2013 (3) TMI 326 - AT - Income Tax

Deduction towards provision for bad debts under sec. 36(1)(viia)- Broken period interest - Depreciation on value of securities - Entertainment expenses - Forward exchange contract - Exemption u/s.10 - Deduction u/s.80M - Disallowance u/s.35D - Interest u/s.201(1A) Held that - the assessee has complied with the requirements of sec. 36(1)(viia) as interpreted by the Hon ble Supreme Court in the case of Vijaya Bank (2010 (4) TMI 46 - SUPREME COURT). Thus the impugned order on this score is upheld and addition was deleted similar view has been taken in all the appeals. Securities are current assets of the assessee, the broken period interest expenditure or income has to be allowed as deduction, Tribunal relied on the judgement of the Hon ble jurisdictional High Court in American Express International Banking Corpn. Vs. CIT (2002 (9) TMI 96 - BOMBAY HIGH COURT ) Similar view has been taken in all the appeals. The excess over the cost price would not be considered for valuing the closing stock. It is only when such security is sold that the profit would stand reflected accordingly. In view of these reasons, we are satisfied that depreciation on account of fall in value of securities held by the assessee as stock in trade, was liable to be considered at the market value, being less than its cost price, as reflected by the assessee. - Decided ini favor of revenue. Entertainment expenses - Held that - According to the Tribunal it would be reasonable to estimate 40 percent of the total expenses as not in the nature of entertainment expenses . Nothing has been brought to our notice to demonstrate that the said order has been modified or set aside by the Hon ble High Court. Respectfully following the precedent, we hold that 40% of total expenses be considered as not in the nature of entertainment expenses. The AO is directed to work out the amount of disallowance accordingly. Similar view has been taken in all the appeals. Set off and carry forward of losses - Disallowance of provision for loss on forward exchange contract where the assessee booked a loss on forward foreign exchange contracts which were unmatured on the date of balance-sheet - held that - matter restored to the file of AO for deciding it afresh on the touchstone of the prescription given by the Special Bench in the aforenoted order. Needless to say the assessee would be allowed a reasonable opportunity of being heard. Similar view has been taken in all the appeals. As against disallowance of exemption u/s.10 in which the assessee claimed interest received on tax free securities amounting to exempt u/s.10(15)(iv)(a, we set aside the impugned order and direct the AO to compute disallowance u/s.14A in accordance with the ratio laid down by the Hon ble jurisdictional High Court in the aforenoted case of Godrej & Boyce Ltd (2010 (8) TMI 77 - BOMBAY HIGH COURT). The ld. A.R. has contended before us that it was having sufficient interest-free funds at its disposal which were invested in securities earning exempt income and hence no disallowance of interest was called for. The AO, while computing disallowance u/s.14A, will also examine this contention of the assessee as per law. Similar view has been taken in all the appeals. deduction u/s.80M. -Divided income - The AO came to hold that deduction should be allowed u/s.80M at 60% of the income from dividend, presumably considering 40% towards expenses. - held that - it would be just and fair if the impugned order is set aside on his issue and the matter is restored to the file of AO for reducing the direct expenses from the amount of gross dividend for the purpose of deduction u/s.80M. Disallowance u/s.35D. - No permission has been granted by the COD to prosecute this ground. In the absence of any approval given by COD, this ground was dismissed. - held that - We order accordingly and direct him to decide this question afresh as per law after allowing a reasonable opportunity of being heard to the assessee. - Decided in favor of assessee. Interest u/s.201(1A) - held that - before charging any interest u/s.201(1A) the assessee should be deemed to be in default in respect of such tax. Treating a person as assessee in default is subject matter of provisions u/s. 201(1), which aspect is decided by the AO (TDS). - The AO, while framing assessment u/s.143(3) of the Act, cannot charge interest u/s.201(1A). - Decided in favor of assessee. In the result, all the appeals are partly allowed for statistical purposes.

Issues Involved:
1. Deduction towards provision for bad debts.
2. Disallowance of broken period interest.
3. Depreciation on value of securities.
4. Disallowance of entertainment expenses.
5. Provision for loss on forward exchange contracts.
6. Disallowance u/s.35D.
7. Exemption u/s.10.
8. Deduction u/s.80M.
9. Charging of interest u/s.201(1A).
10. Set off of unabsorbed depreciation/carried forward loss.

