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2017 (3) TMI 85 - AT - Income TaxPayment to various clients in Valsad region on account of is regularities committed by one of its sub brokers - allowable business expenditure - Held that - We find that the assessee had claimed that the payment was made to the clients for preserving its goodwill and reputation. It is a fact that expenditure in question was not incurred for fostering the business of another person. It was also not gratuitous or for some improper or oblique purpose outside the course of the business. Preserving business reputation by an assessee is allowable expenditure under the head commercial expediency. Old business wisdom states that even at the cost of lakhs credit/ reputation/goodwill should be preserved(Jaaye laakh, rahe Saakh). In short, expenditure incurred by the assessee even voluntary and without any legal obligation has to be allowed as it was incurred for preserving the reputation of its business. Alternatively, it is allowable as business loss also. Considering the peculiar facts and circumstances of the case, we are unable to endorse the order of the FAA. We decide ground of appeal in favour of the assessee.
Issues Involved:
1. Disallowance of bad debts under Section 36(1)(vii) of the Income Tax Act. 2. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules, 1962. 3. Allowability of depreciation on uninterrupted power supply (UPS). 4. Disallowance of ?2.62 crores paid to clients due to sub-broker irregularities. Detailed Analysis: 1. Disallowance of Bad Debts: The first issue pertains to the disallowance of bad debts amounting to ?32.93 lakhs under Section 36(1)(vii) of the Income Tax Act. The Tribunal noted that this issue had been previously adjudicated in favor of the assessee in earlier assessment years (AY 2001-02 to 2004-05). The Tribunal cited its own decision dated 27.07.2011, where it allowed the bad debts claim based on the precedent set by the Special Bench of the Mumbai ITAT in the case of Shreyas S. Morakhia (2010) 40 SOT 440. Consequently, following the Hon'ble Bombay High Court's judgment upholding the Tribunal's decision, the Tribunal decided this ground in favor of the assessee. 2. Disallowance under Section 14A read with Rule 8D: The second issue involves the disallowance under Section 14A read with Rule 8D of the Income Tax Rules, 1962. The Tribunal noted that in the earlier assessment year (ITA No. 1013 & 2028/M/2010 dated 21.05.2012), the issue was restored to the file of the Assessing Officer (AO) for fresh adjudication. The assessee referred to several cases, including Kotak Mahindra Bank Ltd. and Tata Consulting Engineers Ltd., to support its claim. The Tribunal, agreeing with the assessee, restored the matter back to the AO for fresh adjudication, directing the AO to consider the orders of the Tribunal relied upon by the assessee. Thus, this ground was allowed in part. 3. Allowability of Depreciation on UPS: The third issue concerns the allowability of depreciation on uninterrupted power supply (UPS). Both parties agreed that this issue had been deliberated upon by the Tribunal in earlier appeals for AY 2006-07 and 2010-11. Following the Tribunal's previous decisions, this ground was decided in favor of the assessee. 4. Disallowance of ?2.62 Crores Due to Sub-Broker Irregularities: The fourth issue relates to the disallowance of ?2.62 crores paid to clients due to irregularities committed by a sub-broker. The AO disallowed this amount, arguing that the payment was voluntary and not obligatory under the business contract, thus not allowable as business expenditure under Section 37(1) of the Act. The First Appellate Authority (FAA) upheld this disallowance, stating that the payment was made to settle claims and not for business purposes. During the Tribunal hearing, the assessee argued that the expenditure was incurred wholly and exclusively for business purposes, citing commercial expediency and the need to protect its reputation. The Tribunal examined several legal precedents, including Nainital Bank Ltd. and Calcutta Landing & Shipping Co. Ltd., which supported the view that expenditure incurred for preserving goodwill and reputation is allowable under Section 37 of the Act. The Tribunal concluded that the payment made by the assessee was for preserving its business reputation and was thus allowable as business expenditure. Alternatively, it could also be considered a business loss. Therefore, this ground was decided in favor of the assessee. Conclusion: The appeal filed by the assessee was partly allowed, with the Tribunal deciding the issues of bad debts, depreciation on UPS, and the ?2.62 crores payment in favor of the assessee, while the issue under Section 14A was restored to the AO for fresh adjudication. The order was pronounced in the open court on 22nd February 2017.
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