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Income Tax Appellate Tribunal, DELHI BENCH “G”: NEW DELHI
Before: SHRI AMIT SHUKLA & SHRI PRASHANT MAHARISHI
O R D E R PER PRASHANT MAHARISHI, A. M. 1. These are appeals pertaining to one assessee for two different years, as they are heard together, disposed off by this common order. 2. The assessee in has raised the following grounds of appeal against the order of the ld CIT(A), New Delhi dated 31.03.2004 for the Assessment Year 2000-01. “1. That the ld CIT(A) has erred in confirming the action of the Assessing Officer in making an addition of Rs. 1300898/- u/s 14A of the Income Tax Act, 1961.
2. That the learned CIT(A) has erred in giving relief of only Rs. 241271/- on account of foreign traveling expenses as against appellant’s claim of Rs. 12.06355/-. Page | 1
3. That the learned CIT(A) has erred in enhancing income by Rs. 50/- lacs claimed as bad debts by your appellant.
4. That the learned CIT(A) has erred in enhancing income by Rs. 50/- lacs on account that it is capital loss. 5. That the learned CIT(A) has erred in enhancing income by Rs. 50/- lacs without appreciating the fact that same is allowable u/s 37(1) of the Income Tax Act, 1961. 6. That the orders of the learned CIT(A) and learned Assessing Officer are bad in law and on facts of the case.”
Assessee is a company engaged in the business of trading in Hansson pins, investment in shares and bill purchasing activities. The assessee filed its return of income on 29 – 11 – 2000 at Rs. 1 95, 42, 540/- . The assessment under section 143 (3) was passed on 31/3/2003 wherein certain disallowances under section 14 A as well as foreign travelling expenditure was made and total income was assessed at Rs. 2 20, 49, 793/-. The assessee challenged both the disallowances before the Ld. CIT – A who confirmed them. The Ld. CIT – A during the course of appellate proceedings noted that assessee has claimed bad debt of Rs. 5 0, 00, 000/– written off in its profit and loss account during the year. He asked assessee to submit the details regarding the claim. The assessee submitted that that assessee is engaged in purchase of bills for 90 days to 365 days and bill of Rs. 50 Lacs of TASC Ltd Bangalore was purchased. That company could not work profitability and incurred heavy losses. Therefore, heavy penalties and default in payment of interest and principal was raised. As this amount was not recoverable, it is written off. It was further stated that above amount has already been offered for tax in the earlier years and is allowable as deduction to the assessee. The Ld. CIT – A did not accept the explanation of the assessee and asked assessee to furnish that how the above amount has been offered for taxation in the earlier years. Assessee submitted order of assessment year 97 – 98 from which he held that it cannot be ascertained whether the tax deduction at source claimed is in respect of alleged bad debt or not. He further examined the explanation offered by the assessee that the interest income shown from the above company has been taxed in Page | 2 assessment year 97 – 98. He also examined the Ledger copy of that company. After that, he held that the appellant company is not a nonbanking financial company but engaged in the business of bill discounting from which it is earning commission income and the above amount of Rs. 50 Lacs was advanced on account of bill discounting business. He further held that the minutes of the company do not record any resolution of the board regarding the write off of the so-called bad debt. Therefore, he held that it does not satisfy the condition required under section 36 (2) (i) of the act and also that, the claim of the assessee is a capital loss . Therefore, assessee is in appeal before us. The 1st ground of appeal
is with respect to the disallowance under section 4.
