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2012 (5) TMI 482 - AT - Income TaxDisallowance of expenses under section 14A - held that - the claim that expenses such as salary etc. which are not directly relatable to earning of dividend income cannot be disallowed, is not legally tenable. The disallowance of expenses has however to be made on a reasonable basis. - suo-moto disallowance computed by the assessee can be reasonably taken as the expenditure relatable to the exempt income - disallowance under section 14A @ 10% if general expenses in the PD division upheld. Regarding interest u/s 234C - held that - Once there is shortfall in payment of advance tax installment, the levy of interest is mandatory as we have pointed out earlier. In case, under estimate of income for advance tax payment was due to conditions beyond the control of the assessee, it could always apply to the competent authority, for waiver of interest in terms of the CBDT Circular - Decided against the assessee Regarding validity of opening of assessment under section 147 - reason to believe - held that - The only requirement is that there should be some relevant material for formation of belief and the sufficiency of material cannot be questioned. There was material available before AO clearly showed that no expenses in relation to exempt income had been disallowed by the assessee under section 14A which in our view was relevant material for formation of reasonable belief that some income had escaped assessment as it was not possible to earn such huge dividend without incurring any expenses. - Decided against the assessee Speculation loss - setting off - section 73 - held that - profit from purchase and sale of shares are not to be excluded from the deeming provisions of Explanation to section 73. It was accordingly held that the assessee was entitled to set off brought forward speculation loss against profit from sale and purchase of shares in the current year. - Decided in favor of assessee.
Issues Involved:
1. Disallowance of expenses under section 14A. 2. Levy of interest under section 234C. 3. Legal validity of reassessment proceedings under section 147. 4. Set off of speculation loss. 5. Claim of bad debts. Issue-wise Detailed Analysis: 1. Disallowance of expenses under section 14A: The dispute involves the disallowance of expenses related to tax-exempt dividend and interest income. The Assessing Officer (AO) initially attributed 10% of general expenses of the Primary Dealer (PD) division to the exempt income for assessment years 2000-01 and 2001-02. For assessment years 2002-03, 2004-05, and 2005-06, the AO changed the basis to 10% of the exempt dividend income. The Commissioner of Income Tax (Appeals) [CIT(A)] reduced the disallowance to 1% of the expenses. The Tribunal held that the disallowance should be made on a reasonable basis and upheld the AO's disallowance at 10% of general expenses in the PD division, rejecting the argument that only direct expenses should be considered. 2. Levy of interest under section 234C: The issue pertains to the levy of interest for shortfall in the payment of advance tax installments. The AO levied interest due to lower payments in the installments. The assessee argued that the shortfall was due to unforeseen circumstances, such as earning major income in the last quarter and market uncertainties post the 9/11 attacks. CIT(A) upheld the AO's decision, emphasizing that the levy of interest under section 234C is mandatory. The Tribunal agreed, stating that the AO has no discretion to waive interest once the shortfall is established, and any waiver must be sought from the competent authority under CBDT Circular. 3. Legal validity of reassessment proceedings under section 147: The AO reopened the assessment on the grounds that the assessee had not disallowed any expenses related to exempt income, forming a belief that income had escaped assessment. The assessee challenged this, arguing that there was no fresh material and the reopening was based on a change of opinion. CIT(A) upheld the reopening, stating that the return was only processed under section 143(1) and not scrutinized. The Tribunal agreed, noting that the AO had relevant material to form a reasonable belief for escapement of income, and upheld the legal validity of the reassessment. 4. Set off of speculation loss: The issue concerns whether the Explanation to Section 73, which deems purchase and sale of shares as speculation business, applies to profits as well as losses. The AO treated the profit from trading in shares as normal business profit, not allowing set off against brought forward speculation loss. CIT(A) and the Tribunal, following the Bombay High Court's decision in CIT vs. Lokmat News Papers Pvt. Ltd., held that the Explanation applies to both profits and losses, allowing the set off of brought forward speculation loss against current year profits from share trading. 5. Claim of bad debts: The AO disallowed the claim of bad debts on the grounds that there was no evidence to prove that the debts had become irrecoverable. CIT(A) allowed the claim, stating that once the debt is written off in the books, it should be allowed as a deduction. The Tribunal upheld CIT(A)'s decision, citing the Supreme Court's judgment in TRF Ltd., which states that the burden is no longer on the assessee to prove that the debt had actually become irrecoverable. Conclusion: - Appeals by the Department for A.Y 2000-01 and 2001-02 were allowed, while those for A.Y 2002-03, 2004-05, and 2005-06 were partly allowed. - The appeal by the assessee for A.Y 2001-02 was dismissed, and that for A.Y 2002-03 was partly allowed.
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