2017 (2) TMI 557 - AT - Income Tax

Disallowance u/s 14A - Held that - AO has failed to find out as to how the balance expenditure of ₹ 60.77 lacs claimed by assessee was incorrect or had any nexus with earning of exempt income. The AO also did not examine the stand of the assessee that administrative expenses of ₹ 10,70,000/- were in respect of a thin strength of employees who were working for providing IT enabled BPO Services and were not involved in the activity of making investment in shares or mutual funds. We also find substance in the observation of the ld. CIT(A) that the AO has disregarded the fact that he had also disallowed individual expenses embedded in the claim of ₹ 60.77 lakhs separately, such as disallowance of depreciation of ₹ 56,86,641/-, disallowance of rental expenses ₹ 8,23,166, disallowance of bad debts ₹ 2,66,243 and disallowance of advances and security deposits written off ₹ 13,99,056/-. - Decided against revenue Disallowance of depreciation - Held that - Expression used for the purpose of business would mean & imply that the use of asset would be relevant in previous financial years with respect to the discarded assets forming part of the block. Furthermore, the nature of assets in the present case comprises of general items such as furniture & fixtures & office equipments which were ready for use . Such passive user is also entitled for depreciation in view of various decisions of jurisdictional High Court relied by the ld. AR, noted supra. Following the above decisions, and having found no contrary material, we do not find any justification to interfere with the conclusion reached by the ld. CIT(A) on this issue. - Decided against revenue Advances and security deposits written off - Held that - We find that it is not in dispute that substantial material was placed before the AO that the said advances/securities were outstanding for last 5-10 years. The nature of these payments, i.e., towards advances and securities for getting VPN and utility connections, as noted above, is also not doubted by the Assessing Officer. In such state of affairs, if the assessee decided to write off the said advances/securities given in ordinary course of business, in its books of accounts, the claim of assessee cannot be discarded simply because substantial evidences were not placed to prove its efforts of their recovery or that the said debts became irrecoverable, by way of stepping into the shoes of business. - Decided against revenue

Summary

Issues Involved:
1. Deletion of addition made under Section 14A read with Rule 8D.
2. Deletion of disallowance of depreciation on fixed assets.
3. Deletion of disallowance of advances and securities written off.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made Under Section 14A Read with Rule 8D:

The Revenue challenged the deletion of ?56,44,511/- by the CIT(A) made by the AO under Section 14A read with Rule 8D. The AO observed that the assessee earned exempt income but did not claim any expenses for earning this income. The AO invoked Rule 8D and computed disallowance at ?1,38,31,112/-, but restricted it to ?56,44,511/- due to the total expenses claimed by the assessee. The CIT(A) deleted the addition, noting that the AO did not apply Rule 8D correctly and used a thumb rule instead. The CIT(A) highlighted that the assessee had already disallowed 89% of total expenses suo moto and the AO did not provide cogent findings to reject the assessee’s claim. The Tribunal upheld the CIT(A)’s decision, stating that the AO failed to record mandatory satisfaction under Section 14A(2) and did not examine the assessee’s claims adequately. The Tribunal emphasized the necessity of the AO’s satisfaction with the correctness of the assessee’s claim before invoking Rule 8D, citing decisions from the Delhi High Court, including Maxopp Investments Limited Vs. CIT.

2. Deletion of Disallowance of Depreciation on Fixed Assets:

The AO disallowed ?56,86,641/- of depreciation on the grounds that the business activities ceased, and the assets were not used during the year. The CIT(A) deleted the disallowance, relying on the Delhi High Court’s decision in CIT vs. Yamaha Motor India Pvt. Ltd., which held that once an asset becomes part of a block of assets, it loses its individual identity, and depreciation continues until the entire block ceases to exist. The Tribunal upheld the CIT(A)’s decision, agreeing that the expression "used for the purpose of business" includes passive use and assets kept ready for use, even if not actively used in the relevant financial year. The Tribunal cited similar decisions from the Delhi High Court, reinforcing that passive use qualifies for depreciation.

3. Deletion of Disallowance of Advances and Securities Written Off:

The AO disallowed ?13,99,056/- written off by the assessee, arguing that no evidence of recovery efforts was provided. The CIT(A) deleted the disallowance, noting that the advances were given in the ordinary course of business and written off in the books of accounts. The Tribunal upheld the CIT(A)’s decision, stating that the AO cannot impose conditions on the assessee to prove recovery efforts once the amounts are written off in the books. The Tribunal referenced decisions from the Supreme Court and various High Courts, including TRF Ltd. vs. CIT, which support the claim that writing off advances in the books is sufficient for deduction under the Act.

Conclusion:

The Tribunal dismissed the Revenue’s appeal, upholding the CIT(A)’s deletions on all three grounds. The decisions were based on established legal precedents and the requirement for the AO to record specific satisfaction before making disallowances under Section 14A. The Tribunal emphasized the importance of adhering to prescribed methods and judicial principles in tax assessments.