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TMI Blog2015 (10) TMI 2019X X X X Extracts X X X X X X X X Extracts X X X X ..... d as under: 1. Ground No.1 of the assessee's appeal: The assessee has challenged the action of Ld. CIT(A) in upholding the action of the Assessing Officer ( hereinafter called as 'AO' ), in disallowing a sum of Rs. 14,51,00,000/- u/s 14A of the Income Tax Act 1961, out of interest expenditure, claimed as deduction by the assessee. 1.1. Brief facts, as culled out from the orders of the authorities below, are that the assessee company is a non banking finance company and merchant banker, carried out trading in shares and securities. During the course of assessment proceedings, the AO observed that the assessee company received huge amount of dividend and it was observed by him from the balance sheet of the assessee company that assessee had received dividend income on stock- in- trade amounting to Rs. 32.053 crores. It was further observed by him that entire dividend income was claimed as exempt in the return of income filed by the assessee company. He observed that the assessee company did not attribute any expense towards earning of such exempted income. In view of these circumstances, the AO, after examining accounts of the assessee and the facts of the case, observed that the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; A.Y.2000- 01 A.Y.2001- 02 A.Y.2002-03 Rs. In million Securities held as Stock in Trade 1 Taxable 15,068.65 11,140.73 18,214.70 2 Tax-free --- 144.23 186.60 644.72 Total 15,212.88 11,327.33 18,859.42 Securities held as investment 3 Taxable 184.61 469.06 481.42 4 Tax-free 45.02 45.02 45.01 5 Share Capital 2,030.03 2,030.03 2,030.03 6 Reserves & Surplus 525.04 701.51 1,161.85 Total Own Funds(5+6) 2,555.07 2,731.54 3,191.88 Total Tax-free investments (2+4) 189.25 231.62 689.73 Total Taxable investments (1+3) 15,253.26 11,609.79 18,696.1 7 Own Fund (Incremental) 224.66 176.47 460.34 8 Depreciation 52.61 48.74 13.44 Total own cash fund(7+8) 277.27 225.21 473.78 On the basis of the aforesaid chart, it was argued by the Ld. Counsel that the facts have been overlooked o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assesee company. We found that the figures shown in the aforesaid chart, submitted by the Ld. Counsel, duly tally with the figures shown in the balance sheet. Thus, claim of the assessee that amount of 'own funds' of the assessee company are in far excess of the amount of 'tax free' investment appear to be factually correct to us. Ld. DR also could not point out any mistake therein. 1.6. Having considered and examined these facts and under these circumstances, let us now analyse the latest position of law in this regard. Hon'ble jurisdictional High Court in the case of HDFC Bank Ltd., supra has held that where the assessee's own funds and other non-interest bearing funds were more than investment in tax free securities, then no disallowance was required to be made out of the interest expenses u/s 14A. Hon'ble High Court has relied upon another judgment of Hon'ble Bombay High Court in the case of CIT v. Reliance Utilities & Power Ltd. 313 ITR 340 (Bom), relevant para of the judgment is reproduced below: "We find that the facts of the present case are squarely covered by the judgment in the case of Reliance Utilities & Power Ltd. (supra). The finding of fact given by the IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equity shares amounting to Rs. 78,600/- and the stamp duty of Rs. Rs. 3,46,250/-. The assessee has filed the appeal against the amount sustained by the Ld. CIT(A), whereas the revenue has accepted the order of Ld. CIT(A) on this issue. 2.3. Before us, Ld. Counsel has vehemently assailed the order of Ld. CIT(A) and contended that brokerage expenses are not incurred for earning dividend but for the purpose of acquiring investments. In support of his argument, he has relied upon following judgments: i.CIT vs. General Insurance Corporation (254 ITR 203) ii.CIT vs. Central Bank of India (130 Taxman 116) iii. CIT vs. Modem Terry Towers Ltd. (43s Taxmann.com 466)(2014) iv. CIT vs. United Collieries (203 ITR 857). He has placed copies of judgment and has read out the relevant portion of these judgments. On the other hand, Ld. DR has relied upon the order of Ld. CIT(A). 2.4. We have heard both the parties and have gone through the copies of judgments placed before us on this issue. It is observed by us that the Ld. CIT(A) has been quite fair in deleting the disallowance of Rs. 78,49,487/- made out of the brokerage expenditure of Rs. 1,56,98,973/-, on the ground that these were paid fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under: "2.12 As regards, the ad hoc disallowance of Rs. 2,50,10,0001-, I find that the-At) does not seems to have taken note of the suo moto disallowance of Rs. 18,23,39,510/-- made out of indirect expenses and has disallowed 5% of the total indirect expenses. This was the estimate of indirect expenses incurred for earning tax free income. This disallowance has resulted in double taxation to the extent of 5% of Rs. 18,23,39,5101-. There is substantial force in the Appellant's submission. Accordingly the AO is directed to delete the disallowance amounting 'to Rs. 91,16,975/- being 5% of Rs. 18,23,39,510/- out of aggregate disallowance of Rs. 2,50,10,000/- made by the AO. The Appellant gets part relief in regard to this component of disallowance also. In view of the foregoing, while the disallowance challenged in ground No.1 is being upheld, the Appellant gets part relief in ground No.2 & 3. All the three grounds are thus decided in the light of the above discussion." 