2013 (11) TMI 825 - AT - Income Tax

Addition u/s 41(4A) - Withdrawal from special reserve account - In the Balance sheet, the assessee has reduced the Special Reserve Account with certain amount. According to the assessee, it is a contra adjustment only and it has made corresponding reduction from Loans and Advances account also. According to the assessee, it was required to do so as per the directions issued by IDBI, which the assessee is required to comply with. According to the said guidelines, the Assets and Liabilities should be reduced to the extent of Provision utilised from the cumulative balance of reserves created u/s 36(1)(viii), i.e., the assets are to be shown as net of provisions. Held that - As per the guidelines of the IDBI, the assessee is required to classify its assets, mainly loans and advances, into four categories, viz., Standard assets, Sub-standard assets, Doubtful assets and Loss assets. The purpose of classification of the assets in the above categories appears to be to ascertain about the intrinsic strength of those assets - IDBI has also specified the criteria or basis for classifying the assets in the four categories stated above. According to the said guide lines, the assessee is also required to make provisions against the assets classified as Sub-standard, Doubtful and loss category, possibly these categories bear risk of recovery. According to the said guidelines, the SIDCs are required to determine the amount of provision for bad and doubtful debts. According to the guidelines issued by IDBI, the amount available in the Special Reserve Account u/s 36(1)(viii) of the Act is admissible for provision purposes. SIDCs can take into account the amount available in the Special Reserve Account while determining the amount of provision - The provision for bad and doubtful debts is created only to safeguard the financial institution against bad debts, i.e., the possible bad debts risk is evened out to a number of years. Hence, the permission given by IDBI for utilising the amount available in Special Reserve Account for making provision does not mean that the SIDC has actually utilised the Special Reserve Account. The said relaxation only allows the SIDC to determine the amount of Provision for bad and doubtful debts that is required to be made as per the guidelines issued by IDBI, i.e., in terms of IDBI guidelines, the provision for bad and doubtful amount shall be computed by aggregating the amount available in Special Reserve account with the amount available in Provision for bad and doubtful account. Provisions of sec. 41(4A) would not apply so long as the SIDC maintains the Special Reserve Account intact in its books of account. The method of presentation of the same in the Balance Sheet also, does not matter for the purposes of sec. 36(1)(viii) r.w.s. sec. 41(4A) of the Act, there is no reason to invoke the provisions of sec. sec. 41(4A) of the Act, on the basis of Balance sheet, wherein certain adjustments have been made by the assessee for the purpose of presenting it to the share holders and the regulator - Deleted the impugned addition of ₹ 53.96 crores Decided against the Revenue.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance of claim of bad debts under Section 36(1)(vii) of the Income Tax Act.
3. Addition under Section 41(4A) of the Income Tax Act.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The primary issue was the disallowance of expenditure related to earning exempt dividend income. The assessee did not allocate any expenditure for earning Rs. 1.57 crores in dividend income. The Assessing Officer (AO) applied Rule 8D(2)(iii) and disallowed 0.5% of the average value of investments, amounting to Rs. 24,64,479/-. The Commissioner of Income Tax (Appeals) [CIT(A)] further enhanced the disallowance by Rs. 11,69,196/- for proportionate interest expenditure. The assessee contended that no expenditure was incurred and that own funds were used for investments. However, the Tribunal upheld the CIT(A)'s decision, stating that the provisions of Section 14A(3) apply even if the assessee claims no expenditure was incurred.

2. Disallowance of claim of bad debts under Section 36(1)(vii) of the Income Tax Act:
The assessee claimed a deduction of Rs. 55,99,112/- for bad debts. The AO disallowed the claim, stating it did not exceed the credit balance in the provision for bad and doubtful debts account under Section 36(1)(viia). The CIT(A) accepted the assessee's contention that the "provision for bad and doubtful debts" refers to the opening balance, not the closing balance, as supported by the Gujarat High Court in UTI Bank Ltd. and the Delhi Tribunal in Tourism Finance Corporation of India Ltd. The Tribunal found no infirmity in the CIT(A)'s decision, which relied on CBDT Circular No. 17 of 2008, and upheld the deletion of the disallowance.

3. Addition under Section 41(4A) of the Income Tax Act:
The AO added Rs. 53.96 crores to the assessee's income, treating it as withdrawn from the special reserve account created under Section 36(1)(viii). The assessee argued that this was a contra adjustment in the balance sheet for presentation purposes and not an actual withdrawal. The CIT(A) held that the method of presentation amounted to utilization of the special reserve, thereby attracting Section 41(4A). However, the Tribunal disagreed, noting that the special reserve account was maintained intact in the books. The Tribunal concluded that the balance sheet adjustments did not constitute actual utilization of the special reserve and directed the AO to delete the addition of Rs. 53.96 crores.

Conclusion:
The Tribunal upheld the disallowance under Section 14A and the deletion of the bad debts disallowance under Section 36(1)(vii). It reversed the addition under Section 41(4A), directing the deletion of Rs. 53.96 crores from the assessee's income. The revenue's appeal was dismissed, and the assessee's appeal was partly allowed.