TMI Blog2018 (9) TMI 1850X X X X Extracts X X X X X X X X Extracts X X X X ..... l of the Revenue is allowed. MAT computation - Disallowances made under the provisions of Sec. 14A r.w.r. 8D cannot be applied to the provision of Sec. 115JB as per the direction of the Hon'ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. [ 2014 (11) TMI 1169 - CALCUTTA HIGH COURT] Disallowance as per the clause (f) to Explanation-1 of Sec. 115JB independently on account of dividend income. However, we also note that there is no mechanism given under the clause (f) to Explanation-1 of Sec. 115JB to workout/ determine the disallowance. Therefore in the given facts circumstances, we feel that ad-hoc disallowance will service the justice to the Revenue and assessee. Therefore to put the dispute to rest in given facts circumstances, we direct for the ad-hoc disallowance to avoid the multiplicity of the proceedings and unnecessary litigation. Thus we direct the AO to make the disallowance of ₹ 5 Lacs under clause (f) to Explanation-1 of Sec. 115JB of the Act. This fact on record that we have restored other cases involving identical issues to the file of AO for making the disallowance as per the clause (f) to Explanation-1 of Sec. 115J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 1, 2 3 is that ld. CIT(A) erred in deleting the addition made by the Assessing Officer for ₹ 85,65,658/- on account of bad debts. 4. Briefly stated facts are that the assessee is a Private Limited Company and engaged in the business of financing and trading activity of shares and securities as well as agriculture produce. The assessee in the year under consideration has claimed bad debts amounting to ₹ 1,41,03,036/- only. The assessee during the assessment proceedings submitted that it has given loan to M/s. Roopa Plastics Technology Pvt Ltd in the assessment year 2005-06 for an amount of ₹ 2.10 crores. The assessee, up-to to assessment year 2009-10, has charged interest on such loan from the party amounting to ₹ 55,37,378/- which was offered to tax. However, the financial condition of M/s. Roopa Plastics Technology Pvt Ltd was very weak; therefore, it failed to return the amount of loan to the assessee. As such there was outstanding balance of ₹ 2,41,03,036/- as on 01.04.2010, M/s. Roopa Plastics Technology Pvt Ltd paid a sum of ₹ 1 crore on 04.06.2010. The assessee has written off the balance amount of ₹ 1,41,03,036/- in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... money. Out of the funds amounting to ₹ 84.07 crores available, ₹ 67.89 crores has been given in the form of loans and advances. Similar was the ratio for the previous financial year. Hence, loan given to M/s. Roopa Plastic Technology Pvt. Ltd. was given as loan in the normal course of business. Secondly, the debt had been outstanding for the long time in the books of the appellant. The A.O is not doubting the bad debt itself. A similar issue was adjudicated upon by the then CIT(A) in the case of Nirma Ltd. vide order No.CIT(A)-XI/445/ACIT.Cir-5/2013-14 dated 20/5/2015 for A.Y.2010-11 At para-9.3 of the said order the then CIT(A)-9 has allowed the bad debt claimed by the appellant by relying on the case of CIT vs Wood Ward Governors India Pvt. Ltd. 179 Taxman 326 (SC) as well as by relying on the case of CIT vs TRF Ltd. 323 ITR 397 (SC). 5.3 It is clear from the section 36(2) of the Act that the bad debt can be claimed by an appellant who is involved in the business of banking or money lending. The section does not mandate that the appellant has to be registered as a scheduled bank or an NBFC with the RBI. The balance sheet clearly reflects the nature of bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e view of the Assessing Officer by observing that the debtors was written off by the assessee for ₹ 85,65,658/- in the course of its business activities. 8.1 From the preceding discussion, we note that the activity of the assessee being financing has not been doubted by the Assessing Officer. Thus, it is a fact on record that the loan was given by the assessee to M/s. Roopa Plactics Technology Pvt Ltd. in the course of business of the assessee. The provisions of Section 36(2)(i) of the Act allows deduction for the debtors if it represents the money lent in the ordinary course of business. The relevant provision of Section 36(2)(i) reads as under:- 1(2) In making any deduction for a bad debt or part thereof, the following provisions shall apply- 12[(i) no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee;] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made in respect of such expenditure. [Emphasis supplied] Section 145 : Method of Accounting.-(1) Income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources' shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144. 