2010 (10) TMI 664 - AT - Income Tax

Exemption u/s. 10 38)(b) - sale of equity shares - Sec. 10(38)(b) provides exemption to an income arising from the transfer of a long-term capital asset being equity share in a company where such transaction is chargeable to securities transaction tax - Since, assessee contended that it had sold shares through M/s Kodak Securities Ltd. on the regular stock exchanges and securities transaction tax has been paid - Exemption allowed - Decided in favour of assessee. Bad debts written off - the AO has misdirected herself in treating the claim of the assessee under s. 36(1)(viia)(c) of the Act, whereas it was a claim made under s. 36(1)(vii) of the Act. - the claim of the assessee made under s. 36(1)(vii) is required to be examined in the context of provisions contained in s. 36(2)(i) of the Act. Therefore, to this extent, we set aside the order of the CIT(A) and direct the AO to examine as to whether the conditions specified under s. 36(2)(i) of the Act are satisfied or not. Revenue succeeds for statistical purposes. Bifurcation of amount received from defaulters into principal and interest - A sum of Rs. 2,06,22,367 was found credited under the head Current liabilities in the balance sheet. - This amount was received from various parties against pending settlement of their cases - Held that - the AO has made generalized observations without pointing out any reasons to interfere with the regular accounting system followed by the assessee. There is no material to establish as to in what manner the system of accounting followed by the assessee with respect to the impugned amounts, does not lead to proper deduction of income. The CIT(A), in our view, is correct in observing that till the final settlement of accounts with the defaulting borrowers, it is not possible for the appellant to bifurcate interim payments made by the defaulting borrowers between principal and interest till such time the settlement is finally reached. Dividend income - exemption u/s 10(34) - AO disallowed the claim on the ground that the assessee was engaged in financing industrial units and therefore, dividend earned on shares was related to its business activity and hence the same is to be treated as income from business. The exemption was thus denied. - Held that - AO erred in denying the exemption on facts and in law.- the shares were held as investment and the same were not acquired in the course of financing industrial units - exemption u/s 10(34) allowed.

Summary

Issues Involved:
1. Deletion of addition regarding income from the sale of shares.
2. Deletion of addition regarding bad debts written off.
3. Deletion of addition regarding deposits received against pending settlements.
4. Deletion of addition regarding dividend income.

Issue-wise Detailed Analysis:

1. Deletion of Addition Regarding Income from the Sale of Shares:
The first issue concerns the addition of Rs. 1,76,61,492 made by the AO, which was claimed as exempt long-term capital gain by the assessee on the sale of shares. The AO treated this profit as business income, asserting that the shares were acquired through equity participation under financial collaboration agreements. The CIT(A) accepted the assessee's explanation that the shares were acquired through public issues and not through equity participation in industrial undertakings. The CIT(A) noted that the profit was earned on shares held as investments and not as part of financing activities, and thus, the exemption under s. 10(38)(b) of the Act was applicable. The Tribunal upheld the CIT(A)'s decision, finding no error in allowing the exemption, as the Revenue did not controvert the factual findings.

2. Deletion of Addition Regarding Bad Debts Written Off:
The second issue pertains to the addition of Rs. 39,09,536, which the AO disallowed as bad debts written off. The AO's disallowance was based on the absence of details regarding the assessment year in which the amounts were shown as income and the lack of a provision for bad and doubtful debts. The CIT(A) allowed the claim under s. 36(1)(vii) of the Act, noting that the provisions of s. 36(1)(viia) were not applicable as no provision was created by the assessee. The Tribunal agreed with the CIT(A) but remanded the matter to the AO for verification of compliance with s. 36(2)(i) of the Act, allowing the Revenue's appeal for statistical purposes.

3. Deletion of Addition Regarding Deposits Received Against Pending Settlements:
The third issue involves the addition of Rs. 2,06,22,367, which was credited under 'Current liabilities' as amounts received from various parties against pending settlements. The AO treated the entire amount as interest income due to the absence of bifurcation between principal and interest. The CIT(A) deleted the addition, accepting the assessee's accounting policy of bifurcating the amounts only at the time of final settlement. The Tribunal upheld the CIT(A)'s decision, noting that the AO failed to provide reasons to disturb the regular accounting system followed by the assessee.

4. Deletion of Addition Regarding Dividend Income:
The fourth issue concerns the addition of Rs. 1,66,040, which the AO treated as business income instead of exempt dividend income under s. 10(34) of the Act. The AO's reasoning was that the dividend income was incidental to the assessee's business activity of financing industrial units. The CIT(A) found that the shares were held as investments and not acquired in the course of financing activities, and thus, the dividend income was exempt. However, the CIT(A) applied s. 14A of the Act, disallowing Rs. 16,604. The Tribunal affirmed the CIT(A)'s decision, noting that the Revenue did not provide any cogent reasons to support the AO's stand.

Conclusion:
The Tribunal partly allowed the Revenue's appeal, remanding the issue of bad debts written off for verification while upholding the CIT(A)'s decisions on the other issues.