HIND FILTERS LIMITED,MUMBAI vs. ACIT, CIRCLE-3(1)(2),, MUMBAI

Briefly the facts are, in course of assessment proceedings, the assessing officer noticed that the assessee had earned exempt income by way of dividend amounting to Rs.1,19,32,869/-. Whereas, no disallowance of expenditure attributable to earning of exempt income has been made by the assessee. Therefore, he called upon the assessee to explain as to why disallowance should not be computed in terms of rule 8D. Though, the assessee objected to the proposed disallowance; however, the assessing officer rejecting such objection, proceeded to disallow an amount of Rs.13,70,883/- comprising of disallowance of interest expenditure under rule 8D(2)(ii) amounting to Rs.1,71,737/- and administrative expenditure of Rs.12,29,146/- under rule 8D(2)(iii). Assessee contested the aforesaid disallowance before the first appellate authority. After considering the submissions of the assessee in the context of facts and materials on record, learned Commissioner (Appeals) deleted the disallowance of interest expenditure computed under rule 8D(2)(ii). However, he sustained the disallowance made under rule 8D(2)(iii). Further, learned Commissioner (Appeals) directed the assessing officer to delete the suo motu disallowance of Rs.4,05,290 made by the assessee under section 14A of the Act.

Before us, the learned Counsel for the assessee submitted, while computing disallowance under rule 8D(2)(iii) r.w.s. 14A of the Act, the assessing officer should only consider those investments, which have yielded exempt income during the year. For such proposition, he relied upon the decision of ITAT, Delhi Special Bench in case of ACIT vs Vireet Investments (P) Ltd 165 ITD 27 (Del). 5. The learned Departmental Representative relied upon the observations of the assessing officer and learned Commissioner (Appeals).

We have considered rival submissions and perused materials on record. In our view, the contention of learned Counsel for the assessee that only those investments which have yielded exempt income during the year should be considered for computing disallowance under rule 8D(2)(iii) is acceptable in view of the ratio laid down in case of ACIT vs Vireet Invesments (P) Ltd (supra). Accordingly, we direct the assessing officer to compute the disallowance under rule 8D(2)(iii) r.w.s. 14A of the Act, after considering only those investments which have yielded exempt income during the year. These grounds are partly allowed.

In ground 3, assessee has challenged disallowance of bad debts written off of Rs.50 lakhs. 8. Briefly the facts are, in course of assessment proceedings, the assessing officer noticed that the assessee has debited an amount of Rs.50 lakhs towards bad debts written off. After calling upon the assessee to furnish the details and examining them, he found that the bad debts represent inter corporate deposits (ICDs) given to M/s Ankur Drugs & Pharmaceutical Ltd. Stating that lending is not a business of the assessee and it is in the nature of a capital loss, the assessing officer disallowed assessee’s claim of deduction of R.50 lakhs. However, he allowed the interest on bad debts written off amounting to Rs.42,383/-. Learned Commissioner (Appeals) also sustained the aforesaid disallowance. 9. The learned Counsel for the assessee submitted, it is not the first time that the assessee has given ICDs to various parties. Therefore, the reasoning of the assessing officer that the assessee is not in the business of lending is incorrect. Further, she submitted, in the preceding assessment years, the assessee had earned interest income on the ICDs given to M/s Ankur Drugs & Pharmaceutical Ltd and offered it as income under the head “Income from business or profession” which has been accepted by the department. She submitted, even in the impugned assessment year, the assessing officer has allowed deduction in respect of interest on ICDs written off as bad debt. Therefore, she submitted, when part of the debt has been taken into account for computing profit for earlier assessment year, it fulfills the conditions of section 36(1)(vii) of the Act; hence, should be allowed. In support of such contention, she relied upon a decision of the Hon’ble jurisdictional High Court in the case of CIT vs Padamsee Pulp & Paper Mills Ltd (2016) 634 taxmann.com 283 (Bom). Further, to demonstrate that the assessee has offered interest income earned on the ICDs in the preceding assessment year, learned Counsel for the assessee sought permission of the bench to produce certain documentary evidences by way of additional evidence with a prayer to admit them.

The learned Departmental Representative, while strongly relying upon the observations of the departmental authorities, further submitted that since the additional evidence has been filed for the first time, the issue may be restored back to the assessing officer for fresh adjudication.

We have considered rival submissions and perused materials on record. Undisputedly, assessee’s claim of bad debt written off on account of ICDs given to an entity has been rejected on the ground that the assessee is not in money lending business and secondly, it is in the nature of capital loss. However, it is the claim of the assessee that when a part of the debt along with interest earned on it has been considered for computing “Profits and gains of business or profession” in earlier assessment years and offered to tax, the rest of it, which had become bad debt, cannot be disallowed. In this context, the assessee has furnished certain