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TMI Blog2014 (11) TMI 846X X X X Extracts X X X X X X X X Extracts X X X X ..... t been disputed in T.R.F. Ltd Vs CIT [2010 (2) TMI 211 - SUPREME COURT] it has been held that after 1st April 1989, it is not necessary for the assessee to establish that the debt has in fact become irrecoverable - It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee - since the assessee has written off the amount in its Profit and loss Account, the assessee is entitled to its deduction Decided in favour of assessee. Treatment of term loan interest Deferred revenue expenses or revenue expenses Held that:- The assessee had treated the expenses as deferred revenue expenditure in the books of accounts but claimed as revenue expenditure while filing the return of income - CIT(A) rightly deleted the addition made by the AO by relying on its decision in the preceding year thus, the order of the CIT(A) is upheld Decided against revenue. Interest on advances given to employees deleted Held that:- AO had made additions by estimating the interest rate at 18% on the amount outstanding - The AO has not brought any material on record to prove that the advance is not for the purpose of business in The Honble Madras High Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the AO in earlier years and it were deleted by his predecessor Relying upon DCIT Vs Core Health Care Ltd [2008 (2) TMI 8 - SUPREME COURT OF INDIA] - the proviso inserted in section 36(1)(iii) by the Finance Act 2003 with effect from April 1, 2004, will operate prospectively - an assessee is entitled to claim interest paid on borrowed capital provided that the capital is used for business purpose irrespective of what may be the result of using the capital which the assessee has borrowed Decided against revenue. Order passed u/s 144 challenged Held that:- AO has noted to have issued notices to Assessee on various occasions but the Assessee failed to comply with the same - Asseessee has not brought any material on record to prove the compliance of notices issued by AO - the AO had rightly passed order u/s 144 Decided against assessee. Claims, rebate and reversal of claim disallowed Held that:- Assessee contended that the investments were made in earlier years and in the year the investments were made, assessee was having interest free funds and no interest bearing funds have been used for making investments - the Assessee has not placed any material on record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licable to the other years also and therefore all the appeals can be heard together. We therefore proceed to hear all the appeals together for the sake of convenience and are being disposed of by this consolidated order. We proceed with the facts for AY 2000-01 (ITA No 1113 1198/AHD/2004) 3. The assessee is a limited company stated to be engaged in the business of manufacturing of packing materials and trading activities. It filed its return of income for AY 2000-01 on 30-11-2000 declaring total income of Rs.Nil. The case was selected for scrutiny and thereafter the assessment was framed u/s 143(3) vide order dated 28.3.2003 and the total income was determined at ₹ 2,91,82,710/-. Aggrieved by the order of AO, assessee preferred appeal before CIT(A). CIT(A) vide order dated 30.1.2004 granted partial relief to the Assessee. Aggrieved by the aforesaid order of CIT(A), both the Revenue and Assessee are in appeal before us. The grounds raised by the Assessee in ITA No 1113/AHD/2004 reads as under:- 1. That the learned Assessing officer has erred in law and facts by passing the assessment order. The assessment proceeding is bad in law and without jurisdiction and ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . did not seriously object to the submission made by ld. A.R. 7. We have heard the rival contentions and perused the material on record. The factual position is that in AY 1995-96 the AO on the basis on enquiry made, held the transaction entered by the Assessee with Blue Bell Finance Co. Ltd. to be non genuine. The AO in the present year, relying on the observation of his predecessor disallowed the payment in A.Y. 1999-2000. Against the order of AO, Assessee had preferred appeal before Hon ble Tribunal. Hon ble Tribunal vide order dated 9th Oct 2006 (ITA No 3763/Ahd/2003) held as under: 3. We find the issue to be considered on the basis of the outcome of the Court decision, which is pending before the Gujarat High Court in Reference No Company Petition No.74 of 1998.We,therefore, set aside the issue back to the file of the A.O. to decide the matter on the basis of the outcome of the aforesaid Reference Petition. We direct accordingly. 8. Before us, both the parties have admitted that the facts in the year under appeal are identical to that of AY 1999-2000. We therefore, following the order of the co-ordinate Bench of Tribunal for A.Y. 1999-2000 remit the matter back to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not find any reason to interfere with the order of CIT(A) and therefore uphold the order of the CIT(A). Accordingly this ground of the Assessee is dismissed. 13. The next ground of appeal relates to the disallowing ₹ 2,36,27,765/- of rebates and reversal of claims. 14. During the course of assessment proceedings the AO noticed that the assessee had claimed ₹ 2,36,27,765/- as an expenditure on account of claims, rebate and reversal pertaining to transactions entered by it during the earlier years. Assessee furnished the details and offered explanation. The AO was of the view that since the assessee was following mercantile system of accounting it should have made provision for these expenses in the accounts for the relevant years. He was therefore of the view that the expenditure pertained to the earlier years. AO further observed that the assessee has failed to establish as to how the amount of claim crystallized during this year and in view of the fact that no evidence was submitted to support its claims, AO held the expenditure to be pertaining to earlier years and hence ₹ 2,36,27,765/- was disallowed. 