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TaxTMI 
TaxTMI 
TaxTMI 
2017 (8) TMI 1609
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....t nexus for earning such income can be disallowed u/s 14A. Thus, the addition made by the learned assessing officer are upheld on assumptions, without assigning any logical reason for rejecting the claim of the Appellant and without considering the facts and the applicable provisions of the law. 2. However, subsequently, the assessee vide application dated 9.1.2017 has sought to take certain additional grounds of appeal and, accordingly, filed revised the grounds of appeal, which reads as under:- 1. The Learned Deputy Commissioner of Income Tax was not justified in disallowing an amount of Rs. 1,97,70,000/- under Section 14A of the Income Tax Act 1961. The Learned Commissioner of Income Tax (Appeals) was not justified in confirming the same, in principle. 2. The Learned Commissioner of Income Tax (Appeals) erred in law and on the facts in directing the AO to allow the claim of the Appellant of the bad-debt written-off amount to Rs. 2,50,00,000 on account of irrecoverable overdue matured debentures only if the Appellant was an NBFC at the time of acquisition of the said debentures. 3. The Learned Commissioner of Income Tax (Appeals) further erred in not appreciating the fact ....
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....t the assessee was a Non Banking Financial Company (NBFC). The Ld. CIT(A) has directed the Assessing officer to allow the claim of the assessee after verifying the assessee's claim that it was a NBFC. However, while giving effect to the order of the CIT(A), the Assessing officer observed that the claim of the assessee of an amount of Rs. 2.50 crores claimed as 'bad debt written off' was verified and it was found that the debentures were inherited by the assessee on account of merger of companies as per the order No. 563 of 2003 dated September 3, 2004 of the Hon'ble High Court, the period during which the assessee was not a NBFC. The NBFC certificate of registration was issued to the assessee company by the Reserve Bank of India on 18.9.2005, hence, the claim of the assessee was not accepted. It has, therefore, been pleaded that the revised grounds taken by the assessee are not admissible at this stage. 4. Before adjudicating on the admissibility or non-admissibility of the additional grounds, we deem it fit to first go through the relevant facts relating to the issues raised before us. On perusal of the original grounds of appeal as well the revised grounds of appeal, two effecti....
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....inery) 1 Advertisement expenses 188 Telephone expenses 60 Travelling and conveyance 253 Vehicle expenses 119 Printing & Stationery expenses 248 Postage and telegrams 487 Profession fee 49 Auditors' remuneration 301 Demat and Custodian Charges 203 Listing fee 105 Amount written off 525 Share transfer agent expenses 383 Directors sitting fee 250 AGM charges 20 Miscellaneous charges 77 32.69 Total expenditure debited to the profit and loss account 171,34 Less: amount written off (direct nexus to the business income) 166,09 Less: Expenses disallowed as per the computation of income Provision for gratuity 230 Provision for leave encashment 133 ESOP 924 1287 Expenditure to be allocated in to taxable and exempt dividend income for computation of disallowance u/s 14A 15,322 1.5 Out of the above expenses debited to the profit and loss account, the disallowance u/s 14A is to be made on some logical and rational basis. Considering the ratio of Dividend income to the total ....
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.... exempt income. The Assessing Officer was not justified in making further additional disallowance which was equal to the difference of amount of total expenditure booked in profit and loss account and the suo moto disallowance made by the assessee u/s 14A of the Act. That the said disallowance was made by the Assessing officer without proper application of section 14A of the Act. That even the amount of Rs. 39,23,333/- was on account of expenditure incurred in respect of certain specific items such as death gratuity, leave encashment, standard assets etc. was not at all relatable to the earning of the exempt income. It was also pleaded that the assessee had earned a taxable income of Rs. 4,11,43,355/- from business, for earning of which the assessee must have incurred expenditure. The assessee thereafter submitted the details of various expenditure and pleaded that none of the expenditure was directly relatable to the earning of the exempt income accept the D-mat expenses and further that the disallowance u/s 14A of the Act under the circumstances was required to be made on some logical and rational basis. Considering the ratio of dividend income (exempt income) of the total income....
