2012 (10) TMI 215 - AT - Income Tax

Disallowance u/s 14A - 0.5% of average investments yielding tax free income - Held that - No working on the disallowance are found, and how the assessee has arrived at figure of ₹ 8,16,657/- and how and why 0.5% of average of investment yielding tax free income was excessive. In this sense, it would be appropriate to restore the issue to the file of the AO, as done in the preceding year with a direction, that a reasonable disallowance under section 14A may be arrived at, as per law. Disallowance of prior period expenses - Held that - As decided in Union Bank of India Vs ACIT 2012 (6) TMI 500 - ITAT MUMBAI even though such expenses are treated technically as prior period expenses, it relates to a continuous flow of expenditure. Therefore, there is no justification in disallowing the expenditure, otherwise normally eligible for deduction - in favour of assessee. Disallowance of lease premium expenses - Held that - The claim of expenses made by the assessee have been treated as capital in nature and hence cannot be allowed, has been decided by the Special Bench in the case of JCIT Vs Mukund Limited 2007 (2) TMI 358 - ITAT MUMBAI , as conceded by the AR. Respectfully following the decision rendered by the Hon ble Special Bench, we sustain the disallowance of ₹ 1,55,20,622/-, as made by the revenue authorities - against assessee. Short allowance u/s 36 - Held that - CIT(A) erred in not deciding on the issue of short allowance under section 36(1)(viia), based on total income computed by the AO. We, therefore, set aside the order of CIT(A) on this issue and direct the AO to decide the issue afresh - in favour of assessee by way of remand. Disallowance of bad debts claimed - CIT(A) allowed claim - Held that - As decided in M/s. Vijaya Bank Versus Commissioner of Income Tax & Anr. 2010 (4) TMI 46 - SUPREME COURT though a mere debit to the profit and loss account would constitute a provision for a bad and doubtful debt, yet that would not constitute actual write off. But where besides debiting the profit and loss account and creating a provision for bad and doubtful debt, the assessee has simultaneously obliterated the said provision from its accounts by reducing the corresponding amount from loans and advances/debtors on the assets side of the balance-sheet, and, consequently at the end of the year, the figure in the loans and advances or the debtors on the assets side of the balance-sheet is shown as net of the provision for impugned bad debt , the assessee will be entitled to the benefit of deduction under section 36(1)(vii), as there is an actual write off by the assessee in his books. Disallowance cannot be made on an apprehension that if the assessee failed to close each and every individual account of its debtor, it may result in the assessee claiming deduction twice over - in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A.
2. Disallowance of prior period expenses.
3. Disallowance of lease premium expenses.
4. Exclusion of income from foreign branches.
5. Short allowance under Section 36(1)(viia).
6. Allowance of bad debts.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A:
The assessee challenged the CIT(A)'s decision to determine the disallowance under Section 14A at 0.5% of average investments yielding tax-free income. The assessee argued that no expenditure was incurred to earn the tax-free income and cited the ITAT Delhi decision in Minda Investments Ltd Vs DCIT. The CIT(A) had directed the AO to compute a reasonable disallowance, which was contested by the assessee. The ITAT noted the lack of specific working on the disallowance and deemed it appropriate to restore the issue to the AO for a reasonable disallowance determination, as done in the preceding year.

2. Disallowance of Prior Period Expenses:
The assessee contested the disallowance of Rs. 19,67,140/- as prior period expenses, arguing that the expenses were incurred in the current year and citing the continuous nature of expenditure in a large organization. The ITAT referred to the coordinate Bench's decision in Union Bank of India Vs ACIT and other case laws, which supported the assessee's claim. The ITAT directed the AO to delete the addition, following the precedent set in similar cases.

3. Disallowance of Lease Premium Expenses:
The assessee challenged the disallowance of Rs. 1,55,20,622/- as capital expenditure. The AR conceded that the issue had been decided by the Special Bench in JCIT Vs Mukund Limited, which treated such expenses as capital in nature. The ITAT upheld the disallowance, following the Special Bench's decision.

4. Exclusion of Income from Foreign Branches:
The assessee raised the issue of exclusion of income from foreign branches based on the Double Taxation Avoidance Agreement. However, the ITAT noted that this issue did not arise from the CIT(A)'s impugned order and rejected it as non-maintainable.

5. Short Allowance under Section 36(1)(viia):
The assessee contended that the CIT(A) erred in not deciding the issue of short allowance under Section 36(1)(viia). The ITAT set aside the CIT(A)'s order on this issue and directed the AO to decide it afresh, considering the total income computed.

6. Allowance of Bad Debts:
The department appealed against the CIT(A)'s decision to allow the whole of the bad debts claimed by the assessee. The AO had disallowed Rs. 522,14,44,550/- on the grounds that the bad debts were not actually written off in the books. The CIT(A) allowed the claim, relying on the Supreme Court's decision in Vijaya Bank v/s CIT, which held that actual write-off in the books entitles the assessee to deduction under Section 36(1)(vii). The ITAT upheld the CIT(A)'s decision, noting that the issue was settled in favor of the assessee by the Supreme Court and previous ITAT orders.

Conclusion:
- The appeal by the assessee (ITA No. 2155/Mum/2011) was partly allowed.
- The appeal by the department (ITA No. 2443/Mum/2011) was dismissed.