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2011 (1) TMI 34 - AT - Income TaxDividend income - Application of Rule 8D - Claim of bad debts - Held that - Obviously the assessee is maintaining separate books of account for the purpose of business and these investments are in his personal capacity. The A.O. also has not disallowed any expenditure of personal nature out of the income from business or profession in the computation of income in the assessment order. In view of this we are of the opinion that the expenditure claimed in the business of share dealings cannot be correlated to the incomes earned in personal capacity that too on dividend, PPF interest and tax free interest on RBI bonds. The amounts advanced by the assessee in the course of business activity are to be treated as an allowable amount under section 36(2). Considering the facts of the case and the fact that assessee has written off the amount in the books of account, we are of the opinion that the amounts are allowable as bad debt. A.O. is free to bring it to tax in the year in which the assessee recovers the amount, if any.
Issues:
1. Disallowance under section 14A for interest income. 2. Disallowance of bad debts claimed by the assessee. Issue 1: Disallowance under section 14A for interest income: The appellant, an individual and stockbroker, challenged the disallowance of expenditure under section 14A concerning interest income. The Assessing Officer (A.O.) disallowed an amount under section 14A, which was contested before the CIT(A). The CIT(A) directed the A.O. to compute the disallowance as per Rule 8D. However, the Appellate Tribunal found that no disallowance was warranted under section 14A. The Tribunal noted that the appellant maintained separate books of account for business purposes, and the investments generating interest income were in the appellant's personal capacity. The Tribunal concluded that the disallowance made by the A.O. was unjustified, and the direction to apply Rule 8D by the CIT(A) was set aside. Citing a judgment by the Hon'ble Bombay High Court, the Tribunal ruled that Rule 8D was not applicable for the assessment year in question. Consequently, the disallowance under section 14A was deleted, and the appeal on this ground was allowed. Issue 2: Disallowance of bad debts claimed by the assessee: The appellant claimed bad debts amounting to Rs. 13,16,192 in the business of vyaj badla, supported by the argument that these amounts, advanced in the course of the business as a stockbroker, should be allowed as bad debts or treated as business loss. The A.O. disallowed the entire amount of bad debts, which was contested before the CIT(A). The CIT(A) rejected the claim, stating that the conditions under section 36(2) were not satisfied. However, the Appellate Tribunal disagreed with the A.O. and CIT(A), holding that the claim of bad debts should be allowed. The Tribunal noted that the appellant had advanced money as part of the business activity as a stockbroker. Referring to a Special Bench decision, the Tribunal concluded that the amounts advanced in the course of business activity were allowable as bad debts under section 36(2). Therefore, the Tribunal directed the A.O. to allow the amount claimed as bad debts. As a result, the appeal on the issue of bad debts was allowed. In conclusion, the Appellate Tribunal ruled in favor of the appellant on both issues, rejecting the disallowance under section 14A for interest income and allowing the claim of bad debts. The Tribunal emphasized the business nature of the activities and the applicability of relevant legal provisions in determining the outcomes of the appeal.
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