3.2. Both of the parties have filed appeal against the order of Ld. CIT(A) on this issue. Before us, the Ld. Counsel has argued that consistent view is being taken by the Tribunal in cases of other assessees, holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the action of Ld. CIT(A) in upholding the action of Ld. AO in disallowing bad debts written off amounting to Rs. 81,69,611/. The AO has dealt with this issue at page 14 to 18 of the assessment order. 4.1. The brief facts are that the assessee claimed write off of amount of Rs. 81,69,611/- being the amount of dues from various parties towards non-receipt of TDS certificates. The AO disallowed the said amount by observing as under: "From the above submissions, it is clear that the assessee has received the entire amount of interest from the respective parties. While paying the interest to the assessee company the respective parties have deducted tax under various sections of IT Act. As per the statute this amount which is withheld is nothing but payment of tax on behalf of the assessee company and assessee company would have paid its tax liability after deducting this amount. In other words this amount is similar to payment of advance tax or self assessment tax. It is a known fact that the payment of income tax in any form i.e. by way of Advance-tax, or self assessment or TDS is only appropriation of income and is not allowable as a deductible expense. Hence the writing off of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the claim of deduction, both u/s 36(1)(vii) as well as u/s 37(1) of the Income Tax Act, 1961. The only constraint before us is that there is no clear finding, of either of the lower authorities, with regards to the facts that whether any credit for the TDS was claimed and granted to the assessee in the impugned year or in the subsequent years pertaining to those TDS certificates for which impugned amount of bad debts is being claimed. Therefore, we send this issue back to the file of the AO for the limited purpose of verification of the fact whether any claim has been granted to the assessee in this year or in any subsequent year with respect to these TDS certificates. If claim of assessee that no credit has been granted to the assessee, for want of these TDS certificates, is found to be factually correct, then the amount of bad debts claimed by the assessee shall be allowed as deduction. We direct accordingly. Ground no.4 of the assessee's appeal is allowed for statistical purposes. 5. Ground No.5 of the assessee's appeal: In this ground, the assessee has challenged the action of Ld. CIT(A) in bringing to tax the interest on deep discount bonds amounting to Rs. 84,50,164/- on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.3. Before us, Ld. Counsel of the assessee made detailed submissions and reiterated the submissions made before the Ld. CIT(A). Our attention was also drawn on the aforesaid circular of the board dated 12.03.1996 available at page no.34 of the paper book. Relevant portion of the circular is reproduced herein below for ready reference: "It is clarified that the difference between the issue and the redemption price of Deep Discount Bonds will be treated as interest income assessable under the Income -tax Act. On transfer of Bonds before maturity, the difference between the sale consideration and issue price will be treated as Capital Gains/Loss if the assessee purchased them by way of investment. However, in the case of an assessee who deals in purchase and sale of Bonds, Securities, etc., the profit or loss shall be treated as trading profit or loss." 5.4. Consideration of factual aspects and perusal of above, would clearly show that the Board has envisaged that on transfer of Bonds before the maturity, the difference between the sale consideration and issue price will be treated as capital gain/loss or profit/loss, depending upon the nature of activity carried out by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m no.3BA, which was not enclosed by the assessee with the return of income filed by the assessee. However, after raising of query by the AO regarding claim of Y2K expenses, the assessee had filed the audit report in Form No.3BA dated 29.01.2003 before the AO during course of assessment proceedings, but the AO was not satisfied on the ground that the said audit report should have been filed along with return of income, and filing of the auditors' report during the course of assessment proceedings is not equivalent to making mandatory compliance of the statutory requirements of section 36(1)(xi). Accordingly the disallowance was made by the AO in the assessment order. 