2017 (12) TMI 794 - AT - Income Tax

Disallowance of Bad Debts written off - loss on account of share transactions - the amount was advanced by the assessee for purchase of shares for investment purpose - Held that - Commissioner of Income Tax (Appeals) has given a categoric finding that the assessee had shown Short Term Capital Gain arising from sale of shares in the return of income for assessment year 2006-07. It is assessee s own case that he was having running account with Jashnani Leasing & Finance Ltd. If that be so the running account must be in respect of purchase of shares for investment purpose. The return(s) filed in the past by the assessee did not indicate that the assessee at any point of time was engaged in share trading business. The inevitable conclusion that can be drawn from the facts of the case is that the loss on account of share transactions is a capital loss. The loss arising from investments in shares cannot be claimed as bad debt under the provisions of section 36(i)(vii) r.w.s. 36(2)(i) of the Act. We do not find any infirmity in the well reasoned findings of Commissioner of Income Tax (Appeals) on this ground. - Decided against assessee Disallowance of interest - Held that - Advance was given out of own interest free funds on account of commercial expediency. The advance given to Positive Life Style Developers Pvt. Ltd. is to the tune of ₹ 43,75,000/- as against the assessee‟s balance in Capital Account ₹ 65,00,000/-. The Hon‟ble Bombay High Court in the case of Commissioner of Income Tax Vs. Reliance Utilities & Power Ltd. (2009 (1) TMI 4 - BOMBAY HIGH COURT) has held that where both interest free funds and interest bearing funds are available and the interest free funds are more than the investment made, the presumption is that the investments are made out of interest free funds available with the assessee. Thus, in view of undisputed fact that own funds of assessee are sufficient to cover the loan advanced, no disallowance u/s. 36(1)(iii) is called for. Advances to employees - Held that - We are of the considered view that the Assessing Officer cannot step into the shoes of assessee to determine the quantum of advance to be given to the employees and mode and time of recovery of same. It is the discretion of assessee to decide the quantum of advance, period of advance and the mode of recovery of advance from an employee. The only factor that has to be established is that the persons to whom advances are made are the employees of assessee. As pointed earlier this fact has not been disputed. Accordingly, we are of considered view that in the facts of present case, no disallowance of interest is to be made in respect of advance made to three employees of assessee. Accordingly, ground No. 3 raised in the appeal by assessee is partly allowed in the manner aforesaid. Ad hoc disallowance in respect of various expenses which inter alia include Carriage Inward, Packing Material, Printing & Stationary, Travelling Expenses, Vehicle Repairs, Insurance, Depreciation and Telephone Expenses etc. - Held that - After perusal of the orders of authorities below and taking into consideration totality of facts, we are of considered view that disallowance in respect of various office expenditure, if restricted to ₹ 1,00,000/- would be suffice to cover omissions and commissions. Accordingly, ground No. 4 raised in the appeal by assessee is partly allowed.

Summary

Issues Involved:
1. Bad debts written off.
2. Disallowance of interest.
3. Ad hoc disallowance on various expenses.

Detailed Analysis:

1. Bad Debts Written Off:
The assessee claimed a deduction of ?41,44,485/- as bad debts written off, arguing that the amount was advanced to Jashnani Leasing & Finance Ltd. for trading in shares. The authorities, however, concluded that the assessee had previously shown gains from share sales as Capital Gains, indicating an investment purpose rather than a trading one. The Tribunal upheld the findings, stating that no documentary evidence was provided to prove the transition from investment to trading. Consequently, the loss was deemed a capital loss, not eligible for deduction as bad debt under section 36(1)(vii) r.w.s. 36(2)(i) of the Income Tax Act.

2. Disallowance of Interest:
The assessee faced disallowance of ?13,67,455/- in interest, attributed to interest-free loans given to various parties while paying interest on borrowed funds. The Tribunal examined the advances:
- Nagpal Landmarks: The assessee claimed the advance was for investment, but failed to provide evidence. The disallowance was upheld.
- Positive Life Style Developers Pvt. Ltd.: The Tribunal noted that the assessee had sufficient interest-free funds to cover this advance, referencing the Bombay High Court's decision in Commissioner of Income Tax Vs. Reliance Utilities & Power Ltd. Thus, no disallowance was warranted.
- Employees (Prakash C. Gidwani, Naresh C. Gidwani, Madhav K. Gidwani): The Tribunal ruled that the quantum and recovery period of advances to employees is at the discretion of the assessee, provided the recipients are employees. As this fact was undisputed, the disallowance was overturned.

3. Ad Hoc Disallowance on Various Expenses:
The Assessing Officer made an ad hoc disallowance of ?4,16,500/- on various office expenses, which the Commissioner of Income Tax (Appeals) reduced to ?2,00,000/-. The Tribunal further reduced this to ?1,00,000/-, considering it sufficient to cover any omissions and commissions, given no discrepancies were found in the books.

Conclusion:
The appeal was partly allowed. The disallowance of bad debts was upheld, the interest disallowance was partly overturned, and the ad hoc disallowance on expenses was reduced. The Tribunal emphasized the need for clear documentary evidence to substantiate claims and the discretion of the assessee in managing employee advances.