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....ssessee in its return of income, however, at this stage, the Ld. counsel for the assessee has contended that no disallowance u/s 14A was attracted in this case. He has pleaded that the assessee company is an investment company and that it had made strategic investment in its associate / subsidiary companies as part of its business activity and to have control over them. The investments were not made for the purpose of earning of dividend or tax exempt income, rather, the dividend income earned by the assessee was incidental to the above business strategy of the assessee, therefore, the addition made by the lower authorities u/s 14A was not justified. He, to stress upon the point that in case of strategic investment made by a company in its subsidiary company, out of its business activity or out of the business exigencies such as to have control over that company, the assessee is entitled to deduction of interest paid on the borrowed amount for making such investment u/s 36(i)(iii) of the Act and that the disallowance u/s 14 A in relation to such strategic investments is not attracted, has relied upon the following case laws:- 1. 202 Taxman 368 (Bom) CIT Vs. Phil Corporation Ltd. ....
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....ional ground before the Ld. CIT(A) regarding the deletion of addition of Rs. 4 crore offered during the survey action and thereby offered in the return of income can be allowed at this stage? The Ld. Counsel for the assessee in this respect has placed reliance on the decision of the Hon'ble Supreme Court in the case of "National Thermal Power Co. Ltd." vs. CIT" 229 ITR 383. The facts before the Hon'ble Supreme Court were that the assessee in that case offered the interest amount for taxation and the assessment was completed on that basis. Before the Ld. CIT(A), the assessee though had taken a number of grounds of appeal, however, the inclusion of the said amount of interest was not challenged. The inclusion of the said amount of interest was not objected to even in the grounds of appeal as originally filed before the Tribunal. However, the assessee by way of subsequent letter raised the additional ground in relation to the said inclusion of interest into the income of the assessee. In the above circumstances, the question before the Hon'ble Supreme Court was "Where on the facts found by the authorities below a question of law arises (though not raised before the authorities) whic....
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....'ble full bench of the Bombay High Court observed that apart from the above, there was nothing in section 254 or section 251 which would indicate that the appellate authorities are confined to considering only the objections raised before them or allowed to be raised before them either by the assessee or by the department, as the case may be. They can consider the entire proceedings to determine the tax liability of the assessee. The Hon'ble Bombay High Court in the case of "CIT vs. Pruthvi Brokers and Shareholders Pvt. Ltd." (2012) 349 ITR 336 (Bom.) has observed that the assessee is entitled to raise not merely additional legal submissions before the appellate authorities, but is also entitled to raise additional clams before them. The appellate authorities have jurisdiction to deal not merely with additional grounds, which became available on account of change of circumstances or law, but with additional grounds which were available when the return was filed. The words 'could not have been raised' must be construed liberally and not strictly. There may be several factors justifying the raising of a new plea in an appeal and each case must be considered on its own facts. The co....
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....d. Even otherwise, the Ld. CIT(A) ought to have considered the claim of the assessee in exercise of his appellate jurisdiction under section 250 of the Act. Moreover, if the assessee is, otherwise, entitled to a claim of deduction but due to his ignorance or for some other reason could not claim the same in the return of income, but has raised his claim before the appellate authority, the appellate authority should have looked into the same. The assessee cannot be burdened with the taxes which he otherwise is not liable to pay under the law. Even a duty has also been cast upon the Income Tax Authorities to charge the legitimate tax from the tax payers. They are not there to punish the tax payers for their bonafide mistakes. In view of our above observations, it is held that the assessee is not liable to pay Capital Gains Tax, though originally he had subjected himself to the said tax as per his return of income. The AO is directed to process the claim of refund in this respect as per provisions of the law." 21. In view of the above observation, we hold that the Ld. CIT(A) though, rightly admitted the question of law as to whether the income offered by the assessee in the return o....
