2017 (10) TMI 583 - AT - Income Tax

Addition u/s 14A - expenses attributable to earning income on account of dividend and interest which does not from part of the total income - Held that - In the case of Godrej & Boyce Manufacturing Co. Ltd. V/s DCIT (2017 (5) TMI 403 - SUPREME COURT OF INDIA) wherein it has been held that the AO has to record the satisfaction that the assessee has incurred any expenditure in relation of the earning of earning income after examining the records and books of accounts maintained by the assessee and thus the AO has to be record his satisfaction with regard to the correctness of the claim of the assessee otherwise the provisions of section 14A can not be applied. We find merit in the plea of the ld.AR that in absence of any satisfaction recorded by the AO no disallowance could be made u/r 14A r.w.rule 8D. However, to maintain the consistency with the decision of the co-ordinate bench of the Tribunal, we think it fit and reasonable which has been an alternative prayer by the counsel during the course of hearing that the disallowance of 2% be made as has been made by the Tribunal in the assessment year 1998-99 and 1999-2000 Bad debts disallowance u/s 36(1)(vii) - Held that - As decided in u/s Catholic Syrian Bank Ltd. Versus CIT 2012 (2) TMI 262 - SUPREME COURT OF INDIA 36(1)(vii), the assessee would be entitled to general deduction upon an account having become bad debt and being written off as irrecoverable in the accounts of the assessee for the previous year, while the proviso will operate in cases under clause (viia) to limit deduction to the extent of difference between the debt or part thereof written off in the previous year and credit balance in the provision for bad and doubtful debts account made under clause (viia). The proviso to Section 36(1)(vii) will relate to cases covered under Section 36(1)(viia) and has to be read with Section 36(2)(v) of the Act. if the amount of bad debt(s) actually written off in the accounts of the bank represents only debt(s) arising out of urban advances, the allowance thereof in the assessment is not affected, controlled or limited in any way by the proviso to clause (vii). Taxability of the interest relating to the broken period after due date of interest till the close of accounting year - Held that - As perused the decision in the case of Director of Income tax (int.Tax. V/s Credit Suisse First Boston (Cyprus)ltd (2012 (8) TMI 17 - BOMBAY HIGH COURT) and find that the identical issue has been decided by holding that the said interest is not liable to tax qua the broken period

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Deduction of bad debts under Section 36(1)(vii) of the Income Tax Act, 1961.
3. Taxability of interest accrued on securities for the broken period.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961:
The assessee challenged the disallowance of ?50,41,51,500 under Section 14A read with Rule 8D as expenses attributable to earning exempt income. The assessee argued that its own funds and other interest-free funds exceeded the investments in tax-free securities, thus no disallowance was warranted under Rule 8D(2)(ii). Additionally, the Assessing Officer (AO) did not record any dissatisfaction with the assessee's claim, which is a prerequisite for invoking Section 14A read with Rule 8D. The Tribunal found merit in the assessee's argument, noting the AO's failure to record satisfaction regarding the correctness of the assessee's claim. Consequently, the Tribunal directed a disallowance of 2% of the exempt income, consistent with previous Tribunal decisions in the assessee's case.

2. Deduction of bad debts under Section 36(1)(vii) of the Income Tax Act, 1961:
The revenue contested the deletion of an addition of ?289,19,80,059 by the CIT(A) regarding bad debts written off. The AO had disallowed the bad debts to the extent of ?285,92,88,542, arguing that only the excess over the credit balance in the provision account was allowable. The CIT(A) allowed the deduction based on the Supreme Court's decision in Catholic Syrian Bank, which held that Sections 36(1)(vii) and 36(1)(viia) are distinct and independent. The Tribunal upheld the CIT(A)'s decision, reiterating that the provisions are distinct and the assessee is entitled to the deduction of bad debts written off under Section 36(1)(vii) independent of Section 36(1)(viia).

3. Taxability of interest accrued on securities for the broken period:
The revenue appealed against the CIT(A)'s decision that interest accrued on securities for the broken period is not taxable. The AO had added ?86,21,931, arguing that interest accrues on a day-to-day basis and should be taxed accordingly. The CIT(A) allowed the assessee's appeal, stating that the interest is not taxable as the assessee had no right to receive it until the due date. The Tribunal upheld the CIT(A)'s decision, citing the jurisdictional High Court's ruling in Director of Income Tax (Int. Tax) v. Credit Suisse First Boston (Cyprus) Ltd., which held that interest accrues only on the due dates specified in the securities and not on a day-to-day basis.

Conclusion:
The appeals of the assessee were allowed, and those of the revenue were dismissed. The Tribunal's decisions were guided by established legal principles and previous judicial rulings, ensuring consistency and adherence to legal precedents.