2019 (5) TMI 35 - HC - Income Tax

Addition u/s 68 - unsecured cash credit - HELD THAT - CIT(A) accepted the genuineness of the transactions of sale and purchase of shares in question and his findings have not been challenged by the Revenue in the Departmental appeal, therefore, we are of the view that the assessee would be entitled for deduction of loss. CIT(A) was unjustified to direct the AD to allow loss as speculation loss u/s 73 of the Act. We accordingly, set aside the orders of the authorities below and delete the entire addition. Speculation loss u/s 73 - HELD THAT - Where any part of the business of a company consists in the purchase and sale of shares of other companies, it is deemed to be carrying on a speculative business. In the present case, assessee falls within the exception carved out in the part of the section, which is found in the parenthesis ( other than a company whose gross total income consists mainly of income which is chargeable under the heads Interest on securities , Income from house property , Capital gains and Income from other sources , or a company the principal business of which is the business of trading in shares of banking or the granting of loans and advances); its total income mainly consists of income derived from the granting of loans and advances. Such being the case, the CIT(A) clearly falls into error in holding that the loss reported pertains to a speculative transaction; the ITAT acted correctly in law in setting aside that finding. Therefore, no question of law arises in this aspect. Write-off of bad debts - Write off of the principal amount - HELD THAT - ITAT s decision that since the claim for interest had been allowed in the past and was even granted in the current assessment year, the assessee legitimately could claim the write-off as bad debts even towards the principal, was based upon the ruling of the Supreme Court and of this Court especially IFCI Venture Capital 2007 (7) TMI 674 - DELHI HIGH COURT , no question of law arises that the assessee in the first instance did not claim the write-off as a deduction per se that does not stop it or preclude it from claiming relief, given the judgment of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT, (Central), Calcutta 1971 (8) TMI 10 - SUPREME COURT . Furthermore, this Court is also of the opinion that Section 36(2) also applied to the facts and circumstances of this case. Disallowance u/s 14A - HELD THAT - As during the year (AY 2005-06), the total expenditure incurred was about ₹ 90 lakhs. During the hearing, the break-up of these expenses was revealed about ₹ 2.5 lakhs was spent on salaries; the rest was on professional fees (including legal fees) transport, maintenance of vehicles, stationery, postage, printing etc. It was within the power of the AO to have inquired into these items, to scientifically apportion amounts attributable to expenditure that could reasonably bear proximity with earning of tax exempt income; instead, the AO merely rested content with applying a proportion, which was not appropriate. Given that the funds and scrips (which yielded dividend) were legacy assets, the assessee s arguments were reasonable - question relating to disallowance under Section 14A does not arise.

Summary

Issues Involved:

1. Disallowance under Section 14A.
2. Write-off of principal amount of bad debts.
3. Speculative loss under Section 73.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A:

In ITA 1142/2018 and ITA 1144/2018, the primary issue was the correctness of the ITAT's findings regarding the disallowance under Section 14A. The assessee claimed no expenditure was incurred in earning dividend income, which constituted approximately 40% of its income. The AO, however, disallowed a portion of the expenditure, roughly apportioning about 9-10% of the exempt income. The ITAT held that Rule 8D, which sets the formula for calculating disallowance, was not applicable for the assessment years in question (2005-06 and 2006-07). The tribunal emphasized that the AO did not record satisfaction based on credible evidence that interest-bearing funds were used to earn tax-free income. The tribunal's reasoning was supported by the judgment in CIT vs Abhishek Industries Ltd., which stated that Section 14A could only be invoked if the assessee used borrowed funds for investments. The court upheld the ITAT's decision, noting that the AO failed to disprove the assessee's claim that no expenses were incurred for earning dividend income and that the investments were legacy assets. Therefore, no question of law arose, and the disallowance under Section 14A was not warranted.

2. Write-off of Principal Amount of Bad Debts:

The second issue in ITA 1142/2018 concerned the write-off of the principal amount of bad debts. The AO initially disallowed the interest, and the CIT(A) granted relief only for the interest write-off, not the principal amount. The ITAT allowed the write-off of the principal amount, relying on the Supreme Court's judgment in T.R.F. Limited v. CIT, Ranchi, which stated that the assessee does not need to prove that the debt became bad in the relevant year for claiming deduction under Section 36(1)(vii). The ITAT also referenced the Delhi High Court's judgment in CIT v. IFCI Venture Capital, which reiterated that the write-off in the books of accounts is sufficient for claiming deduction. The court upheld the ITAT's decision, stating that the assessee could claim the write-off as bad debts even if it was not initially claimed as a deduction. The court also noted that Section 36(2) was applicable, and no substantial question of law arose.

3. Speculative Loss under Section 73:

The third issue in ITA 1142/2018 was the finding regarding speculative loss under Section 73. The AO had added back the loss, treating the transactions as suspect under Section 68. The CIT(A) accepted the genuineness of the transactions but held that the assessee indulged in speculative transactions, thus disallowing the loss under Section 73. The ITAT set aside the CIT(A)'s findings, stating that the assessee was excepted from the operation of Explanation to Section 73, as its principal business was the granting of loans and advances. The court upheld the ITAT's decision, noting that the assessee fell within the exception provided in Section 73, as its total income mainly consisted of income from loans and advances. Therefore, the CIT(A) erred in holding the loss as speculative, and no question of law arose on this aspect.

Conclusion:

The court dismissed the appeals, concluding that no substantial question of law arose for consideration. The ITAT's findings on disallowance under Section 14A, write-off of principal amount of bad debts, and speculative loss under Section 73 were upheld. The appeals were thus dismissed.