2014 (12) TMI 562 - AT - Income Tax

Claim of bad debts written off - Waiver of interest u/s 36(vii) Held that - CIT(A) rightly observed that the only dispute between assessee and department is in respect of working out 10% of aggregate average rural advances - while assessee has made such working by considering the entire outstanding advances at the end of each month, AO has worked out by considering the aggregate average rural advances of each month and not on the entire outstanding advances - a perusal of the provision contained u/s 36(1)(viia) and rule 6ABA, would make it clear that the 10% of aggregate average advances has to be worked out on the entire outstanding advances and not the advances of that month alone. Quantum of deduction u/s 36 (1)(vii) and 36(1) (viia) Held that - An assessee can claim deduction under both the clauses subject to the condition imposed under the proviso to 36(1)(vii) - CIT(A) rightly deleted the addition of ₹ 3,88,25,673 - as far as deduction of ₹ 18,79,704 is concerned, the same cannot be allowed u/s 36(1)(vii) considering the fact such amount has not exceeded the provision for bad and doubtful debts u/s 36(1)(viia) - the amount was waived at the direction of the State Govt. Department has not controverted this fact - the waiver of interest at the instance of the State Government, has to be allowed as business expenditure u/s 37(1) - the order of CIT(A) is upheld in deleting addition Decided against revenue. Deletion of provision of audit fee Held that - AO has disallowed the deduction claimed for the reason that the provision has been created for an unascertained liability whereas CIT(A) has allowed assessee s claim by holding that the liability has already accrued - as on 31/03/06, there is an outstanding demand of ₹ 39,36,734 on account of audit fees whereas an amount of ₹ 14,41,903 was raised during the FY 2006- 07 - the audit fee does not relate to the current AY -without examining as to whether the expenditure relates to the current year, CIT(A) was not justified in allowing assessee s claim thus, the order of the CIT(A) is set aside and the matter is remitted back to the AO for verification Decided partly in favour of revenue. Eligibility of deduction on long term advances u/s 36(1)(viii) Held that - CIT(A) rightly held that the deduction has to be worked out on the basis of total outstanding advances and not the outstanding advances of the year alone - the provisions of section 36(1)(viii) cannot be interpreted in a manner to suggest that 20% of the deduction has to be worked out only on the advances given during the year the order of the CIT(A) is upheld Decided against revenue. Waiver of interest to primary agricultural cooperative societies (PACS) disallowed Held that - Assessee claimed that the amount claimed as deduction is not in the nature of bad debts, but, is actually a business expenditure allowable u/s 37(1) - even if it is considered as bad debt u/s 36(1)(vii), the proviso to section 36(1)(vii) will not apply, since the said amount is to be debited to provision/reserve for bad debt reserve account and if it is so debited, then, the same will still be allowable u/s 36(1)(viia) thus, the assessee s claim of deduction of the interest waived amounting to ₹ 5,84,360 deserves to be allowed the AO is directed to delete the addition Decided in favour of assessee. Restriction of expenses to ₹ 2,26,16,355 in place of ₹ 3,12,31,869 Held that - Assessee has to bear a share in the relief package given to PACS on account of loss incurred due to waiver of interest to small and marginal farmers - the expenditure incurred is not strictly in the nature of bad debts written off but in the nature of expenditure provided u/s 37(1) - assessee has no other option but to incur the expenditure as per the directive of the Govt. as well as APCOB - the amount of ₹ 3,12,31,869 is allowable as business expenditure - Since the CIT(A) has already allowed expenditure to the extent of ₹ 2,26,16,355, the balance amount of ₹ 86,15,514 is directed to be allowed Decided in favour of assessee. Deduction claimed towards miscellaneous reserves created disallowed Held that - Assessee contended that as per the provisions of section 36(1)(viii) assessee is eligible for deduction for an amount of ₹ 79,39,000 whereas deduction to the extent of ₹ 14,21,432 has been allowed to assessee, hence, assessee remains eligible to claim deduction u/s 36(1)(viii) to the extent of ₹ 65,17,568 - The only restriction imposed as per proviso to section 36(1)(viii) is aggregate of amount carried to such reserve account should not exceed twice the amount of paid up share capital and general reserve - Therefore, it cannot be said that the items appearing in the miscellaneous reserve cannot be treated as special reserves as there is nothing in the provision to suggest that only statutory reserves can be treated as special reserve - considering the fact that assessee is eligible to claim deduction u/s 36(1)(viii) to the extent of ₹ 79,39,000 out of which an amount of ₹ 14,21,432 has already been allowed, assessee is entitled to claim deduction of the balance amount of ₹ 65,17,568 the AO is directed to allow the deduction Decided in favour of assessee.

