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2014 (2) TMI 272 - AT - Income Tax


Issues Involved:
1. Assessment of interest on securities.
2. Allowability of depreciation on leased assets.
3. Disallowance of entertainment expenses.
4. Disallowance of loss on unmatured foreign exchange contracts.
5. Reduction of claim of bad debt under section 36(1)(vii).

Issue-wise Detailed Analysis:

1. Assessment of Interest on Securities:
The primary issue was whether interest income from securities accrued during the broken period before the due date should be assessed. The assessee argued that interest only accrued on the due dates specified in the securities, citing the Bombay High Court judgment in Director (International Taxation) vs. Credit Suisse First Boston (Cyprus) Ltd. The Revenue countered, citing Supreme Court judgments, that interest accrues on a day-to-day basis. The Tribunal concluded that the issue was covered by the Bombay High Court judgment, which held that interest income does not accrue during the broken period if the due date falls after the end of the previous year. Thus, the Tribunal set aside the CIT(A)'s order and deleted the additions.

2. Allowability of Depreciation on Leased Assets:
The assessee's claim for depreciation on a leased boiler was disallowed by the AO, who deemed the transaction a financial one rather than a genuine lease. The Tribunal referred to a Special Bench decision in the assessee's own case, which found the transaction to be a mere loan, not a genuine lease, and upheld the disallowance of depreciation.

3. Disallowance of Entertainment Expenses:
The AO disallowed entertainment expenses on the grounds that they were not wholly and exclusively for business purposes. The CIT(A) restricted the disallowance to 25%. The Tribunal found that the expenses were incurred in connection with clients and business visitors and were thus for business purposes. Since the specific provision for disallowance of entertainment expenses under section 37(2) was deleted, the Tribunal allowed the full claim of the assessee, setting aside the CIT(A)'s order.

4. Disallowance of Loss on Unmatured Foreign Exchange Contracts:
The AO disallowed the loss on unmatured foreign exchange contracts, considering it notional. The Tribunal noted that the issue was covered by a previous decision in the assessee's own case, which allowed the claim based on the method of accounting and FEDAI guidelines. The Tribunal set aside the CIT(A)'s order and allowed the claim.

5. Reduction of Claim of Bad Debt under Section 36(1)(vii):
The AO reduced the bad debt claim by deducting the opening and closing provisions, which was upheld by the CIT(A). The Tribunal referred to a previous decision in the assessee's own case and the case of Oman International Bank, SAOG vs. DCIT, which clarified that the deduction under section 36(1)(vii) should be allowed without considering the provision under section 36(1)(viia)(b) for the relevant year. The Tribunal directed the AO to compute the deduction accordingly.

Conclusion:
The Tribunal allowed the appeals partially, providing relief to the assessee on the issues of interest on securities, entertainment expenses, loss on unmatured foreign exchange contracts, and bad debt claims, while upholding the disallowance of depreciation on leased assets.

 

 

 

 

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