2012 (10) TMI 16 - AT - Income Tax

Disallowance of expenditure incurred on earning exempt income u/s 14A AO contention that a certain percentage of the expenses claimed by the assessee would be definitely attributable to the tax free income earned - AO, therefore, estimated the ratio of exempt income to total income Following the decision in case of Godrej & Boyce Mfg. Co. Ltd. (2010 (8) TMI 77 - BOMBAY HIGH COURT) computation of disallowance has to be made at a reasonable basis, considering the fact that the assessee has not incurred any expenditure, specifically for the earning of exempt income. Issue remand back to AO Disallowance of bad debts Held that - Assessee has not furnished any evidence in support of its claim that the said debt had become bad . It has not produced anything in respect of its claim that the said party had expressed its inability to make payment. Assessee is bound to explain the measures he has taken before arriving at the conclusion that the debt has become bad. Therefore issue remand back to AO Disallowance of STT Said expense pertained to client on whose behalf we have executed the saudas and the STT pertaining to those saudas is borne by the assessee AO disallow the same that expenditure which is specifically prohibited cannot be allowed as an expenditure even if it pertains to someone else Held that - In so far as the question of revenue is concerned, there is no revenue loss to the exchequer, because the assessee is making that payment, which in any case, also it would have been the assessee only to make the payment, it is only a simple case of book entry, because neither the STT nor the service tax, though collected under the gross amount has been paid off. It is just a case of alternate book entries, which does not call for any addition on this account. Therefore appeal decides in favour of assessee

Issues Involved:
1. Disallowance under Section 14A of the I.T. Act.
2. Disallowance of bad debts arising from share trading business.
3. Disallowance of Securities Transaction Tax (STT) payments.
4. Treatment of Short-Term Capital Gains (STCG) as business income.

Detailed Analysis:

1. Disallowance under Section 14A of the I.T. Act:
The first ground of appeal for the assessment year 2005-06 pertains to the disallowance of Rs. 4,05,823/- under Section 14A of the I.T. Act. The assessee earned dividend income and long-term capital gains but claimed that no expenditure was incurred to earn these incomes. The AO, relying on ACIT v/s Citicorp Finance (India) Ltd., estimated a 14% ratio of exempt income to total income and computed the disallowance accordingly. The CIT(A) restored the issue to the AO for recomputation as per Rule 8D. The ITAT, referencing the Bombay High Court decision in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT, held that Rule 8D is prospective from the assessment year 2008-09 and directed the AO to recompute the disallowance on a reasonable basis. This ground was allowed for statistical purposes.

2. Disallowance of bad debts arising from share trading business:
The second issue involved the disallowance of Rs. 5,78,183/- claimed as bad debts from share trading business. The AO disallowed the claim on the grounds that the debts had not become bad and did not satisfy the conditions under Section 36(1)(vii) and 36(2). The CIT(A) set aside the issue to the AO with specific directions to allow the debt if brokerage income was shown with respect to each party in any previous year. The ITAT upheld the CIT(A)'s order, finding no reason to give a distinct finding and endorsing the directions given.

3. Disallowance of Securities Transaction Tax (STT) payments:
The third issue was the disallowance of STT payments amounting to Rs. 3,25,483/- in the assessment year 2005-06 and Rs. 75,025/- in the assessment year 2006-07. The AO disallowed the STT payments as they are specifically prohibited under Section 40(a)(ib). The CIT(A) upheld the AO's decision, emphasizing that specific provisions prevail over general provisions. The ITAT found that the assessee had to circumvent statutory provisions for a major client, Bank of Maharashtra, by issuing STT-inclusive invoices. The ITAT ruled that this was merely a case of alternate book entries and did not result in revenue loss to the exchequer. Therefore, the ITAT set aside the CIT(A)'s order and directed the AO to delete the disallowance.

4. Treatment of Short-Term Capital Gains (STCG) as business income:
The fourth issue was the treatment of STCG as business income. The CIT(A) observed that the assessee made substantial investments out of borrowed funds, and the intention and conduct indicated that of a trader, not an investor. The CIT(A) also noted that res judicata did not apply due to material changes in transaction trends. The ITAT found discrepancies in the arguments regarding the nature of the loans and the consistency of the assessee's position as a trader and investor. The ITAT set aside the CIT(A)'s order and restored the issue to the AO for a detailed factual interpretation and comprehensive findings after giving the assessee reasonable opportunity.

Conclusion:
The appeals filed by the assessee for the assessment years 2005-06 and 2006-07 were treated as partly allowed. The ITAT directed the AO to recompute disallowances and re-examine issues with detailed factual interpretations where necessary.

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