2011 (4) TMI 840 - AT - Income Tax

Dis-allowance u/s 14A - expenses attributable to Dividend income - Held that - This issue has been recently decided in the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT, wherein it has been held that only a reasonable expenditure should be disallowed after examining the nature of expenditure. Therefore remit the matter back to the file of the AO. Dis-allowance of Long term capital loss - unquoted shares of the group companies sold by assessee at cost price and the loss arose due to indexation of the cost price - AO rejected the claim not on the ground of it being family arrangement, rather on the ground of improper consideration and that it was merely paper transaction - Held that - Fundamental principle is that if it is alleged that assessee has received less consideration the revenue should have proved that assessee has received more consideration. In the case before us, the revenue could have easily reworked the appropriate value but the matter has been left only by making an allegation. Further, shares have been held by the assessee company from AYs 1994-95 to 1999-00 which means shares were already held for more than 4 to 6 years. The same have been sold for restructuring of the business so as to concentrate on the main business of the company. The shares have been already transferred to the various companies and, therefore, same cannot be construed only as paper transactions. Therefore, loss claimed by the assessee is allowable. Dis-allowance of business loan becoming bad on ground of it being of capital nature - Revenue contended that same has not been declared as income in earlier years so this amount cannot be allowed as deduction u/s 36(1)(vii) - Held that - Once assessee has lent the surplus money and offered the interest income as business income, then the activity of lending the money has to be treated as business activity. In any case, if this claim cannot be allowed as bad debt, same has to be allowed as business loss because money was lent during the course of business for earning income. Once a provision of doubtful debt has been debited in the P&L A/c and the corresponding provision has been credited or reduced from the debtor s account on the assets side of the balance-sheet, then this would amount to writing off. In this case as assessee company has correspondingly reduced the assets by reducing the amount of unsecured loans outstanding and thus would amount to writing off of the loan. Accordingly, assessee would become entitled to the claim of bad debt. Deletion of dis-allowance of provision of doubtful debts in the working of book profit u/s 115JB - Held that - Once such claim is allowable as such, then there is no question of adding back the same to the book profits - confirm the order of the CIT(A) - Decided against the Revenue

Issues Involved:
1. Disallowance under section 14A of the Income-tax Act, 1961.
2. Disallowance of long-term capital loss.
3. Provision for doubtful debts in the working of book profit under section 115JB of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Disallowance under section 14A of the Income-tax Act, 1961:
During the assessment proceedings, the Assessing Officer (AO) noticed that the assessee had earned dividend income and disallowed Rs. 2,15,764 attributing it to expenses incurred for earning this income. The CIT(A) confirmed this action. However, the Tribunal referred to the Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT, which stated that only reasonable expenditure should be disallowed after examining the nature of expenditure. Consequently, the Tribunal set aside the CIT(A)'s order and remitted the matter back to the AO for re-examination in light of the Bombay High Court's decision.

2. Disallowance of long-term capital loss:
The AO disallowed the long-term capital loss of Rs. 3,06,75,158 claimed by the assessee, observing that the transactions were not in the normal course of business and were planned to generate a capital loss. The CIT(A) upheld this disallowance, noting that the shares were sold to group companies at prices lower than their purchase prices, and the sale consideration was not received immediately.

Before the Tribunal, the assessee argued that the shares were sold as part of a business restructuring to focus on core activities, and the transactions were genuine. The Tribunal found that the shares were sold through the stock exchange and at more than their intrinsic value, and the revenue had not proved that the assessee received more consideration than declared. Referring to the Supreme Court's decision in K.P. Varghese v. ITO, the Tribunal held that the burden of proving understatement of consideration was on the revenue, which it failed to discharge. Consequently, the Tribunal allowed the assessee's claim for long-term capital loss.

3. Provision for doubtful debts in the working of book profit under section 115JB of the Income-tax Act:
The AO disallowed the provision for doubtful debts of Rs. 1,90,51,000, treating it as a capital expenditure. The CIT(A) confirmed this disallowance, stating that only amounts offered to tax in earlier years could be written off as bad debts under section 36(1)(vii).

The Tribunal admitted the additional ground raised by the assessee regarding the provision for doubtful debts and found that the provision was debited to the profit & loss account and reduced from the loans and advances in the balance sheet, thus constituting a write-off. Referring to the Supreme Court's decision in Vijaya Bank v. CIT, the Tribunal held that the provision for doubtful debts was allowable as a bad debt. Consequently, the Tribunal directed the AO to allow the claim for bad debt.

Provision for doubtful debts under section 115JB:
The revenue's appeal on this issue was dismissed. The Tribunal noted that the provision for doubtful debts was a diminution of assets, which, according to the Supreme Court's decision in CIT v. HCL Comnet Systems & Services Ltd., could not be added back to the book profits. However, with the insertion of clause (i) to section 115JB, even the provision for diminution of assets was required to be added back. Since the Tribunal allowed the bad debt claim, there was no need to add it back to the book profits under section 115JB.

Conclusion:
The Tribunal allowed the assessee's appeal partly by directing the AO to re-examine the disallowance under section 14A and to allow the long-term capital loss and bad debt claims. The revenue's appeal regarding the provision for doubtful debts under section 115JB was dismissed.

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