2023 (3) TMI 1113 - HC - Income Tax

Provision for bad and doubtful debts - Interpreting section 36(1)(viia)(a) - NPA - scope of the expression at its option - Whether deduction under the first proviso to Section 36(1)(viia)(a) was alternative to that under sub-clause (a) and that no deduction under the first proviso was allowable if the deduction had been allowed under sub-clause (a)? - HELD THAT - The proviso carves out an exception from the stipulation in sub-clause(c), otherwise the use of the expression at its option would lose its significance. The said decision would squarely apply to the case on hand and the only distinction being sub-clause(a) of Section 36(1)(viia)(a) would stand attracted in the case on hand and the said provision was given effect to from the assessment year 2000-01. The decision in the case of Tamilnadu Industrial Investment Corporation Limited was challenged by the revenue before the Hon ble Supreme Court and the Special Leave Petition was dismissed as reported 2019 (7) TMI 408 - SC ORDER Decided in favour of assessee. Disallowance u/s 14A r.w.r. 8D - HELD THAT - As relying on Dhansar Engineering Co. (P) Ltd. case 2021 (12) TMI 824 - CALCUTTA HIGH COURT the procedure under Rule 8D of the Income Tax Rules, 1962 was held to be prospective in operation and not retrospective. Thus, the substantial questions of law nos.2 and 3 are answered in favour of the appellant/assessee and the AO is directed to do the recomputation bearing in mind the above legal principle.

Issues involved:
1. Interpretation of Section 36(1)(viia)(a) of the Income Tax Act for deduction under the first proviso.
2. Applicability of proviso of sub-sections (2) and (3) in Section 14A of the Income Tax Act for the assessment year 2003-2004.
3. Direction to Assessing Officer on disallowance under section 14A based on Rule 8D without finding on expenditure incurred in relation to tax-free interest income.
4. Computation of book profit under section 115JB regarding provisions for bad and doubtful debts, standard assets, depreciation of investment, fraud and forgery, stationery wastage, and tangible assets.

Interpretation of Section 36(1)(viia)(a):
The Court considered whether the deduction under the first proviso to Section 36(1)(viia)(a) was alternative to that under sub-clause (a). Referring to a similar case, the Court held that the proviso carves out an exception from the stipulation in sub-clause (c), emphasizing the use of the expression "at its option." The decision in the case of Tamilnadu Industrial Investment Corporation Limited was upheld, and the substantial question of law no.1 was answered in favor of the assessee.

Applicability of proviso in Section 14A and Rule 8D:
The Court addressed the applicability of proviso of sub-sections (2) and (3) in Section 14A and Rule 8D for the assessment year 2003-2004. Citing a previous case, the Court held that the procedure under Rule 8D was prospective in operation and not retrospective. Consequently, substantial questions of law nos.2 and 3 were answered in favor of the appellant/assessee, directing the Assessing Officer to recompute based on the legal principle.

Direction on disallowance under section 14A and expenditure incurred:
The Court considered the direction to the Assessing Officer on disallowance under section 14A based on Rule 8D without a finding on the expenditure incurred in relation to tax-free interest income. The matter was remanded back to the Assessing Officer for a fresh decision, deeming the substantial question of law no.4 as entirely factual and not necessary to be answered in the appeal.

Conclusion:
In conclusion, the appeal was allowed to the extent indicated, with the substantial question of law no.4 remaining unanswered due to the matter being remanded back to the Assessing Officer for a fresh decision.

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