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TMI Blog2018 (9) TMI 1850X X X X Extracts X X X X X X X X Extracts X X X X ..... stain the disallowance made by the AO under Rule 8D(2)(iii) for 6,36,463/- only. This ground of appeal of the Revenue is allowed. MAT computation - Disallowances made under the provisions of Sec. 14A r.w.r. 8D cannot be applied to the provision of Sec. 115JB as per the direction of the Hon ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. [ 2014 (11) TMI 1169 - CALCUTTA HIGH COURT] Disallowance as per the clause (f) to Explanation-1 of Sec. 115JB independently on account of dividend income. However, we also note that there is no mechanism given under the clause (f) to Explanation-1 of Sec. 115JB to workout/ determine the disallowance. Therefore in the given facts circumstances, we feel that ad-hoc disallowance will service the justice to the Revenue and assessee. Therefore to put the dispute to rest in given facts circumstances, we direct for the ad-hoc disallowance to avoid the multiplicity of the proceedings and unnecessary litigation. Thus we direct the AO to make the disallowance of 5 Lacs under clause (f) to Explanation-1 of Sec. 115JB of the Act. This fact on record that we have restored other cases involving identical issues to the file of AO for ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee is a Private Limited Company and engaged in the business of financing and trading activity of shares and securities as well as agriculture produce. The assessee in the year under consideration has claimed bad debts amounting to ₹ 1,41,03,036/- only. The assessee during the assessment proceedings submitted that it has given loan to M/s. Roopa Plastics Technology Pvt Ltd in the assessment year 2005-06 for an amount of ₹ 2.10 crores. The assessee, up-to to assessment year 2009-10, has charged interest on such loan from the party amounting to ₹ 55,37,378/- which was offered to tax. However, the financial condition of M/s. Roopa Plastics Technology Pvt Ltd was very weak; therefore, it failed to return the amount of loan to the assessee. As such there was outstanding balance of ₹ 2,41,03,036/- as on 01.04.2010, M/s. Roopa Plastics Technology Pvt Ltd paid a sum of ₹ 1 crore on 04.06.2010. The assessee has written off the balance amount of ₹ 1,41,03,036/- in the year under consideration on the ground that it was outstanding for long time. 4.1 However, the Assessing Officer disagreed with the submissions of the assessee on the ground that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opa Plastic Technology Pvt. Ltd. was given as loan in the normal course of business. Secondly, the debt had been outstanding for the long time in the books of the appellant. The A.O is not doubting the bad debt itself. A similar issue was adjudicated upon by the then CIT(A) in the case of Nirma Ltd. vide order No.CIT(A)-XI/445/ACIT.Cir-5/2013-14 dated 20/5/2015 for A.Y.2010-11 At para-9.3 of the said order the then CIT(A)-9 has allowed the bad debt claimed by the appellant by relying on the case of CIT vs Wood Ward Governors India Pvt. Ltd. 179 Taxman 326 (SC) as well as by relying on the case of CIT vs TRF Ltd. 323 ITR 397 (SC). 5.3 It is clear from the section 36(2) of the Act that the bad debt can be claimed by an appellant who is involved in the business of banking or money lending. The section does not mandate that the appellant has to be registered as a scheduled bank or an NBFC with the RBI. The balance sheet clearly reflects the nature of business of the appellant as of lending money. Hence, the appellant is squarely covered by sec.36(2) of the Act. Therefore, considering the facts and circumstances, I am of the opinion that the A.O is not justified in making an addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if it represents the money lent in the ordinary course of business. The relevant provision of Section 36(2)(i) reads as under:- 1(2) In making any deduction for a bad debt or part thereof, the following provisions shall apply- 12[(i) no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee;] 8.2 The plain reading of the above provision reveals that the assessee who is in the money lending business in the ordinary course is entitled for deduction for the bad debts on account of principal amount as well as interest amount. 8.3 The expenses of the bad debts can also termed as losses in the course of the business and accordingly the deduction for the same will be allowed under section 37(1) of the Act. In this regards, we also extend our reliance on the judgment of Hon'ble Supreme Court of India in the case of CIT vs. Wood Ward Governors India Pvt Ltd, repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144." 