TaxTMI 
TaxTMI 
2026 (5) TMI 1692
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.... a. failed to objectively examine the Appellant's claim that there was no nexus between general or administrative expenses incurred and the exempt income earned by the Appellant. b. erred in concluding that the learned AO had objectively recorded his dissatisfaction about the amount of disallowance under section 14A of the Act, suo motu offered by the Appellant in its return of Income. c. erred in equating the working of disallowance under section 14A of the Act read with rule 8D of the Rules (submitted by the Appellant to the learned AO on "without prejudice" basis) with acceptance of applicability of rule 8D of the Rules by the Appellant. d. erred in simply brushing aside the judicial precedents relied on by the Appellant as "of no relief to the Appellant", without any rationale for such an opinion. 2. The learned CIT(A) erred in confirming that the amount of disallowance under clause (1) of Explanation 1 to section 115JB(2) of the Act would be equal to the amount of disallowance under section 14A of the Act considered by the learned AO in the computation of income as per the normal provisions of the Act in the assessment order. 3. T....
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.... incurred certain expenditure such as interest, administrative expenses and other indirect expenses. According to the Assessing Officer as per the provisions of section 14A expenditure in relation to income which does not form part of total income cannot be allowed as deduction. Although the assessee has suo motu disallowed expenses amounting to Rs. 6,00,566/- in relation to the above exempt income, however, he noted that the said disallowance was not worked out in accordance with Rule 8D of the Rules as prescribed u/s 14A of the Act. He, therefore, confronted the same to the assessee in response to which the assessee filed a detailed explanation. However, the Assessing Officer was not satisfied with the arguments advanced by the assessee and computed the disallowance @ 1% of annual average of the monthly averages of the opening and closing balance of investments and computed the said disallowance at Rs. 74,29,500/-. After considering the suo motu disallowance offered by the assessee of Rs. 6,00,566/-, he made addition of Rs. 68,28,934/-. 7. In appeal, the Ld. CIT(A) / NFAC confirmed the disallowance made by the Assessing Officer. While doing so, he held that the amendment to Ru....
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....he view laid down is in contravention to the decision of Hon'ble Supreme Court. He accordingly submitted that the order of the Ld. CIT(A) / NFAC be modified and the Assessing Officer be directed to work out the disallowance at 0.50% of the annual average of the monthly averages of the opening and closing balance of investments as per amended Rule 8D of the Rules. 13. The Ld. DR on the other hand heavily relied on the order of the Ld. CIT(A) / NFAC. 14. We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. CIT(A) / NFAC and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. The only dispute to be decided in the impugned ground is regarding the computation of disallowance u/s 14A r.w.s. 8D. While the Assessing Officer in the instant case has computed the disallowance @ 1% of annual average of the monthly averages of the opening and closing balance of investments. It is the submission of the Ld. Counsel for the assessee that the same should be computed @ 0.50% of annual average of tax free investments since the amendment to Rule 8D of the Rules w.e.f. 2nd June, 201....
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....is underlying every income-tax assessment have to be rejected as misconceived." 17. We find the Hon'ble Supreme Court in the case of CIT vs. Essar Teleholdings Ltd. (supra) in the context of applicability of Rule 8D has considered the amendment brought in w.e.f. 02.06.2016 and in para 46 of the order has held that the said amendment is prospective in operation. The relevant observations of Hon'ble Supreme Court read as under: "46. The method for determining the amount of expenditure brought in force w.e.f. 24.03.2008 has been given a go-bye and a new method has been brought into force w.e.f. 02.06.2016, by interpreting the Rule 8D retrospective, there will be a conflict in applicability of 5th & 14th Amendment Rules which clearly indicates that the Rule has a prospective operation, which has been prospectively changed by adopting another methodology." 18. Similar view has been taken by the Hyderabad Bench of the Tribunal in the case of Prasad Film Laboratories Pvt Ltd vs. ACIT (supra). 19. So far as the decision of the coordinate Bench of the Tribunal in the case of Poonawalla Shares & Securities vs. ACIT (supra) is concerned, the said decision cannot be followed ....
