2006 (1) TMI 183 - AT - Income Tax

Company as bad or doubtful - Computation of book profit for the purpose of s. 115JA - Exempted dividend income u/s 14A - HELD THAT - A provision for bad and doubtful debts is made with the view to guarding against the non-recovery of certain debts which are considered by the company as bad or doubtful. It implies that monies receivable by the company may not be realised. Explanation (c) refers to amount set aside to provisions made for meeting liabilities . By making the provision for bad and doubtful debts, the assessee is not guarding against any liability which it may be called upon to pay. For instance, a provision made for gratuity payable to the employees may properly be called a provision made for meeting a liability. But, when a provision is made to guard against the possible non-recovery of amounts due to the assessee, it cannot be described as provision made for meeting a liability. The Institute of Chartered Accountants of India (ICAI), in its guidance note on Terms used in Financial Statements (filed by the assessee) had defined a liability as the financial obligation of an enterprise other than owners' funds . Therefore, on this ground also, the decision of the CIT(A) requires to be upheld. We do so and dismiss the ground. Exempted dividend income u/s 14A - Sec. 14A does not seek to touch upon the above controversy at all. In fact, it cannot, because the controversy has been settled in favour of the Revenue both judicially as well as statutorily as noted above. Now, s. 14A, as explained by the Memorandum Explaining the Provisions of the Finance Bill, 2001, which we have already quoted above, seeks to nullify the effect of certain judgments in which it has been held that in the case of an indivisible business, no part of the expenditure incurred by the assessee can be disallowed as relating to the exempted income. There is no dispute that the entire dividend, which is exempt u/s 10(33) was received from M/s Eicher Motors Ltd. by a single dividend warrant and no effort or expenses were necessary or were incurred to earn such income. There is also no material brought before us to show that the assessee's contention that no part of the interest can be attributed to the earning of the dividend income since the shares were acquired from the own funds in the earlier years and not from borrowed funds, is factually incorrect. In these circumstances, we have to agree with the assessee that there is no material on the basis of which the AO would estimate and disallow a sum by invoking s. 14A. We, therefore, agree with the decision of the CIT(A), affirm the same and dismiss the ground No. 3. In the result, the appeal is dismissed with no order as to costs.

Issues Involved:
1. Depreciation on furniture and fixtures.
2. Deduction under Section 35AB of the IT Act.
3. Addition of provision towards bad and doubtful debts under Section 115JA.
4. Disallowance under Section 14A for earning exempted dividend income.

Issue-wise Detailed Analysis:

1. Depreciation on Furniture and Fixtures:
The first issue was whether the CIT(A) erred in allowing depreciation of Rs. 2,69,700 on furniture and fixtures, which the AO claimed were not used for business purposes. The Tribunal noted that this issue had been previously decided in favor of the assessee for earlier assessment years (1993-94, 1994-95, and 1997-98). The assessee had provided these items to employees under a scheme allowing them to purchase the items at WDV after five years. The Tribunal, following its earlier decisions, upheld the CIT(A)'s order, dismissing the ground.

2. Deduction under Section 35AB of the IT Act:
The second issue involved the CIT(A) allowing a deduction of Rs. 1,35,417 under Section 35AB. The AO had not allowed this deduction in the assessment year under appeal, despite allowing it in previous years. The CIT(A) noted that the expenditure was towards the cost of Mofa drawings, which had been treated as technical know-how expenditure, and 1/6th of this amount was allowed as a deduction in earlier years. The Tribunal found no infirmity in the CIT(A)'s direction to allow the deduction, noting consistency with the AO's stand in earlier years and the absence of an appeal by the Department in a similar case for the assessment year 1997-98. This ground was dismissed.

3. Addition of Provision Towards Bad and Doubtful Debts Under Section 115JA:
The third issue was whether the CIT(A) erred in directing the AO not to add the provision towards bad and doubtful debts while computing book profit under Section 115JA. The AO had added back Rs. 2,21,32,285, arguing it was not an ascertained liability. The CIT(A) disagreed, noting that the provision was made for specific and identified debts, thus constituting an ascertained liability under Part III of Schedule VI to the Companies Act. The Tribunal upheld this view, citing the Supreme Court's decision in Apollo Tyres Ltd. vs. CIT, which limited the AO's power to adjust book profits to specific adjustments under the Explanation to Section 115JA. The Tribunal agreed that the provision for doubtful debts was for an ascertained liability and dismissed the ground.

4. Disallowance under Section 14A for Earning Exempted Dividend Income:
The fourth issue concerned the disallowance of Rs. 5 lakhs under Section 14A for expenses allegedly incurred in earning exempted dividend income. The AO had disallowed this amount on the assumption that some expenditure must have been incurred. The CIT(A) deleted the disallowance, agreeing with the assessee that no actual expenditure was incurred for earning the dividend, which was received from a group company by a single dividend warrant. The Tribunal noted that Section 14A requires actual expenditure to be shown as incurred in relation to exempt income. It emphasized that the AO must prove, based on material evidence, that such expenditure was incurred. The Tribunal found no material to support the AO's estimate and upheld the CIT(A)'s decision, dismissing the ground.

Conclusion:
The Tribunal dismissed the Department's appeal on all grounds, affirming the CIT(A)'s decisions on depreciation, deduction under Section 35AB, provision for bad and doubtful debts, and disallowance under Section 14A. The Tribunal emphasized the need for actual evidence of incurred expenditure and consistency with previous rulings.

← Previous Next →