2018 (6) TMI 959 - AT - Income Tax

Disallowance of foreign travel expense - disallowance u/s 14A - expenditure incurred exclusively to earn dividend or not - Held that - Foreign travelling expenditure has been incurred by the assessee for the purposes of the businesses of assessee as it is holding shares along with USA Company in another company from which the dividend income is received - it is the business concern of the assessee for which the directors of the assessee are undertaking foreign tour - these expenditure has not been stated to be incurred for the personal expenditure of the directors it was also not shown before us by revenue that such expenditure is only for the purpose of the earning of dividend - hence, these expenditure are incurred for the purposes of the business and hence they are allowable u/s 37(1) - hence we do not find any reason to confirm disallowance of any part of the expenditure out of the foreign travel expenditure - Decided in favor of assessee. Additions u/s 14A - Held that - Certain expenditure has been incurred by the assessee for earning exempt income such as maintenance of accounts of the dividend etc - however no direct expenditure has been incurred by it for earning exempt income - assessee has also not given any details of the expenditure, which are incurred for earning exempt income - in absence of any such detail furnished by the assessee, it would be fair to estimate a reasonable sum for such disallowances - therefore in the interest of the Justice and looking to the facts of the case it is appropriate if the total disallowance on such expenditure which are been incurred in relation to earning of the exempting exempt income is restricted to ₹ 2 Lacs - hence AO is directed to disallow ₹ 2 Lacs under section 14A. Disallowance of bad debts - Held that - Assessee has written off a sum of ₹ 50 Lacs advanced to one party by way of bill purchase - thus it is apparent that the business of the bill discounting is a financing business. Assessee is engaged in that business has not been disputed by the revenue - as the money has also been lent in the ordinary course of the business, it cannot also be held to be capital expenditure/loss - hence we reverse the finding of the Ld. CIT A and directs the assessee to allow the above claim of bad debt of ₹ 50 Lacs - Decided in favor of assessee. Disallowance of interest on account of diversion of borrowed funds - Held that - Interest on capital were not disallowed in earlier years the amount standing view on the 1st day of the relevant assessment year cannot be taken into account for the purpose of the disallowance. Further with respect to the advance given to Sak Consumer Retail Services Limited of ₹ 1.85 crores is an allotment money paid for purchase of the shares and same was allotted also therefore it was an investment. Also CIT has noted that the balance amount was also given out of its own funds and no interest-bearing funds were diverted. With respect to the advance given to Sonnet Trading Co he further noted that that once of these 14.29 Lacs was given for the purpose of the renovation of the building which was taken on rent by the appellant does that once was given for the purposes of business. The above finding of facts would not disputed by the Ld. departmental representative. Interest disallowance on the basis of the interest charged from the above company at the rate of 8% whereas he noted that assessee is receiving interest@ of 12.5% with others - Held that - Assessee received interest from these parties at the rate of 8% whereas the AO noted that interest is being charged from other parties at the rate of 12.5%. The Ld. CIT A has noted that the assessee is in the advance to the party out of the interest free funds and no interest-bearing funds been utilized for advancing the sum. The above finding of fact recorded by the Ld. CIT A was not controverted by the revenue. This we do not interfere in the finding of the Ld. CIT A and direct the assessing officer delete the disallowance on account of proportionate interest.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance of foreign travel expenditure.
3. Disallowance of bad debts claimed as a deduction.
4. Disallowance of interest expenditure on borrowed funds and proportionate interest on loans.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The assessee contested the disallowance of ?13,00,898 under Section 14A related to expenses for earning exempt dividend income. The Assessing Officer (AO) disallowed 10% of the dividend income as expenses incurred for earning the exempt income. The Tribunal found that while the assessee admitted to incurring some expenses for maintaining accounts, the 10% disallowance was not justified. It was decided that a reasonable sum of ?2,00,000 should be disallowed under Section 14A, partially allowing the assessee's appeal.

2. Disallowance of Foreign Travel Expenditure:
The AO disallowed foreign travel expenses of ?12,06,355, claiming they were related to earning exempt dividend income. The CIT(A) allowed only 1/5th of these expenses. The Tribunal reversed this, stating the foreign travel was for business purposes and not solely for earning dividends. The expenses were deemed allowable under Section 37(1), and the full amount was allowed, reversing the lower authorities' findings.

3. Disallowance of Bad Debts Claimed as Deduction:
The assessee claimed a deduction for bad debts of ?50 lakhs, which was disallowed by the CIT(A) as a capital loss. The Tribunal found that the amount was advanced in the ordinary course of business and written off due to non-recovery. As the business involved bill discounting, the write-off was allowable as bad debt under Section 36(2)(i). The Tribunal reversed the CIT(A)'s decision and allowed the deduction.

4. Disallowance of Interest Expenditure on Borrowed Funds and Proportionate Interest on Loans:
The revenue appealed against the deletion of disallowance of ?26,54,899 and ?7,68,559 related to interest on borrowed funds. The AO disallowed these amounts, claiming the funds were diverted to sister concerns without interest. The CIT(A) found no new interest-free loans were given during the year, and the advances were out of the assessee's own funds. The Tribunal upheld the CIT(A)'s findings, noting the advances were for business purposes or from non-interest-bearing funds. The revenue's appeal was dismissed.

Conclusion:
The Tribunal allowed the assessee's appeal regarding the disallowance under Section 14A and foreign travel expenditure, partially and fully, respectively. The bad debt claim was also allowed. The revenue's appeal on the disallowance of interest expenditure was dismissed, upholding the CIT(A)'s deletion of the disallowance. The final order was pronounced on 13/06/2018.