15. The assessee carried the matter in appeal befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... written off were shown as sales in earlier years and were also offered to tax in the respective years. The fact that in the year under appeal, the assessee has debited its Profit and loss account and the amount has been written off has not been disputed by the Revenue. The Hon ble Apex Court in the case of T.R.F. Ltd Vs CIT (supra) has held that after 1st April 1989, it is not necessary for the assessee to establish that the debt has in fact become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. In view of the aforesaid facts and respectfully following the decision of Apex Court cited hereinabove, we are of the view that since the assessee has written off the amount in its Profit and loss Account, the assessee is entitled to its deduction. Accordingly, we delete the addition made by the AO. In the result this ground of the Assessee is allowed. 20. The next ground of appeal is against the charging of correct interest after considering the prepaid taxes and interest u/s 234B, and 234C. Since charging of interest is consequential to the total income to be determined, the Assessing Officer is directed to recalculate the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Ltd. and Gujarat High Court s decision in the case of Core Health Ltd., addition of ₹ 1,89,68,093/- on account of rejection of claim of revenue expenses is deleted. 25. Against the order of CIT(A), the Revenue is now in appeal before us. Before us the Ld. D.R. submitted that the assessee had capitalized the expenses but claimed the said expenditure as revenue expenditure in its return of income. He thus submitted that in the aforesaid circumstances, the AO was right in disallowing the claim of the assessee. He thus urged that the order of the AO be upheld. 26. On the other hand the Ld. A.R. submitted that the CIT(A) had deleted the addition made by the AO by relying on the decision of the Gujarat High Court in the case of Core HealthCare (supra). He further submitted that the decision of the Gujarat High Court has been approved by Hon ble Apex Court and reported in 298 ITR 194 (SC). He thus urged that the order of the CIT(A) be upheld. 27. We have heard rival contentions and perused the material on record. The factual matrix of the case is that the assessee had treated the expenses as deferred revenue expenditure in the books of accounts but claimed as revenue ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd no such disallowances have been made and that the A.O. has failed to establish that the interest bearing fund has been utilized for non business purposes. It is submitted by the appellant that it had ample fund at its disposal from which the advances have been made. The Madras High Court in the case of CIT vs. Hotel Savera (1998) 585, 591, 592 has delivered that for disallowance of the interest, or a part of it, paid on money borrowed for the business purposes, it is essential that a clear finding should be given by the authority concerned that the borrowed money or part of it has been utilized for non-business purposes. Where the assessee has both, his own money as well as borrowed money, a presumption can arise that the money lent, even free of interest, came out of his own funds. In view of the above, the A.O. is not justified in disallowing the interest, without any specific findings. The A.O. is therefore directed to allow the claim of the interest paid in full as claimed. The disallowance and addition of ₹ 7,96,520/- on this point is deleted. 30. Aggrieved by the decision of the CIT(A), the Revenue is now in appeal before us. Before us, the Ld. D.R. submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18% on ₹ 28,70,139/- (cost of investment) being the interest paid on funds as per provision of Section 14A of the Act. 34. Assessee carried the matter in appeal before the CIT(A). CIT(A) after considering the submissions of the Assessee deleted the addition by observing as under:- 9.3. After going through the facts of the case I find that the appellant company has sufficient interest free funds to the tune of ₹ 52.74 crores against the total investment to the tune of ₹ 11.31 crores and the A.O. has failed to establish the nexus that the interest bearing fund has been utilized for the purpose of investments under consideration, there is no question of disallowance of interest and there is no effective new investment in shares and securities during the year, but there is net reduction in the investment to the tune of ₹ 2.77 crores and there is no such disallowance in earlier year. Since the A.O. could not prove that the relevant investments is out of interest bearing borrowed funds, I hold that the A.O. is not justified in estimating the interest expenses for earning dividend income. I therefore delete the addition made of ₹ 5,16,625/- on this cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reads as under:- 1. The Ld. CIT (A) has erred in law and on facts in deleting the additions on account of (i) Prior period adjustment of ₹ 1,01,26,985/- (ii) Interest free advances of ₹ 7,50,420/- (iii) Interest on capital asset of ₹ 2,27,64,818/- Deletion of prior period adjustments:- 39. During the course of assessment proceedings AO observed that the assessee has claimed the expenses which were incurred in earlier years. AO was of the view that those expenses were not allowable in the year under appeal as the same should have been claimed in respective years to which it pertained. The expenses were in the nature of hire charges, legal charges, purchases etc. The A.O. also noted that since the assessee was following mercantile system of accounting and receipts and expenses are accounted on accrual basis, therefore the expenses claimed by the assessee were not allowable in the year and he accordingly disallowed the expenses of ₹ 1,01,26,985/-. 