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TMI Blog2012 (8) TMI 325X X X X Extracts X X X X X X X X Extracts X X X X ..... tten off as bad debt stating that assessee has not filed the necessary details. Before the CIT (A) it was pointed out that assessee filed the relevant details vide letter dated 15-12-2010 which was stated by AO in Para 03.02. After that AO never asked any further details. It was further contented that it is not necessary to establish that the debt has become bad/ irrevocable. For satisfying the conditions stipulated under section 36(2), assessee submitted that it satisfied the conditions and relied on the Special Bench decision in the case of Shri Shreyas S. Morakhia in ITA No.3374/Mum/2004 dated 16-7-2010. Assessee also relied on the decision of the Hon'ble Supreme Court in the case of TRF Ltd vs. CIT 323 ITR 397 (SC). However, the learned CIT (A) put the onus on assessee that it did not furnish any details and accordingly he upheld the disallowance. 4. Before us the learned Counsel referring to the letter filed with AO and submissions made before him vide Para 7 of the letter and also other letters filed and the replies given to the CIT (A) in the course of appellate proceedings submitted that assessee had only one debt in question pertains to M/s Rajen Investment and Finance (P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses towards earning this income. He analyzed the expenditure and the incomes and arrived at the claim of expenditure at 0.5% is not correct as percentage of brokerage income was to the extent of 61%. He was of the opinion that for the lack of better measure of estimation, allocation of 25% expenses incurred by assessee during the year towards earning share trading income is a fair estimate. Accordingly he attributed the expenses at Rs.41,61,118/- and arrived at the net share income at Rs.37,47,179/- and rebate at 30% was worked out at Rs.11,24,153/. The CIT (A) has confirmed the action of AO as assessee has maintained common account and allocated mere 5% as expenditure. 7.2. Before us the learned Counsel contended that assessee has entered into jobbing agreements and the incomes were offered after claiming the job work charges and the expenses directly attributable to the above income was arrived at Rs.3,08,381/. He referred to page No.42 to submit that the gross income earned was to the tune of Rs.3,32,31,409/- which was shared with the jobbers at Rs.253,23,113/-, net share trading profit was arrived at Rs.79,08,296/, out of which 5% was considered as expenditure attributable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.1,16,75,005/-, whereas in this year it was Rs.1,17,75,005/- more or less at the same level. However, as seen from the detailed schedules of the balance sheet, the stock in hand has gone up from Nil in earlier year upto Rs.1,46,27,156/-. It indicates that the borrowed funds were used for its business in trading transactions. The volume of income earned before distributing with jobbers was to the tune of Rs.3,33,31,409/-. This indicates that assessee's volume of transactions in trading is more. If an analysis of the borrowed funds and its use was considered interest payment alone of Rs.22,80,089/- is attributable to the trading activity. Therefore, in our view AO is very conservative in attributing only 25% of the expenditure to the share trading activity. There is no dispute with reference to the inclusion of net income only while considering the rebate under section 88E(2). In view of this, we uphold the action of AO and reject the ground. However AO is directed to work out the rebate while giving effect to this order as some of the issues may result in variation of income. 11. Ground No.3 is as under: "On the facts and circumstances of the case and in the law the learned CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... UO)73 to submit that when AO did not express any satisfaction that assessee's working is not correct disallowance under section 14A(2) can not be done. The learned DR relied on the orders of AO and the CIT (A). 14. We have considered the issue. As seen from the record assessee is having both investments as well as trading incomes in its business. Section 14A prescribes that the expenditure incurred towards exempt income is to be disallowed and certain method was prescribed under the rule how to work out the disallowance. However, it is necessary that AO should express satisfaction while invoking the provisions of section 14A(2) to r.w. Rule 8D. This issue was discussed by the Hon'ble Delhi Bench in the case of Jindal Photo Ltd (Supra) vide Para 10 onwards as under: "10. Now coming to ground No.3, the Department alleges that the CIT(A) has erred in restricting the addition u/s 14A of the Act to Rs.19,43,022, as against that of Rs.31,01,542/- made by the AO. This issue was also there before the Tribunal in the assessee's case for assessment year 2007-08. On behalf of the assessee, it has been contended that Rule 8D of the I.T. Rules was not applicable for that year; that however, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ead office. It was the case of the assessee that to earn such dividend income, no direct expenditure was required and no expenses were incurred to make investment of surplus amounts in mutual funds. The suo moto disallowance had, however, been made by the assessee keeping in consideration, the provisions of section 14A of the Act. 18. Now, as per section 14A(2) of the Act, if the AO, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in relation to income which does not form part of the assessee's total income under the Act, the AO shall determine the amount incurred in relation to such income, in accordance with such method as may be prescribed, i.e., under Rule 8D of the I.T. Rules. However, in the present case, the assessment order does not evince any such satisfaction of the AO regarding the correctness of the claim of the assessee. As such, Rule 8D of the Rules was not appropriately applied by the AO as correctly held by the CIT(A). It has not been shown by the AO that any expenditure had been incurred by the assessee for earning its dividend income. Merely, an ad hoc disallowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar, industrial alcohol, fertilizer, generation and distribution of power etc. and no part of borrowed money had any direct link or nexus with the investments made by assessee company, which had yielded tax-free dividend income. The assessee had substantial capital of its own i.e., share capital plus reserves amounting to Rs.94,366.07 Lakhs (as on 31st March, 2007) and Rs.1,02,718.44 lakhs (as on 31st March, 2008) averaging at Rs. 98,542.26 lakhs which is more than 9 times of the average value of investments, amounting to Rs.10,431.39 lakhs computed by the AO in the assessment order itself. Assessee had utilized its entire borrowings in the form of term 10ans/ECBs for setting up Greenfield projects/expansion of existing projects. Similarly, borrowings in the form of cash credit facilities were utilized for its day to day requirements of working capital to run the business. As per fund flow statement it is clear that entire amount of investments, Yielding tax-free dividend income to the assessee, were acquired from its owned funds represented by the share capital and free reserves and neither long-term borrowings in the form of term loans/ECBs etc. nor short-term borrowings in the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re made by assessee or the claim made by assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the Act for the relevant assessment year. In the absence of any such finding, facts of the present case show that the investment in shares was made out of own capital employed and not from borrowed funds, no disallowance on account of interest expenditure can be made by invoking r. 80". On the principles of law AO should have expressed satisfaction about the working given by assessee. 16. Even though on legal principles the matter is in favour of assessee, since assessee has not furnished any details of expenditure before AO and the working furnished was without prejudice to its claim, We in the interest of justice, are of the opinion that this matter requires re-examination by AO keeping in view of the principles laid down by the above cases and also to see there is any expenditure incurred in relation to the exempt income. For this, we set aside the orders of AO and the CIT (A) on the above issue and restore the matter to the file of AO to examine it afresh. The ground is considered allowed for statistical purposes. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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