TaxTMI 
TaxTMI 
2018 (9) TMI 1850
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....to tax in earlier assessment year. 3. The ld. CIT(A) 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/-....
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....loan Only to the extent of interest income i.e. Rs. 55,37,378/- which is offered for tax, 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 ord....
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.... to tax in the earlier years; therefore, the same was allowed by the Assessing Officer. However, the Assessing Officer was of the 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 ....
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....he removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been 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 a....
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....e of M.P. Financial Corporation v. CIT [1987] 165 ITR 765 the Madhya Pradesh High Court has held that the expression "expenditure" as used in section 37 may, in the circumstances of a particular case, cover an amount 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 in....
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....harge as a matter of practice, though, as stated above, loss due to fall in the price below cost is allowed even though such loss has not been realized actually. At this stage, we need to emphasise once again that the 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 no....
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....dministrative expenditure in relation to such dividend income. Therefore, no disallowance needs to be made under the provisions of Section 14A read with Rule 8D of the Income-tax Rules. However, the Assessing Officer disagreed with the 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....
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....inst the investment of Rs. 1.26 crores which is substantially more than the investment. It is seen from the submissions that these investments have not been made out of any borrowed funds. The appellant has placed its reliance on the judgment of jurisdictional High Court in 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 cons....
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....rest expense is for financing business. It has nothing to with investment made in shares and securities from where dividend income is earned. Hence, no disallowance u/s. 14A towards interest expenses could be made. g) New tax free investment was made for Rs. 46.43 lacs during the year under consideration. The 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 state....
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....emand deposits and Rs. 2485 crores) as against which the tax free investments were to the tune of Rs. 589 crore. Thus the interest free funds were far in excess of the investments. CIT(A) has given a finding that the facts in AY 2003-04 are identical to the facts of the case in AY 2002-03 and accordingly he has followed the decision of CIT(A) for AY 2002- 03. These facts have not been controverted by the Ld. D.R. nor have they brought 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 i....
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....estion under Rule 8D of the Income Tax Rules. Learned Departmental Representative fails to rebut this factual position. We however noticed that the issue stands covered as per the above tribunal's decision only qua the former limb of proportionate interest expenditure disallowance. The latter limb of administrative expenditure disallowance (supra) has nowhere been discussed either in CIT(A)'s order in question or before the tribunal. The CIT(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 Repr....
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.... before the ld CIT(A) submitted that the disallowance made under the provisions of Section 14A read with Rule 8D cannot be made while determining the income under the provisions of Section 115JB of the Act. The ld. CIT(A), after considering the submissions of the assessee, deleted the addition made by the Assessing Officer by observing as under:- "8.2 I have carefully considered the rival submissions and order of AO. It is observed that AO had made an addition of Rs. 1,83,74,928/- 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)....
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.... the case. Thus it can be concluded that the provisions of section 14A r.w.r. 8D cannot be resorted while determining the expenses as mentioned under clause (f) to explanation 1 to section 115JB of the Act. 25.4 However, in our considered view the disallowance needs to be made as per Clause (f) to Section 115JB of the Act independently on account of dividend/ exempted income as specified. The judgment of Hon'ble Gujarat High Court relied in the case of Alembic Ltd. (supra), does not deny for making the disallowance 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:....