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....with harsh penalty, in case he is found to have furnished inaccurate particulars of income or concealed his income. In such a situation, if the assessee has mistakenly offered certain amount for taxation, which he is legally not supposed to offer, in our view, he can also raise such an additional claim before the appellate authorities. The assessee cannot be put to a disadvantageous position because of mere technicalities. The assessee cannot be burdened with the taxes which he otherwise is not liable to pay under the law. Even a duty has also been cast upon the Income Tax Authorities to charge the legitimate tax from the tax payers. They are not there to punish the tax payers for their bonafide mistakes. In view of our above observations and in the light of the proposition of law laid down in the decisions of Hon'ble Supreme Court in the case of "National Thermal Power Company Ltd. vs. CIT" (supra), Full Bench of the Hon'ble High Court in the case of "Ahmedabad Electricity Co. Ltd. vs. CIT" (supra) and another decision of the Hon'ble Bombay High Court in the case of "CIT vs. "CIT vs. Pruthvi Brokers and Shareholders Pvt. Ltd." (supra) and of the Coordinate Bench decision in the c....
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....mes to the conclusion that he is not satisfied with the claim of the assessee. However, as observed above, in the case in hand, the Assessing officer has not followed the guidelines of objective satisfaction as laid down by the Hon'ble Bombay High Court in the case of 'Godrej & Boyce' (supra) while making the disallowance. He without recording any reasoning for his dissatisfaction with regard to the working/claim of the assessee, straightway applied Rule 8D against the mandate of the provisions of section 14A of the Income Tax Act. The Id. CIT(A) also ignored the mandate of the provisions of section 14A, while giving part relief to the assessee on a different footing. Since we have already restored the matter to the AO on this issue, we direct that the AO will also look into and consider the above aspects and adjudicate on all alternate contentions also of the assessee on this issue and will comply with the requirements of law, as discussed above, while deciding this issue a fresh. 13. In respect of the issue relating to the 'bad debts written off', no ground has been originally taken by the assessee in this appeal, however, in the revised ground of appeal, ground Nos. 2 to 4 ....
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....ns of The Companies Act 1956, a private limited company is not allowed to issue a prospectus as it cannot invite the public for subscription. In view of the fact that all the OCDs were issued by private limited companies there would be no requirement of a prospectus in such cases. The OCDs are issued by private limited companies usually on a private placement basis. 4. As the OCDs were issued long back and since matured became a non performing debt, provided for and written off, the copies of certificates are not readily traceable. However, the matured debentures regularly appeared in balance sheet of the company and details ate enclosed herewith. 5. As the assessee company has been under litigation with the aforesaid companies, it does not have access to details of OCDs issued by these companies to other persons. 6. The assessee company has accounted for interest income during the assessment years 2004-05 and 2005-06 in respect of these debentures before they became non-performing assets. The party wise details of the interest income accrued to assessee and offered to tax on these OCDs is as follows:- S.No. Name of the Company Interest offered for tax in assessment year 2....
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....e Act. Since the OCDs are not capital assets of the assessee, but its business debts in the course of its business as non banking finance company, the question of treating the bad debts as capital loss does not arise. 10. Copy of the NBFC registration Certificate issued by RBI to the assessee company is enclosed herewith,." 15. The Ld. Assessing officer, however, did not accept the above explanation given by the assessee observing as under:- "6.3 The reply of the assessee has been considered but found not acceptable. The assessee did not file copy of Prospectus issued by the aforesaid companies. He also not furnished the copy of Debenture Certificate. Although assessee filed reply, but details of OCDs issued by the companies to other persons were also not filed. The assessee company has slated that during A.Y. 2004-05 and 2005-06, interest income was offered on non-performingassets, but evidence in this respect was not submitted the assessee. Assessee submitted that as a Non Banking Finance Company, it was a regular business to advance loans and investment in various companies. It claimed at said investment was in normal course of business, to earn interest income. Reply in re....