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.... d. erred in simply brushing aside the judicial precedents relied on by the Appellant as "of no relief to the Appellant", without any rationale for such an opinion. 2. The learned CIT(A) erred in a. confirming that the amount of disallowance under clause (f) of Explanation 1 to section 115JB(2) of the Act would be equal to the amount of disallowance under section 14A of the Act considered by the learned AO in the computation of income as per the normal provisions of the Act in the assessment order; and b. confirming the consequent reduction in the amount of set-off of Minimum Alternate Tax ('MAT") credit. 3. The learned CIT(A) erred in summarily brushing aside, without adjudicating on merits, the Appellant's claim of deduction towards reversal of the provision for deferred tax allowable under clause (viii) of the Explanation 1 to section 115JB(2) of the Act. 4. The CIT(A) erred in confirming disallowance of INR 2,06,29,784 made by the learned AO under section 36(1)(vi) of the Act, without following the decision of the Hon'ble Supreme Court in Vijaya Bank V. CIT & Another (323 ITR 166 (SC) 5. The learned CIT(A) e....
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....come Tax And Anr (supra), the additional ground raised by the assessee is admitted for adjudication. 28. Ground of appeal No.1 raised by the assessee relates to the order of the Ld. CIT(A) / NFAC in confirming the disallowance of Rs. 24,19,716/- u/s 14A r.w.s. 8D. 29. The Ld. Counsel for the assessee at the outset submitted that the Assessing Officer worked out the disallowance u/s 14A by considering all the investments. However, such disallowance u/s 14A has to be computed by taking only those investments which have yielded exempt income in the year under consideration. 30. We find merit in the above arguments of the Ld. Counsel for the assessee. It has been held in various decisions that only those investments which have yielded exempt income in the year under consideration should be considered while calculating disallowance u/s 14A. We find the Delhi Special Bench of the Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. [2017] 165 ITD 27 (Delhi - Trib) (SB) has held that for computing the average value of investment under Rule 8D(2)(iii), only those investments which have actually earned exempt income during the year and not those investments, which did not y....
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....nt. Therefore, in view of the Explanation (1) to section 36(1)(viii) of the Act, it is not entitled for deduction u/s 36(1)(vii) of the Act. No actual write off of debtors has been made during the year. He, therefore, disallowed the same. 35. In appeal, the Ld. CIT(A) / NFAC upheld the action of the Assessing Officer by observing as under: 5.4 In the course of appellant proceedings, I have carefully considered the arguments advanced by the appellant company. In fact the appellant has also objected to action of the Assessing Officer's decision of referring to and relying upon the judgement of in the case of Southern Technologies Limited vs JCIT (supra). I have carefully perused the impugned assessment order, submissions of the appellant and has also perused the relied upon judgements. It would be in the fitness of things to refer to the provisions of section 36(1)(vii) of the Income Tax Act, 1961, which reads as under: 36. Other Deductions 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 1. to (vi) xxxxxxxxxxxxxx ....
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....ion 36(1)(vii) provides for a deduction in the computation of taxable profits for the debt established to be a bad debt. 5.5 The Supreme Court noticed that the Explanation to section 36(1)(vii), introduced by the Finance Act, 2001, had to be examined in conjunction with the principal section. The Explanation specifically excluded any provision for bad and doubtful debts made in the account of the assessee from the ambit and scope of 'any bad debt, or part thereof, written off as irrecoverable in the accounts of the assessee'. Thus, the concept of making a provision for bad and doubtful debts would fall outside the scope of section 36(1)(vii). It is trite and settled law that u/s 36(1)(vii) of the Income-tax Act, 1961, the appellant assessee carrying on business is entitled to a deduction, in the computation of taxable profits, of the amount of any debt which is established to have become a bad debt during the previous year, subject to certain conditions. However, a mere provision for bad and doubtful debt(s) is not allowed as a deduction in the computation of taxable profits. The Apex Court in its decision in the case of M/s Southern Tech....
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....he assessee is in appeal before the Tribunal. 37. The Ld. Counsel for the assessee submitted that the claim made by the assessee is in accordance with the principles laid down by the Hon'ble Supreme Court in the case of Vijaya Bank vs. CIT & Anr (supra). In that case, the Hon'ble Supreme Court has held that where the assessee creates a provision for doubtful debts and besides debiting the Profit and Loss Account the assessee had also obliterated the said provision by reducing the corresponding amount from the debtors account in the balance sheet, it amounts to write off and the deduction u/s 36(1)(vii) is allowable. He submitted that similar claim for assessment year 2011-12 was made and the Ld. CIT(A) following the decision of Hon'ble Supreme Court in the case of Vijaya Bank vs. CIT & Anr (supra), allowed the claim, copy of which is placed at pages 129 to 142 of the paper book. Referring to the order of the Tribunal, copy of which is placed at pages 180 to 194 of the paper book, he submitted that although the Revenue had filed the appeal before the Tribunal on other issues, however, did not challenge this issue before the Tribunal. 38. Referring to the order of the Ld. CIT(A....
