2014 (11) TMI 279 - AT - Income Tax

Disallowance u/s 14A Computation under rule 8D(2)(ii) - Held that - It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt - interest expenses directly attributable to tax exempt income as also directly attributable to taxable income, are required to be excluded from computation of common interest expenses to be allocated under rule 8D(2)(ii) - Since there is mistake in computing the disallowance, net current assets is to be considered while applying the formula under Rule 8D of the I.T. Rules instead of gross current assets thus, the AO is directed to re-compute the disallowance and decide the issue afresh Decided partly in favour of assessee. Speculation loss disallowed Held that - It is proper to examine the issue afresh on the plea of the assessee that it has actually taken delivery of pepper - If the assessee has actually taken delivery of pepper and thereafter sold it, then the provisions of sec. 43(5) cannot be applied thus, the matter is remitted back to the AO for fresh consideration. Bad debts disallowance Held that - The Assistant Commissioner of Income tax is not correct in disallowing the bad debts on the ground that it was not offered as income in earlier years and hence conditions u/s. 36(2) was not satisfied - The amounts written off were considered as income in the earlier years and hence bad debts written off should have been allowed as expenditure - allowing dues from client written off as bad debts on the ground that the conditions u/s. 36(2) were not satisfied is also not justified - The assessee is a stock broker and the amounts receivable from clients which includes brokerage payable by the client was a part of the debt and the debt had been taken into account in the computation of income, the conditions stipulated in section 36(1)(vii) and 36(2) stood satisfied - both the grounds have not been properly adjudicated thus, the matter is remitted back to the AO for fresh consideration Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance of speculation loss.
3. Disallowance of bad debts.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:

The primary issue in this appeal concerns the disallowance of Rs. 5,60,565/- under Section 14A of the Income Tax Act. The assessee had cumulative investments in mutual funds amounting to Rs. 3,20,75,000/- and earned a dividend income of Rs. 5,46,453/-. The assessee claimed expenses of Rs. 5000/- for earning this income. However, the Assessing Officer (AO) invoked Section 14A read with Rule 8D and disallowed Rs. 5,60,565/-, which was confirmed by the CIT(A).

The assessee argued that it had sufficient own funds and no borrowed funds were used for investments. The capital and reserves increased significantly during the year, and the incremental investment was less than the profit earned. The assessee contended that the AO incorrectly used gross current assets instead of net current assets in the Rule 8D formula. Additionally, the assessee argued that the AO must first determine the correctness of the claim regarding the expenses incurred for earning tax-free income before applying the prescribed method under Rule 8D.

The Tribunal observed that Rule 8D(2)(ii) deals with the allocation of common interest expenses to taxable and tax-exempt income. However, the formula under Rule 8D(2)(ii) was found to be incongruous as it excluded interest expenses directly related to tax-exempt income but not those directly related to taxable income. The Tribunal concluded that both types of interest expenses should be excluded from the computation of common interest expenses. Consequently, the Tribunal directed the AO to re-compute the disallowance using net current assets instead of gross current assets and decide the issue afresh.

2. Disallowance of Speculation Loss:

The second issue pertains to the disallowance of Rs. 28,99,882/- on account of speculation loss. The assessee claimed a loss from commodity trading, specifically in pepper, without actual purchase or delivery. The AO treated this as a speculative transaction and disallowed the loss, which was upheld by the CIT(A).

The CIT(A) noted that Section 43(5) defines speculative transactions as those settled otherwise than by actual delivery. The assessee's transactions did not fall within the exclusion clauses of Section 43(5). The CIT(A) also invoked Explanation to Section 73, which deems certain transactions as speculative business. The assessee argued that it had taken actual delivery of pepper and requested a fresh examination of the issue.

The Tribunal remitted the issue back to the AO for fresh consideration, directing the AO to verify if the assessee had indeed taken delivery of the pepper. If actual delivery was taken, Section 43(5) would not apply.

3. Disallowance of Bad Debts:

The third issue involves the disallowance of bad debts amounting to Rs. 19,57,037/-. The assessee claimed that the conditions under Sections 36(1)(vii) and 36(2) were satisfied, and the amounts written off were considered as income in earlier years. However, the CIT(A) only adjudicated on bad debts of Rs. 5,24,532/- and not the entire amount.

The Tribunal noted that the CIT(A) did not properly adjudicate both grounds raised by the assessee. Consequently, the Tribunal remitted the issue back to the AO for fresh consideration and directed the AO to decide in accordance with the law.

Conclusion:

The appeal was partly allowed for statistical purposes, with directions for fresh consideration of the disallowance under Section 14A, speculation loss, and bad debts by the Assessing Officer. The judgment emphasizes the importance of correctly applying the provisions of the Income Tax Act and ensuring proper verification of facts before making disallowances.