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2006 (7) TMI 524 - AT - Income TaxDisallowance of expenditure - earning interest on tax free bonds and dividend income - Expenditure incurred in relation to income not includible in total income - Bad debts - HELD THAT:- In the case of the assessee bank, it is an admitted position that the assessee is having the indivisible business and considering the nature of the business of the assessee the investment in the tax free bonds or investment in the shares may be in the nature of stock-in-trade. There is no identity in respect of the funds applied for investment in the tax free bonds or shares and funds which are applied for earning taxable income. The Assessing Officer has adopted the method which is not prescribed as per the provisions of sub-section (2) of section 14A. Moreover, we find that unless the method for working out disallowance of the expenditure in case of an indivisible business is prescribed as provided in sub-section (2) of section 14A, no disallowance is permissible. We are, therefore, of the opinion that in spite of the introduction of section 14A, the principles laid down by the Apex Court in the case of Rajasthan State Warehousing Corpn. [2000 (2) TMI 5 - SUPREME COURT] still hold good law and as there is no clear identity in respect of the funds applied by the assessee for making the investment for earning the tax free income as well as taxable income and as assessee’s business is indivisible one, the method adopted by the Assessing Officer for making the disallowance is not a permissible method and Assessing Officer was not justified in making the disallowance from the expenditure in respect of the interest attributable to investment on tax free bonds and expenditure incurred for earning the dividend income. We, therefore, set aside the order of the CIT(Appeals) on this issue and direct the Assessing Officer to delete the said addition. Bad debt - It is revealed that the assessee had made certain provision directly to the profit and loss account which as per the assessee, is the special provision made for working out the realizable value. It is not denied on the facts of this case that the provision was in respect of only bad and doubtful debts. As per the Explanation to clause (vii) to section 36(1) of the Act, any provision which is in the nature of bad and doubtful debt is not an allowable deduction and cannot be treated as bad debt for the purpose of the said clause. We, therefore, confirm the disallowance made by the Assessing Officer on this issue. In the result, the assessee’s appeal is partly allowed whereas revenue’s appeal is dismissed.
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