ASHOK LEYLAND LIMITED,CHENNAI vs. DCIT COMPANY CIRCLE 1 (1), CHENNAI

आदेश /O R D E R

PER INTURI RAMA RAO, ACCOUNTANT MEMBER:

This appeal filed by the assessee is directed against the

order of the Commissioner of Income Tax (Appeals) -3, Chennai

[‘CIT(A)’ for short] dated 30.11.2017 for the assessment year 2011-

12.

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2.1 The CIT(A) has erred in upholding the disallowances of bad and doubtful debts made by the AO without appreciating the facts.

Approving the action of AO causes double jeopardy

2.2 That, on one hand CIT(A) had concurred with the facts submitted by your Appellant that the corresponding provision for bad debts was already disallowed in the computation of business income of your Appellant in AY 2010- 11 and on the other hand, approved the action of AO to disallow the bad debts again, when the same is written-off i.e. in ÀY 2011-12 thereby causing double jeopardy.

Reasoning of CIT(A) to uphold AO action of disallowance is factually incorrect

2.3 The CIT(A) erred in observing that the Appellant failed to produce necessary evidence for write-off of the debt from the books of accounts, which is contrary to the fact as it was never raised by the AO.

2.3.1 AO had only sought for proof of evidence that, doubtful debts were disallowed in previous years along with relevant (edger copies which were duly submitted by your Appellant whereas AO had unilaterally made an addition by stating that the “assesse failed to produce the evidence supporting the write- off of debt from the books of accounts”.

Details of write-off was available on record but ignored by the A.O.

2.4 AO had also ignored the fact that write off from the books of accounts was duly disclosed in Schedule 2.3 to the Profit and Loss account which was duly submitted and available before the AO on record;

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2.4.1 The action of the AO in making a unilateral disallowance is in violation of the principles of nature justice without an opportunity being given to your appellant and hence requires to be stuck down.

Section 41 cannot be applied as amounts were disallowed in earlier year:

3.1 The CIT(A) erred in upholding the action of the AO to make an addition of reversal of generation tax as income u/s 41(1) of the Act without understanding the facts that the same were disallowed in the earlier assessment year u/s 43B.

3.2 The CIT(A) failed to appreciate that an addition u/s 41(1) can be triggered only when the same has been claimed as expenditure in the previous years.

3.3 The CIT(A) failed to render justice by brushing aside the submissions of the Appellant made before him.

Reasoning of CIT(A) to uphold AO action of disallowance is factually incorrect

3.4 The CIT(A) erred in observing that Appellant failed to give the necessary explanations which is contrary to the fact since your appellant were never given any opportunity to be heard on this mater

3.5 CIT(A) had erred in concurring with the findings of AO and totally ignored the following facts put forward by your Appellant that, (a) the AO had sought for a note on generation tax reversal which duly furnished by your Appellant but the Learned AO had incorrectly stated the facts in his order that ‘the assesse has not offered any explanation’. (b) the AO had also recorded an incorrect fact that the expenditure was claimed in earlier years by your appellant. Hence the order of CIT(A) is liable to be overruled to render justice.

Disallowance by AO was upheld without understanding the issue:

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4.1 The CIT(A) erred in upholding the action of the AO in disallowing the advances written off and brushed aside your Appellant’s submission on their cLaim on every item claimed there on.

4.2 CIT(A) had erred in concurring with the addition made by the Learned AO without going the nature of amounts written off which is summarized below

Nature Amount Basis for claim • Dividend receivable was accounted on accrual basis and offered to tax in preceding years. • The same was charged to P&L Dividend receivable 4,109 in ÀY 2011-12 since the same was irrecoverable. • Deduction for the said amount is eligible, since the corresponding income was offered to tax by your Appellant.

Service tax credit 44,90,526 • Service tax paid on inputs was capitalised in books and claimed for refund from tax authorities. • This was charged off to P&L in ÀY 2011-12 in the natural process of accounting since credit was not granted. • Deduction for the said amount is eligible, since the service tax paid on inputs for which credit was not granted would assume the character of the inputs for which it was originally paid and hence, is allowable as deduction.

Advances written off 15,60,825 • Your Appellant had incurred certain office maintenance expenditure on behalf of one of its group companies, M/s.

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Indiran Engineering Projects and Systems Kish (LLC). • Said group company had gone into winding up process and hence, the receivable advances from the said group company was charged off to P&L account. This expenditure has been incurred wholly and exclusively in relation to business of the Appellant and hence, the appellant is eligible to claim deduction for the same.

Credit for taxes 1,72,143 TDS deducted on income of the deducted at source Appellant was claimed as credit (TDS) in preceding years, but was not granted. This was charged off to P&L in ÀY 2011-12 in the natural process of accounting as the credit was not granted. Once the credit was not granted, it would assume the character of expenditure incurred wholly and exclusively in relation to income of the Appellant which is deductible while computing income from business! profession.