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....m the time when this investment in debenture was made. After considering the rival submission, I agree with the contention of the appellant in principle to the extent that since the business of the appellant company is financing, it being a NBFC company, it is entitled to claim the write off of bad debt of investment such as convertible debentures after the same have become a nonperforming asset (NPA). Accordingly, the AO is directed to allow the claim of the appellant, but only after verifying contention of the appellant that it was NBFC at the time of acquisition of the debentures by the appellant." As discussed above, the assessee could not get relief on this issue from the Assessing officer in the order giving effect to the CIT(A) order as the assessee could not establish that NBFC certificate was granted prior to the issue of debentures. Now the assessee by way of these additional grounds of appeal has pleaded that the assessee was a finance / investment company since its inception. That even the interest on the overdue matured debentures was included in the taxable income for the assessment year 2004-05 and assessment year 2005-06 as its business income. Further, that even t....
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....t OCDs were to be converted into shares or to be redeemed after the expiry of 7 years from the date of allotment, that these OCDs were allotted to the appellant on the merger of M/s JIndal Vijaynagar Steel Limited in financial year 2004-05, that these OCDs were matured in the year 2001, that these assets were classified as mature debentures by the Jindal Vijaynagar Steel Limited, that the claim of the assessee about acquiring the OCDs in the year 2003-04, 2004-05 & 2005-06 was not correct. He held that the claim of the assessee about reversal of interest income of non-performing assets could not be accepted, that the guidelines issued by the RBI to NFBC were only disclosure guidelines, that the said guidelines did not override the provisions of the Act. Relying upon the order of the Hon'ble Supreme Court delivered in the case of M/s Southern Technologies Limited, in ITA 1337/2003, he held that the assessee was not entitled to deduction on account of provisions of NPA, even though the provisions was made as per the RBI guidelines. He further held that there was no provisions under the Act to allow deduction on account of reversal of income shown in the earlier years unless there was....
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....respectively was duly provided for by the appellant company and the same was offered for taxation in relevant AYs. iv).On 30-06-2005, an amount of Rs. 7,47,944/-, accrued as interest on the said OCDs for the period from 01-042005 to 30-06-2005, was provided in the books of accounts-thereby taking the total interest accrued to Rs. 55,05,644/-. v).Assessee company was declared a non-banking financial institute in the year under consideration; vi).During AY 2005-06,the appellant had written off the aforesaid interest dues, aggregating to Rs. 55,05,644/,and debited the same to the Profit and Loss Account. vii).AO disallowed the said amount as he was of the opinion that the assessee has not written off the entire debt outstanding and only part of the debt was written off. If the above mentioned facts are considered along with the provisions of Section 36(1)(vii) of the Act, then in our opinion, disallowance made by the AO and confirmed by the FAA cannot be upheld. 9.1. There is no doubt that above-referred amount has actually been written off as irrecoverable in the accounts of the appellant company for the relevant Assessment Year and amounts were offered as Interest income....
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.... since the assessee had offered the said amount of interest as income which was subsequently written off, because of its non-recovery and that the same was in accordance with the prescribed guidelines. Now the question before us is that, even if, the said interest has been allowed to be written off, whether the said OCDs are allowable for deduction as bad debts written off. The relevant clause (vii) of section 36(1) of the Act which deals with the bad debts is reproduced as under:- "36 (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- (i) ..... (vii)subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year : Provided that where the amount of 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 thereof becomes irrecoverable or of an earlier previous year on the basis of income computation and disclosure standards notified under ....
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....mpany had offered interest on such OCDs as its business income. The said OCDs neither represent the debt or part thereof which has been taken into account in computing the income of the assessee in any earlier previous year nor the same represents the money lent in the ordinary course of business of money lending carried on by the assessee. Now coming to the other case laws relied upon by the Ld. Counsel for the assessee on this issue, there is no question of any debate on the proposition of law laid down by the Hon'ble Supreme Court in the case T.R.F. Ltd.(supra) that assessee has to establish that debt was written off and it is not necessary for the assessee to establish that the debt in fact has become irrecoverable. However, the question before us as to the above claim of write off of OCDs qualify to be 'bad debts written off' to get relief u/s section 36 of the Act, which, in view of discussion made above, is answered in negative. In the case of "CIT Vs. T. Veerabhadra Rao, K. Koteswara Rao & Co." the business was succeeded as a whole along with assets and liabilities of the predecessor firm by the successor assessee including the debts due. It was under these facts that the ....