TMI Blog2017 (8) TMI 1609X X X X Extracts X X X X X X X X Extracts X X X X ..... nd decide the issue a fresh in accordance with law in the light of the available decisions of the higher/highest courts/court. It is also held that it will not be an impediment or reason to deny the claim to the assessee that the assessee itself offered the disallowance in its return of income, if the assessee otherwise is found legally entitled to such a claim. Disallowance u/s 14A - Non - recording of satisfaction - HELD THAT:- The satisfaction of the AO must be arrived at on an objective basis. In a situation where the accounts of the assessee furnish an objective basis for the AO to arrive at a satisfaction in regard to the correctness of the claim of the assessee, there would be no warrant for taking recourse to the method prescribed by the rules. An objective satisfaction contemplates a notice to the assessee, an opportunity to the assessee to place on record all the relevant facts including his accounts and in the event that he comes to the conclusion that he is not satisfied with the claim of the assessee. As observed above, in the case in hand, the AO has not followed the guidelines of objective satisfaction as laid down in the case of Godrej Boyce [ 2010 (8) T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lent in the ordinary course of business of money lending carried on by the assessee. In the case in hand the OCDs were part of the investment portfolio of the Predecessor Company and not business debt. The same, therefore, cannot be held to be debts due in the hands of the successor / assessee. This issue is accordingly decided against the assessee. Write off of irrecoverable principle amount of overdue debentures was allowable as deduction to the assessee in normal course of business of finance / investment activity - HELD THAT:- Restore this issue to the file of the Assessing officer to consider this contention of the assessee as to whether the amount of said OCDs can be treated as business loss to the assessee being loss of business asset. AO is directed to re-adjudicate this issue after giving proper opportunity to the assessee of hearing and furnish necessary evidence in this regard and then decide the same in accordance with law. - ITA No. 714/Mum/2015 - - - Dated:- 31-8-2017 - Shri Sanjay Garg, Judicial Member Sh Rajesh Kumar, Accountant Member Appellant By : Sh. Hiro Rai Respondent By : Smt. Arju Garodia ORDER Sanjay Garg, The pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Learned Commissioner of Income Tax (Appeals) also erred in not appreciating the fact that the deduction for irrecoverable interest on the said overdue matured debentures has already been allowed as bad-debt written-off by the ITAT while computing Income from Business/Profession in A.Y. 2007-08. 5. The Learned Commissioner of Income Tax (Appeals) erred in not appreciating the fact that the write off of irrecoverable principal amount of overdue matured debentures was allowable as deduction to the Appellant in its normal course of business as finance / investment company. 3. The Department has strongly objected to the admission of additional grounds at this stage. In their letter dated 28.4.2017, it has been pleaded that the ground no.1 of the revised grounds raised by the assessee relates to disallowance u/s 14A the Income-tax Act, 1961 (in short 'the Act'). That the said ground does not arise at all from the order of the CIT(A) and is not maintainable. It has been pleaded that the Ld. CIT(A) has not confirmed the disallowance of ₹ 1,97,70,000/- as pleaded by the assessee rather the CIT(A) in para 5.1 of his order has directed the Assessing officer to verify ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 14A of the Act, the brief facts relating to this issue as culled out from the order of the Assessing officer are that the assessee company is engaged in the business of advancement of loan and investing in shares and securities. During the assessment proceedings, on perusal of the profit and loss account, the Assessing officer noticed that the assessee company had earned dividend income of ₹ 16,88,14,470/-. The assessee had suo moto disallowed a sum of ₹ 1,07,47,339/- as expenditure relatable to the earning of the aforesaid tax exempt dividend income as per the provisions of section 14A of the Act. The Assessing officer, however, show caused the assessee as to why the disallowance should not be worked out as per the working prescribed under Rule 8D of the I.T. Rules. The assessee in this respect gave the following explanation:- Explanation as to why the disallowance u/s 14A should not be made as per rule 8D 1.1 Kindly note that the assessee has taxable business income of ₹ 4,09,60,958/- and Long Term Capital Gain of ₹ 182,397 part from exempt dividend income of ₹ 16,88,14,770/- 1.2 For earning the taxable business income, the assessee has i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 171,34 Less: amount written off (direct nexus to the business income) 166,09 Less: Expenses disallowed as per the computation of income Provision for gratuity 230 Provision for leave encashment 133 ESOP 924 1287 Expenditure to be allocated in to taxable and exempt dividend income for computation of disallowance u/s 14A 15,322 1.5 Out of the above expenses debited to the profit and loss account, the disallowance u/s 14A is to be made on some logical and rational basis. Considering the ratio of Dividend income to the total income, the proportionate disallowance can be computed as under:- Total income (in Rs. 000) ₹ 240,663 100% Proportionate disallowance (in Rs. 000) ₹ 1,68,614/- 70% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance which was equal to