13. As stated above, one of the main arguments advanced by the learned Additional Solicitor General on behalf of the Department before us was that the word expenditure in section 37(1) connotes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id amount has not gone out from the pocket of the assessee. This view of the Madhya Pradesh High Court has been approved by this Court in the case of Madras Industrial Investment Corpn. Ltd. v. CIT [1977] 225 ITR 802 . According to the Law and Practice of Incometax by Kanga and Palkhivala, section 37(1) is a residuary section extending the allowance to items of business expenditure not covered by sections 30 to 36. This section, according to the learned Author, covers cases of business expenditure only, and not of business losses which are, however, deductible on ordinary principles of commercial accounting. (see page 617 of the eighth edition). It is this principle which attracts the provisions of section 145. That section recognizes the rights of a trader to adopt either the cash system or the mercantile system of accounting. The quantum of allowances permitted to be deducted under diverse heads under sections 30 to 43C from the income, profits and gains of a business would differ according to the system adopted. This is made clear by defining the word paid in section 43(2), which is used in several sections 30 to 43C, as meaning actually paid or incurred according to the metho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng can be superseded or modified by legislative enactment. This is where section 145(2) comes into play. Under that section, the Central Government is empowered to notify from time to time the Accounting Standards to be followed by any class of assessees or in respect of any class of income. Accordingly, under section 209 of the Companies Act, mercantile system of accounting is made mandatory for companies. In other words, accounting standard which is continuously adopted by an assessee can be superseded or modified by Legislative intervention. However, but for such intervention or in cases falling under section 145(3), the method of accounting undertaken by the assessee continuously is supreme. In the present batch of cases, there is no finding given by the Assessing Officer on the correctness or completeness of the accounts of the assessee. Equally, there is no finding given by the Assessing Officer stating that the assessee has not complied with the accounting standards. 15. For the reasons given hereinabove, we hold that, in the present case, the loss suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owever, the Assessing Officer disagreed with the submissions of the assessee on the ground that the assessee is using mixed funds (own funds + interest bearing funds) in the investments; therefore, the assessee must have used some interest bearing funds in such investments. Similarly, the Assessing Officer also opined that the assessee must have incurred some administrative expenses in relation to such income. Accordingly, the Assessing Officer, in the absence of any explanation from the side of the assessee evidencing that no borrowed funds have been used in such investment and no administrative expenditure has incurred in relation to such income, the Assessing Officer invoked the provisions of Section 14A read with Rule 8D and made the following disallowances:- Sr. No. Particulars Amount (Rs.) 1 Direct expenses under Rule 8D(2)(i) Nil 2 Interest expenditure under Rule 8(2)(ii) 70,49,073 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the appellant has also relied on various judgments discussing the availability of non-interest bearing funds and disallowance u/s.14A of the Act. It is a matter of fact that the appellant had the share capital and reserves amounting to ₹ 16.08 crores against the investment of ₹ 1.26 crores which is substantially more than the investment. It is seen from the submissions that these investments have not been made out of any borrowed funds. The appellant has placed its reliance on the judgment of jurisdictional High Court in the case of UTI Bank Ltd. 32 Taxman.com 370 (Guj.) and CIT vs Suzlon Energy Ltd. 354 ITR 630 (Guj). In both the cases it has been held that where the assessee has sufficient interest free funds to meet its tax free investment yielding exempt income then it can be presumed that the 'investments were made from interest free funds and not loaned funds as well as there exist no direct nexus between interest bearing borrowed funds and such investments. Therefore, no disallowance u/s.14A is warranted. The appellant has also relied upon various other case laws as mentioned in the submission of the appellant. I agree with the principles laid down in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rming the order of Hon'ble Tribunal, allowing the net interest expenses for making disallowance u/s. 14A r.w. Rule 8D. Order enclosed with chart. f) Assessee company had interest expenses of ₹ 5.18 crores as against interest income of ₹ 1.08 crores, resulting in to net interest expenses of ₹ 4.10 crores. Net interest expense is for financing business. It has nothing to with investment made in shares and securities from where dividend income is earned. Hence, no disallowance u/s. 14A towards interest expenses could be made. g) New tax free investment was made for ₹ 46.43 lacs during the year under consideration. The same were acquired out of sale proceeds arising on sale of equity shares of Nirma Ltd. Hence, the assessee did not incur any interest expense for acquisition of these shares. h) The assessee company was allotted equity shares of Saurashtra Chemicals Ltd. in lieu of Preference shares of Saurashtra Chemicals Ltd. This was on exchange of Preference shares which has not resulted into any financial expenditure. And the learned Authorized Representative vehemently supported the order of the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14.1 From the above, there remains no ambiguity that own-funds of the assessee is exceeded the investment as discussed above. In such circumstances, the Hon ble Gujarat High Court in the case of UTI Bank Ltd. reported in 32 taxmann.com 370 has observed that where sufficient interest-free funds are available to meet the amount of investment