Issue-wise Detailed Analysis:

1. Deduction towards provision for bad debts:
For A.Y. 1996-97, the assessee claimed a deduction for bad debts of Rs.52,30,30,064/-, which included sub-standard, doubtful, and loss assets. The AO disallowed Rs.9,48,36,000/- out of this amount, allowing only the actual amount written off. The CIT(A) overturned this decision, allowing the full provision. The Tribunal upheld this decision, referencing the Supreme Court's ruling in Vijaya Bank vs. CIT, which allowed such deductions if the bad debts were debited to the P&L account and reduced from debtors in the balance sheet. Similar deductions were allowed for subsequent years (A.Y. 1997-98 to 2003-04).

2. Disallowance of broken period interest:
For A.Y. 1996-97, the AO disallowed Rs.81,21,716/- of broken period interest on securities in closing stock. The CIT(A) deleted this addition. The Tribunal upheld this deletion, citing the Special Bench decision in DCIT vs. Bank of Bahrain & Kuwait and the Bombay High Court ruling in American Express International Banking Corpn. vs. CIT, which allowed such deductions for current assets. This issue was similarly resolved in favor of the assessee for subsequent years (A.Y. 1997-98 to 2003-04).

3. Depreciation on value of securities:
For A.Y. 1996-97, the AO disallowed Rs.55,53,09,959/- claimed as depreciation on securities. The CIT(A) allowed this deduction. The Tribunal upheld this decision, emphasizing that the securities were valued at "cost or market price, whichever is less," and any depreciation in value should be allowed as a deduction. This principle was applied consistently in subsequent years (A.Y. 1997-98 to 2003-04).

4. Disallowance of entertainment expenses:
For A.Y. 1996-97, the AO disallowed Rs.11,17,081/- of entertainment expenses. The CIT(A) deleted this addition. The Tribunal directed that 40% of total expenses be considered as non-entertainment expenses, following a precedent from an earlier Tribunal order. This approach was applied in subsequent years (A.Y. 1997-98 to 2003-04).

5. Provision for loss on forward exchange contracts:
For A.Y. 1997-98, the AO disallowed Rs.17,84,97,527/- for loss on forward exchange contracts. The Tribunal restored the matter to the AO for a fresh decision, following the Special Bench decision in DCIT vs. Bank of Bahrain & Kuwait, which allowed such deductions. This issue was similarly addressed in subsequent years (A.Y. 1998-99 to 2003-04).

6. Disallowance u/s.35D:
For A.Y. 1997-98, the AO disallowed expenses claimed u/s.35D. The CIT(A) upheld this disallowance. The Tribunal dismissed this ground due to the absence of COD approval. This issue was similarly dismissed in subsequent years (A.Y. 1998-99 to 2003-04).

7. Exemption u/s.10:
For A.Y. 1997-98, the AO reduced the exempt income by proportionate expenses. The Tribunal restored the matter to the AO for fresh computation, following the Bombay High Court ruling in Godrej & Boyce Mfg. Ltd. vs. DCIT, which required a reasonable basis for disallowance u/s.14A. This approach was applied in subsequent years (A.Y. 1998-99 to 2003-04).

8. Deduction u/s.80M:
For A.Y. 1997-98, the AO allowed only 60% of the gross dividend for deduction u/s.80M. The Tribunal restored the matter to the AO for fresh computation, following the Bombay High Court ruling in CIT vs. Central Bank of India, which disallowed indirect expenses from the dividend income. This issue was similarly addressed in subsequent years (A.Y. 1998-99 to 2003-04).

9. Charging of interest u/s.201(1A):
For A.Y. 1998-99, the AO charged interest u/s.201(1A). The Tribunal allowed the assessee's appeal, stating that the AO (TDS) should decide on treating a person as an assessee in default, not the AO framing assessment u/s.143(3).

10. Set off of unabsorbed depreciation/carried forward loss:
For A.Y. 1998-99, the Tribunal noted this issue as consequential and disposed of it accordingly.

Conclusion:
The Tribunal's consolidated order addressed multiple issues across different assessment years, often restoring matters to the AO for fresh decisions based on established precedents and principles, ensuring consistent application of law and fairness in deductions and disallowances.

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