2024 (11) TMI 1158 - AT - Income Tax

Disallowing of deduction for bad debts written off being net of sale consideration of the non-performing asset (NPA) u/s 36(i)(vii) - HELD THAT - As the claim of the assessee as a bad debt is as per the provisions of the Act and also allowable as a business loss. Therefore, we do not find any merit in the impugned addition. The AO is directed to delete the addition. Denial of deduction for bad debts written off u/s 36(1)(vii) r.w.s. 36(2) of the Act and also u/s 37(1) - HELD THAT - The assessee had assets of Rs. 7.84 Crores (being loan outstanding). The assessee was assigned assets, market value of which was Rs. 4.55 Crores (being price of shares on NSE on the date of credit in the D-Mat account). Thus, the assets of Rs. 7.84 Crores was exchanged for another asset for Rs. 4.55 Crores and hence the loss of Rs. 3.29 Crores, which is nothing but a business loss and deserves to be allowed. The reasons for denial of the claim have been considered while deciding Ground Nos. 1 to 5 (supra) and for our detailed reasoning therein, this claim of loss is also allowed. Ground Nos. 6 to 8 are accordingly allowed. Disallowance u/s 14A r.w.r. 8D - shares were held as stock-in-trade - assessee claimed exempt income on which suo moto disallowance u/s 14 of the Act was computed by applying Rule 8D - HELD THAT - The assessee while computing the income at Clause 8 of the notes to the computation of total income has made it abundantly clear that though the assessee has disallowed u/s 14A r.w.r. 8D out of abundant caution, the bank reserves its right to claim that provision of Rule 8D should not be attracted in their case. This was in line with the judicial decisions prevailing at the time of filing of the return of income. However, now that the Hon ble Supreme Court in Maxopp Investment Ltd. 2018 (3) TMI 805 - SUPREME COURT has settled the dispute, the assessee was not required to disallow any expenditure for earning the exempt income as mentioned elsewhere. Therefore, the AO is directed to delete the suo moto disallowance. Ground No. 9 is accordingly allowed. Non-inclusion of the amount taxed as income of the head-office while working out adjusted total income for computing the deduction u/s 36(1)(viia) - AO has computed the adjusted total income without considering income of the head-office while working of deductions u/s 36(1)(viia) and Section 44C - HELD THAT - . After giving a thoughtful consideration to the orders of the authorities below, we are of the considered view that this issue needs a fresh look qua the decision taken in AY 2013-14 by the appellate authorities. Therefore, this issue is restored to the file of the AO and the AO is directed to decide it afresh after considering the facts of AY 2013-14. Disallowance of payment of professional fees - expenses not related with day to day business of assessee and also expenses were related with expansion of the assessee s business - assessee explained that the fees were paid for services connected with developing India 2.0 plan for the Bank with focus on key areas like Macro and Regulatory Context, potential partnerships and inorganic play - HELD THAT - As considering the business background of the assessee vis- -vis the fees paid to McKinsey Co. Inc., we are of the considered view that the expenditure was incurred primarily and essentially related to the operation and working of the business of the assessee. It was an expenditure which was not for acquiring any tangible or intangible asset but for conducting the business of banking better and more efficiently in the present. See Empire Jute Co. Ltd vs Commissioner of Income 1980 (5) TMI 1 - SUPREME COURT

Issues Involved:

1. Deduction for bad debts written off under Section 36(1)(vii) of the Income Tax Act.
2. Applicability of Supreme Court decision in Southern Technologies to the present case.
3. Deduction under Section 37(1) and Section 28 of the Act.
4. Deduction for bad debts on conversion of debt to equity shares.
5. Disallowance under Section 14A of the Act read with Rule 8D.
6. Non-inclusion of head-office income for computing deductions under Section 36(1)(viia) and Section 44C.
7. Deletion of disallowance of professional fees as capital expenditure.
8. Disallowance of interest paid to head office.

Detailed Analysis:

1. Deduction for Bad Debts Written Off:

The assessee, a non-resident banking company, claimed a deduction for bad debts written off amounting to Rs. 4,27,46,46,000 under Section 36(1)(vii) of the Income Tax Act. The Assessing Officer (AO) disallowed the claim, arguing that the loss on the sale of non-performing assets (NPA) is not a bad debt under the Act. The AO relied on the Supreme Court decision in Southern Technologies, which emphasized that RBI guidelines cannot override statutory tax provisions. However, the Tribunal found that the bad debt claim was allowable as a business loss, directing the AO to delete the addition.

2. Applicability of Supreme Court Decision in Southern Technologies:

The Tribunal noted that the Supreme Court decision in Southern Technologies was delivered in a different context and was not applicable to the present case. The Tribunal emphasized that the assessee's claim was valid under the provisions of the Act, distinguishing it from the circumstances in Southern Technologies.

3. Deduction Under Section 37(1) and Section 28:

The Tribunal considered alternative claims under Section 37(1) and Section 28, concluding that the loss was a business loss incurred in the ordinary course of business. Therefore, the claim was allowed under these sections as well.

4. Deduction for Bad Debts on Conversion of Debt to Equity Shares:

The assessee claimed a loss of Rs. 3,28,68,000 on conversion of debt to equity shares under Section 36(1)(vii). The AO disallowed the claim, but the Tribunal allowed it as a business loss, finding that the conversion resulted in a loss due to the difference in the market value of shares.

5. Disallowance Under Section 14A Read with Rule 8D:

The assessee had made a suo moto disallowance under Section 14A, which the Tribunal found unnecessary, as the shares were held as stock-in-trade. Citing the Supreme Court's decision in Maxopp Investment Ltd., the Tribunal directed the AO to delete the disallowance, as no expenditure was required to be disallowed for earning exempt income.

6. Non-Inclusion of Head-Office Income for Deductions:

The AO's computation of adjusted total income did not consider the head-office income for deductions under Sections 36(1)(viia) and 44C. The Tribunal restored the issue to the AO for reconsideration, directing a fresh decision based on the facts of the earlier assessment year.

7. Deletion of Disallowance of Professional Fees:

The AO disallowed professional fees paid to McKinsey & Co. as capital expenditure. The Tribunal, however, found the expenditure to be revenue in nature, incurred for conducting business more efficiently. The Tribunal upheld the CIT(A)'s decision, allowing the deduction.

8. Disallowance of Interest Paid to Head Office:

The Tribunal dismissed the grounds related to the disallowance of interest paid to the head office, as these issues were not reflected in the assessment order or the CIT(A)'s order.

Conclusion:

The assessee's appeal was partly allowed, providing relief on several grounds, including the deduction for bad debts and professional fees. The revenue's appeal was dismissed, affirming the Tribunal's decisions on the contested issues.

← Previous Next →