6.2. Before the Ld. CIT(A), the assessee contested this matter and submitted in detail that due compliance has been made by the assessee as prescribed by law and that AO was not justified in making the disallowance of the legitimate claim of the assessee. Reliance was placed by the assessee on the decisions of Hon'ble Bombay High Court in the case of CIT v. Shivanand Electronics , [1994] 209 ITR 63 and of Hon'ble Calcutta High Court in the case of CIT-vs-Magnum Export (Pvt.) Ltd. [262 ITR 10] (Calcutta). The Ld. CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e benefits of the claim and Ld. CIT(A) is justified in granting relief to the assessee in this regard. We uphold the order of Ld. CIT(A) on this ground and accordingly Ground no.4 of Revenue's appeal is dismissed. So far as, Ground raised by the assessee with respect to disallowance of Rs. 8,80,000/- is concerned, made by the AO on the ground of prior period expenses, we have seen bills of expenses with the assistance of Ld. Counsel. It is noted by us that paper book pages no.44 and 48 are the bills with respect to impugned expenditure. It is seen from the bills that, in the preceding year, impugned amount was paid by the assessee on account of advance for an ongoing project. The final amount was payable on implementation or on delivery of the product. The undisputed fact is that implementation/execution/delivery of the work/ project was done during the year under consideration. Thus, the expenses got crystallised during this year. Therefore, these expenses, pertain to the year under consideration, and have been incurred during the year. In our view, these expenses should not have been disallowed, therefore disallowance of Rs. 8,80,000/- is directed to be deleted and consequently ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f in the books. It is not necessary for the Appellant to establish that the debts has become bad. Merely because part of the debt was recovered subsequently; does not mean that the debt has not become bad. It was pointed out that the amount subsequently recovered has been offered to tax. The ld. Representative for' the Appellant drew support from the decision of Hon'ble ITAT, Mumbai in the case reported at 86 ITD 193(tm), wherein, it was held that it is not obligatory for the Assessee to place demonstrative proof for establishing the debt as bad and if he has taken steps to write off in the previous year, it is a sufficient compliance for claiming, debt as bad debt. Support has also been drawn from the decision reported at 152 CTR 119 (Guj) and the decision of Hon'b le ITAT, Calcutta, reported at 153 ITD 3 13. After carefully analysing the submissions of the assessee, the Ld. CIT(A) decided this issue in favour of the assesee and deleted the disallowance made by the AO, keeping in view the facts of the case and judgments relied upon by the assessee. Now, Revenue has brought this issue before the Tribunal. 7.3. Before us, Ld. Counsel appearing on behalf of the assessee has submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement of law led to enormous litigation. With a view to avoid this litigation and hardships to the assessee, the provision in this regard was simplified and now in the post amended law, the only requirement is that the impugned amount is to be written off as bad debt in the books of account of the assessee company and to be debited accordingly in the profit and loss account of the assessee. Thus, in other words, in the amended law there is no requirement of proving the impugned amount of debt as 'bad'. Further, it has been also been provided under the law that subsequently if any recovery is made out of the amounts claimed as bad debt, then the same would be included in the income of the assessee in the year in which recovery is made. Thus, the law is now plain and simple. It has been so clarified in this very manner by Hon'ble Supreme Court also in the case of T.R.F. Ltd. (supra). It is further noted by us that no doubts, whatsover, have been expressed by the AO on the genuineness of the claim or about the nature of the claim. The objection raised by the AO in the assessment order is not sustainable under the law and therefore, the Ld. CIT(A) has rightly deleted the addition made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also set aside. The AO shall be at liberty to initiate the penalty proceedings, if considered appropriate, after this issue is re-decided by the AO, as per law. 8.5. As a result thereof, penalty appeal of the Revenue is partly allowed. Assessee's appeal in ITA No.4152/Mum/2005 & Revenue's appeal in ITA No.4103/Mum/2005 for, Assessment Year 2001-02:- These cross appeals were filed by the Revenue and assessee against the order of Ld. CIT(A) dated 29.03.2005 for the assessment year 2001-02. 9. Ground No.1 of assessee's appeal: The assessee has challenged the action of Ld. CIT(A) in confirming the disallowance made by the AO on account of interest amounting to Rs. 1,61,23,300/-. 9.1. This ground is identical to the Ground No.1 of assessee's appeal for A.Y. 2000-01 in ITA No.4325/Mum/2004,(supra). We have decided this issue in favour of the assessee and held that no disallowance was called for, out of interest expenses u/s 14A. While deciding appeal for 2001-02, the Ld. CIT(A) has followed the order of A.Y.2000-01 of its predecessor and confirmed the disallowance. It is noted by us that facts are identical in this year as well and therefore, following our own order for A.Y. 2000-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in assessee's appeal in A.Y. 2000-01, as Ground No.5, wherein this addition has been deleted. The Ld. CIT(A) has followed the order for A.Y. 2000-01 to uphold the addition made by the AO. Thus, we find that admittedly facts are identical in this year as well. Thus, following our own order, we hold that the addition made by AO is not sustainable in law and therefore, the same is directed to be deleted. Consequently, Ground No.4 of assessee's appeal is allowed. 