14. A of the income tax act of Rs. 1300898. The 2nd ground is also interconnected with this ground of appeal as the foreign travel expenditure are disallowed by the Ld. assessing officer over and above disallowance under section 14. A of the income tax act applying provisions of section 14. A. Therefore the expenditure on foreign travelling of Rs. 1 206355/– is disallowed as per section 14. A of the income tax act and further disallowance to the extent of 10% of dividend income of Rs. 1 200898 is considered to be the expenses relating to or earning exempt income and same was disallowed. The assessee has received dividend income of Rs. 1, 30, 08, 980 which has been claimed as exempt under section 10. (33) of the income tax act. Assessee was asked to furnish the details of any expenditure incurred for that. Assessee submitted reply where in it is stated that no direct expenditure is incurred but there are some indirect expenses incurred. On examination of the accounts, The Ld. AO noted that assessee has incurred foreign travel expenditure of Rs. 1 2, 06, 355/– during the year. It was further noted by the AO that company has made substantial investment in India and the directors are undertaking the travel to USA for discussion between the promoters and foreign promoters of one company from which part of the dividend is received. The assessee stated that the company has the benefit of 37, 85, 355/– is dividend income from the visit. The 2nd visit was also taken to West Germany and Israel for the purpose of discussion on the bonus Page | 3 shares. The 3rd visit was also carried out in Germany for finalizing the issue of bonus sales. In view of this, the Ld. AO noted that all these travels are directly related to ensuring the interest of the companies from whom substantial amount of dividend has been received. Therefore he held that such foreign expenditure of Rs. 1 206355/– is directly related to the earning of dividend income which is exempt under section 10 (33) of the income tax act 1961 and hence he disallowed the same as per the provisions of section 14A of the income tax act. The assessee carried the matter before the Ld. CIT – A. The Ld. CIT appeal called for the minutes books of the assessee company and noted that it is quite clear that the main purpose of the trips made by the director of the company was on account of substantial investment and interest in the appellant company and the purposes of the trip was to ensure regular receipt of dividend and issue of bonus shares as evidenced by the entries in the minutes of the appellant company. He therefore upheld the addition made by the Ld. AO. However, he noted that these trips are also required by other business consideration other then the dividend income on the shares and therefore he directed to allow 1/5th of the expenditure so claimed by the assessee. Therefore, assessee is in appeal before us.
5. Before us, the Ld. authorized representative submitted that assessee is not incurred any expenditure for the purposes of the earning dividend. He referred to the submission made on 21st of August 2003 wherein specifically stated that there are no direct expenditure involved in connection with the dividend income as the company has not borrowed any amount for investment in shares which income by way of dividend is received. He stated that however some expenses on maintenance of accounts for dividend income and its certification by the auditors may be presumed to be incurred for earning dividend income. He therefore stated that the disallowance made of the foreign travel expenditure as well as expenses of Rs. 1300898 disallowed by the Ld. assessing officer are unreasonable. With respect to the foreign travel expenditure, it is submitted that assessee has incurred the foreign travel expenditure for the purposes of the business and therefore it should not have not been Page | 4 disallowed at all. He further stated that the Ld. CIT – A has erred in restricting the allowable expenditure only to the 1/5 of those expenditure when he has already held that these expenditure have been incurred by the assessee for the purposes of the business and he further he confirmed the disallowance under section 14 A for earning exempt income separately.
The Ld. departmental representative vehemently supported the order of the Ld. assessing officer and the Ld. CIT – A. He stated that the foreign travel expenditure incurred by the assessee is for looking at its interest in the company in which it held shares along with the USA Company. Therefore, such expenditure is directly related to the earning of exempt income, hence, correctly disallowed under section 14A of the act. With respect to the other indirect expenditure, he submitted that the Ld. AO and the Ld. CIT appeal has only confirmed 10% of the dividend income as expenditure incurred for the purposes of the earning of the dividend income on account of indirect expenditure , which is the most reasonable and the assessee has not shown any reason that how assessee has not incurred such expenditure to that extent.
We have carefully considered the rival contention and perused the orders of the lower authorities.
In ground no 2 assessee has challenged the confirmation of disallowance of 4/5th of foreign travel expenditure. The foreign travelling expenditure admittedly has been incurred by the assessee for the purposes of the businesses of assessee as it is holding shares along with USA Company in another company from which the dividend income is received. It is not the case that for the purpose of earning dividend income only those investments have been made. It is in fact the business concern of the assessee for which the directors of the assessee are undertaking foreign tour. Further assessee has also undertaken the risk and reward of the business of joint investments. In fact, it is the strategic investment of the assessee with USA Company in India and for that purpose, the expenditure of the foreign travel is incurred. Dividend and bonus shares are part of the minutes of the board of directors of the company where Page | 5 ever such business arises in the company, That does not mean that such expenditure for travelling of attending board meeting is incurred by the assessee for the purposes of earning the dividend. These expenditure has not been stated to be incurred for the personal expenditure of the directors it was also not shown before us by revenue that such expenditure is only for the purpose of the earning of dividend. In fact as assessee has invested substantial sum in the joint-venture company for the purposes of the business, hence, these expenditure are incurred for the purposes of the business and hence they are allowable under section 37 (1) of the act. In view of this we do not find any reason to confirm disallowance of any part of the expenditure out of the foreign travel expenditure incurred by the assessee of Rs. 1 206535/–. Further the reasonable amount of disallowance u/s 14 A has already been contested by the assessee in ground no 1 of this appeal, where in we will deal with any part of the expenditure disallowable under that section. In view of this, we reverse the finding of lower authorities and allow ground No. 2 of the appeal of the assessee.