the difference of amount of total expenditure booked in profit and loss account and the suo moto disallowance made by the assessee u/s 14A of the Act. That the said disallowance was made by the Assessing officer without proper application of section 14A of the Act. That even the amount of ₹ 39,23,333/- was on account of expenditure incurred in respect of certain specific items such as death gratuity, leave encashment, standard assets etc. was not at all relatable to the earning of the exempt income. It was also pleaded that the assessee had earned a taxable income of ₹ 4,11,43,355/- from business, for earning of which the assessee must have incurred expenditure. The assessee thereafter submitted the details of various expenditure and pleaded that none of the expenditure was directly relatable to the earning of the exempt income accept the D-mat expenses and further that the disallowance u/s 14A of the Act under the circumstances was required to be made on some logical and rational basis. Considering the ratio of dividend income (exempt income) of the total income, the proportionate disallowance u/s 14A of the Act was calculated at ₹ 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age, the Ld. counsel for the assessee has contended that no disallowance u/s 14A was attracted in this case. He has pleaded that the assessee company is an investment company and that it had made strategic investment in its associate / subsidiary companies as part of its business activity and to have control over them. The investments were not made for the purpose of earning of dividend or tax exempt income, rather, the dividend income earned by the assessee was incidental to the above business strategy of the assessee, therefore, the addition made by the lower authorities u/s 14A was not justified. He, to stress upon the point that in case of strategic investment made by a company in its subsidiary company, out of its business activity or out of the business exigencies such as to have control over that company, the assessee is entitled to deduction of interest paid on the borrowed amount for making such investment u/s 36(i)(iii) of the Act and that the disallowance u/s 14 A in relation to such strategic investments is not attracted, has relied upon the following case laws:- 1. 202 Taxman 368 (Bom) CIT Vs. Phil Corporation Ltd. 2. ITA NO. 6173/Mum/2012 M/s Shree Shyamkamal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the deletion of addition of ₹ 4 crore offered during the survey action and thereby offered in the return of income can be allowed at this stage? The Ld. Counsel for the assessee in this respect has placed reliance on the decision of the Hon ble Supreme Court in the case of National Thermal Power Co. Ltd. vs. CIT 229 ITR 383. The facts before the Hon ble Supreme Court were that the assessee in that case offered the interest amount for taxation and the assessment was completed on that basis. Before the Ld. CIT(A), the assessee though had taken a number of grounds of appeal, however, the inclusion of the said amount of interest was not challenged. The inclusion of the said amount of interest was not objected to even in the grounds of appeal as originally filed before the Tribunal. However, the assessee by way of subsequent letter raised the additional ground in relation to the said inclusion of interest into the income of the assessee. In the above circumstances, the question before the Hon ble Supreme Court was Where on the facts found by the authorities below a question of law arises (though not raised before the authorities) which bears on the tax liability of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt observed that apart from the above, there was nothing in section 254 or section 251 which would indicate that the appellate authorities are confined to considering only the objections raised before them or allowed to be raised before them either by the assessee or by the department, as the case may be. They can consider the entire proceedings to determine the tax liability of the assessee. The Hon ble Bombay High Court in the case of CIT vs. Pruthvi Brokers and Shareholders Pvt. Ltd. (2012) 349 ITR 336 (Bom.) has observed that the assessee is entitled to raise not merely additional legal submissions before the appellate authorities, but is also entitled to raise additional clams before them. The appellate authorities have jurisdiction to deal not merely with additional grounds, which became available on account of change of circumstances or law, but with additional grounds which were available when the return was filed. The words could not have been raised must be construed liberally and not strictly. There may be several factors justifying the raising of a new plea in an appeal and each case must be considered on its own facts. The co-ordinate bench of the Tribunal in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ught to have considered the claim of the assessee in exercise of his appellate jurisdiction under section 250 of the Act. Moreover, if the assessee is, otherwise, entitled to a claim of deduction but due to his ignorance or for some other reason could not claim the same in the return of income, but has raised his claim before the appellate authority, the appellate authority should have looked into the same. The assessee cannot be burdened with the taxes which he otherwise is not liable to pay under the law. Even a duty has also been cast upon the Income Tax Authorities to charge the legitimate tax from the tax payers. They are not there to punish the tax payers for their bonafide mistakes. In view of our above observations, it is held that the assessee is not liable to pay Capital Gains Tax, though originally he had subjected himself to the said tax as per his return of income. The AO is directed to process the claim of refund in this respect as per provisions of the law. 21. In view of the above observation, we hold that the Ld. CIT(A) though, rightly admitted the question of law as to whether the income offered by the assessee in the return of income consequent to offer made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is found to have furnished inaccurate particulars of income or concealed his income. In such a situation, if the assessee has mistakenly offered certain amount for taxation, which he is legally not supposed to offer, in our view, he can also raise such an additional claim before the appellate authorities. The assessee cannot be put to a disadvantageous position because of mere technicalities. The assessee cannot be burdened with the taxes which he otherwise is not liable to pay under the law. Even a duty has also been cast upon the Income Tax Authorities to charge the legitimate tax from the tax payers. They are not there to punish the tax payers for their bonafide mistakes. In view of our above observations and in the light of the proposition of law laid down in the decisions of Hon ble Supreme Court in the case of National Thermal Power Company Ltd. vs. CIT (supra), Full Bench of the Hon ble High Court in the case of Ahmedabad Electricity Co. Ltd. vs. CIT (supra) and another decision of the Hon ble Bombay High Court in the case of CIT vs. CIT vs. Pruthvi Brokers and Shareholders Pvt. Ltd. (supra) and of the Coordinate Bench decision in the case of Pandoo P. Naig (sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he is not satisfied with the claim of the assessee. However, as observed above, in the case in hand, the Assessing officer has not followed the guidelines of objective satisfaction as laid down by the Hon'ble Bombay High Court in the case of Godrej Boyce (supra) while making the disallowance. He without recording any reasoning for his dissatisfaction with regard to the working/claim of the assessee, straightway applied Rule 8D against the mandate of the provisions of section 14A of the Income Tax Act. The Id. CIT(A) also ignored the mandate of the provisions of section 14A, while giving part relief to the assessee on a different footing. Since we have already restored the matter to the AO on this issue, we direct that the AO will also look into and consider the above aspects and adjudicate on all alternate contentions also of the assessee on this issue and will comply with the requirements of law, as discussed above, while deciding this issue a fresh. 13. In respect of the issue relating to the bad debts written off , no ground has been originally taken by the assessee in this appeal, however, in the revised ground of appeal, ground Nos. 2 to 4 are relatable to this is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AAACA8328C 5 Zafonic Finlease Investments Pvt. Ltd. 1 24, Andheri Universal Industrial Estate, J.P. Rood, Andheri {W}, Mumbai-400058 AAACZ0310K 6 Ottoman Fin!ease Investments Pvt. Lid. 21, Sethi Mansion, Kuintha Street, Bollard Estate, Mumbai 400 038 AAAC01161F 3. As per the provisions of The Companies Act 1956, a private limited company is not allowed to issue a prospectus as it cannot invite the public for subscription. In view of the fact that all the OCDs were issued by private limited companies there would be no requirement of a prospectus in such cases. The OCDs are issued by private limited companies usually on a private placement basis. 4. As the OCDs were issued long back and since matured became a non performing debt, provided for and written off, the copies of certificates are not readily traceable. However, the matured debentures regularly appeared in balance sheet of the company and details ate enclosed herewith. 5. As the assessee company has been under litigation with the aforesaid companies, it doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious year as per the amendments made w.e.f. April I, 1989 The facts of the case of the assessee are similar. The debts due to the assessee in its normal course of business as Non Banking Finance Company have been written off by the assessee in its accounts as these have become Irrecoverable. Following the above judgement, the claim of the assessee is allowable under section 36(l)(vii) of the Act. For your ready reference and records, we enclose (he copy of the decision of the apex court in the case of TRF. Ltd as CJT (2O10] 333 JTR 397 (SC) for your ready reference and records. 9. The matured OCDs were the recoverable debts of the assessee company in its regular course of business as Non Banking Finance Company. The income on these debts has been offered for taxation as staled above. As per the provisions of the Act, if any debts or part of debt is not recoverable, then the assessee is entitled to claim the same, as bad debts under section 36(1)(vii) of the Act. Since the OCDs are not capital assets of the assessee, but its business debts in the course of its business as non banking finance company, the question of treating the bad debts as capital loss does not arise. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance of claim of amount written off of ₹ 2.50 crores. The dispute on this issue is that the AO has not allowed the claim of write off of an amount of ₹ 2.50 crores in respect of the debenture on the ground that it is a capital loss which can only be carried forward. On the other hand, it was the claim of the appellant before the AO as well as during appeal proceedings that the appellant was a NBFC company at the time of investment in the debentures in question. The AO has mainly made this addition on the ground that the NBFC certificate of the appellant company was issued to the appellant in June 2007, whereas the convertible debentures which have been written off during the year under consideration were issued prior to F.Y.2006-07. The appellant on the other hand has refuted this observation of the AO and claimed that the AO has misunderstood the NBFC certificate of June 2007 because it was only a renewal of old certificate and the appellant is an old NBFC company from the time when this investment in debenture was made. After considering the rival submission, I agree with the contention of the appellant in principle to the extent that since the business of the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l amount outstanding of such OCDs in the books of accounts, that the assessee had made a provision of doubtful debts, that the assessee had written off only the interest of the debt. He further held that as per the provision of Section 36(1)(vii) of the Act, bad debts could be allowed only when the debts had been written off as irrecoverable in the accounts of the assessee. Relying upon the order delivered by the Hon ble Madras High Court in the case of Micromax Systems Pvt. Ltd. (277 ITR 409), he held that the assessee had not written off the debts in his books of accounts. Finally, he disallowed the entire amount of reversed interest (₹ 55.05 lakhs) and added it to the total income of the assessee. 7. Assessee preferred an appeal before the FAA. After considering the submissions of the assessee and the arguments of the AO, he held that the assessee had not stated certain facts correctly in the assessment proceedings, that OCDs were purchased by Jindal Vijaynagar Steel Limited in the year 1994, that OCDs were to be converted into shares or to be redeemed after the expiry of 7 years from the date of allotment, that these OCDs were allotted to the appellant on the merger of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f in the books of accounts, that conditions for writing off the interest were fulfilled, that all the necessary facts of the case were submitted before AO during the assessment proceedings. 9. We have heard the rival submissions and perused the material before us. The undisputed facts of the case emerging from the file can be summarised as under :- i).Pursuant to a Scheme of Arrangement and Amalgamation between Jindal Iron Steel Ltd (JISL) and Jindal Vijayanagar Steel Ltd (JVSL) Investment Portfolio consisting of Investments and Loans Advances had been transferred to the Company and the Steel business was merged in Jindal Vijayanagar Steel Ltd with effect from 1stApril, 2003. ii).Transferred investments included 16% Optionally Convertible Debentures (OCD) amounting to Rs,2,50,00,000/- The said OCDs had matured in 2001 and were classified as Matured Debentures under the head Loans and Advances . iii).Interest on the aforesaid OCDs for FY 2003-04 and for FY 2004-05amounting to ₹ 23, 85,000/- and ₹ 23,72,700/- respectively was duly provided for by the appellant company and the same was offered for taxation in relevant AYs. iv).On 30-06-2005, an amount o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany w.e.f. 1.4.2003, which included the OCDs in question amounting to ₹ 2.50 cores. In view of the long overdue status of these OCDs, the assessee company made provisions for these OCDs in financial year 2005-06 and financial year 2006-07 being non-performing assets (NPA). During the year under consideration, the assessee company has written of these NPAs in the books and claimed as bad debts written off in the return of income. The interest on the aforesaid OCDs for financial year 2003-04 and financial year 2004-05 was provided for on accrual basis and the same were offered for taxation during the relevant assessment year. The assessee company was declared Non-banking Financial Institution in the assessment year 2006-07. The assessee company had written off all the aforesaid interest dues as irrecoverable and debited the same to the profit and loss account during the assessment year 2006-07. The Tribunal observed that the assessee had fulfilled all the requirements of Clause (vii) of sub clause (1) of section 36 of the Act. The Tribunal observed that since the assessee had offered the said amount of interest as income which was subsequently written off, because of its non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e given the same treatment in the hands of the successor. Since the aforesaid OCDs were part of the investments of the predecessor holder and, hence, it cannot be said that the same were business assets of the predecessor holder or that the said OCDs has been taken into account in computing the income of the predecessor holder of any previous year. Hence, it cannot be said that the assessee has acquired any right of the predecessor company to claim deduction on account of bad debts written off in respect of such write off of OCDs, because such rights were not available even to predecessor holder of these OCDs. Nor the said OCDs represents money lent in the ordinary course of business of money lending carried on by the assessee. Admittedly, the assessee was not a NBFC at the time of acquiring the said OCDs, hence, it cannot be said that the OCDs were part of the money lent in the ordinary course of business, though later on the assessee company had offered interest on such OCDs as its business income. The said OCDs neither represent the debt or part thereof which has been taken into account in computing the income of the assessee in any earlier previous year nor the same represents ..... X X X X Extracts X X X X X X X X Extracts X X X X
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