2007 (9) TMI 300 - AT - Income Tax

Disallowance of bad debts - Written Off - sold and purchased units of mutual funds - earned dividend and commission as profit on trading of shares - HELD THAT - In our considered opinion the debts in question have already been written off in the previous year relevant to the assessment year under consideration and in view of the amendment to s. 36(2) of the Act the AO was not justified in rejecting the claim of the assessee merely on the ground that it was premature to write-off the debts in question. The decision of the learned CIT(A) on this issue cannot therefore be sustained. This ground of appeal is allowed. Interest accrued on loan advanced - Penal interest - HELD THAT - As discussed there was no possibility of recovery of loan from SFL and ASTIL and we have therefore allowed the claim of the assessee that the amount was required to be allowed as bad debt because the assessee has also written off the amount in view of the fact that the financial position of the aforestated two parties was very bad and there was no hope of recovery despite legal suit pending against them. We are therefore of the opinion that even if the assessee could have provided for the penal interest the same was liable to be written off as irrecoverable. In our considered opinion since the principal itself was not likely to be recovered the question of providing for penal interest did not arise and therefore the lower authorities were not correct in making addition on account of penal interest on accrual basis. The decision of the learned CIT(A) on this issue cannot therefore be sustained. The addition is deleted. This ground of appeal is allowed. Disallowance out of the total Court fees - pursuing civil proceedings for the recovery of bad debts - HELD THAT - In our considered opinion the expenditure has been incurred for filing the suit for recovery of debts before the amount was written off by the assessee but the expenditure is not admissible as business expenditure because the debts have been written off and the decisions of the lower authorities on this issue deserve to be sustained. This ground of appeal of the assessee is rejected. Expenditure attributable to earning of dividend income - HELD THAT - The amendment to s. 14A of the IT Act has been inserted by the Finance Act 2006 w.e.f. 1st April 2007 and the lower authorities were not correct in disallowing proportionate expenditure against the dividend income without establishing the nexus thereto. The addition is therefore deleted. This ground of appeal is therefore allowed. As a result the appeal of the assessee is partly allowed.

Issues Involved:
1. Disallowance of bad debt claim of Rs. 1,70,70,000.
2. Addition of Rs. 3,41,400 as interest accrued on loan.
3. Disallowance of Rs. 1,50,000 out of total court fees.
4. Disallowance of Rs. 3,31,408 as expenditure attributable to earning of dividend income.

Issue-wise Detailed Analysis:

1. Disallowance of Bad Debt Claim of Rs. 1,70,70,000:
The assessee firm, engaged in trading investment, financing, and bill discounting, claimed bad debts of Rs. 1,70,70,000, which included Rs. 25,70,000 from Solar Farmachem Ltd. (SFL) and Rs. 1,45,00,000 from Apollo Steel and Tubes Ltd. (ASTL). The AO disallowed the claim, arguing that the assessee had not exhausted all recovery options and it was premature to write off the debts while court cases were still pending. The CIT(A) upheld this decision, stating that the assessee had not exploited all possible means for recovery. However, the Tribunal noted that the debts were written off in the relevant accounting period and, per the amended s. 36(2), the AO was not justified in rejecting the claim on the ground of prematurity. The Tribunal allowed this ground of appeal.

2. Addition of Rs. 3,41,400 as Interest Accrued on Loan:
The AO added Rs. 3,41,400 as penal interest on the loan of Rs. 1,70,70,000 from SFL and ASTL, arguing that the assessee was in the money-lending business and had to provide for interest on an accrual basis. The CIT(A) upheld this addition. The Tribunal, however, found that since the principal was unlikely to be recovered, the question of providing for penal interest did not arise. Consequently, the Tribunal deleted the addition, allowing the assessee's appeal on this ground.

3. Disallowance of Rs. 1,50,000 Out of Total Court Fees:
The assessee claimed Rs. 3,00,000 as court fees for pursuing civil proceedings to recover bad debts. The AO disallowed Rs. 1,50,000, and the CIT(A) upheld this, reasoning that since the debts were written off, the expenditure was not admissible as business expenditure. The Tribunal agreed with the lower authorities, stating that the expenditure was not admissible as business expenditure because the debts had been written off. This ground of appeal was rejected.

4. Disallowance of Rs. 3,31,408 as Expenditure Attributable to Earning of Dividend Income:
The assessee claimed various expenses totaling Rs. 7,96,743 and dividend income of Rs. 49,11,930 as exempt under s. 10(33). The AO attributed Rs. 3,31,408 of the expenses to the earning of dividend income and disallowed it. The CIT(A) upheld this disallowance. The Tribunal, however, noted that the amendment to s. 14A was effective from 1st April 2007 and the lower authorities did not establish a nexus between the expenses and the dividend income. Therefore, the Tribunal deleted the addition, allowing this ground of appeal.

Conclusion:
The appeal of the assessee was partly allowed, with the Tribunal overturning the disallowance of the bad debt claim and the addition of interest accrued on the loan, while upholding the disallowance of court fees and deleting the disallowance of expenses attributable to dividend income.

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