With respect to the ground No. 1 about the disallowance under section 14 A of the income tax act, The Ld. assessing officer has noted that assessee has earned dividend income of Rs. 13008980/– which is claimed as an exempt income under the act. It is also admitted by the assessee before the AO that certain expenditure has been incurred by the assessee for earning exempt income such as maintenance of accounts of the dividend etc. However it is been claimed by the assessee before the AO that no direct expenditure has been incurred by it for earning exempt income. The Ld. assessing officer has held that 10% of the dividend income earned is considered to be the expenses relating to or earning exempt income amounting to Rs. 1200898/-. Further, on looking at the details of the dividend income, assessee has received dividend from 5 sources including mutual funds. It can also not be said that assessee has not incurred any expenditure when assessee itself has admitted that it has incurred some expenditure such as for the purpose of the maintenance of the books of accounts etc. It is also not the case of the Page | 6 assessee that it has not incurred any expenditure. Assessee has also not given any details of the expenditure, which are incurred for earning exempt income. In absence of any such detail furnished by the assessee, it would be fair to estimate a reasonable sum for such disallowances. However looking at the dividend income does not justify the disallowance at @ 10 % of such income. Such disallowance is also not based on any working of such disallowance either made by the ld AO or submitted by the assessee. Further, it cannot be said that assessee has not incurred any expenditure for earning exempt income. Therefore now it is required to be estimated a reasonable sum which can be disallowed under section 14 A of the income tax act for earning of the exempt income. Therefore in the interest of the Justice and looking to the facts of the case it is appropriate if the total disallowance on such expenditure which are been incurred in relation to earning of the exempting exempt income is restricted to Rs. 2 Lacs. The Ld. AO is directed to disallow Rs. 2 Lacs under section 14 A of the act. Accordingly, ground No. 1 of the appeal of the assessee is partly allowed.
Ground No. 3-5 is with relation to the disallowance of bad debts of Rs. 50 lakhs claimed by the assessee as deduction , which was disallowed by the Ld. CIT – A in appellate proceedings. The brief facts shown before us are that assessee is a company engaged in the business of financing by bill purchase for 90 days to 365 days. The assessee has purchased a bill of Rs. 50 Lacs of one company, which have not been able to work satisfactory and have been incorporating heavy losses thereby releasing penalty in default in payment of interest and principal. Therefore, the above amount has been written off during the year and claimed as bad debt. It was further stated that the above amount has already been offered for tax in earlier years and is allowable in this year. Therefore, it was stated by the assessee before the Ld. CIT – A that the above sum is allowable as bad debts. The Ld. CIT appeal disallowed the above sum holding that it is a capital loss and it could not be ascertained that whether such sum has been offered for taxation in the earlier years or not. Page | 7
The Ld. authorized representative reiterated the submission before made before the Ld. CIT – A. He further referred to the minutes of the meeting with respect to write off the above amount. He further referred to page No. 96 of the paper book showing that the amount of discount and interest is received for the assessment year 97-98 and offered for taxation in that year. In view of this, he submitted that the above amount is allowable to the assessee as bad debts.
The Ld. departmental representative vehemently supported the order of the Ld. CIT – A and submitted that that there is no clarity whether such income has been offered by the assessee for income in earlier years or not. He further stated that the Ld. CIT – A has categorically held that the above sum is a capital loss. He therefore submitted that the above claim of the assessee is not allowable. 13. We have carefully considered the order of the Ld. CIT – A and the arguments placed before us by both the parties. Admittedly, the assessee has written off a sum of Rs. 50 Lacs advanced to one party by way of bill purchase. The above party as stated went into losses and therefore the above amount could not be recovered and hence written off. It is apparent that the business of the bill discounting is a financing business. Assessee is engaged in that business has not been disputed by the revenue. Therefore, it represents money lent in the ordinary course of the business of banking or money lending which is carried on by the assessee. If such sum has been written off by the assessee to the profit and loss account, it is allowable to the assessee as bad debt. As the money has also been lent in the ordinary course of the business, it cannot also be held to be capital expenditure/loss. Further when the money has been lent in the ordinary course of the business, it is not required to be shown that whether this money has been shown as income in the earlier years or not as only interest or discount received by the assessee can be shown to have been received and credited to the profit and loss account in the earlier years, which assessee has shown to have been credited to the profit and loss account in 97 – 98. In view of this we reverse the finding of the Ld. CIT – A and directs the assessee to allow the above Page | 8 claim of bad debt of Rs. 50 Lacs. Accordingly, ground No. 3 – 5 of the appeal of the assessee is allowed.