then no disallowance on account of interest expenses is warranted under section 14A r.w.r. 8D of Income Tax Rules. The relevant extract of the order is reproduced below: 3. The issue pertains to disallowance under Section 14A of the Act made by the Assessing Officer which was partially deleted by the CIT(A). Such order of CIT(A) gave rise to cross appeals at the hands of the assessee as well as the revenue. Tribunal confirmed the view of the CIT(A) making following observations: 33. We have heard the rival contentions and perused the material on record, The undisputed facts are that during the year the assessee has earned interest of ₹ 17.45 crore on tax free bond and debentures as against which the assessee had suo motu disallowed ₹ 5.53 crore being the interest expenses u/s. 14A as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses can be made. We accordingly direct for the deletion of the addition made by the AO and allow this ground of the assessee. 4. In our opinion the Tribunal has committed no error. Basically the entire disallowance has been made on the basis of facts emerging on record. The Tribunal also relied on the decision of the Bombay High Court in case of CIT v. Reliance Utilities Power Ltd. [2009] 313 ITR 340/178 Taxman 135. Additionally, we find that the Assessing Officer had, without giving a finding as to how much administrative expenditure have been incurred to earn the exempt income, had made disallowance. In the earlier years also, similar position obtained. That being the fact, no question of law arises. Thus, given above, we conclude that there is no question of making the disallowance on account of interest expenses in the given facts and circumstances. 14.2 Coming to the administrative expenses claimed by the assessee for ₹ 6,36,463/-, we note that, in similar facts and circumstances, the Hon ble ITAT in own case of the assessee in ITA No.1121/Ahd/2016 pertaining to Assessment Year 2009-10 has upheld the disallowance on acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance made U/S.14A of the Act of ₹ 1,83,74,928/-. 2. The Ld. CIT(A) has erred in law and on facts by not appreciating that the assessee could not establish that the investment in assets yielding exempt income was clearly made out of interest free funds available. 3. The Ld. CIT(A) has erred in law and on facts in deleting the addition of ₹ 1,83,74,928/- made in book profit on account of disallowance u/s.14A of the Act for MAT purposes. 4. On the facts and circumstances of the case, the Ld. Commissioner of Income Tax(A) ought to have upheld the order of the Assessing Officer. 18. The first issue raised by the Revenue in Ground Nos. 1 2 is that the ld. CIT(A) erred in deleting the addition made by the Assessing Officer for ₹ 1,83,74,928/- only under section 14A r.w.r. 8D of Income Tax Rule. 19. At the outset, we note that the identical issue has already been decided by us in ITA No.790/Ahd/2016 vide paragraph nos. 22-29, wherein the Revenue s appeal has been partly allowed. Respectfully following the same, the ground nos. 1 2 of the appeal raised by the Revenue are partly allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Appeal No. 1249/2014 where the following question was raised: (iii) Whether on the facts and in the circumstances of the case and in law, the ITAT was justified in holding that adjustment made on account of disallowance u/s 14A of the Act in computation of book profit u/s115JB of the Act is not as per law without appreciating that the amount disallowable under section 14A is covered under clause (f) of Explanation to section 115JB (2) and, thus said amount has to be added back while computing amount of book profits? 25.1 The above question raised before the Hon ble Gujarat High Court was answered as below: 8. Taking into consideration the evidence on record and considering the decision of this court in the case of Commissioner of Income Tax I vs. Gujarat State Fertilizers Chemicals Ltd. (supra), we are of the opinion that issue Nos. (iii) and (iv) required to be answered in favour of the assessee and against the revenue. In that view of the matter, we answer questions (iii) and (iv) referred to us in favour of the assessee and against the revenue. The appeal of revenue is dismissed. 25.2 We also note that in the rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter of computation is a complete code in itself and resort need not and cannot be made to section 14A of the Act. 25.6 Given above, we hold that the disallowances made under the provisions of Sec. 14A r.w.r. 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB of the Act as per the direction of the Hon'ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. (Supra). 25.7 Now the question arises to determine the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently on account of dividend income. However, we also note that there is no mechanism given under the clause (f) to Explanation-1 of Sec. 115JB of the Act to workout/ determine the disallowance. Therefore in the given facts circumstances, we feel that ad-hoc disallowance will service the justice to the Revenue and assessee. Therefore to put the dispute to rest in given facts circumstances, we direct for the ad-hoc disallowance to avoid the multiplicity of the proceedings and unnecessary litigation. Thus we direct the AO to make the disallowance of ₹ 5 Lacs under clause (f) to Explanation-1 of Sec. 115JB of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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