13. In Ground No.5 of assesseee's appeal; The assessee has challenged the action of Ld. CIT(A) in invoking provisions of section 94(7) of the Act and making an addition of Rs. 1,33,55,778/-. 13.1. It is seen that no addition was made by the AO in the assessment order in this regard. Ld. CIT(A) for first time during the course of appellate proceedings, found that out of the total dividend income amounting to Rs. 2.22 crores, dividend for an amount of Rs. 1,66,76,805/- pertained to the purchase/sale of units of various mutual funds. The details of these transactions have been reproduced by the Ld. CIT(A) in appellate order at page no.11 and 12. The Ld. CIT(A) further observed that the assessee company had incurred a loss of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt Share and Stock Brokers (P) Ltd. (supra), Ld. DR had nothing to submit. 13.3. We have carefully considered the submissions made by both the sides. We find that this issue stands covered with the judgment of Hon'ble Supreme Court in the case of Walfort Share and Stock Brokers (P) Ltd. (supra). The relevant portion of the judgment as relied upon by the Ld. Counsel is reproduced hereunder: "Impact of section 94(7) The next point which arose for determination was whether the 'loss' pertaining to exempt income was deductible against the chargeable income. The real objection of the department appeared to be that the assessee was getting tax-free dividend and at the same time, it was claiming loss on the sale of the units; and that the assessee had purposely and in a planned manner entered into a pre-meditated transaction of buying and selling units yielding exempt dividends with full knowledge about the fall in the NAV after the record date and the payment of tax-free dividend and, therefore, loss on sale was not genuine. There was no merit in the arguments of the department. The lead matter covered assessment years before insertion of section 94(7) vide the Finance Act, 2001 with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 14A was inserted with effect from 1-4-1962 whereas section 94(7) was inserted with effect from 1-4-2002. The reason is obvious, the Parliament realized that several public sector undertakings and public sector enterprises had invested huge amounts over last couple of years in the impugned dividend stripping transactions so also declaration of dividends by mutual fund are being vetted and regulated by the SEBI for last couple of years. If section 94(7) would have been brought into effect from 1-4-1962, as in the case of section 14A, it would have resulted in reversal of large number of transactions. This could be one reason why the Parliament intended to give effect to section 94(7) only with effect from 1-4-2002. However, this last reasoning has nothing to do with the interpretations given to sections 14A and 94(7). [Paras 19 and 20] Reconciliation of sections 14 and 94(7) The next question was about reconciliation of sections 14A and 94(7). The two operate in different fields. Section 14A deals with disallowance of expenditure incurred in earning tax-free income against the profits of the accounting year under sections 30 to 37. On the other hand, section 94(7) refers to di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken by it to recover its dues from these parties. 2. The names of various parties cited above have never appeared as defaulter anywhere. 3. Had assessee taken appropriate legal action against these parties, by no stretch of imagination, it can be said that these parties would not have paid their dues." In nutshell, the AO held that the assessee failed to establish justification of its write off of the debts. As per AO for making claim, it was necessary for the assessee to establish that the assessee has utilized all sources of means available to it to recover its dues and its debts cannot be simply allowed because it has been written off in the books of accounts. Thus, claim of the assessee was rejected. 14.2. This issue was contested by the assessee before the Ld. CIT(A). The Ld. CIT(A), relying upon the order of assessment year 2000-01 in the assessee's own case, held that the assessee company was well within its rights to claim the aforesaid amount as bad debts and accordingly this disallowance was deleted. 14.3. Before us, Ld. Counsel of the assessee company has submitted that now this issue has been settled by Hon'ble Supreme Court in the case of T.R.F. Ltd. v. CIT (20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our attention upon the judgment of Hon'ble Supreme Court in the case of SA Builders vs. CIT 288 ITR 1 (SC). On the other hand, the Ld. DR relied upon the orders of Ld. CIT(A) and the AO. 15.4 We have heard both the sides. It is seen by us that facts in the preceding years are identical. In addition to the above, it is further observed that Hon'ble Supreme Court in the case of SA Builders Ltd.,supra, had observed that even if expenditure may not have been incurred under any legal obligation, yet it is allowable as business expenditure if it was incurred on the grounds of commercial expediency. Thus keeping in view the aforesaid factual position and clear position of law and following the order of assessment years 2000-01 and 2001-02, we decide this issue in favour of the assessee and accordingly disallowance of interest of Rs. 59,40,000/- is directed to be deleted. Thus, total disallowance of Rs. 11,47,10,000/- made by the AO is also deleted and consequently Grounds no.1 and 2 of the assessee's appeal are allowed. 