2018 (9) TMI 1850 - AT - Income Tax

Addition on account of bad debts - HELD THAT - Assessee is eligible for claiming bad debts as it was provided to M/s. Roopa Plastics Technology Pvt Ltd in the course of money lending business. Thus, we do not find any reason to disturb the findings of the CIT(A). Hence, these grounds of appeal of the Revenue are dismissed. Addition u/s 14A read with Rule 8D - HELD THAT - There remains no ambiguity that own-funds of the assessee is exceeded the investment as discussed above. In such circumstances, the Hon ble Gujarat High Court in the case of UTI Bank Ltd. . 2013 (8) TMI 238 - GUJARAT HIGH COURT has observed that where sufficient interest-free funds are available to meet the amount of investment then no disallowance on account of interest expenses is warranted under section 14A r.w.r. 8D of Income Tax Rules. Disallowance under Rule 8D(2)(iii) - Assessee failed to bring anything contrary to the findings of the Hon ble ITAT as discussed above. Therefore, we sustain the disallowance made by the AO under Rule 8D(2)(iii) for ₹ 6,36,463/- only. This ground of appeal of the Revenue is allowed. MAT computation - Disallowances made under the provisions of Sec. 14A r.w.r. 8D cannot be applied to the provision of Sec. 115JB as per the direction of the Hon'ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. 2014 (11) TMI 1169 - CALCUTTA HIGH COURT Disallowance as per the clause (f) to Explanation-1 of Sec. 115JB independently on account of dividend income. However, we also note that there is no mechanism given under the clause (f) to Explanation-1 of Sec. 115JB to workout/ determine the disallowance. Therefore in the given facts circumstances, we feel that ad-hoc disallowance will service the justice to the Revenue and assessee. Therefore to put the dispute to rest in given facts circumstances, we direct for the ad-hoc disallowance to avoid the multiplicity of the proceedings and unnecessary litigation. Thus we direct the AO to make the disallowance of ₹ 5 Lacs under clause (f) to Explanation-1 of Sec. 115JB of the Act. This fact on record that we have restored other cases involving identical issues to the file of AO for making the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB independently. But now we are of the view that as there is no mechanism provided under the clause (f) to Explanation-1 of Sec. 115JB of the Act to make the disallowance independently, therefore there would be unnecessarily further litigation, if the matter is sent back to the file of AO. Thus, we propose to limit the disallowance on an ad-hoc basis for ₹ 5 Lacs as per the clause (f) to Explanation-1 of Sec. 115JB. Thus the ground of appeal of the Revenue is partly allowed.

Summary

Issues Involved:
1. Disallowance of bad debts.
2. Disallowance under Section 14A of the Income Tax Act.
3. Addition of disallowance under Section 14A for Minimum Alternate Tax (MAT) purposes.

Detailed Analysis:

1. Disallowance of Bad Debts:

Facts:
The assessee, a private limited company engaged in financing and trading activities, claimed bad debts amounting to ?1,41,03,036/-. This included interest income of ?55,37,378/- and the principal loan amount of ?85,65,658/- given to M/s. Roopa Plastics Technology Pvt Ltd. The Assessing Officer (AO) allowed the interest income but disallowed the principal amount, arguing it was not deductible under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act.

CIT(A) Decision:
CIT(A) allowed the deduction of the principal amount, noting that the assessee was engaged in money lending as part of its business. The balance sheet reflected significant loans and advances, indicating the business nature of the transaction. CIT(A) cited the Supreme Court cases of CIT vs. Wood Ward Governors India Pvt. Ltd. and CIT vs. TRF Ltd. to support the decision.

Tribunal Decision:
The Tribunal upheld the CIT(A) decision, emphasizing that the assessee’s financing activity was not doubted by the AO. It reiterated that under Section 36(2)(i), bad debts can be claimed if they represent money lent in the ordinary course of business. The Tribunal also referenced the Supreme Court judgments to conclude that the bad debts were allowable as losses under Section 37(1).

2. Disallowance under Section 14A:

Facts:
The assessee earned dividend income of ?11,83,473/- but did not disallow any expenditure related to it under Section 14A read with Rule 8D. The AO disallowed ?76,85,536/- (comprising interest and administrative expenses) on the grounds that the assessee used mixed funds for investments and must have incurred some administrative expenses.

CIT(A) Decision:
CIT(A) deleted the disallowance, noting that the assessee had sufficient interest-free funds (?16.08 crores) to cover the investments (?1.26 crores). CIT(A) cited jurisdictional High Court rulings in UTI Bank Ltd. and Suzlon Energy Ltd., which held that if sufficient interest-free funds are available, it can be presumed that investments were made from these funds.

Tribunal Decision:
The Tribunal upheld the CIT(A) decision regarding interest expenses but sustained the AO’s disallowance of administrative expenses of ?6,36,463/-, referencing its own earlier judgment in the assessee’s case for a different assessment year.

3. Addition of Disallowance under Section 14A for MAT Purposes:

Facts:
The AO added the disallowance under Section 14A while determining the book profit under Section 115JB of the Income Tax Act.

CIT(A) Decision:
CIT(A) deleted this addition, stating that since the disallowance under Section 14A was deleted, it should not affect the MAT calculation.

Tribunal Decision:
The Tribunal held that disallowances under Section 14A cannot be imported into the MAT calculation under Section 115JB. It cited the Gujarat High Court’s decision in Alembic Ltd. and the Special Bench of the Delhi Tribunal in Vireet Investment Pvt. Ltd. However, the Tribunal directed an ad-hoc disallowance of ?5 lakhs under clause (f) to Explanation-1 of Section 115JB, noting the lack of a specific mechanism for such disallowance.

Conclusion:
The Tribunal partly allowed the Revenue's appeal, sustaining the disallowance of administrative expenses under Section 14A but upholding the deletion of the principal bad debt disallowance and limiting the MAT-related disallowance to ?5 lakhs.