2016 (2) TMI 662 - AT - Income Tax

Disallowance of loss - Held that - Admittedly, the assessee does not have any material to prove that the advance of ₹ 3,50,000/- was given in connection with a view to start new venture in the pharmaceutical lines. Hence, the claim of the assessee that the advance was given in the normal course of business was not substantiated. The tax authorities were right in holding that the loss of advance cannot be claimed as bad debt, since the same was not offered as income in any of the years. In the absence of any material to show that it was a trading loss, we are of the view that the ld. CIT(A) was justified in confirming the disallowance of ₹ 3,50,000/- made by the AO. At the same time, we find merit in the alternative submission of the assessee. Since the disallowance of ₹ 3,50,000/- has been confirmed by us during the year under consideration, the said amount offered by the assessee in the assessment year 2014-15 is liable to be deleted. Accordingly, we direct the assessee to move an appropriate petition before the AO, who shall act upon it in accordance with the discussions made (supra). Disallowance of repair and maintenance expenditure - Held that - We notice that the assessee had taken business premises on rent and it has been occupying the same for the last 40 years. The ld. AR, inviting our attention to the details of repairs and maintenance furnished in the paper book, submitted that the assessee has only strengthened and repaired the existing structures of the business premises and hence the same is allowable as revenue expenditure. A perusal of the details submitted by M/s Saya Construction Co. would show that it has mainly done plastering work and has also undertaken repairs of floor and other items. It was not shown to us that the assessee has not built any new structure by incurring these expenditures. Accordingly, we are of the view that the amount of ₹ 2,90,000/- spent by the assessee is in the nature of revenue expenditure, since the same has been incurred on maintenance of the existing business premises of the assessee. Accordingly, we set aside the order of ld. CIT(A) on this issue and direct the AO to delete the impugned addition. Disallowance u/s 14A - Held that - Closing value of shares held as investment was ₹ 84.07 lakhs and the closing value of stock-in-trade was ₹ 20.42 lakhs. The partners capital account stand at ₹ 120.27 lakhs, which is more than the value of investments/stock in trade of shares. The profit and loss account provided by the assessee for share trading business shows that the assessee has booked only direct expenses in the business. The aggregate expenditure (other than interest) booked in other business carried on by the assessee stands at ₹ 49.10 lakhs, of which the administrative expenses stand at ₹ 17.34 lakhs and salary expenses stand at ₹ 13.37 lakhs. The assessee was having a turnover of ₹ 14.65 crores in its other business. Thus, we notice that the administrative expenses have been mainly incurred for other business purposes. Considering all these factors, we are of the view that the disallowance made u/s 14A may be determined at ₹ 46,425/-, as worked out by the assessee, since the same works out to about 5% of the dividend income received by the assessee. Accordingly, we set aside the order of ld.CIT(A) and sustain the disallowance u/s 14A at ₹ 46,425/-.

Summary

Issues:
1. Disallowance of bad debts claimed by the assessee.
2. Disallowance of repair and maintenance expenditure.
3. Disallowance made under section 14A of the Act.

Issue 1: Disallowance of Bad Debts:
The appeal concerned the disallowance of a claim of Rs. 3,50,000 made by the assessee as bad debts. The assessee, a partnership firm in the pharmaceutical products business, had given an advance to a person for a new venture, which did not materialize. The advance was written off as bad debt. The tax authorities disallowed this claim as the amount was not offered as income previously. The tribunal upheld this disallowance as the assessee failed to prove the advance was for business purposes. However, the tribunal directed the deletion of the amount offered as income in a subsequent assessment year.

Issue 2: Disallowance of Repair and Maintenance Expenditure:
The second issue revolved around the disallowance of repair and maintenance expenditure. The assessee claimed Rs. 4,59,666 as such expenditure, including a payment of Rs. 2,90,000 to a construction firm for renovation. The tax authorities treated this amount as capital expenditure due to extensive construction work. However, the tribunal found that the expenditure was for maintenance of existing premises, not new construction. Consequently, the tribunal directed the deletion of the disallowed amount.

Issue 3: Disallowance under Section 14A of the Act:
The final issue pertained to the disallowance made under section 14A of the Act. The assessee received dividend income of Rs. 8.94 lakhs and argued that the disallowance should be reasonable. The tribunal noted that Rule 8D was not applicable for that year and determined the disallowance at Rs. 46,425, about 5% of the dividend income. Considering various factors, including the nature of investments and business activities, the tribunal sustained the disallowance at the revised amount.

In conclusion, the appellate tribunal partially allowed the appeal, confirming the disallowance of bad debts and the disallowance under section 14A while directing the deletion of the repair and maintenance expenditure disallowance. The judgment provided detailed reasoning for each issue, emphasizing the need for substantiating claims and applying relevant legal provisions.