All other grounds of the appeal of the assessee are general in nature and therefore they are dismissed.
In the result, appeal filed by the assessee for assessment year 2000 – 01 is partly allowed.
Now we come to the appeal of the revenue for assessment year 2004 –0 5 filed against the order of CIT – X, New Delhi wherein the Ld. CIT – A deleted the disallowance of Rs. 2654899/– out of the interest disallowance made by the Ld. assessing officer. The grievance of the revenue was that the Ld. CIT – A deleted the disallowance of interest expenditure made by the AO on proportionate Loan Given to Sak Abrasives Ltd. The revenue has raised the following grounds of appeal:- “1. On the facts and in the circumstances of the case the ld CIT(A) erred in law and on the facts in deleting the disallowance made by the AO on account of disallowance of Rs. 2654899/- out of interest on account of diversion of borrowed funds.
2. On the facts and in the circumstances of the case the ld CIT(A) erred in law and on the facts in deleting the disallowance made by the AO on account of disallowance of Rs. 768559/- as proportionate interest on loan given to M/s. Sak Abrasive Ltd.” 17. the brief facts of the case was that the assessee company filed its return of income on 29/10/2004 declaring loss of Rs. 2,82, 40, 010/– as per the provisions of rule paid tax under the minimum alternate tax showing book profit under section 115 JB at Rs. 2, 82, 48,007/-. The appellant has made investment in its subsidiaries companies and joint ventures. The Ld. assessing officer noted that appellant has debited interest expenditure on loan of Rs. 33, 74, 174/– . He further observed that on the one hand the assessee is paying interest on the funds borrowed but on the other hand substantial amount was given as loan to sister concerns without interest. Therefore he held that appellant has diverted interest-bearing funds the non-interest-bearing advances and disallowed interest expenditure of Rs. 26, 54, 899/–. Further disallowance of Rs. 7, 68, 59 was also made on account of advances given to M/s Sak abrasive is limited where assessee has earned interest at the rate of 8% however the rate of interest paid and received by the assessee in other cases is 12.5% therefore he disallowed the shortfall of Rs. 768559/–.
18. The assessee carried the matter of the Ld. CIT – A, who deleted the above disallowance holding that that in case of one company no new funds were given during the year as interest free loans by the appellant. In the earlier in that particular company on the loans given by the assessee no disallowance been made. In case of other company wherein the advance of these 1.85 crores was given is for the purchase of shares and the shares were allotted to the company. Therefore he held that no disallowance of interest thereon can be made. With respect to the other amounts advanced to that company he noted that the balance amount was given by the company out of its own funds and no interest-bearing funds were diverted. Therefore he deleted the disallowance of these 26, 54, 8991 account of interest disallowance.
The Ld. departmental representative relied upon the order of the Ld. assessing officer. The Ld. authorised representative relied upon the order of the Ld. CIT – A.
We have carefully considered the rival contentions and the orders of the lower authorities. With respect to the interest disallowance the Ld. CIT – A has noted that in case of Sak Technologies LImited there was an opening balance of Rs. 30.93 Lacs and during the year the assessee had received back amount of Rs. 16 .74 Lacs in the closing balance was only Rs. 14.48 Lacs. In the earlier years also the Ld. assessing officer has not made the above disallowance as the carry forward balances are coming out of the opening balances only. The Ld. CIT – A has followed the decision of the Hon’ble Karnataka High Court in 19 ITR 167 that where the interest on capital were not disallowed in earlier years the amount standing view on the 1st day of the relevant assessment year cannot be taken into account for the purpose of the disallowance. Further with respect to the advance given to Sak Consumer Retail Services Limited of Rs. 1.85 crores is an allotment money paid for purchase of the shares and same was allotted also therefore it was an investment. With respect to the other amount the Ld. CIT has noted that the balance amount was Page | 10