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TMI Blog2018 (4) TMI 879X X X X Extracts X X X X X X X X Extracts X X X X ..... essee's appeal):- 1. "That the order dated 03.01.2013 passed u/s 250 of the Income Tax Act, 1961 by the Learned Commissioner of Income Tax (Appeals)-1, New Delhi is against law and facts on the file in as much as he was not justified to direct the Learned Assessing Officer to treat the loss of M/s Globe Stocks Ltd., as a speculation loss u/s 73 of the Income Tax Act, 1961." 3.1. This issue relates to disallowance of claim of trading loss of Rs. 73,54,155.80 on purchase and sale of shares of M/s Globe Stocks Ltd. The AO in view of certain discrepancy noticed in the replies filed by the assessee held that the assessee could not establish the genuineness of these transactions and disallowed the claim of loss in purchase and sale of the said shares. It is clarified that the name of the shares which is the subject matter of dispute here is Globe Stocks & Securities Ltd. The written submissions of the assessee is reproduced in the impugned order in which the assessee briefly explained that the assessee company was an integrated steel manufacturing unit at Hisar with the name of Jindal Strips Ltd. With the demerger duly approved by the Punjab & Haryana High Court w.e.f 01.04.2002, Ji ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO was directed to allow the loss as speculation loss u/s 73 of the Act. 3.3. Ld. Counsel for the assessee reiterated the submissions made before the authorities below. He has submitted that the assessee moved an application dated 09.03.2004 to the RBI for registration as Non-Banking Financial company pursuant to scheme of arrangement and de-merger approved by Hon'ble Punjab & Haryana High Court. Name of the company Jindal Strips Ltd. was further changed to name of the assessee which was also informed to the RBI and later on NBFC Certificate was granted to the assessee vide certificate dated 25.07.2005. He has submitted that the registration as NBFC relates to date of application because of scheme of arrangement and demerger as approved by the Hon'ble Punjab & Haryana High Court. RBI in their letter dated 26.07.2005 did not give any adverse remarks in registration certificate. He has, therefore, submitted that the assessee would be entitled for deduction of the loss. 3.4. On the other hand, Ld. DR relied upon the order of Ld.CIT(A) and submitted that no registration has been granted in AY under appeal to the assessee as NBFC. 4. We have considered rival submissions. The AO in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as non-banking financial institution, RBI has not made any adverse remarks for carrying on business from a particular date since as per scheme of arrangement and demerger of Jindal Strips Ltd. shall be deemed to be investment company and shall be registered as nonPage banking financial company. M/s Jindal Strips Ltd. moved to RBI for grant of registration as an NBFC on 09.03.2004 because of scheme of arrangement and demerger was approved by the Hon'ble Punjab & Haryana High Court on 30.06.2003. Subsequently, name of M/s Jindal Strips Ltd. has been changed to the name of the assessee company which was also intimated to the RBI. These facts clearly support the explanation of the assessee that consequent upon scheme of arrangement and demerger, the assessee company shall be deemed to be investment company and shall be registered as non-banking financial company as per the judgment of the Hon'ble High Court which was approved prior to the FY, therefore, registration granted to the assessee as NBFC would relate back to the date of application i.e. 09.03.2004 as such the assessee would be NBFC in FY under appeal. Since Ld.CIT(A) accepted the genuineness of the transactions of sale and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under consideration. So far as advances are concerned, which has accumulated till last year upto Rs. 20.43 crores were informed, the principal amount comprising the advances of Rs. 1097.25 lakhs and the corresponding interest which has been considered by the assessee as income upto last year was Rs. 946 lakhs which has been written off as bad debts. Further, it has already been brought to the notice of the Department that over period of four years, the repayment of principal amount as well as the recovery of interest has become difficult, it was pointed out by the auditor also. Copy of the balance sheet of Jindal Holdings Ltd. for preceding years were filed to show that it is accumulating losses. It was, therefore, submitted that in earlier years, this company was suffering huge loss and only in the current year, there was a nominal profit and that too as a result of non provision of interest. This company has huge accumulated losses. Since there is no movement in the investments and due to liquidity crunch as explained, the repaying capacity was worsening year after year and the assessee company had to take harsh steps to write off the debt including interest. This was the reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as bad debt, it was noted that the assessee had itself during the assessment proceedings, given up this claim. It was noted that conditions of section 36(2) are not satisfied, therefore, principal amount advanced by the assessee does not fall in this category. Since the assessee was not an NBFC during AY under appeal as certificate was granted on 25.07.2005, the claim of the assessee was rejected. The additional ground was accordingly rejected. 