40. Aggrieved by the order of the A.O. assessee carried the matter in appeal before the CIT(A). After considering the submissions of the Assessee, CIT (A) deleted the addition by holding as unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advances given to other staff. AO also noted that Assessee did not furnish any reason for advancing huge advances to the two employees. He therefore calculated interest @ 18% on the amount advanced and added ₹ 7,50,420/- to the income. 47. Aggrieved by the above action of the A.O., the assessee carried the matter in appeal before CIT(A). CIT(A) after considering the submissions of the A.R. deleted the addition by holding as under:- 5(iii) I have considered the submissions made by the Ld. Authorised Representative and have gone through the facts on records. It is seen that the A.O. has made the disallowance simply stating that the advances are much higher than the usual advances given to other staff and further that the assessee has not furnished any reasons for such huge advances and has made disallowance calculated at the rate of 18% on such advances. The A.O. has not brought out any cogent reason for the disallowance. Since on the similar fact, the disallowance of ₹ 7,96,520/- was deleted by my predecessor in the appellant s own case in the earlier assessment year agreeing with such finding, the disallowance of ₹ 7,50,420/- is directed to be deleted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest @18% on the expenditure of purchase of new machinery and on the advance for capital goods as being of capital in nature and accordingly held the interest of ₹ 2,27,64,818/- as not deductible u/s. 36(1)(iii) of I.T. Act and disallowed the same out of interest expenses. 53. Assessee preferred appeal against this disallowance before CIT(A). After considering the submissions of the A.R., CIT(A) allowed the appeal of the assessee by holding as under :- 6.(iii) I have gone through the facts of the case and the submission made by the appellant on behalf of the appellant. I find that addition made on the similar ground have been deleted by the CIT(A) in appellant s case in earlier years. Having regard to the finding of my predecessor and the facts and circumstances of the case in the earlier years and also considering the legal authority relied upon by the appellant, the disallowance/addition of ₹ 2,27,64,818/- is ordered to be deleted. 54. Aggrieved by the order of CIT(A), Revenue is now in appeal before us. 55. Before us, the ld. D.R. submitted that the interest expense has been rightly disallowed by the AO in view of the fact that the interest was on ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee was entitled to deduction under section 36(1)(iii) prior to its amendment by the Finance Act, 2003, in relation to money borrowed for purchase of machinery even though the assessee had not used the machinery in the year of borrowing. Decision of the Gujarat High Court in Deputy CIT vs. Core Health Care Ltd., (2001) 251 ITR 61 affirmed on this point. 57. The present appeal before us is with respect to AY 2001-02. Hon ble Apex Court in the case of Core Health Care (supra) has held that the proviso inserted in section 36(1)(iii) by the Finance Act 2003 with effect from April 1, 2004, will operate prospectively. The Hon ble Apex Court has further held that an assessee is entitled to claim interest paid on borrowed capital provided that the capital is used for business purpose irrespective of what may be the result of using the capital which the assessee has borrowed. In view of the totality of the facts and respectfully following the decision of Hon ble Apex Court in the case of Core Health Care (supra), we feel that the CIT(A) has rightly deleted the addition made by the AO. We accordingly uphold the action of the CIT(A) and thus dismiss this ground of appeal of Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aveling expenditure. Since the entire expenditure is for the purpose of business and its accounts are audited, no part of traveling expenditure can be disallowed and the learned CIT(A) be directed accordingly. 59. Ground No.1 is regarding challenging of order passed u/s.144 of the Act. 60. AO in the assessment order has noted that he had issued notice u/s 143(2) on 18.7.2002 and was duly served on the assessee. Thereafter notices were issued and served u/s 143(2) and 142(1) on various occasions. The assessee was also directed to produce books of accounts. The assessee had failed to comply with the directions of the A.O. As the assessee had failed to comply with the directions of the AO, the AO completed the assessment u/s 144 of the Act. Before us, the Assessee had now challenged the order passed u/s 144 of the Act. 61. Before us, the Ld AR submitted that the order passed by AO u/s 144 of the Act was bad in law and therefore the same be quashed. The Ld. DR on the other hand pointed to the findings of AO and submitted that due to the non-compliance to the notices by the Assessee, AO had rightly framed the assessment u/s 144. He thus supported the order of AO. 62. We have he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one or two years before the year in appeal when such claim is made for the first time and that the appellate appears to have made no efforts for its recovery. Further, that the concerned parties are reputed companies having running accounts with the assessee and as such write off can be made for running accounts. Further that, it seemed very impractical to conclude that the sale profit would not be realized in future. Since the appellant could not discharge its onus that these were bad debts, my predecessor did not find the claim of the appellant as tenable. I find that the facts in respect of the claim are similar in this year, as well. Since the appellant has not discharged its onus to prove the claim allowable, finding of the A.O. is considered reasonable. This ground of appeal is therefore rejected and the addition of ₹ 8,04,87,441/- confirmed. 