16. Ground No.3 of assessee's appeal and Ground No.2 of Revenue's appeal: In these grounds the assessee has challenged the action of Ld. CIT(A) in upholding the action ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This issue has already been decided in favour of the assessee in earlier years. Thus following the orders of earlier years, we decide this issue in favour of the assessee. Ground No 5 of assesse's appeal is allowed. 17.4. Ground No.6 of assessee's appeal: The assessee company is aggrieved against the action of Ld. CIT(A) in confirming the action of the AO in treating the loss of Rs. 20,77,919/- arising from the sale of shares of South Indian Bank as 'speculative loss', which was claimed by the assessee as 'business loss'. The assessee is also aggrieved against the action of the AO in not allowing the Long Term Capital Loss of Rs. 7,74,718/- arising from the sale of the aforesaid shares. 17.5. The facts of the case are that the assessee had purchased shares of South India Bank Ltd. on 16.3.1995 @ Rs. 60/- per share. These shares were originally held as investments and were shown as such in the balance sheet. However, w.e.f. 01.04.1996, the assessee converted these shares into stock in trade. Some of these shares were sold during the previous year relevant to A.Y. 2002-2003. The gain/loss equivalent to the difference between the indexed purchase price and the market value of the sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... speculative income and Rs. 30,54,731/-. Pursuant to a notice by the Assessing Officer, the assessee vide letter dated 05/10/2011 filed statement of short term capital loss and long term capital gains. The reply of the assessee is reproduced hereunder:- "In this context it is submitted that the assessee decided to carry on share investment activity. With that intention the assessee bout the shares and held them as investments in the books of accounts. The memorandum and article of association also authorize the company to make investment in the shares and securities of other companies. Your honours attentions is also invited to the definition of short term M/s Mother India Securities Pvt. Ltd. capital asset as provided u/s 2(42A) of the income Tax Act which states that if the shares are held by an assessee for not more than 12 months the same are to be treated as short term capital asset and accordingly as per section 2(42B) the capital gain arising on the transfer of such asset should be treated as short term capital gain." However, the ld. Assessing Officer in view of explanation to section 73 of the Act held the transaction as speculative in nature and the entire long term cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the assessee has no income from any other speculation business, shall, subject to the other provisions of this chapter, be carried forward to the following assessment years and (i) It shall be set off against the profit and gains, if any, of any speculation business carried on by him assessable for that assessment year and M/s Mother India Securities Pvt. Ltd. (ii) If the loss cannot be wholly set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on. Thus, we find no infirmity in the conclusion of the ld. Commissioner of Income Tax (Appeals) because there is no positive income available for taxation for the current year and even if, these are held to be speculative transactions, the loss was required to be set off against the profit during the year itself as per sub-section 1 to section 73. However, we are in agreement with the finding of the ld. Commissioner of Income Tax (Appeals) that the LTCG and STCG were not speculative transactions." On the other hand, the Ld. DR has relied upon the orders of Ld. CIT(A) and the AO and has vehemently argued that these losses have been rightly disallowed. It was further submitted by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tinuously; 2. In the fast changing business techniques, these expenses are incurred frequently for keeping up with constant modernization and hence they do not fall within the ambit of capital expenditure; 3. The computer software expenses are wholly and exclusively incurred for the purpose of business; 4. These expenses enable the management to carry on the business more efficiently and profitably; 5. The life cycle of such software is computer technology and obsolescence rate is also high; The AO was not satisfied and expenses incurred on these softwares were held to be disallowable. 18.2. Before the Ld. CIT(A), the assessee made detailed submissions reiterating the arguments made before the AO, but Ld. CIT(A) was also not satisfied and the disallowance made by the AO was confirmed. 18.3. Before us, Ld. Counsel has made detailed submissions and submitted that modifications in existing software to facilitate assessee's business are allowable as revenue expenditure. Reliance has been placed by the ld. Counsel on the following judgment:- (i) CIT vs. Raychem RPG Ltd. (346 ITR 138)(Bombay) (ii) CIT vs. Amway India Enterprises (2012) (346 ITR 342) (iii) CIT vs. Asahi India Sa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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