TMI Blog2014 (12) TMI 675X X X X Extracts X X X X X X X X Extracts X X X X ..... the subsidiaries for acquiring their shares and such investment was made out of own funds of the assessee - the entire borrowed funds, on which interest was paid, were used for business purposes and no portion was used for making investment - The amount of interest expenditure cannot be considered for proportional disallowance under rule 8D of the rules - CIT(A) has not made any disallowance on account of other expenditures as per sub-rule (2)(iii) of rule 8D – thus, the order of the CIT(A) is modified and the AO is directed to compute the disallowance at 0.5% of the average value of investment on account of other expenditures – Decided partly in favour of revenue. Disallowance of balance written off deleted – Held that:- CIT(A) rightly held that ₹ 35.63 lakhs were accounted for in earlier years as income and the Revenue has not brought anything on record to dispute these facts - once there is a compliance of provisions of section 36(2) of the Act, the same should be allowed as bad debt on its written off - assessee is entitled for the loss on its written off in the books of account either in the form of bad debt or in the form of business loss – thus, the order of the CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eleting addition of ₹ 35,62,653/- on a/c of disallowance of balance written off and in allowing the claim of deduction of ₹ 252.03 lakhs without verifying the facts on records and assigning any logical reason. 5. That the Ld. CIT (A) has erred in law and on facts in deleting addition of ₹ 3,35,06,424/- on account of disallowance of trial run expenses without verifying the facts on records and assigning any logical reason. 6. That the Ld. CIT(A) has erred in law and on facts in deleting addition of ₹ 1,48,03,212/- on account of 'disallowance of proportionate interest without verifying the facts on records and assigning any logical reason. 7. That the order of the Ld. CIT (A) being erroneous in law and on facts which needs to be vacated and the order of the A.O. be restored. 2. Apropos ground No.1, it was contended on behalf of the assessee that this ground is squarely covered in favour of the assessee by the order of the Tribunal in the assessee s own case for assessment year 2008-09 as well as the judgment of the jurisdictional High Court in the assessee s own case Income-tax Appeal No.211 of 2011. Copies of the order of the Tribunal as well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of section 14A of the Act is to be invoked and the disallowance of the corresponding expenditure can only be computed as per rule 8D of the I.T. Rules. The ld. D.R. has further invited our attention to the computation of income in which the assessee himself has added back ₹ 1,70,46,926/- as inadmissible expenses as per provisions of section 14A of the Act read with rule 8D, but later on vide letter dated 13.12.2011, the assessee claimed that it has wrongly disallowed ₹ 1,70,46,926/- in the computation of income, as no amount is inadmissible in its case under section 14A of the Act and rule 8D of the Rules. 6. Having carefully examined the orders of the lower authorities as well as the order of the Tribunal in the assessee s own case for assessment year 2008-09, we find that in that assessment year the Tribunal was of the view that the investment was an old investment made in 1993 in the subsidiaries for acquiring their shares and such investment was made out of own funds of the assessee. Keeping in view these facts, the Tribunal has held that the entire borrowed funds, on which interest was paid, were used for business purposes and no portion thereof was used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be considered for proportionate disallowance under Rule 8D. Out of total disallowance made by the Assessing Officer u/s 14A of ₹ 67.75 lac, the disallowance of ₹ 66.79 lac is out of interest expenditure and therefore, to this extent, the disallowance is deleted. The remaining disallowance of ₹ 0.96 lac is on account of other expenditure to the extent of 0.5% of average value of investment and by respectfully following the Tribunal decision rendered in the case of R G P Moulds Pvt. Ltd. vs. Dy. CIT (supra), this part disallowance of ₹ 0.96 lac is confirmed. Ground No. 1 2 are partly allowed. 7. On a careful perusal of the order of the ld. CIT(A), it is noticed that during that year, the assessee has made fresh investment of ₹ 327.63 lakhs but the total loan was reduced from ₹ 1,51,224.51 lakhs to ₹ 1,51,004.02 lakhs. Therefore, no borrowed funds were utilized in the investment of shares. Similarly, the reserve and surplus were also raised during the year. Therefore, there is no evidence on record wherefrom it can be evidenced that the investment was made out of funds borrowed during the year. While adjudicating the issue, the ld. CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how the. assessee's computation was wrong. Consequently, the invocation of Rule 8D was improper and the disallowance was not permissible. In this back ground of the case and various judicial, pronouncement cited by the AR for the appellant the disallowance of ₹ 1,70,46,929/ under section 14 A read with rule 8D when no borrowed money'was used for the purchase of shares/ no expenditure was incurred by the appellant and no exempt income was received by way of dividend on shares, is deleted. The ground of appeal as raised by the appellant stands allowed. 8. The ld. CIT(A) has deleted the entire addition made by the Assessing Officer without looking to the fact that once investments are made in shares, provisions of section 14A of the Act read with rule 8D of the Rules, cannot be out rightly ignored. In assessment year 2008-09, the Tribunal, while deleting the disallowance on account of interest expenditure, has restricted it to the extent of 0.5% of the average value of investment on account of other expenditures, by following the order of the Tribunal in the case of R.G.P. Moulds Pvt. Ltd. Vs. Dy. CIT in I.T.A. No. 555/LKW/2011. In the instant case, the ld. CIT(A) ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n account of closure of the factory due to unrest in Nepal. Now the question arises whether the loss should be allowed as business loss under section 28 of the Act or under section 36(1)(vii) of the Act? The assessee has already accounted for the said amount in earlier as income, therefore, the same should be allowed under section 36(1)(vii) of the Act on its actual written off in the books of account. 13. Having given a thoughtful consideration to the rival submissions and from the careful perusal of the record and the orders of the authorities below, we find that while adjudicating the issue, the ld. CIT(A) has categorically held that ₹ 35.63 lakhs were accounted for in earlier years as income and the Revenue has not brought anything on record to dispute these facts. Therefore, once there is a compliance of provisions of section 36(2) of the Act, the same should be allowed as bad debt on its written off. Moreover, the assessee has suffered a loss on account of closure of the factory due to unrest in Nepal. The aforesaid amount was recoverable from M/s Vasulinga Sugar and Gen. Mills in respect of debits of spares and store supplies and expenses debited to them in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assets side of the balance sheet should be shown as net of the provision for the impugned bad debt. In the totality of the circumstances of the appellant's case, therefore, the disallowance as made by the AO is deleted. 14. Since the ld. CIT(A) has adjudicated the issue in proper perspective in the light of the given facts and circumstances, we do not find any infirmity therein and we confirm the same. 15. Apropos ground No.5, it was contended on behalf of the assessee that this ground, relating to disallowance made on account of Trial Run expenses, is squarely covered by the judgment of the Hon'ble jurisdictional High Court in the assessee s own case in Income-tax Appeal No.211 of 2011, in which their Lordships have held that pre-operational expenses in trial run were revenue expenses and not capital expenses. The relevant portion of the judgment of the Hon'ble High Court is extracted hereunder:- 18. In the present case, the pre-operation expenses have been detailed in the material produced before the Assessing Officer and which has been referred to in the paper book at pages 14, 15 and 17 in respect to Co-Generation Plant, Rauzagaon; Oxalic Acid, Dhampur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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