee has itself admitted of disallowances u/s 14A read with Rule 8D, therefore, the disallowancewere calculated as follows : i) Rule 8D(2)(i) is not applicable in the case of the assessee. ii) As per Rule 8D(2)(ii), interest allocation will be: a) Total interest / finance cost paid Rs. 55,38,776/- b) Average Investment Rs. 13,33,012/- c) Average of total assets Rs. 30,7208,586/-....
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....were Rs. 4,25,98,050/- and Rs. 14,11,98,435/- respectively whereas the aggregate investment in shares was merely Rs. 13,33,012/-. Thus, the Assessee company had sufficient interestfree funds to meet its investments. Therefore, it may be safely deduced that investments in shares were financed out of the interest free funds available with the Assessee. Accordingly, no disallowance is called for u/s 14A. of the Act. For that we rely on the judgment of the Hon`ble Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd., [20091 313 ITR 340, wherein it was held that "if there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee has raised a loan it can be presumed that the investments were from the interest-free funds available." Therefore, we delete the addition under Rule 8D(2) (ii) of the Rules. 15. So far disallowance under Rule 8D (2) (iii) is concerned, we note that AO has disallowed Rs. 6,665/-. We note that the AO has not taken into account the dividend bearing securities for the purpose of computing average investment. Therefore, to meet the end of justice we direct the AO to disallow Rs. 5....