Issues Involved:

1. Addition of Rs. 18,79,704 on account of disallowance towards interest waived.
2. Addition of Rs. 3,88,25,672 towards bad debts.
3. Addition of Rs. 50,43,457 towards provision for audit fee.
4. Computation of eligible deduction u/s 36(1)(viii) on long-term advances.
5. Adoption of income for computing eligible deduction u/s 36(1)(viia).
6. Disallowance of Rs. 5,84,360 for waiver of interest.
7. Restriction of deduction claimed u/s 36(1)(viia).
8. Disallowance of Rs. 3,12,31,869 on account of waiver of interest.
9. Disallowance of deduction claimed towards miscellaneous reserves created.

Issue-wise Detailed Analysis:

1. Addition of Rs. 18,79,704 on account of disallowance towards interest waived:

The department contended that the CIT(A) erred in deleting the addition of Rs. 18,79,704 made on account of disallowance towards interest waived. The AO observed that the bad debt written off has not exceeded the reserve created, hence it cannot be allowed. The CIT(A) deleted the addition, holding that the interest waived was as per the direction of the Government of AP and should be allowed as expenditure. The Tribunal upheld the CIT(A)'s decision, agreeing that the waiver of interest at the instance of the State Government should be allowed as business expenditure under section 37(1).

2. Addition of Rs. 3,88,25,672 towards bad debts:

The AO restricted the deduction u/s 36(1)(viia) to Rs. 1,28,21,305, while the assessee claimed Rs. 5,16,46,977. The CIT(A) allowed the assessee's claim, interpreting that the 10% of aggregate average rural advances should be based on the total outstanding advances at the end of each month. The Tribunal upheld the CIT(A)'s decision, agreeing that the deduction should be computed on the entire outstanding advances.

3. Addition of Rs. 50,43,457 towards provision for audit fee:

The AO disallowed the provision for audit fee, stating it was not an ascertained liability. The CIT(A) allowed the claim, noting that the liability had already accrued. The Tribunal remitted the matter back to the AO to verify whether the expenditure pertains to the current year and has accrued as an expenditure.

4. Computation of eligible deduction u/s 36(1)(viii) on long-term advances:

The AO computed the deduction u/s 36(1)(viii) on advances made during the year only, while the assessee contended it should include advances from earlier years. The CIT(A) agreed with the assessee, and the Tribunal upheld this decision, stating that the deduction should be based on total outstanding advances.

5. Adoption of income for computing eligible deduction u/s 36(1)(viia):

The AO computed 7.5% of gross total income at Rs. 4,15,92,798, while the CIT(A) used Rs. 13,94,75,710. The Tribunal directed the AO to compute the deduction based on the gross total income determined in accordance with the Tribunal's direction.

6. Disallowance of Rs. 5,84,360 for waiver of interest:

The AO disallowed the waiver of interest, stating it did not exceed the reserve created. The CIT(A) upheld this decision. The Tribunal allowed the deduction, considering it as a business expenditure under section 37(1), as the waiver was directed by the State Government.

7. Restriction of deduction claimed u/s 36(1)(viia):

The AO restricted the deduction to Rs. 34,58,567, while the assessee claimed Rs. 90,65,767. The CIT(A) upheld the AO's decision. The Tribunal dismissed the assessee's appeal, agreeing with the CIT(A).

8. Disallowance of Rs. 3,12,31,869 on account of waiver of interest:

The AO disallowed the waiver of interest, considering it as bad debt. The CIT(A) allowed the claim to the extent of Rs. 2,26,16,355. The Tribunal held that the entire amount of Rs. 3,12,31,869 should be allowed as business expenditure under section 37(1), as it was part of a relief package under the ADWDRS scheme.

9. Disallowance of deduction claimed towards miscellaneous reserves created:

The AO disallowed the deduction for miscellaneous reserves, stating they were not statutory reserves. The CIT(A) upheld this decision. The Tribunal allowed the deduction, noting that the term "special reserve" under section 36(1)(viii) should be interpreted liberally to include such reserves.

Conclusion:

The Tribunal partly allowed the department's appeal for statistical purposes and dismissed the other appeals, while partly allowing the assessee's appeals.

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