2015 (10) TMI 2019 - AT - Income Tax

Disallowance u/s 14A - Held that - If some disallowance was required to be made, as per law, then, only the amount of tax free investments was to be considered. Analysis of the aforesaid details clearly suggest that the total amount of tax free investment was aggregating to ₹ 189.25 millions as against aggregate amount of own funds of the assessee to the tune ₹ 2,555.07 millions. Thus, apparently the amount of own funds is in far excess of amount of tax free investments of the assessee company. In other words, the assessee company has got sufficient amount of surplus funds. Further, our attention was also drawn to the balance sheet of the assessee company available at page no.1 to 10 of the paper book filed by the assesee company. We found that the figures shown in the aforesaid chart, submitted by the Ld. Counsel, duly tally with the figures shown in the balance sheet. Thus, claim of the assessee that amount of own funds of the assessee company are in far excess of the amount of tax free investment appear to be factually correct to us. Hon ble jurisdictional High Court in the case of HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT has held that where the assessee s own funds and other non-interest bearing funds were more than investment in tax free securities, then no disallowance was required to be made out of the interest expenses u/s 14A - Decided in favour of assessee. Disallowance of 21% of brokerage, stamp duty and custodial services charges - disallowance on the ground that the said expenditure was incurred for the purpose of earning tax free income - Held that - It is observed by us that the Ld. CIT(A) has been quite fair in deleting the disallowance of ₹ 78,49,487/- made out of the brokerage expenditure of ₹ 1,56,98,973/-, on the ground that these were paid for Government Securities, ICD & other debt instruments. With respect to other expenditure aggregating to ₹ 9,09,960/-, it is noted that admitted case of the assessee is that these have been incurred for the purpose of acquisition of shares. Ld. CIT(A) has been very reasonable in restricting the disallowance to 21% of the said amount of expenses. Thus, the disallowance sustained is now of a very miniscule amount. The argument of the Ld Counsel, that no amount at all can be correlated with the dividend income, is not acceptable. Thus, on this issue we find that order of Ld. CIT(A) is quite justified and no interference is called for and therefore - Decided against assessee. Ad hoc disallowance - Held that - Ld. Counsel fairly stated that no suo moto disallowance has been made by the assessee company in the computation sheet filed along with return of income, and it seems that Ld CIT(A) has mentioned it so in his order, by mistake . We have ourselves seen the computation sheet of income enclosed at PB-11-12 of the paper book filed by the assessee company. It is noted by us that no such disallowance has been made in the computation sheet as has been mentioned by the Ld. CIT(A) in its order with respect to proportionate indirect expenses disallowable u/s 14A. Under this mistaken belief, Ld. CIT(A) has presumed that the disallowance made by AO has resulted in double taxation. We find that the basic premise of the Ld. CIT(A) appears to be factually incorrect. There seems to be some error in mis appreciation of facts on the part of the Ld. CIT(A) in this regard. Therefore, in the interest of justice, we find it appropriate to send this issue back to the file of the Ld. CIT(A) to re-adjudicate the same after giving adequate opportunity of hearing to the assessee and after taking into consideration correct facts. - Decided in favour of revenue for statistical purposes. Disallowance of bad debts written off - Held that - It is held that the assessee is eligible for the claim of deduction, both u/s 36(1)(vii) as well as u/s 37(1) of the Income Tax Act, 1961. The only constraint before us is that there is no clear finding, of either of the lower authorities, with regards to the facts that whether any credit for the TDS was claimed and granted to the assessee in the impugned year or in the subsequent years pertaining to those TDS certificates for which impugned amount of bad debts is being claimed. Therefore, we send this issue back to the file of the AO for the limited purpose of verification of the fact whether any claim has been granted to the assessee in this year or in any subsequent year with respect to these TDS certificates. If claim of assessee that no credit has been granted to the assessee, for want of these TDS certificates, is found to be factually correct, then the amount of bad debts claimed by the assessee shall be allowed as deduction. Decided in favour of assessee for statistical purposes. Taxation on interest on deep discount bonds - whether amount of interest had accrued to the assessee company and since the assessee was following mercantile system of accounting, aforesaid interest income was liable to be included in its taxable income of the year under consideration? - Held that - it is noted that the assessee s income fall in higher tax brackets and good amount of taxes are being paid by assessee every year. Under these circumstances, the Revenue is not going to suffer with the amount of tax, whether the interest income is