2012 (8) TMI 325 - AT - Income Tax

Bad Debts - dis-allowance on ground that assessee has not filed the necessary details - assessee contended that AO never asked any further details and it is not necessary to establish that the debt has become bad/ irrevocable - Held that - Assessee has satisfied the conditions stipulated in section 36(2)(i) since these are business debts which could not be recovered and written off. Further, Supreme Court in the case of TRF Ltd vs. CIT (2010 (2) TMI 211 - SUPREME COURT) has held that it is not necessary to establish that the debt had in fact had become irrevocable after the provisions were amended w.e.f. 1.4.1989. bad debts stand allowed. Rebate u/s 88E - stock broking - assessee out of the gross income considered 5% of the expenditure whereas AO on assumption that assessee has not furnished any details of expenditure attributable to the above transactions and estimated the income at 25% of the gross expenditure - Held that - As seen from the detailed schedules of the balance sheet, the stock in hand has gone up from Nil in earlier year upto Rs.1,46,27,156/-. It indicates that the borrowed funds were used for its business in trading transactions. If an analysis of the borrowed funds and its use was considered interest payment alone of Rs.22,80,089/- is attributable to the trading activity. Therefore, in our view AO is very conservative in attributing only 25% of the expenditure to the share trading activity. We uphold the action of AO Dis-allowance u/s 14A - Held that - Even though on legal principles the matter is in favour of assessee, since assessee has not furnished any details of expenditure before AO and the working furnished was without prejudice to its claim. However in the interest of justice, matter requires re-examination by AO keeping in view of the principles laid down by the above cases and also to see there is any expenditure incurred in relation to the exempt income - Decided partly in favor of assessee.

Summary

Issues Involved:
1. Disallowance of bad debts under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961.
2. Rebate under Section 88E of the Income Tax Act, 1961.
3. Addition under Section 14A read with Rule 8D of the Income Tax Act and Rules.

Issue-Wise Detailed Analysis:

1. Disallowance of Bad Debts:
Ground No. 1: The assessee contested the disallowance of Rs. 3,55,938/- claimed as bad debts under Section 36(1)(vii) read with Section 36(2). The Assessing Officer (AO) disallowed the claim stating that the necessary details were not provided. The CIT (A) upheld this disallowance, placing the onus on the assessee to furnish details.

Tribunal's Decision: The Tribunal found that the assessee had submitted all required details to the AO, including the specifics of the debt related to M/s Rajen Investment and Finance (P) Ltd. The Tribunal referenced the Special Bench decision in the case of Shri Shreyas S. Morakhia and the Supreme Court decision in TRF Ltd vs. CIT, which clarified that it is not necessary to establish that the debt has become irrevocable post the amendment effective from 1.4.1989. The Tribunal concluded that the assessee satisfied the conditions under Section 36(2) and directed the AO to allow the bad debt as claimed.

2. Rebate under Section 88E:
Ground No. 2: The assessee, engaged in stock broking and trading, claimed a rebate under Section 88E amounting to Rs. 25,53,628/-. The AO disagreed with the assessee's calculation, attributing only 25% of the expenses to share trading income, resulting in a rebate of Rs. 11,24,153/-. The CIT (A) confirmed the AO's action.

Tribunal's Decision: The Tribunal examined the allocation of expenses and found that the AO's estimation of 25% was reasonable considering the overall expenditure and income distribution. The Tribunal noted the significant increase in interest expenses due to borrowed funds used for trading activities. Consequently, the Tribunal upheld the AO's action but directed the AO to work out the rebate while giving effect to this order, considering potential variations in income.

3. Addition under Section 14A read with Rule 8D:
Ground No. 3: The assessee challenged the addition of Rs. 4,95,524/- under Section 14A read with Rule 8D, contending that no expenditure was incurred to earn the exempt dividend income of Rs. 69,820/-. The AO calculated the disallowance without recording satisfaction as required under Section 14A(2). The CIT (A) partially upheld the AO's action, providing minor relief.

Tribunal's Decision: The Tribunal emphasized the necessity for the AO to record satisfaction regarding the correctness of the assessee's claim before invoking Rule 8D, referencing decisions from ITAT Delhi and Kolkata Benches. The Tribunal found that the AO did not express such satisfaction and thus erred in applying Rule 8D. However, due to the lack of detailed expenditure information from the assessee, the Tribunal set aside the orders of the AO and CIT (A) and remanded the matter for re-examination by the AO, directing him to follow the principles laid down in the cited cases.

Conclusion:
The appeal was partly allowed. The Tribunal directed the AO to allow the bad debt claim, upheld the AO's estimation of expenses for the Section 88E rebate, and remanded the Section 14A disallowance issue for fresh examination.