65. Aggrieved by the order of CIT(A), the assessee is now in appeal before us. 66. Before us the Ld. A.R. submitted that the details of the amounts reversed in the accounts are placed at page 40-70 of the paper book. It was submitted that the amount reversed apart from freight charges and liquidated damages mainly represent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee had also made purchases of ₹ 12,70,79,584/- and ₹ 5,28,82,005/- from Vishnu Vijay Packages Ltd. and Sharp Industries Ltd respectively who are the specified persons u/s. 40A(2)(b) of the I.T. Act and to whom the assessee has provided huge finance in the form of investment and for which the assessee has borrowed from banks and paid huge interests. According to AO, the shares were purchased to earn dividend income which is exempt u/s. 10(33) of the I.T. Act. The AO was of the view that assessee has taken huge term loans and other loans from ICICI, IFCI, IDBI and other banks and has debited interest of ₹ 11,29,53,733/-. Thus according to AO, the assessee has made investment out of interest bearing fund taken from banks. According to AO, the basic requirement for claiming deduction u/s. 36(1)(iii) of I.T. Act for interest expenses is that the amounts must have been borrowed and utilized for business purposes. Since the assessee has diverted interest bearing funds to its subsidiary company without charging interest, AO was of the view that the interest payments claimed by the assessee to the extent of fund diverted interest-free to subsidiary company canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that that no dividend was received during the year under consideration and therefore no disallowance can be made u/s 14A. He further submitted that the investments were made in the past out of own funds and not borrowed funds. He therefore submitted that no disallowance can be made in the present case. He also relied on the decision in the case ofHiren Aluminium Ltd. vs. DCIT in ITA No.1259/Ahd/2005 dated 20-3-2009. 73. On the other hand, the Ld. D.R. submitted that as per the provisions of section 14A, the expenditure incurred has to be disallowed. Even the Bombay High Court in the case of Godrej Boyce Mfg. Co.Ltd. vs. DCIT 328 ITR 81 (Bom.) has held that though Rule 8D is applicable from AY 2008-09 but prior to AY 2008-09, reasonable expenditure needs to be disallowed. He thus relied on the order of the lower authorities. 74. We have heard the rival submissions and perused the material on record. Before us, ld. A.R. has submitted that the investments were made in earlier years and in the year the investments were made, Assessee was having interest free funds and no interest bearing funds have been used for making investments. Before us, the Assessee has not placed any ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome from the transaction in past. On the other hand, the Assessee in the paper book has submitted the details of amounts written off. Since the details filed by the Assessee in the paper book were not before AO, we are of the view that in these circumstances, in the interest of justice and fair play the matter be remitted to the file of AO for verification. We accordingly remit the issue to the file of AO with the direction to verify the details and examine the issue as per the provisions of law and in light of the decision of Hon ble Apex court in the case of TRF Ltd. Vs CIT (2010) 323 ITR 397 (SC) and thereafter decide the issue as per law. Needless to state, AO shall grant adequate opportunity of hearing to the Assessee. The Assessee will also cooperate with the AO and submit all the required details promptly as asked by the AO. Thus this ground of the assessee is allowed for statistical purposes. The next ground of appeal relates to disallowance of ₹ 6,00,000/-on account of legal and professional fees. 79. The A.O. observed that the assessee has debited expenses of ₹ 20,34,115/- under legal and professional fees for Unit-1 and Unit-II. On verification of acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal relates to confirming the disallowance of ₹ 5,24,421/- being hire charges paid to Blue Blends Finance Ltd. 85. Before us, both the parties submitted that the issue is the present ground is identical to the ground no. 2 in ITA No 1113 for AY 2000-01 and they have same submissions to make. 86. We have heard the rival submissions and perused the material on record. Before us, both the parties submitted that the facts in the present ground are identical to that ground no. 2 in AY 2000-01 which have been decided by us hereinabove. We for the same reasons given while deciding the ground for AY 2000-01 also remit the issue to the file of A.O with similar directions. Thus this ground is allowed for statistical purposes. 87. The next ground of appeal relates to the disallowance of ₹ 3,20,160/- being 1/10th of travelling expenses. 88. The assessee company has debited travelling expenses ₹ 32,01,507/- as against the expenses of ₹ 24,61,450/- debited in immediately preceding. AO observed that the sales of the company stood decreased from ₹ 105.27 crores to ₹ 50.70 crores. He was of the view that prima facie, there appears no reason for inc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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