TaxTMI 
TaxTMI 
2018 (9) TMI 1850
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....has erred in law and on facts by not appreciating that the assessee is not a financial institution or Bank registered with the RBI. 4. The ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 76,85,836/- made on account of disallowance u/s 14A of the Act. 5. The ld. CIT(A) has erred in law and on facts by not appreciating that the assessee could not establish that the investment in assets yielding exempt income was clearly made out of interest free funds. 6. On the facts and circumstances of the case, the Ld. Commissioner of Income Tax (A) ought to have upheld the order of the Assessing Officer." 3. The first issue raised by the Revenue in Ground Nos. 1, 2 & 3 is that ld. CIT(A) erred in deleting the addition made by the Assessing Officer for Rs. 85,65,658/- on account of bad debts. 4. Briefly stated facts are that the assessee is a Private Limited Company and engaged in the business of financing and trading activity of shares and securities as well as agriculture produce. The assessee in the year under consideration has claimed bad debts amounting to Rs. 1,41,03,036/- only. The assessee during the assessment proceedings submitted that it has given ....
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....would be allowable as bad debt. Further the A.O has stated that the appellant is not a financial institution or a bank registered with the RBI. In its reply the appellant has claimed that the said bad debt has been claimed u/s.36(1)(vii) r.w.s. 36(2). Section 36(2) of the Act allows the deduction for a bad debt incurred by the assessee on account of money lent in the ordinary course of business of banking or money lending which is carried on by the assessee. Perusal of the balance sheet and the P & L A/c. clearly reflects that the appellant is involved in the business of lending money. Out of the funds amounting to Rs. 84.07 crores available, Rs. 67.89 crores has been given in the form of loans and advances. Similar was the ratio for the previous financial year. Hence, loan given to M/s. Roopa Plastic Technology Pvt. Ltd. was given as loan in the normal course of business. Secondly, the debt had been outstanding for the long time in the books of the appellant. The A.O is not doubting the bad debt itself. A similar issue was adjudicated upon by the then CIT(A) in the case of Nirma Ltd. vide order No.CIT(A)-XI/445/ACIT.Cir-5/2013-14 dated 20/5/2015 for A.Y.2010-11 At para-9.3 of the ....
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....view that the amount of Rs. 85,65,658/- is representing the principal amount of loan which cannot be allowed as deduction as per the provisions of Section 36(1)(vii) r.w.s. 36(2) of the Act. However, the learned CIT(A) reversed the view of the Assessing Officer by observing that the debtors was written off by the assessee for Rs. 85,65,658/- in the course of its business activities. 8.1 From the preceding discussion, we note that the activity of the assessee being financing has not been doubted by the Assessing Officer. Thus, it is a fact on record that the loan was given by the assessee to M/s. Roopa Plactics Technology Pvt Ltd. in the course of business of the assessee. The provisions of Section 36(2)(i) of the Act allows deduction for the debtors if it represents the money lent in the ordinary course of business. The relevant provision of Section 36(2)(i) reads as under:- 1(2) In making any deduction for a bad debt or part thereof, the following provisions shall apply- 12[(i) no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part ....
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.... incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure." [Emphasis supplied] "Section 145 : Method of Accounting.-(1) Income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources' shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144." 13. As stated above, one of the main arguments advanced by the learned Additional Solicitor General on behalf of the Department before us was that th....
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....which is a "loss" even though the said amount has not gone out from the pocket of the assessee. This view of the Madhya Pradesh High Court has been approved by this Court in the case of Madras Industrial Investment Corpn. Ltd. v. CIT [1977] 225 ITR 802 . According to the Law and Practice of Incometax by Kanga and Palkhivala, section 37(1) is a residuary section extending the allowance to items of business expenditure not covered by sections 30 to 36. This section, according to the learned Author, covers cases of business expenditure only, and not of business losses which are, however, deductible on ordinary principles of commercial accounting. (see page 617 of the eighth edition). It is this principle which attracts the provisions of section 145. That section recognizes the rights of a trader to adopt either the cash system or the mercantile system of accounting. The quantum of allowances permitted to be deducted under diverse heads under sections 30 to 43C from the income, profits and gains of a business would differ according to the system adopted. This is made clear by defining the word "paid" in section 43(2), which is used in several sections 30 to 43C, as meaning actually pai....