taxed in the impugned year or in the next year, so long as, Return has been filed by the assesse showing taxable income and taxes have been paid thereon, in both the years. In our considered opinion, liberal approach should be adopted by the revenue and unnecessary litigation should be avoided. We derive support from the judgment of Hon ble Supreme Court in the case of Excel Industries Ltd. 2013 (10) TMI 324 - SUPREME COURT . It is further noted by us that the assessee has already been taxed on this income in the year of sale of bonds. Thus, as on date, the assessee is suffering with the amount of double addition on the same income. In our view, such kind of situation should have been avoided, as far as possible. Keeping in view these facts and circumstances of the case, we delete the addition - Decided in favour of assessee. Disallowance u/s 36(1)(xi) for making computer systems of the assessee as Y2K compliant - Held that - Revenue should avoid highly technical approach in such cases. If legislature has brought beneficial provisions on the statute, then, there should be an endeavor to ensure that the assesse is able to rightfully claim the benefits of the beneficial provisions. In our considered view, since the claim has been found genuine and the audit report was filed by the assessee, during the course of assessment proceedings and the same was examined by AO in which nothing wrong, has been found, thus, the assessee would be entitled for the benefits of the claim and Ld. CIT(A) is justified in granting relief to the assessee in this regard - Decided in favour of assessee. Disallowance of bad debts on account of writing off of non-convertible debentures - Held that - In the amended law there is no requirement of proving the impugned amount of debt as bad . Further, it has been also been provided under the law that subsequently if any recovery is made out of the amounts claimed as bad debt, then the same would be included in the income of the assessee in the year in which recovery is made. Thus, the law is now plain and simple. It has been so clarified in this very manner by Hon ble Supreme Court also in the case of T.R.F. Ltd. (2010 (2) TMI 211 - SUPREME COURT). It is further noted by us that no doubts, whatsover, have been expressed by the AO on the genuineness of the claim or about the nature of the claim. The objection raised by the AO in the assessment order is not sustainable under the law and therefore, the Ld. CIT(A) has rightly deleted the addition made by the AO. Similarly with regard to interest also, when the principle amount itself is allowable as bad debt, then interest amount would also be allowable and accordingly we hold that Ld. CIT(A) has rightly deleted the disallowance made by the AO - Decided in favour of assessee. Penalty order u/s 271(1)(C) - Held that - Out of the disallowances mentioned we have deleted the disallowances on account of interest on deep discount bonds and software expenses. Therefore, with respect these two disallowances, the basis of levy of penalty cease to exist and therefore, consequently, penalty also cannot survive and accordingly we uphold the order of Ld. CIT(A) in deleting the penalty on both these issues. With respect to the remaining disallowance, with regard to bad debts it is noted that this amount represented dues from various parties towards non-receipt of TDS certificates. This issue has been sent back by us to the file of the AO for re-deciding the same. Therefore, as on date, this addition does not survive. Consequently, the penalty order on this addition is also set aside. The AO shall be at liberty to initiate the penalty proceedings, if considered appropriate, after this issue is re-decided by the AO, as per law. Addition invoking provisions of section 94(7) - disallowance of loss - Held that - Section 94(7) is not retrospective and therefore, it cannot be invoked in the year under consideration. Further, Hon ble Supreme Court in the case of Walfort Share and Stock Brokers (P) Ltd. 2010 (7) TMI 15 - SUPREME COURT has observed that in absence of section 94(7), the transactions done by the assessee in this regard were permitted under the income tax law and thus losses resulting there from could not have been disallowed. Thus, respectfully following the judgment of Hon ble Supreme Court, we find that Ld. CIT(A) has wrongly disallowed the loss. Thus, reversing the action of Ld. CIT(A), we direct the AO to allow the loss - Decided in favour of assessee. Disallowance of expenditure on software expenses - Held that - Expenditure incurred on the software expenses are revenue in nature and AO was not justified in disallowing the same. See CIT Versus Raychem RPG Ltd. 2011 (7) TMI 953 - Bombay High Court - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Disallowance of brokerage, stamp duty, and custodial services charges.
3. Ad hoc disallowance of indirect expenses.
4. Disallowance of bad debts written off.
5. Taxation of interest on deep discount bonds.
6. Disallowance of expenses for Y2K compliance.
7. Disallowance of bad debts related to non-convertible debentures.
8. Penalty under Section 271(1)(c) of the Income Tax Act.
9. Disallowance of interest and brokerage expenses.
10. Treatment of loss from the sale of shares as speculative loss.
11. Disallowance of software expenses.