13. As stated above, one of the main arguments advanced by the learned Additional Solicitor General on behalf of the Department before us was that the word "expenditure" in section 37(1) connotes "what is paid out" and that which has gone irretrievably. In this connection, heavy reliance was placed on the judgment of this Court in the case of Indian Molasses Co. (P.) Ltd. (supra). Relying on the said judgment, it was sought to be argued that the increase in liability at any point of time prior to the date of payment cannot be said to have gone irretrievably as it can always come back. According to the learned counsel, in the case of increase in liability due to foreign exchange fluctuations, if there is a revaluation of the rupee vis-a-vis foreign exchange at or prior to the point of payment, then there would be no question of money havin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , however, deductible on ordinary principles of commercial accounting. (see page 617 of the eighth edition). It is this principle which attracts the provisions of section 145. That section recognizes the rights of a trader to adopt either the cash system or the mercantile system of accounting. The quantum of allowances permitted to be deducted under diverse heads under sections 30 to 43C from the income, profits and gains of a business would differ according to the system adopted. This is made clear by defining the word "paid" in section 43(2), which is used in several sections 30 to 43C, as meaning actually paid or incurred according to the method of accounting upon the basis on which profits or gains are computed under section 28/29. That is why in deciding the question as to whether the word "expenditure" in section 37(1) includes the word "loss" one has to read section 37(1) with section 28, section 29 and section 145(1). One more principle needs to be kept in mind. Accounts regularly maintained in the course of business are to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. One more aspect n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dified by Legislative intervention. However, but for such intervention or in cases falling under section 145(3), the method of accounting undertaken by the assessee continuously is supreme. In the present batch of cases, there is no finding given by the Assessing Officer on the correctness or completeness of the accounts of the assessee. Equally, there is no finding given by the Assessing Officer stating that the assessee has not complied with the accounting standards. 15. For the reasons given hereinabove, we hold that, in the present case, the "loss" suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure under section 37(1) of the 1961 Act. 8.4 We also place our reliance on the judgment of Hon'ble Supreme Court in the case of TRF Ltd Vs. CIT, reported in {2010] 323 ITR 397 (SC), wherein the Hon'ble Court has held as under:- "4. This position in law is well-settled. After 1-4-1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. However, in the presen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment and no administrative expenditure has incurred in relation to such income, the Assessing Officer invoked the provisions of Section 14A read with Rule 8D and made the following disallowances:- Sr. No. Particulars Amount (Rs.) 1 Direct expenses under Rule 8D(2)(i) Nil 2 Interest expenditure under Rule 8(2)(ii) 70,49,073 3 Administrative expenses under Rule 8D(2)(iii) 6,36,463 Total 76,85,536 10.1 In view of the above, the Assessing Officer made disallowance of ₹ 76,85,536/- and added to the total income of the assessee. 11. Aggrieved, the assessee preferred an appeal before the ld. CIT(A). The assessee before the ld. CIT(A) submitted that it has its own share capital and reserves aggregating to ₹ 16.08 crores as against investment of ₹ 1.26 crores as on 31.03.2011. Therefore, there is no question of making the disallowance of interest expenses. 11.1 Similarly, the assessee submitted that it has not incurred any expenditure on account of administrative activity as the dividend was either directly credited to the bank or dividend warrants were issued which were deposited in the bank subsequently. The assessee in support of its claim relied up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arranted. The appellant has also relied upon various other case laws as mentioned in the submission of the appellant. I agree with the principles laid down in the case law of UTI Bank Ltd, and Suzlon Energy Ltd (supra) and various other judgments of jurisdiction a I High Court. Considering the availability of non-interest bearing funds in the hands of the appellant for making investments earning exempt income, I am of the considered opinion that no disallowance under sub-section 14A is warranted in this case. Accordingly, the A.O is directed to delete the disallowance of Rs,76,85,836/- made u/s.14Aof the Act. Thus, this ground of appeal is allowed." 12. Being aggrieved by the order of the ld. CIT(A), the Revenue is in appeal before us. 13. Learned Departmental Representative before us vehemently supported the order of the Assessing Officer. On the other hand, learned Authorized Representative submitted as under:- a) Appellant has not incurred any expense to earn tax free income. b) Assessee company had enough balance of share capital and reserves and surplus aggregating to ₹ 14.08 crores as against investments of ₹ 46.43 lacs as on 31.03.2011. Reliance is plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehemently supported the order of the ld. CIT(A). 14. We have heard the rival contentions and perused the material available on record. The facts of the case are not in dispute; therefore, we are not inclined to repeat the same for the sake of brevity, convenience and adjudication. There is no doubt that the own funds of the assessee exceeds the amount of investments as evident from the audited financial statement of the assessee which is placed on page Nos. 1 to 20 of the paper-book. The relevant extract is reproduced below:- Balance sheet as at 31st March, 2011 AS AT AS AT Particulars Schedule 31.03.2011 31.03.2010 Sources of funds Shareholder's funds Share capital 1 20,000,000 2,000,000 Reserves and Surplus 2 140,805,975 267,116,166 Loan funds Secured Loans NIL NIL Unsecured Loans 3 679,963,338 731,636,588 840,769,313 1,00,752,754 Application of funds Fixed assets 4 Gross block 10,749,930 10,884,930 Less: Depreciation 5,698,120 5,701,101 Net block 5,051,810 5,183,829 Investments 5 12,569,532 78,631,532 14.1 From the above, there remains no ambiguity that own-funds of the assessee is exceeded the investment as discussed above. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Bombay High Court, we are of the view that in the facts of the present case, no further disallowance over and above than what has been disallowed by the Assessee is called for. As far as disallowance of other administrative expenses is concerned, the undisputed fact is that the disallowance has been made by the AO without giving a finding as to how much administrative expenditure has been incurred to earn the exempt income. In the case of Hero Cycles (supra) the Hon'ble High Court has held that the contention of the Revenue that directly or indirectly some expenditure is always incurred which must be disallowed u/s. 14A cannot be accepted. Disallowance u/s. 14A requires finding of incurring of expenditure. In the present case, the AO has presumed that the assessee might have incurred expenditure to earn the exempt income. He has not given any finding of incurring of expenditure. In view of these facts and respectfully following the decision of High Court, we are of the view that no disallowance of administrative expenses can be made. We accordingly direct for the deletion of the addition made by the AO and allow this ground of the assessee." 4. In our opinion the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e's former substantive ground is therefore partly accepted in above terms." 14.3 On specific query from the Bench to the learned Counsel for the assessee for making the disallowance under Rule 8D(2)(iii) of the Income-tax Rules, the learned Authorized Representative for Assessee failed to bring anything contrary to the findings of the Hon'ble ITAT as discussed above. Therefore, we sustain the disallowance made by the Assessing Officer under Rule 8D(2)(iii) for ₹ 6,36,463/- only. This ground of appeal of the Revenue is allowed. 15. Other grounds raised by the Revenue are general in nature and do not need any specific adjudication. 16. In the result, appeal of the Revenue bearing ITA No.790/Ahd/2016 is partly allowed. 17. Now, we take up ITA No.791/Ahd/2016 for Assessment Year 2010-11. The Revenue has raised following grounds of appeal:- "1. The Ld. CIT(A) has erred in law and on facts in deleting the disallowance made U/S.14A of the Act of ₹ 1,83,74,928/-. 2. The Ld. CIT(A) has erred in law and on facts by not appreciating that the assessee could not establish that the investment in assets yielding exempt income was clearly made out of interest free fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the ld. CIT(A), the Revenue is in appeal before us. 24. Learned Departmental Representative relied upon the order of the Assessing Officer, whereas, on the other hand, learned Authorized Representative supported the order of the learned CIT(A). 25. We have heard the rival contentions and perused the material available on record. In the instant case, the Assessing Officer made the addition of disallowance made u/s 14A read r.w.r. 8D of the Income-tax Rules while determining the book profit under Section 115JB of the Act. It is settled law that the amount of disallowance made by the AO u/s 14A of the Act cannot be imported while determining the book profit u/s 115JB of the Act. In this regard, we rely on the judgment Hon'ble Gujarat High Court in the case of Alembic Ltd. in Tax Appeal No. 1249/2014 where the following question was raised: "(iii) Whether on the facts and in the circumstances of the case and in law, the ITAT was justified in holding that adjustment made on account of disallowance u/s 14A of the Act in computation of book profit u/s115JB of the Act is not as per law without appreciating that the amount disallowable under section 14A is covered under clause ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19.11.14 wherein it was held that the disallowance about exempted income needs to be made as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. The relevant extract of the judgment is reproduced below:- "We find computation of the amount of expenditure relatable to exempted income of the assessee must be made since the assessee has not claimed such expenditure to be Nil. Such computation must be made by applying clause (f) of Explanation 1 under section 115JB of the Act. We remand the matter for such computation to be made by the learned Tribunal. We accept the submission of Mr. Khaitan, learned Senior Advocate that the provision of section 115JB in the matter of computation is a complete code in itself and resort need not and cannot be made to section 14A of the Act." 25.6 Given above, we hold that the disallowances made under the provisions of Sec. 14A r.w.r. 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB of the Act as per the direction of the Hon'ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. (Supra). 25.7 Now the question arises to determine the disallowance as per the clause (f) to Explanati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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