2017 (4) TMI 465 - AT - Income Tax

Addition of debt written off - Held that - The debt was taken into account in the income of the assessee for the AYs 2000-01 and 2001-02 when the interest income accruing thereon was taxed in the hands of the assessee. The nature of the income indicated the transactions from which it emerged. The transaction was the debt and the debt was taken into account in computing the income of the assessee of the relevant previous year. The principal amount which has been written off attracts clause (i) of sub-section (2) of section 36 of the Act and, therefore, the conditions specified in section 36(1)(vii) of the Act and requirement of clause (i) of sub-section (2) of sec. 36 of the Act have been fulfilled and, therefore, the Ld. CIT(A) has rightly deleted the addition and allowed the claim of the assessee. Disallowance under Rule 8D(2)(ii) - CIT(A) held that if net of interest received and interest paid is positive figure, no part of interest can be disallowed under rule 8D(2)(ii) as attributable to earning tax free dividend - Held that - We note from the P&L Account of the assessee that the net interest reflected is an interest income of ₹ 58,23,756/-. Rule 8D(2)(ii) cannot be applied when there is no net interest expenditure upon setting up of interest credited to the P&L Account and, therefore, no part of interest debited can be disallowed as attributable to earning tax free dividend. The Ld. DR could not controvert this fact and, therefore, the AO erred in computing disallowance under Rule 8D(2)(ii) and, therefore, the Ld. CIT(A) has correctly allowed relief to the assessee and we do not find any infirmity in the order passed by the Ld. CIT(A) on this issue and, therefore, we uphold the impugned order of Ld. CIT(A) and dismiss this ground of appeal of revenue.

Summary

Issues:
1. Deletion of claimed debt written off by the assessee.
2. Disallowance of interest under Rule 8D(2)(ii) for tax-free dividend income.

Issue 1: Deletion of claimed debt written off by the assessee:
The Revenue appealed against the deletion of a debt written off by the assessee, a Non-Banking Financial Company (NBFC), amounting to ?3,41,87,613. The AO rejected the claim stating it was not a sundry debtor and interest was not accounted for in previous years. The Ld. CIT(A) allowed the appeal, citing provisions of section 36(1)(vii) and section 36(2) of the Act. The ITAT noted that the debt was taken into account in the income of the assessee for relevant assessment years, fulfilling the conditions specified in the Act. The ITAT upheld the Ld. CIT(A)'s decision, dismissing the Revenue's appeal.

Issue 2: Disallowance of interest under Rule 8D(2)(ii) for tax-free dividend income:
The Revenue challenged the Ld. CIT(A)'s decision to delete the disallowance of ?3,91,97,029 under section 14A of the Act. The AO computed the disallowance under Rule 8D(2)(ii), whereas the assessee disallowed a sum as per Rule 8D(2)(iii). The Ld. CIT(A) relied on the fact that the net interest income was positive, and no net interest expenditure was incurred. Referring to a Kolkata Tribunal decision, the Ld. CIT(A) ruled in favor of the assessee. The ITAT concurred, stating that Rule 8D(2)(ii) cannot be applied when there is no net interest expenditure, upholding the Ld. CIT(A)'s decision and dismissing the Revenue's appeal.

In conclusion, the ITAT dismissed the Revenue's appeal in both issues, affirming the Ld. CIT(A)'s decisions.