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.... above system of commercial accounting can be superseded or modified by legislative enactment. This is where section 145(2) comes into play. Under that section, the Central Government is empowered to notify from time to time the Accounting Standards to be followed by any class of assessees or in respect of any class of income. Accordingly, under section 209 of the Companies Act, mercantile system of accounting is made mandatory for companies. In other words, accounting standard which is continuously adopted by an assessee can be superseded or modified by Legislative intervention. However, but for such intervention or in cases falling under section 145(3), the method of accounting undertaken by the assessee continuously is supreme. In the present batch of cases, there is no finding given by the Assessing Officer on the correctness or completeness of the accounts of the assessee. Equally, there is no finding given by the Assessing Officer stating that the assessee has not complied with the accounting standards. 15. For the reasons given hereinabove, we hold that, in the present case, the "loss" suffered by the assessee on account of the exchange difference as on the date of the ba....
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....he submissions of the assessee on the ground that the assessee is using mixed funds (own funds + interest bearing funds) in the investments; therefore, the assessee must have used some interest bearing funds in such investments. Similarly, the Assessing Officer also opined that the assessee must have incurred some administrative expenses in relation to such income. Accordingly, the Assessing Officer, in the absence of any explanation from the side of the assessee evidencing that no borrowed funds have been used in such investment and no administrative expenditure has incurred in relation to such income, the Assessing Officer invoked the provisions of Section 14A read with Rule 8D and made the following disallowances:- Sr. No. Particulars Amount (Rs.) 1 Direct expenses under Rule 8D(2)(i) Nil 2 Interest expenditure under Rule 8(2)(ii) 70,49,073 3 Administrative expenses under Rule 8D(2)(iii) 6,36,463 Total 76,85,536 10.1 In view of the above, the Assessing Officer made disallowance of Rs. 76,85,536/- and added to the total income of the assessee. 11. Aggrieved, the assessee preferred an appeal before the ld. CIT(A). The assessee before the ld. CIT(A) submitt....
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....n the case of UTI Bank Ltd. 32 Taxman.com 370 (Guj.) and CIT vs Suzlon Energy Ltd. 354 ITR 630 (Guj). In both the cases it has been held that where the assessee has sufficient interest free funds to meet its tax free investment yielding exempt income then it can be presumed that the 'investments were made from interest free funds and not loaned funds as well as there exist no direct nexus between interest bearing borrowed funds and such investments. Therefore, no disallowance u/s.14A is warranted. The appellant has also relied upon various other case laws as mentioned in the submission of the appellant. I agree with the principles laid down in the case law of UTI Bank Ltd, and Suzlon Energy Ltd (supra) and various other judgments of jurisdiction a I High Court. Considering the availability of non-interest bearing funds in the hands of the appellant for making investments earning exempt income, I am of the considered opinion that no disallowance under sub-section 14A is warranted in this case. Accordingly, the A.O is directed to delete the disallowance of Rs,76,85,836/- made u/s.14Aof the Act. Thus, this ground of appeal is allowed." 12. Being aggrieved by the order of the ld.....
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....he same were acquired out of sale proceeds arising on sale of equity shares of Nirma Ltd. Hence, the assessee did not incur any interest expense for acquisition of these shares. h) The assessee company was allotted equity shares of Saurashtra Chemicals Ltd. in lieu of Preference shares of Saurashtra Chemicals Ltd. This was on exchange of Preference shares which has not resulted into any financial expenditure. And the learned Authorized Representative vehemently supported the order of the ld. CIT(A). 14. We have heard the rival contentions and perused the material available on record. The facts of the case are not in dispute; therefore, we are not inclined to repeat the same for the sake of brevity, convenience and adjudication. There is no doubt that the own funds of the assessee exceeds the amount of investments as evident from the audited financial statement of the assessee which is placed on page Nos. 1 to 20 of the paper-book. The relevant extract is reproduced below:- Balance sheet as at 31st March, 2011 AS AT AS AT Particulars Schedule 31.03.2011 31.03.2010 Sources of funds Shareholder's funds Share capital 1 20,000,000 2,000,000 Reserves....