CIT(A) had failed to render justice by upholding the action of AO not following the principles of natural justice

4.3 During the assessment proceedings, the AO sought for party wise break- up of the write off which was duly furnished by your AppelLant. No further information was sought from your Appellant, and hence, the action of the AC in making a unilateral disallowance is in violation of the principles of nature justice and hence requires to be stuck down.

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4.3 Further, the statement of the AO and the allegation made by the CIT(A) that the Appellant failed to offer any explanation for write off, is factuaLLy incorrect and contrary to the facts.

Section 14A disallowance not warranted:

5.1 The CIT(A) erred in not accepting the Appellant’s contention that no disallowance u/s 14A is warranted, since the Appellant has not incurred any expenditure for the purpose of earning dividend income which is exempt from tax.

5.2 The CIT(A) failed to understand that the AC has made a categorical observation that there are no direct expense and interest expenses which have been incurred in relation to the investments of the Appellant and has contradicted himself by making of a disallowance of administrative expenses at 0.5% of the average value of investments, despite your Appellant’s submission that no expenses were incurred by your Appellant for earning such exempt income.

5.2 Incorrect reliance on judicial precedents which are factually different: The CIT(A) erred in brushing aside alL the decisions quoted by your Appellant and without any justification restricted the disallowance to the amount of exempt income by adopting the decision in the case of M/s. Rayalla Corporation (P) Ltd I.T.A. No. 908/Mds/2015, the facts of which are distinguishable from the facts of your Appellant.

5.3 No investments made in ÀY 2011-12: The CIT(A) failed to appreciate that dividend has been received out of investments made in the preceding previous years and no fresh investment was made during ÀY 2011-12.

5.4 Disallowance of administrative expenditure cannot exceed 2% of exempt income: The CIT(A) erred in not considering our submission that even if salary and administrative expenditure can be reasonably estimated as being attributable to management of investment portfolios, the disallowance u/s 14A should be restricted to 2% of the amount of the exempt income as held by the Hon’ble ITAT in your Appellant’s own case for AY 2008-09 (ITA No. 2839/Mds/2014 dated 23.09.2016) and in the case of CIT v. Hero Cycles 323

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ITR 518 (P&H High Court) and DCITv. Jindal Photo Limited ITA No. 814 (Del) 2011.

5.5 Incorrect interpretations made by AC while applying Rule 8D: The CIT(A) failed to dispose grounds raised by your Appellant on the wrong interpretation of the provisions made by the AO by including the following investments for computation of disallowance at 0.5% of average value of investments under the 3 limb of Rule 8D:

5.5.1 Investments which did not yield a dividend income during the subject ÀY are required to be excluded as held in ACIT.v. M. Baskaran [2015] 152 lTD 844 (Chennai - Trib.) and ACIT v. Vireet Investment Private Limited (2017] 58 ITR(T) 313 (Delhi -Trib.) (SB);

5.5.2 Investments which are strategic in nature and not intended for earning dividend are required to be excluded as held in EIH Associated Hotels Ltd. v. DCIT by the High Court of Madras 2013- TIOL-796-ITAT-MAD (ITA no 1503 & 1624/Mds/ 2012 dt. 17-07-2013) and CIT vs RPG Transmissions Ltd [2014] 48 taxmann.com 57 (Madras High Court);

5.5.3 Investments in overseas entities whose dividend income is taxable are required to be excluded as held in CIT v. Suzion Energy Limited [2013] 354 ITR 630 (Gui);

5.5.4 Investments in unlisted entities cannot be included if there is a possibility of the gains on transfer of the shares being taxable, as held in CIT v. Holcim India P.Ltd. [2014] 272 CTR 282(Delhi) (HC);

5.5.5 AO erred in adopting the incorrect average value of total assets of the Appellant by considering the amount of total assets net of current liabilities and provisions instead of the gross amount of total assets.

The assessee is a company incorporated under Companies

Act, 1956. It is engaged in the business of management

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consultancy in the areas of implementation and promotion of the projects. The return for the assessment year 2011-12 was filed on 29th September, 2011 disclosing total income of ₹9783/-. Against the said return of income, the assessment was completed by the Deputy Commissioner of Income Tax, Company Circle -1(1), Chennai (‘A.O.’ in short) vide order dated 27th March, 2014 passed under Section 143(3) of the Income-tax Act, 1961 (in short 'the Act') at total income of ₹1,17,57,080/-. While doing so, the A.O. has made the following disallowances;

₹46,63,000/- (1) Disallowance of doubtful debts ₹3,07,486/- (2) Addition on account of reversal of generation tax ₹62,27,603/- (3) Addition on account of advances written off ₹5,59,208/- (4) Disallowance under Section 14A

preferred by the CIT(A), who vide impugned order partially allowed the appeal by directing the A.O. to restrict the amount of disallowance under Section 14A of the Act to the extent of exempt

income and the balance additions had been confirmed by the CIT(A).

in appeal before us in the present appeal. Ground Nos.1 and 6 are

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general nature. Ground No.2 challenges the disallowance of bad and doubtful debts of ₹46,63,000/-. The Assessing Officer

disallowed the claim of provision for bad and doubtful debts on the ground that the assessee had failed to substantiate that the debts were written off in the books of account. Even before the

CIT(Appeals), the assessee contended that the provision for bad and doubtful debts were debited to the Profit & Loss account in the assessment year 2010-11, the same was disallowed while computing the taxable income for assessment year 2010-11.

