2006 (1) TMI 614 - AT - Income Tax

Bad and doubtful debts - book profit for the purpose of section 115JA - Interest on borrowings - disallowance u/s 14A - whether there is any evidence or material on record in the present case authorizing the Assessing Officer to invoke section 14A for the purpose of disallowing the expenditure of ₹ 5 lakhs HELD THAT - A provision for bad and doubtful debts is made with the view to guarding against the non-recovery of certain debts which are considered by the company as bad or doubtful. It implies that monies receivable by the company may not be realised. Explanation (c) refers to amount set aside to provisions made for meeting liabilities . By making the provision for bad and doubtful debts, the assessee is not guarding against any liability which it may be called upon to pay. For instance, a provision made for gratuity payable to the employees may properly be called a provision made for meeting a liability. But, when a provision is made to guard against the possible non-recovery of amounts due to the assessee, it cannot be described as provision made for meeting a liability. The Institute of Chartered Accountants in India (ICAI), in its guidance note on terms used in financial statements (filed by the assessee) had defined a liability as The financial obligation of an enterprise other than owners funds . Therefore, on this ground also, the decision of the CIT(A) requires to be upheld. We do so and dismiss the ground. Interest on borrowings - disallowance u/s 14A - Section 14A gives the Assessing Officer the power to disallow expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. The precise question that arises for consideration is whether it is necessary for the Assessing Officer to show on the basis of the material on record that the assessee in fact incurred expenditure to produce non-taxable income which he may disallow or whether he can estimate a part of the expenditure incurred by the assessee as expenditure incurred to produce non-taxable income on the assumption that a part of the expenditure must have necessarily been incurred to produce non-taxable income. The conclusion seems inescapable that the expenditure which the Assessing Officer seeks to disallow u/s 14A should be actually incurred and so incurred with a view to producing non-taxable income. If this much is clear from the section, it follows that it is the duty of the Assessing Officer to pin point such expenditure on the basis of the material on record. The mere removal of the disability statutorily, however does not ipse facto authorize him to assume that a part of the expenditure has been incurred by the assessee in relation to the exempted income and to proceed to disallow the same on estimate. The section does not, in our opinion, relieve the Assessing Officer of the burden of proving, on the basis of evidence or material on record that the assessee has in fact incurred expenditure which has relation to the exempted income. Even in regard to section 80M, the Calcutta and Madhya Pradesh High Courts have held that the Assessing Officer cannot estimate and disallow any notional or ad hoc expenditure to reduce the dividend income. No dispute that the entire dividend of ₹ 83,02,635 which is exempt under section 10(33) was received from M/s. Eicher Motors Ltd. by a single dividend warrant and no effort or expenses were necessary or were incurred to earn such income. These is also no material brought before us to show that the assessee s contention that no part of the interest can be attributed to the earning of the dividend income since the shares were acquired from the own funds in the earlier years and not from borrowed funds, is factually incorrect. In these circumstances, we have to agree with the assessee that there is no material on the basis of which the Assessing Officer would estimate and disallow a sum of ₹ 5 lakhs by invoking section 14A. We, therefore, agree with the decision of the CIT(A), affirm the same and dismiss the Ground No. 3. In the result, the appeal is dismissed with no order as to costs.

Issues Involved:
1. Depreciation on furniture and fixtures.
2. Deduction under section 35AB for technical know-how expenditure.
3. Addition of provision for bad and doubtful debts while computing book profit under section 115JA.
4. Disallowance of expenditure under section 14A related to exempt dividend income.

Detailed Analysis:

1. Depreciation on Furniture and Fixtures:
The first issue pertains to the disallowance of depreciation amounting to Rs. 2,69,700 on furniture and fixtures, which the Assessing Officer (AO) claimed were not used for business purposes. The assessee argued that these items were provided to employees under a scheme allowing them to purchase the items at written down value (WDV) after five years. The CIT(A) allowed the depreciation, following the Tribunal's decision in the assessee's favor for previous assessment years (1993-94, 1994-95, and 1997-98). The Tribunal upheld this decision, noting that the facts of the case remained consistent with previous years.

2. Deduction under Section 35AB:
The second issue concerns the deduction of Rs. 1,35,417 under section 35AB for expenses related to Mofa drawings. The AO had allowed 1/6th of the expenditure in the assessment year 1994-95 but did not allow it for the current year. The CIT(A) directed the AO to allow the deduction, consistent with the AO's stand in earlier years and previous appellate decisions. The Tribunal found no infirmity in this direction and noted that the department did not appeal a similar decision for the assessment year 1997-98.

3. Addition of Provision for Bad and Doubtful Debts under Section 115JA:
The third issue involves the addition of Rs. 2,21,32,285 for provision towards bad and doubtful debts while computing book profit under section 115JA. The AO added this amount, considering it a provision for unascertained liabilities. The assessee contended that the provision was made for specific and identified debts, thus qualifying as an ascertained liability. The CIT(A) agreed, referencing Part III of Schedule VI to the Companies Act, which defines provisions for ascertained liabilities. The Tribunal upheld this view, noting that the provision for doubtful debts was indeed for ascertained liabilities and thus should not be added back to the book profit.

4. Disallowance of Expenditure under Section 14A:
The fourth issue deals with the disallowance of Rs. 5 lakhs under section 14A, related to earning exempt dividend income. The AO disallowed this amount on the assumption that some expenditure must have been incurred to earn the dividend income. The assessee argued that the dividend was received from a group company with minimal effort and no specific expenditure. The CIT(A) ruled that only actual expenses incurred to earn exempt income could be disallowed, not estimated or notional expenses. The Tribunal agreed, emphasizing that section 14A requires the AO to show that actual expenditure was incurred in relation to exempt income, and there was no material evidence to support the AO's disallowance in this case.

Conclusion:
The Tribunal dismissed the department's appeal on all grounds, upholding the CIT(A)'s decisions. The Tribunal emphasized the need for actual evidence of incurred expenses for disallowance under section 14A and confirmed that provisions for ascertained liabilities should not be added back to book profits under section 115JA. The decision also reinforced the consistency of applying previous Tribunal decisions in similar cases for depreciation and technical know-how expenditure deductions.

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