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....orders of the Ld. CIT(A) / NFAC before the Tribunal on other issues for both the years, however, it has not challenged the order of the Ld. CIT(A) / NFAC in granting relief with respect to deletion of disallowance u/s 36(1)(vii) of the Act. Therefore, in view of the rule of consistency also, the order of the Ld. CIT(A) / NFAC being not in accordance with law, has to be set aside. 42. We find some force in the above arguments of the Ld. Counsel for the assessee. We find the Hon'ble Supreme Court in the case of Vijaya Bank vs. CIT & Anr (supra) has observed as under: "5. At the outset, we may state that, in these civil appeals, broadly, two questions arise for determination. The first question which arises for determination concerns the manner in which actual write off takes place under the Accounting principles. The second question which arises for determination in these civil appeals is, whether it is imperative for the assessee-Bank to close the individual account of each debtor in it's Books or a mere reduction in the "Loans and Advances Account" or Debtors to the extent of the provision for bad and doubtful debt is sufficient? 6. The first question is no....
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....Additional Solicitor General appearing for the Department, the view expressed by the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala [supra] was prior to the insertion of the Explanation vide Finance Act, 2001, with effect from 1st April, 1989, hence, that law is no more a good law. According to the learned counsel, in view of the insertion of the said Explanation in Section 36(1)(vii) with effect from 1st April, 1989, a mere debit of the impugned amount of bad debt to the Profit and Loss Account would not amount to actual write off. According to him, the Explanation makes it very clear that there is a dichotomy between actual write off on the one hand and a provision for bad and doubtful debt on the other. He submitted that a mere debit to the Profit and Loss Account would constitute a provision for bad and doubtful debt, it would not constitute actual write off and that was the very reason why the Explanation stood inserted. According to him, prior to Finance Act, 2001, many assessees used to take the benefit of deduction under Section 36(1)(vii) of 1961 Act by merely debiting the impugned bad debt to the Profit and Loss Account and, therefore, the Parliament....
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....ed upon by the Assessing Officer is that mere reduction of the amount of loans and advances or the debtors at the year-end would not suffice and, in the interest of transparency, it would be desirable for the assessee-Bank to close each and every individual account of loans and advances or debtors as a pre-condition for claiming deduction under Section 36(1)(vii) of 1961 Act. This view has been taken by the Assessing Officer because the Assessing Officer apprehended that the assessee-Bank might be taking the benefit of deduction under Section 36(1)(vii) of 1961 Act, twice over. [See Order of CIT (A) at Pages 66, 67 and 72 of the Paper Book, which refers to the apprehensions of the Assessing Officer]. In this context, it may be noted that there is no finding of the Assessing Officer that the assessee had unauthorisedly claimed the benefit of deduction under Section 36(1)(vii), twice over. The Order of the Assessing Officer is based on an apprehension that, if the assessee fails to close each and every individual account of it's debtor, it may result in assessee claiming deduction twice over. In this case, we are concerned with the interpretation of Section 36(1)(vii) of 1961 Act....
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....estore this issue to the file of the Ld. CIT(A) / NFAC with a direction to adjudicate the additional ground raised before him. The ground of appeal No.5 raised by the assessee is accordingly allowed for statistical purposes. 46. In the result, both the appeals filed by the assessee are partly allowed for statistical purposes. Order pronounced in the open Court on 20th April, 2026. ============= Document 1 "Prior to April 1, 1989, the law, as it then stood, took the view that even in cases in which the assessee(s) makes only a provision in its accounts for bad debts and interest thereon and even though the amount is not actually written off by debiting the profit and loss account of the assessee and crediting the amount to the account of the debtor, the assessee was still entitled to deduction under section 36(1)(vii). [See CIT v. Jwala Prasad Tiwari (1953) 24 ITR 537 (Bom) and Vithaldas H. Dhanjibhai Bardanwala vs. CIT (1981) 130 ITR 05 (Guj)] Such state of law prevailed up to and including the assessment year 1988-89. However, by insertion (with effect from April 1, 1989) of a new Explanation in section 36(1)(vii), it has been clarified that any bad debt written off as ....