2019 (6) TMI 1119 - AT - Income Tax

Allowability of business loss - Advance given for supply of refractory materials in the normal course of its business of trading and manufacturing of refractories and written off as irrecoverable as company became sick - HELD THAT - We note that the loss of ₹ 10,55,360/-must be held to arise out of the carrying on of business and to be incidental to it and that is how it would be dealt with according to ordinary commercial principles of trading, hence it is an allowable business loss. Judgment of the Hon ble Supreme Court in the case of CIT vs. Nainital Bank Ltd. 1964 (9) TMI 11 - SUPREME COURT wherein it was held that under section 10(1) of Indian Income Tax Act, 1922 (which is similar / identical to section 28 of the 1961 Act), the trading loss of a business is deductible in computing the profits earned by a business. However, every loss is not deductible unless it is incurred in carrying out the operation of a business and is incidental to the operation. We note that on the similar facts in the case of Ram Chander Shiv Narayan vs. CIT 1977 (11) TMI 2 - SUPREME COURT has held that loss is deductible where there is a direct and proximate nexus between the operation and the loss or where the loss is incidental to it, as, without the business operation and doing all that is incidental to it, no profit can be earned. Therefore, based on the facts and circumstances of the case, as narrated above, we delete addition and allow ground No. 1 raised by the assessee. Addition u/s 14A read with Rule 8D - interest -free funds - assessee has not made any disallowances u/s 14A in its computation - HELD THAT - Investment made in the earlier years has been carried forward during the impugned F.Y 2011-12, as it is evident from the aforesaid particulars where the balance at the end of the year shows the same investment as appearing in the earlier year(s). Accordingly, it may safely be deduced that during the year under consideration, no interest bearing funds were deployed for making any exempt income bearing investments. Assessee company had sufficient interest -free funds to meet its investments. Therefore, it may be safely deduced that investments in shares were financed out of the interest free funds available with the Assessee. Accordingly, no disallowance is called for u/s 14A. We delete the addition under Rule 8D(2) (ii) of the Rules. Disallowance under Rule 8D (2) (iii) we note that AO has disallowed ₹ 6,665/-. We note that the AO has not taken into account the dividend bearing securities for the purpose of computing average investment.

Summary

Issues Involved:
1. Disallowance of ?10,00,000/- written off as irrecoverable.
2. Disallowance of ?30,698/- under Section 14A read with Rule 8D of the Income Tax Rules, 1962.

Detailed Analysis:

1. Disallowance of ?10,00,000/- Written Off as Irrecoverable:
The first issue pertains to the disallowance of ?10,00,000/- written off by the assessee as irrecoverable. The assessee had advanced this amount to M/s Refractory Specialities (India) Ltd. for the supply of refractory materials in the ordinary course of its business. The amount became irrecoverable due to the liquidation of the supplier company.

Facts and Arguments:
- The assessee claimed a write-off of ?10,55,360/- (including interest of ?55,360/-) as bad debts.
- The amount was advanced in 1998 and became irrecoverable due to the financial difficulties and subsequent liquidation of M/s Refractory Specialities (India) Ltd.
- The assessee argued that the write-off should be allowed as a deduction under Section 36(2) of the Income Tax Act, 1961, as it was a loss incidental to business.

Tribunal's Findings:
- The Tribunal noted that the amount was advanced in the ordinary course of business and became irrecoverable due to the liquidation of the supplier company.
- The Tribunal referred to the Supreme Court's judgment in Badridas Daga v. CIT, which held that losses incidental to business are allowable as deductions.
- The Tribunal also cited the Supreme Court's judgment in CIT vs. Nainital Bank Ltd., which held that trading losses are deductible if they are incidental to the operation of the business.
- Based on these precedents, the Tribunal concluded that the loss of ?10,55,360/- was incidental to the business and allowable as a business loss under Section 28 of the Act.

Conclusion:
The Tribunal deleted the addition of ?10,55,360/- and allowed the assessee's ground of appeal.

2. Disallowance of ?30,698/- Under Section 14A Read with Rule 8D:
The second issue pertains to the disallowance of ?30,698/- under Section 14A read with Rule 8D of the Income Tax Rules, 1962. This disallowance was made on the grounds that the assessee had made investments in equity shares, which yielded exempt income.

Facts and Arguments:
- The Assessing Officer (AO) noted that the assessee had investments in equity shares and made a disallowance under Rule 8D.
- The assessee argued that no part of the interest-bearing loans was used for making exempt-income bearing investments.
- The assessee also contended that strategic investments in group companies and investments that did not yield any exempt income were erroneously included in the disallowance calculation.

Tribunal's Findings:
- The Tribunal observed that no fresh investments were made in shares during the relevant financial year.
- The Tribunal noted that the interest expenses mainly arose from cash credits used to finance the working capital of the assessee company.
- The Tribunal referred to the Bombay High Court's judgment in CIT Vs. Reliance Utilities & Power Ltd., which held that if interest-free funds are available, it can be presumed that investments were made from these funds.
- The Tribunal concluded that no disallowance was warranted under Rule 8D(2)(ii) as the investments were financed out of interest-free funds.

Conclusion:
- The Tribunal deleted the addition under Rule 8D(2)(ii).
- For the disallowance under Rule 8D(2)(iii), the Tribunal directed the AO to disallow ?5,000/- instead of ?6,665/-.

Final Order:
The appeal of the assessee was partly allowed. The Tribunal deleted the addition of ?10,55,360/- and modified the disallowance under Rule 8D(2)(iii) to ?5,000/-.