2017 (12) TMI 1395 - AT - Income Tax

Disallowance made under section 14A - Held that - in view of the availability of interest free funds in the form of share capital and reserves & surplus, being more than the investments made in securities, income from which was exempt from tax, there is no merit in making any disallowance under section 14A of the Act read with Rule 8D(ii) of the Rules. The assessee having applied the said funds in fixed and current assets, cannot be the basis for denying the availability of interest free funds available with the assessee i.e. share capital and reserves & surplus for making investments in tax free securities. Accordingly, we hold so. In view thereof, there is no merit in making any disallowance under Rule 8D(ii) of the Rules. However, we uphold the disallowance made under Rule 8D(iii) of the Rules on account of administrative expenses. Accordingly, the addition of ₹ 40,751/- in assessment year 2009-10 and ₹ 46,695/- in assessment year 2010-11 is upheld. The ground of appeal No.1 raised by the assessee in assessment years 2009-10 and 2010-11 is thus, partly allowed. Allowance of expenditure incurred on account of discount given to the dealers - Held that - The perusal of the details would reflect that in none of the cases even after paying discount which the Assessing Officer felt was higher, the assessee had made the profits. The total turnover of the assessee for the year under consideration was about ₹ 32 crores and the total expenditure booked by the assessee on account of discount is ₹ 1 crore which less than 5% of the total sales. The assessee as businessman had taken business decision to make a policy for the distribution of its goods and to pay discount to different dealers in this regard. Such business decision cannot be negated by the Assessing Officer on the surmise that as per the Assessing Officer, the discount paid by the assessee was higher. The assessee is best judge of its business arrangement and in the absence of any evidence found that the expenditure has not been incurred, merely on the ground that the rate of discount paid is higher, the expenditure cannot be disallowed in the hands of assessee. Claim of bad debts - Held that - Where the assessee has filed the outstanding statement and proofs of the entries made in the books of account in the respective previous years to which sales to the said parties were reflected and once the amount had not been recovered and had been written off in the books of account of the assessee, then the same is to be allowed as deduction under section 36(1)(vii) r.w.s. 36(2) of the Act. Accordingly, we hold so. Allowing late delivery charges - Held that - no error in the order of CIT(A) in holding that the late delivery charges paid by the assessee were in the nature of expenditure carried out during the course of carrying on the business. The said late delivery charges were levied by the OEM customers, who were given specific orders to the assessee for delivery within time frame, but because of the delay in the project, clause for L.D. charges was applied and the amount was recovered from the assessee. In the totality of the above said facts and circumstances, we are of the view that the said expenditure is duly allowable in the hands of assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income-tax Act.
2. Depreciation on civil foundation work for windmills.
3. Allowance of expenditure on account of discount given to dealers.
4. Allowance of claim of bad debts.
5. Allowance of expenditure on account of late delivery charges.

Detailed Analysis:

1. Disallowance under Section 14A of the Income-tax Act:
The assessee contested the disallowance of ?3,85,073/- under Section 14A of the Act for the assessment years 2009-10 and 2010-11. The Assessing Officer (AO) had disallowed the amount based on interest expenditure and administrative expenses as per Rule 8D of the Income Tax Rules. The assessee argued that the investments generating tax-free income were made out of its own funds, which were significantly higher than the investments. The Tribunal referred to the Bombay High Court's decision in CIT Vs. HDFC Bank Ltd., which supports the assessee's claim that no disallowance should be made under Rule 8D(ii) if sufficient interest-free funds are available. Consequently, the Tribunal upheld the disallowance under Rule 8D(iii) for administrative expenses but allowed the assessee's appeal regarding interest expenditure.

2. Depreciation on Civil Foundation Work for Windmills:
The assessee had withdrawn the ground of appeal regarding the restriction of the claim of depreciation on civil foundation work for windmills to 10% instead of 80%. Hence, this issue was dismissed as withdrawn.

3. Allowance of Expenditure on Account of Discount Given to Dealers:
The Revenue challenged the CIT(A)'s decision to allow the expenditure on account of discounts given to dealers. The AO had disallowed the discount expenditure, arguing that the assessee inflated the expenditure to reduce profit margins. The CIT(A) observed that the discounts were part of the business strategy to boost sales in a competitive market and were justified by the profits earned post-discount. The Tribunal upheld the CIT(A)'s decision, emphasizing that business decisions regarding discounts should not be second-guessed by the AO unless there is evidence of non-genuine transactions.

4. Allowance of Claim of Bad Debts:
The Revenue contended that the conditions under Section 36(2) of the Act were not fulfilled for the bad debts claimed by the assessee. The CIT(A) found that the debts written off were previously included in the assessee's income and were written off in the books of account. The Tribunal, referencing the Supreme Court's decision in TRF Ltd. Vs. CIT, upheld the CIT(A)'s decision, allowing the bad debts as the assessee had written them off in its books of account.

5. Allowance of Expenditure on Account of Late Delivery Charges:
The Revenue appealed against the CIT(A)'s decision to allow late delivery charges claimed by the assessee. The AO had disallowed these charges, but the CIT(A) allowed them, stating they were incurred in the course of business and were not penalties. The Tribunal agreed with the CIT(A), noting that the late delivery charges were business expenses due to delays in project execution by OEM customers and were allowable.

Conclusion:
The Tribunal's consolidated order resulted in the partial allowance of the assessee's appeals for the assessment years 2009-10 and 2010-11, dismissal of the appeal for the assessment year 2011-12, and dismissal of the Revenue's appeals for both assessment years 2010-11 and 2011-12.