2022 (8) TMI 242 - AT - Income Tax

Disallowance of expenses u/s 14A - as argued assessee did not receive any dividend and hence did not make any disallowance under section 14A - CIT(A) deleted the disallowance - HELD THAT - Since the assessee has not earned in dividend income no disallowance is called for as per the decision rendered in the case of PCIT Vs. Il Fs Energy Development Company ( 2017 (8) TMI 732 - DELHI HIGH COURT . Since the decision rendered by Ld CIT(A) gets support from the above said decision we do not find any reason to interfere with the order passed by him on this issue. Disallowance of Provision for inventory written off - AO accepted that the debit made in the profit and loss account and reduction made in material consumption have mutual effect but since the closing stock of raw material is resultant figure after adjustment he took the view that the same has resulted in double deduction - HELD THAT - We noticed that the Ld CIT(A) had confirmed identical disallowance made in AY 2009-10 and hence the assessee had challenged the same before Tribunal in A.Y. 2009-10 and the ITAT has deleted the disallowance by following the decision rendered by the Tribunal in assessee s own case in A.Y. 2008-09. Thus we notice that the assessee has done an accounting adjustment only which may not lead to double deduction as presumed by the AO. Accordingly following the order passed by the Tribunal in AY 2009-10 we confirm the relief granted by learned CIT(A) on this issue. Disallowance of interest expenditure relating to loan given to the subsidiary - AO noticed that the assessee has advanced interest free loan to its subsidiary group and associate companies accordingly he disallowed proportionate interest expenditure u/s 36(1)(iii) - HELD THAT - We notice that the Tribunal has deleted identical disallowance made in the earlier years on the ground that the loans to subsidiaries group companies have been given out of own funds. During the current year it is noticed from the order passed by Ld CIT(A) the outstanding amount of loan due from sister concerns - However we could not find details of own funds/interest free funds available with the assessee. In the absence of relevant details we have no other option but to restore this issue to the file of AO for examining this issue by following the ratio of the decision rendered by the Tribunal in the hands of the assessee in the earlier years after verifying relevant facts. Accordingly we restore this issue to the file of AO. Disallowance of bad debts claim - AO disallowed the claim observing that the assessee has not furnished any proof regarding its liability as per provisions of section 36(1)(vii) read with section 36(2) - CIT-A allowed the claim - HELD THAT - In this year the break-up details of bad debts written off have not be furnished. The main grievance of the AO is that the assessee has not proved the compliance of conditions prescribed in sec. 36(2) of the Act i.e. the amount claimed as bad debts has been offered as income in the current year or in any of the earlier years. We notice that the Ld CIT(A) has also not examined this aspect. Accordingly we are of the view that this issue also requires fresh examination at the end of AO. Accordingly we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of AO for examining it afresh. The assessee is also directed to furnish the details of compliance of requirement of sec.36(2) of the Act to the AO. Revenue appeal is partly allowed.

Summary

Issues Involved:
1. Disallowance made under section 14A of the I.T. Act
2. Disallowance of provisions for inventory written off
3. Disallowance of interest under section 36(1)(iii) of the Act
4. Disallowance of bad debts written off

Issue-wise Detailed Analysis:

1. Disallowance made under section 14A of the I.T. Act
The first issue pertains to the disallowance of expenses under section 14A of the Act. During the assessment year, the assessee did not receive any dividend income and hence did not make any disallowance under section 14A. However, the Assessing Officer computed disallowance as per Rule 8D, resulting in a disallowance of Rs. 67,77,174/-. The CIT(A) deleted this disallowance by following his decisions in A.Y. 2009-10 and 2010-11. The Tribunal upheld the CIT(A)'s decision, citing the Hon'ble Delhi High Court's decision in PCIT Vs. Il & Fs Energy Development Company, which supports no disallowance if no dividend income is earned.

2. Disallowance of provisions for inventory written off
The second issue involves the disallowance of provisions for inventory written off. The assessee debited Rs. 3.88 crore to the profit and loss account for inventory value reduction and made an equivalent reduction in material consumption. The Assessing Officer disallowed this amount, suspecting a double deduction. The CIT(A) deleted this disallowance, referencing his decision in A.Y. 2010-11. The Tribunal confirmed the CIT(A)'s relief, noting similar disallowances were deleted in A.Y. 2008-09 and 2009-10 by the Tribunal, and concluded that the accounting adjustment did not lead to double deduction.

3. Disallowance of interest under section 36(1)(iii) of the Act
The third issue concerns the disallowance of interest expenditure related to loans given to subsidiaries. The Assessing Officer disallowed Rs. 1.47 crore, noting the interest-free loans to subsidiary and associate companies. The CIT(A) deleted the disallowance, following his decisions in A.Y. 2008-09 and 2010-11. The Tribunal upheld this decision, referencing its own decisions in earlier years where it was established that loans to subsidiaries were given out of own funds. However, for the current year, due to the absence of detailed information on own funds, the Tribunal restored the issue to the Assessing Officer for re-examination.

4. Disallowance of bad debts written off
The final issue is the disallowance of bad debts amounting to Rs. 2.01 crore. The assessee claimed bad debts/advances written off, debiting Rs. 151.64 lakhs to the profit and loss account and Rs. 50.27 lakhs to the provision for bad debts account. The Assessing Officer disallowed the claim due to lack of proof of liability under section 36(1)(vii) read with section 36(2). The CIT(A) deleted the disallowance, referencing his decisions for A.Y. 2009-10 and 2010-11. The Tribunal noted the lack of detailed break-up for the current year and the failure to prove compliance with section 36(2). Consequently, the Tribunal restored the issue to the Assessing Officer for fresh examination, directing the assessee to furnish necessary compliance details.

Conclusion:
The appeal filed by the Revenue is partly allowed, with the Tribunal upholding the CIT(A)'s decisions on certain issues and restoring others to the Assessing Officer for re-examination. The Tribunal's order was pronounced in the open court on 01.07.2022.