Detailed Analysis:

1. Disallowance under Section 14A:
Assessee's Appeal:
The assessee challenged the disallowance of Rs. 14.51 crores under Section 14A. The AO disallowed this amount, attributing it to interest expenses on borrowed funds used for earning dividend income. The CIT(A) upheld the AO's decision. The Tribunal found that the assessee had sufficient own funds exceeding the tax-free investments, thus no disallowance was warranted. The Tribunal relied on judgments from the Bombay High Court, including CIT vs. HDFC Bank Ltd., and directed the deletion of the disallowance.

2. Disallowance of Brokerage, Stamp Duty, and Custodial Services Charges:
Assessee's Appeal:
The AO disallowed Rs. 8.30 million, attributing it to expenses incurred for earning exempt income. The CIT(A) partly deleted the disallowance but upheld Rs. 78,600 for brokerage and Rs. 3,46,250 for stamp duty. The Tribunal upheld the CIT(A)'s decision, finding the disallowance reasonable and dismissing the assessee's appeal.

3. Ad hoc Disallowance of Indirect Expenses:
Cross Appeals:
The AO disallowed Rs. 25.01 million, attributing it to indirect expenses related to earning exempt income. The CIT(A) reduced the disallowance by Rs. 91,16,975. The Tribunal found a factual error in the CIT(A)'s order regarding a supposed suo moto disallowance by the assessee. The issue was remanded back to the CIT(A) for re-adjudication.

4. Disallowance of Bad Debts Written Off:
Assessee's Appeal:
The AO disallowed Rs. 81,69,611 claimed as bad debts related to non-receipt of TDS certificates. The CIT(A) upheld the disallowance. The Tribunal remanded the issue back to the AO for verification of whether any credit for TDS was claimed and granted. If no credit was granted, the bad debts should be allowed.

5. Taxation of Interest on Deep Discount Bonds:
Assessee's Appeal:
The AO added Rs. 84,50,164 as accrued interest income. The CIT(A) upheld this addition. The Tribunal found that the CBDT circular clarified that such income should be taxed in the year of redemption or sale, not on an accrual basis. The addition was deleted.

6. Disallowance of Expenses for Y2K Compliance:
Cross Appeals:
The AO disallowed Rs. 63,90,000 for Y2K compliance expenses due to the late filing of the audit report. The CIT(A) allowed the claim but disallowed Rs. 8,80,000 as prior period expenses. The Tribunal upheld the CIT(A)'s approach but found the disallowed expenses were incurred in the relevant year and directed their allowance.

7. Disallowance of Bad Debts Related to Non-Convertible Debentures:
Revenue's Appeal:
The AO disallowed bad debts of Rs. 5,69,69,000 and related interest of Rs. 79,75,660. The CIT(A) deleted the disallowance, relying on the Supreme Court's decision in T.R.F. Ltd. v. CIT. The Tribunal upheld the CIT(A)'s decision, noting that the write-off in the books was sufficient for claiming bad debts.

8. Penalty under Section 271(1)(c):
Revenue's Appeal:
The AO levied a penalty of Rs. 1,34,74,826 on disallowances made in the assessment order. The CIT(A) deleted the penalty. The Tribunal upheld the deletion of the penalty related to the disallowances it had already deleted and set aside the penalty on bad debts for re-examination by the AO.

9. Disallowance of Interest and Brokerage Expenses:
Cross Appeals for A.Y. 2001-02:
The AO disallowed Rs. 1,61,23,300 as interest expenses under Section 14A. The CIT(A) upheld the disallowance. The Tribunal, following its decision for A.Y. 2000-01, deleted the disallowance.

10. Treatment of Loss from Sale of Shares as Speculative Loss:
Assessee's Appeal:
The AO treated a loss of Rs. 20,77,919 from the sale of shares as speculative. The CIT(A) upheld this treatment. The Tribunal remanded the issue back to the AO for re-examination in light of new factual pleadings and relevant judgments.

11. Disallowance of Software Expenses:
Assessee's Appeal:
The AO disallowed Rs. 39,85,423 as capital expenditure. The CIT(A) upheld the disallowance. The Tribunal found that software expenses were routine and necessary for business operations and directed their allowance as revenue expenditure.

Conclusion:
The Tribunal provided relief to the assessee on several grounds, including disallowances under Section 14A, bad debts, and software expenses, while remanding some issues for re-examination. The penalty under Section 271(1)(c) was largely deleted, with the AO directed to reconsider it based on the final outcomes of the disallowances.