5.3. Ld. Counsel for the assessee reiterated the submissions made before the authorities below. He has submitted that even if bad debt was not pressed before the AO, the assessee could take additional ground of appeal which has also been decided by Ld.CIT(A). He has submitted that bad debts were written off as recoverable in the books of accounts of the assessee. He has submitted that the assessee is an NBFC and registration relates to AY under appeal as well. He has submitted that the issue is covered by the judgment of the Hon'ble Supreme Court in the case of TRF Ltd. (supra). Principal amount advanced on which interest was allowed deduction on commercial consideration should also to be allowed to the assessee. He is relied upon the follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of the assessee here is much stronger than what it was in Ground No.1. Further, the balance does include lease rent and commission due from Glen View which was offered for taxation in the earlier years. Therefore, the condition laid down in s. 36(1)(vii) is also fulfilled. Accordingly, in the light of this discussion and in the light of the reasons given in respect of Ground No.1, we delete the disallowance of Rs. 1,26,95,765." (iii) Decision of Bombay High Court in the case of CIT vs Cable Corporation of India Ltd. [2016] 75 Taxmann.com 117 (Bombay) in which it was held that:- "Loss on account of reduced recovery of loan advanced, would be considered a business loss; it would be allowable as deduction." (iv) Judgement of Calcutta High Court in the case of CIT vs Vivek Engineering & Casting Ltd. [2016] 383 ITR 480(Calcutta) in which it was held that :- "The Tribunal as the last fact-finding authority has come to the conclusion that more than 50 per cent of the capital of the assessee is deployed in money lending. Therefore, the fact that the assessee is in the money lending business cannot be doubted. Thus, bad debt claim should be allowed." (v) Judgement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee is supported by the balance sheet of the debtor company to show that they have accumulated losses. The decisions relied upon by Ld. Counsel for the assessee support the claim of bad debt on principal amount as well as on interests. The AO thus should not have rejected the claim of the assessee. The claim of the assessee thus allowable as bad debts as well as business loss. We accordingly, set aside the orders of the authorities below and delete the addition of Rs. 1811.73 lakhs sustained by the Ld.CIT(A). Ground No.2 of the appeal of the assessee is allowed. 6.1. It may be noted here that the Revenue has also raised Ground Nos. 3 & 4 on the same issue which reads as under:- 3. "The Ld. CIT(A)erred in law and on facts in not considering the fact that the assessee has failed to substantiate and justify its claim of outstanding interest portion of Rs. 1438.24 lacs as bad debts from M/s Jindal Holdings Ltd. and Colorado Trading Co. ltd. which is group concern/subsidiary of the assessee. 4. The Ld. CIT(A) erred in law and in facts of the case by ignoring the fact that the bad debts u/s 36(2) of the Act are allowed to be claimed as regular and proper expenditure in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowance u/s 14A of the Act. It is undisputed fact that the assessee has not declared any direct expenses nor apply Rule 8D. However, the assessee earned dividend income which is exempt. It was for the assessee to establish that borrowed funds have not been used in such investments. This ground of appeal of the assessee was dismissed. 6.5. Ld. Counsel for the assessee submitted that Rule 8D is not applicable to AY under appeal because it was introduced by Income tax Amendment Rules 2008 w.e.f 24.03.2008 and will have applicability from AY 2008-09. He has submitted that the assessee has not incurred any expenditure to earn dividend income. The AO himself admitted that no interest elements have been involved. The AO has not recorded any satisfaction as per section 14A of the Act so as to reject the explanation of the assessee, therefore, no disallowance is required in the facts and circumstances of the case. On the other hand, Ld. DR relied upon the order of the AO. 7. We have heard the rival submissions. It is not a dispute that Rule 8D is applicable from AY 2008-09. The assessee submitted before the AO that it has not incurred any expenditure for earning the dividend income. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edible and relevant evidence. The onus, therefore, to prove that interest bearing funds were used, lies squarely on the shoulders of the Revenue. Thus, if the Assessing Officer is able to refer to relevant material while recording satisfaction that borrowed funds were used to earn interest-free income as opposed to the assessee's own funds, the Assessing Officer may legitimately disallow such a claim. The Assessing Officer, however, cannot, by recording general observations, particularly where the assessee has denied using interest bearing funds, proceed to infer that interest bearing income must have been used to earn exempted income. Section 14A, being in the nature of an exception, was to be construed strictly and only where the Assessing Officer records satisfaction, on the basis of clear and cogent material, shall an order be passed under section 14A disallowing such a claim. The assessee made a categorical submission of fact before the Assessing Officer that no interest bearing funds had been diverted to make investments leading to tax exempt income. The Assessing Officer, under section 14A read with rule 8D of the Income-tax Rules, 1962, disallowed expenditure in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee challenged the action of the AO in computing book profit u/s 115JB of the Act by adding a sum of Rs. 13,55,929/- being diminition in value of investment and the exempt income of Rs. 4.06 crores. The assessee contended before Ld.CIT(A) that there is no such provision u/s 115JB of the Act for making such addition. Ld.CIT(A) found the action of the AO in order. Ld.CIT(A) also noted "further, as per clause (f), the book profit is to be increased by the amount of expenditure relatable to any exempt income. The AO is directed to add the amount of Rs. 36,35,873/- for the purpose of computing book profit u/s 115JB." Ld. Counsel for the assessee at the outset submitted that this issue is covered in favour of the assessee by order of ITAT, Delhi Special Bench in the case of ACIT vs Vireet Investment Pvt. Ltd. 82 Taxmann.com 415 in which in para 6.22 it is held as under:- "In view of above discussion, we answer the question referred to us in faovur of assessee by holding that the computation under clause (f) of Explanation 1 to section 115JB(2), is to be made without resorting to the computation as contemplated u/s 14A read with Rule 8D of the Income tax Rules, 1962." Ld. DR did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital expenditure. The assessee stated before Ld.CIT(A) that AO failed to appreciate that during the course of carrying on the activities of the company, there are various consultations from time to time as well as advice on various aspects on the business for which consultants are engaged. No new business has come into existence, payment is made by cheque on which TDS deducted. Ld.CIT(A) found that services of experts are engaged for business purposes to prepare a project report and feasibility report. Ld.CIT(A), therefore, found that amount incurred wholly and exclusively for the purpose of business and, how business is to be conducted is not concern of the Revenue. Ld.CIT(A) allowed the expenditure u/s 37(1) of the Act. 11.2. After considering rival submissions, we are of the view that no inference is called for in the matter. When the assessee engaged consultants for the purpose of business of the assessee, it is revenue expenditure because it was incurred wholly and exclusively for the purpose of business. This ground of appeal of Revenue has no merit, the same is, therefore, dismissed. No other point is argued. 12. In the result, the appeal of the assessee is partly allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were no recovery from these parties since previous years 1999-2000, 2002-03 and 2005-06 respectively. Hence, the loan becomes NPA as per RBI guidelines and interest was not accrued on the said loans as per RBI guidelines. The AO referred to section 145 of the Act which prescribe system of accountancy i.e. cash or Mercantile. The AO further noted that the assessee is free to maintain its account as per RBI guidelines but it is obligatory on the part of the assessee to determine the income on the basis of mercantile system of accounting which the assessee is following. Once loan are good and secured, it cannot Be bad. The AO, accordingly, made the addition. The assessee reiterated the same facts before Ld. CIT(A) and submitted that there were no recovery from these parties in earlier years and hence loan have become NPA as per RBI guidelines and no interest has accrued to the assessee. The detailed written submissions of the assessee is reproduced in the appellate order alongwith the case laws. Ld.CIT(A) noted that the assessee is a NBFC and had advanced interests bearing loans to the above three concerns. The assessee did not account for interest in the relevant assessment year due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, matter may be remanded back to the AO for verification. He has submitted that due to amalgamation and change in the name of the parties, there is confusion on facts, therefore, these facts needs verification. Ld. DR also suggested that matter may be remanded to the AO. 16.2. In view of the submissions of the parties, we are of the view that the matter as regards Ground No.2 of the appeal of the assessee needs verification at the level of the AO. Ld.CIT(A) confirmed the addition of interest of Rs. 49,07,985/- because principal amount have been recovered by the assessee from M/s Jindal Steel & Alloys Ltd. AY under appeal. Ld. Counsel for the assessee, however, submitted that due to amalgamation, there is change in the names of the parties and the assessee has not recovered any amount. Therefore, these facts require clarification at the level of the AO. We accordingly, set aside the orders of the authorities below and restore the issue to the file of the AO with a direction to pass an order afresh after verification of facts by giving the reasonable opportunity of being heard to the assessee. Ground No.2 of the appeal of the assessee is allowed for statistical purposes. 16.3. Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 64 crores. The AO asked for the details of expenses attributed towards exempt income disallowable u/s 14A of the Act. The assessee submitted that it has made provision of disallowance u/s 14A as per assessment order of previous year to avoid the penalty but the assessee has not incurred any expenses for earning of dividend income. It was submitted that investments are existing since 1998 and has come to the assessee company upon demerger. The AO noted that the assessee has disallowed proportionate amount of expenditure relatable to exempt income of Rs. 27,18,533/-. The AO accordingly worked out disallowance u/s 14A r.w. Rule 8D at an amount of Rs. 87,56,000/-. The AO reduced the amount disallowed by the assessee himself and made the addition of Rs. 54.54 lacs. The assessee reiterated the same facts before Ld.CIT(A) and it was submitted that the assessee has not incurred any expenses for earning of dividend income. There is no nexus between the tax free income and expenditure incurred for earning such income. It was submitted that the AO has added the amount disallowed by the assessee for Rs. 27,18,533/-, therefore, at the most the addition should be of Rs. 27.27 lakhs only. Ld.CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld CIT(A) has erred in law and on facts in directing the AO to delete the additions of Rs. 5,96,392/- made on account of interest on advances made to M/s Nalwa Metal & Alloys Ltd., Gagan Trading Co. Ltd. & M/s Jindal Stainless (Mauritius) Ltd. 2, The Ld. CIT (A) has erred in law and on facts in ignoring the fact that M/s Nalwa Metal & Alloys Ltd & Gagan Trading Co. Ltd. & M/s Jindal Stainless (Mauritius) Ltd. are sister/group concerns of the assessee and holding them as NPAs is baseless because mere improbability of recovery does not mean that real Income has accrued to the assessee. 3. The ld. CIT (A) has erred in law and on facts in not considering the fact that Sec.145 of the I.T.Act which is mandatory for every assessee, permits use of one type of accounting system in a particular year and hybrid accounting system is not allowed. 4. The Ld. CIT (A) has erred in law and on facts by ignoring the fact that the amount added to the income of the assessee is arrived at after reducing the amount of Rs. 29,03,953/- u/s 14 A of the Act already disallowed by the assessee from its computation of income." 21. Ground No.2 in appeal of the assessee and Ground No.1, 2 & 3 of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed and Ground No.2 of the departmental appeal is dismissed. On Ground No.1 of the department, Ld.CIT(A) followed his order for AY 2007-08 as well as AY 2008-09 & 2009-10 to delete the addition. It is stated that this issue is same as have been raised in AY 2008-09 & 2009-10. Following the reasons for the decision for AY 2008-09 & 2009-10, we do not find any merit in departmental appeal. This ground of departmental appeal is dismissed. 24.3. In the result, the appeal of the assessee is allowed and departmental appeal is dismissed. ITA No. 6546/Del/2014 [Assessee's Appeal] (AY: 2011-12) ITA No. 6973/Del/2014 [Revenue's Appeal] (AY: 2011-12) 25. Both these cross-appeals are directed against the order of Ld.CIT(A)- XVI, Delhi dated 30.09.2014 for AY 2011-12. The assessee raised the following ground:- "That the order dated 30.09.2014 passed u/s 250 of the Income tax Act, 1961 by the Learned Commissioner of Income Tax (Appeals) XVI, New Delhi is against law and facts on the file in as much as he was not justified to restrict the disallowance to the tune of Rs. 20.74 lakhs being the expenditure allegedly incurred in relation to earning tax free income by invoking the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X
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