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.... on record any facts to the contrary. Hon'ble Bombay High Court in case of CIT v. Reliance Utilities & Power Ltd. (supra) has held that if there are 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 interest free funds available. In the present case, since the assessee has suo moto disallowed Rs. 5.53 crore u/s. 14A, respectfully following the decision of Bombay High Court, we are of the view that in the facts of the present case, no further disallowance over and above than what has been disallowed by the Assessee is called for. As far as disallowance of other administrative expenses is concerned, the undisputed fact is that the disallowance has been made by the AO without giving a finding as to how much administrative expenditure has been incurred to earn the exempt income. In the case of Hero Cycles (supra) the Hon'ble High Court has held that the contention of the Revenue that directly or indirectly some expenditure is always incurred which must be disallowed u/s. 14A cannot be accepted. Disallowance u/s. 14A requires finding of incurring of....
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....T(A)'s above extracted findings also nowhere specifically deal with the instant administrative expenditure issue. There can hardly be any dispute that such an administrative expenditure has to be disallowed post assessment year 2008-09. We therefore accept learned Departmental Representative's corresponding submission regarding this administrative expenditure issue aspect. The impugned disallowance is therefore revived to the extent of Rs. 7,21,908/- only. The Revenue's former substantive ground is therefore partly accepted in above terms." 14.3 On specific query from the Bench to the learned Counsel for the assessee for making the disallowance under Rule 8D(2)(iii) of the Income-tax Rules, the learned Authorized Representative for Assessee failed to bring anything contrary to the findings of the Hon'ble ITAT as discussed above. Therefore, we sustain the disallowance made by the Assessing Officer under Rule 8D(2)(iii) for Rs. 6,36,463/- only. This ground of appeal of the Revenue is allowed. 15. Other grounds raised by the Revenue are general in nature and do not need any specific adjudication. 16. In the result, appeal of the Revenue bearing ITA No.790/Ahd/2....
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....8/- on account of disallowance u/s 14A of the Act while working out MAT liability u/s 115JB of the Act. Since the addition on account of disallowance u/s 14A r.w.r. 8D is directed to be deleted in the decision for the previous ground, no addition is sustainable on account of reworking of MAT based on disallowance u/s 14A. Accordingly, addition of Rs. 1,83,74,928/- is directed to be deleted. This ground is thus allowed." 23. Being aggrieved by the order of the ld. CIT(A), the Revenue is in appeal before us. 24. Learned Departmental Representative relied upon the order of the Assessing Officer, whereas, on the other hand, learned Authorized Representative supported the order of the learned CIT(A). 25. We have heard the rival contentions and perused the material available on record. In the instant case, the Assessing Officer made the addition of disallowance made u/s 14A read r.w.r. 8D of the Income-tax Rules while determining the book profit under Section 115JB of the Act. It is settled law that the amount of disallowance made by the AO u/s 14A of the Act cannot be imported while determining the book profit u/s 115JB of the Act. In this regard, we rely on the judgment Hon'ble G....
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....lowance as per clause (f) u/s 115JB of the Act for the expenses incurred in relation to dividend income. 25.5 Thus it is clear that the disallowance needs to be made in terms of the provisions of clause (f) to section 115JB of the Act while determining the book profit. In holding so, we draw our support from the judgment of Hon'ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. in GO No.1501 of 2014 (ITAT No.47 of 2014) dated 19.11.14 wherein it was held that the disallowance about exempted income needs to be made as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. The relevant extract of the judgment is reproduced below:- "We find computation of the amount of expenditure relatable to exempted income of the assessee must be made since the assessee has not claimed such expenditure to be Nil. Such computation must be made by applying clause (f) of Explanation 1 under section 115JB of the Act. We remand the matter for such computation to be made by the learned Tribunal. We accept the submission of Mr. Khaitan, learned Senior Advocate that the provision of section 115JB in the matter of computation is a complete code in itself an....