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TMI Blog2019 (6) TMI 1119X X X X Extracts X X X X X X X X Extracts X X X X ..... COURT] has held that loss is deductible where there is a direct and proximate nexus between the operation and the loss or where the loss is incidental to it, as, without the business operation and doing all that is incidental to it, no profit can be earned. Therefore, based on the facts and circumstances of the case, as narrated above, we delete addition and allow ground No. 1 raised by the assessee. Addition u/s 14A read with Rule 8D - interest -free funds - assessee has not made any disallowances u/s 14A in its computation - HELD THAT:- Investment made in the earlier years has been carried forward during the impugned F.Y 2011-12, as it is evident from the aforesaid particulars where the balance at the end of the year shows the same investment as appearing in the earlier year(s). Accordingly, it may safely be deduced that during the year under consideration, no interest bearing funds were deployed for making any exempt income bearing investments. Assessee company had sufficient interest -free funds to meet its investments. Therefore, it may be safely deduced that investments in shares were financed out of the interest free funds available with the Assessee. Accordingly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r under Rule 8D(ii) of the Income Tax Rules, 1962. 2c) That without prejudice to the above, the ld. CIT(A) further erred in overlooking the fact that strategic investments in group companies and investments which did not yield any exempt income were erroneously included by the ld. A.O. while computing disallowance under Rule 8D(ii) 8D(iii) of the Income Tax Rules, 1962 r.w.s 14A of the Income Tax Act, 1961. 3) That the appellant craves leave to add, amend and/or alter any of the foregoing grounds and such other grounds as may be urged at the time of hearing. 3. Grounds No. 1 raised by the assessee relates to advance given to M/s Refractory Speaclities (India) Ltd. at ₹ 10,00,000/- (Interest accrued ₹ 55,360/-) and written off as irrecoverable in the books of the assessee. 4. Brief facts qua the issue are thatduring assessment proceedings the A.O. noticed that in the Profit and Loss account, the assessee had claimed to have written off ₹ 10,55,360/-, as bad debts. The assesseehad explained the assessing officer that the amountof ₹ 10,55,360/- was receivable from Refractory Specialties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer noted that for the year under consideration the Assesee had written off ₹ 10,55,360/- as irrecoverable in its Profit Loss Account under the head exceptional items. The Assessee explained that the said amount represented advance of ₹ 10,00,000/- paid by the Assessee company to M/s. Refractory Specialities (India) Ltd. against supply of refractory materials in the normal course of its business of trading and manufacturing of refractories and was pending since the year 1998. Copy of the relevant voucher showing advance of ₹ 10 lakhs made by the Assessee company to M/s. Refractory Specialities (India) Ltd. was placed before the AO. The said company however failed to supply the refractory materials as per the contract on account of various business exigencies and financial constraints, but assured the Assessee that it would refund the entire amount in future along with interest. The Assessee accordingly, charged interest of ₹ 55,360/- and added the same to the outstanding amount. However, due to its continuously deteriorating financial position, the said company became sick and went into liquidation. In support of the aforesaid, the screenshot fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee lost all hopes of recovery and after waiting for a considerable period of time finally wrote off the entire amount of ₹ 10,55,360/- as irrecoverable in the F.Y. 2011-12. (vii).That since the said trade advance was made during the ordinary course of its business by the Assessee, any loss on account of its non-recoverability would be a loss incidental to business and hence allowable as deduction as a regular trading loss under section 28 of the Act. We note that the Hon'ble Supreme Court in the case of BadridasDaga v. CIT [1958] 34 ITR 10, has held that in assessing the amount of profits and gains liable to tax, one must necessarily have regard to the accepted commercial practice that deduction of such expenses and losses is to be allowed, if it arises in carrying on business and is incidental to it. The question before the Hon'ble Apex Court pertained to whether monies embezzled by the agent or employee are allowable as deduction in computing the profits of business under section 10 of the 1922 Act. In response, the Hon'ble Court has clearly and lucidly enunciated the principle of loss incidental to business, and the factor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o yield taxable profits has to be carried on through agents, cashiers, clerk and peons. Salary and remuneration paid to them are admissible under s. 10(2)(xv) as expenses incurred for the purpose of the business. If employment of agents is incidental to the carrying on of business, it must logically follow that losses which are incidental to such employment are also incidental to the carrying on of the business. Human nature being what it is, it is impossible to rule out the possibility of an employee taking advantage of his position as such employee and misappropriating the funds of his employer and the loss arising from such misappropriation must be held to arise out of the carrying on of business and to be incidental to it. And that is how it would be dealt with according to ordinary commercial principles of trading. 8. At the same time, it should be emphasized that the loss for which a deduction could be made under s. 10(1) must be one that springs directly from the carrying on of the business and is incidental to it and not any loss sustained by the assessee, even if it has some connection with his business. (emphasis supplied) Therefore, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act should not be made. In response, the assessee has furnished the following explanation: The assessee has admitted that disallowance u/s 14A read with Rule 8D is applicable in their case. The assessing officer perused the reply of the assessee and observed that the assessee has itself admitted of disallowances u/s 14A read with Rule 8D, therefore, the disallowancewere calculated as follows : i) Rule 8D(2)(i) is not applicable in the case of the assessee. ii) As per Rule 8D(2)(ii), interest allocation will be: a) Total interest / finance cost paid ₹ 55,38,776/- b) Average Investment ₹ 13,33,012/- c) Average of total assets ₹ 30,7208,586/- [i.e. (₹ 30,76,33,250/- + ₹ 30,67,78,3922/-) /2] (a) X (b)/(c)= ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hare Capital and Reserves Surplus at the end of F.Y.2011-12 were ₹ 4,25,98,050/- and ₹ 14,11,98,435/- respectively whereas the aggregate investment in shares was merely ₹ 13,33,012/-. Thus, the Assessee company had sufficient interestfree funds to meet its investments. Therefore, it may be safely deduced that investments in shares were financed out of the interest free funds available with the Assessee. Accordingly, no disallowance is called for u/s 14A. of the Act. For that we rely on the judgment of the Hon`ble Bombay High Court in the case of CIT Vs. Reliance Utilities Power Ltd., [20091 313 ITR 340, wherein it was held that if there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee has raised a loan it can be presumed that the investments were from the interest-free funds available. Therefore, we delete the addition under Rule 8D(2) (ii) of the Rules. 15. So far disallowance under Rule 8D (2) (iii) is concerned, we note that AO has disallowed ₹ 6,665/-. We note that the AO has not taken into account the dividend bearing securities for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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