During the previous year relevant to the assessment year 2011-12, the provision was reversed. It was claimed even before the CIT(A) that since the provision was not allowed as deduction in the

assessment year 2010-11, the same should not be taxed in the year of reversal of provision. However, the CIT(A) confirmed the addition taking note of the findings of the A.O. that what was disallowed was

only provision of bad and doubtful debts debited to Profit & Loss account.

appeal. Similar contentions as advanced before the CIT(A) were reiterated even before us. It was further claimed that material available on record clearly establishes that the provision for bad and

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doubtful debts were disallowed while computing the taxable income for assessment year 2010-11 and therefore, in the year of reversal

the same cannot be taxed.

authorities.

was taken citing that it is only reversal of the provision for bad and doubtful debts which was disallowed by the assessee itself for the assessment year 2010-11 and the same was reversed in the

previous year relevant to the assessment year under consideration. There cannot be any quarrel as to the proposition advanced by the Ld.counsel for the assessee that in the year of reversal of the

provision, no addition can be made in the event of provision was disallowed in the year of creation of provision. However, one should appreciate that claim for relevance of reversal of provision for bad

and doubtful debts and the allowance for provision of bad and

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doubtful debts stand on altogether different footing. This issue requires a due verification of facts. In these circumstances, we are of the considered opinion that the matter should go back to the file of the A.O. for de novo assessment of the issue in accordance with law.

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it cannot be brought to tax. The CIT(A) confirmed the action of the

A.O. taking note of the fact that the liability for payment of

generation tax ceases to exist.

present appeal. It was contested before us that the question of

disallowance under Section 41(1) of the Act does not arise as the

expenditure was never allowed as deduction.

the orders of the lower authorities.

available on record. The A.O. made disallowance invoking the

provisions of Section 41(1) of the Act in respect of reversal of

provision for generation tax. The contention of the assessee that

the provision was disallowed under Section 43B of the Act in the

earlier years was never looked into by the lower authorities.

Therefore, the issue requires remission to the A.O. for due

verification of the factual aspects of the claim. We order

accordingly.

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the correctness of his confirmation of the addition on account of advances written off to the extent of ₹62,27,603/-.

of advances written off with the following particulars:

Amount in ₹ Sl.No. Particulars

(1) Dividend receivable 4109 (2) TDS credit not granted 172143 (3) Service tax credit charged off 4490526 (4) Advance written off 1560825 TOTAL 6227603

The A.O. disallowed the above on the ground that no reason or so

why the advances were written off was furnished by the assessee.

Even before the CIT(A), no explanation as to the circumstances

under which the advances were written off was furnished.

Therefore, the CIT(A) confirmed the addition made by the A.O.

present appeal. It is contended before us that the statutory claims,

which were not received, were actually written off in the books and

the onus does not lie on the assessee to establish that the debts

were actually became bad.

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were made wholly and exclusively for business purposes. From the details filed before us, it appears that the statutory claims such as TDS and service tax were also written off. There is nothing on

record to show that these advances were made wholly and exclusively for business purposes. Further, in respect of statutory claims receivable, it requires to be verified whether the same was

offered to tax in the earlier years. In the circumstances, we remit the issue back to the file of the A.O. for carrying out necessary verification and thereafter decide the issue in accordance with law.

The A.O. disallowed a sum of ₹5,49,208/- under Section 14A 24. of the Act. On appeal before the CIT(A), the CIT(A) restricted the

disallowance to the extent of exempt income and the decision of the

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CIT(A) is no doubt in consonance with the law laid down by the Hon'ble Madras High Court in Redington (India) Ltd. v. Addl. CIT (2017) 392 ITR 633. However, while computing the disallowance, only the amount of investments which yielded exempted income alone has to be considered. Therefore, we remit the matter back to the file of the A.O. to recompute the amount of disallowance under Section 14A of the Act considering only the investments which yielded exempted income.

Order pronounced in the court on 4th November, 2019 at Chennai.

sd/- sd/- (इंटूर� रामा राव) (एन.आर.एस. गणेशन) (N.R.S. Ganesan) (Inturi Rama Rao) �या�यक सद�य/Judicial Member लेखा सद�य/Accountant Member चे�नई/Chennai, �दनांक/Dated, the 4th November, 2019. Kri. आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु�त (अपील)/CIT(A)-3, Chennai 4. Principal CIT- 1, Chennai 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF.