2022 (4) TMI 956 - AT - Income Tax

Addition u/s 14A r.w.r. 8D - AO noticed that assessee has earned exempt income being dividend from investments made in various mutual funds and stock in trade - suo motto disallowance - HELD THAT - CIT(A) stated that assessee has made investment in subsidiary/joint venture company which did not require any expenses of day to day basis therefore directed the assessing officer to restrict the disallowance @ 0.5% on average investment other than strategic investment and accordingly arrived at disallowance to the amount of Rs. 10, 53, 875/-. Since the assessee has made suo motto disallowance at Rs. 14, 70, 606/- therefore disallowance was restricted to Rs. 14, 70, 606/-. We consider that it has been held in various pronouncements that Sec. 14A r.w.rule 8D is not applicable to the assessment year 2007-08. The Hon ble jurisdictional High Court of Bombay in the case of Godrej Boyce Hsg. Co. Ltd. 2010 (8) TMI 77 - BOMBAY HIGH COURT held that Rule 8D shall apply with effect from A.Y.2008-09. The Hon ble Supreme Court in the case of CIT Vs. Essar Tech. Ltd. 2018 (2) TMI 115 - SUPREME COURT held that rule 8D is prospective in operation and cannot be applied to any assessment year prior to assessment year 2008-09. Therefore we don t find any error in the finding of ld. CIT(A). Accordingly this ground of appeal of the revenue stand dismissed. Correct head of income - Investment in IPO - STCG or business income - HELD THAT - Assessee is in the business of banking and as per the investment policy it has made an elaborate investment in various instrument such as investment in government securities treasury bills CD s CP s Tier-III Bonds Debentures IPO s Equity Shares etc - CBDT Circular No. 4 of 2007 dated 15.06.2007 provide that assessee can have two portfolio i.e Investment port folio comprising of securities which were to be treated as capital asset and trading port folio comprising of stock in trade which were to be treated as trading assets.The ld. CIT(A) has also discussed that some of the shares subscribed by the assessee in the IPO s were held for duration up to 340 days therefore observation of the assessing officer that all the shares were sold immediately after allotment of shares was factually incorrect. Considering the facts and findings elaborated in the decision of ld. CIT(A) that the investment made in shares in various IPO s cannot be considered as trading activity we don t find any infirmity in his decision therefore this ground of appeal of the revenue stand dismissed. Disallowance of bad debt written off - A.O noticed that in the computation of total income the assessee has disallowed the bad debt u/s 36(2)(v) on the ground that the bad debt related to advances to which Section 36(1)(viia) of the Act applicable and the bad debt have to be necessarily debited to the provisions for bad and doubtful debt - HELD THAT - The assessee being a banking company is entitled to bad debt @ 7.5% of gross total income as deduction u/s 36(1)(viia). In addition to this the assessee is also entitled to bad debt on the basis of actually written off bad debt and this deduction was allowable u/s 36(1)(vii) of the Act. During the year under consideration the assessee had claimed deduction of provision based at Rs. 9, 79, 68, 016/-. In addition the total amount of bad debt actually written off were Rs. 24, 14, 97, 278/- therefore the allowability of provision was in accordance with Section 36(1)(viia) at 7.5% of gross total income. We consider that the bad debt actually written off was at Rs. 24, 14, 97, 278/- against opening balance in the provision of amount at Rs. 14, 35, 29, 262/- therefore the difference of Rs. 9, 79, 68, 016/- is allowable as deduction. Therefore we don t find any error in the decision of ld. CIT(A) accordingly this ground of appeal stand dismissed. Addition being entrance fee paid to club - AO was of the view that such fees paid to clubs for using club facility provide advantage to the assessee of an enduring nature which was capital in nature therefore same was added to the total income of the assessee - CIT-A deleted the addition - HELD THAT - CIT(A) has placed reliance on the decision of ITAT Mumbai in the case of Bombay Burmah Trading Corporation Ltd. 2001 (1) TMI 974 - ITAT MUMBAI and in the case of Otis Elevator 1991 (4) TMI 53 - BOMBAY HIGH COURT wherein it has been held that even entrance fees paid to club is allowable as deduction. After taking into consideration the decision of Hon ble Jurisdictional High Court and coordinate bench of ITAT as referred above we don t find any infirmity in the decision of the order of the ld. CIT(A) therefore this ground of appeal of the revenue stand dismissed. Depreciation on lease asset - recharacterisation of various lease transactions in earlier years as Hire Purchase / Financing transactions - HELD THAT - It is noticed that similar issue on identical facts have been adjudicated by the ITAT in the appeal of the assessee pertaining to assessment year 1995-96 to 2003-04 as per copies of order placed in the asesssee s paper book wherein the issue was set aside to the A.O for adjudicating the same in accordance with law and in the light of the order passed in the earlier years. Accordingly we restore this matter to the file of the A.O to examine the claim of the assessee in accordance with law as per the direction of the ITAT given in the earlier years. Therefore this ground of appeal of the assessee is allowed for statistical purposes.

Summary

Issues:
1. Disallowance of addition under Section 14A of the Income Tax Act
2. Treatment of short term capital gain as business income
3. Disallowance of bad debt written off
4. Addition of entrance fee paid to club
5. Disallowance of depreciation on premises given on lease
6. Disallowance of depreciation on lease assets

Analysis:

1. Disallowance under Section 14A:
The assessing officer added an amount under Section 14A for exempt income earned by the assessee. However, the CIT(A) deleted the addition based on the inapplicability of Rule 8D for the relevant assessment year. The tribunal upheld the CIT(A)'s decision citing relevant case laws and held that Rule 8D is not retrospective for assessment years prior to 2008-09.

2. Treatment of Short Term Capital Gain:
The AO treated short term capital gain as business income, disallowing the benefit of Section 111A. The CIT(A) allowed the appeal, considering the nature of the assessee's investments and distinguishing between capital assets and trading assets. The tribunal upheld the CIT(A)'s decision, emphasizing the investment nature of the shares acquired through IPOs.

3. Disallowed Bad Debt Written Off:
The AO disallowed a portion of bad debt written off by the assessee, citing provisions related to bad and doubtful debts. The CIT(A) allowed the deduction, considering the actual bad debt written off and the provisions under Section 36(1)(viia). The tribunal upheld the CIT(A)'s decision, allowing the deduction of the difference in bad debt written off.

4. Addition of Entrance Fee Paid to Club:
The AO added the entrance fee paid to clubs as capital expenditure. However, the CIT(A) deleted the disallowance based on precedents allowing such expenses as deductions. The tribunal upheld the CIT(A)'s decision, citing relevant case laws supporting the deductibility of entrance fees paid to clubs.

5. Disallowed Depreciation on Premises Given on Lease:
The AO disallowed depreciation on premises given on lease, which was contested by the assessee. The tribunal noted similar issues adjudicated in previous years and directed the AO to reexamine the claim in accordance with the law and previous orders. The ground of appeal was allowed for statistical purposes.

6. Disallowed Depreciation on Lease Assets:
The AO disallowed depreciation on lease assets due to recharacterization of lease transactions. The assessee requested depreciation on such assets if held as lease transactions. The tribunal restored the matter to the AO for examination based on previous orders, allowing the appeal for statistical purposes.

In conclusion, the tribunal dismissed the revenue's appeal and allowed the assessee's appeal for statistical purposes, addressing various issues related to disallowances and treatment of income and expenses.