ACIT, NEW DELHI vs. MRS. SADHNA SACHDEVA, NEW DELHI

O R D E R PER PRASHANT MAHARISHI, A. M. 1. These are the appeal filed by the revenue and the assessee against the order of the ld XXIV, New Delhi dated 31.03.2013 and 15.03.2011 for the Assessment Year 1996-97. 2. The revenue in AY 1996-97 has raised the following grounds of appeal in order of CIT (A) against order of AO u/s 154 of the act passed by AO on 2/8/2002:- “1. Deleting the addition of Rs. 81387720/- made u/s 154 rectifying the mistake of order u/s 143(3)/ 263 where the disallowance on account of bad debts was discussed.”

3. The assessee in for AY 1996-97 has raised following grounds of appeal a in order of CIT (A) against order of AO u/s 143(3) of the act:-

Page 2 of 7 “1. The loss of stocks in trade amounting to Rs.3, 65, 44,566/- occurring due to theft should have been allowed as a deduction.

are independent and without prejudice to one another.”

4. First, we take up the appeal of the assessee in ITA No. 2279/Del/2011.

5. The assessee has not pressed ground No. 1 to 4 of the appeal and hence they are dismissed.

6. Ground No. 5 and 6 of the appeal of the assessee is against confirmation of disallowance of bank charges and interest amounting to Rs. 4162324/-. Before the ld Assessing Officer the assessee submitted the bank a statement advises of the bank and it was stated that the evidence supports these, however, the Assessing Officer disallowed the same. The assessee further contested before the ld CIT (A) who also sustained the disallowance.

7. Before us the ld AR referred to the page No. 45 to 47 of the paper book to submit that assessee has incurred those bank charges for cash credit account and therefore it should be allowed as business deductions.

8. Ld. departmental representative stressed that the assessee could not submit anything before the lower authorities and disallowance has been made discussing the whole issue extensively by them therefore the disallowance may be sustained.

9. We have carefully considered the rival contentions and perused the order of the lower authorities. The Ld. CIT (A) has decided the whole issue is under:- “7. Vide ground no. 4, the appellant challenges the disallowance of Rs. 41,62,324/- out of bank interest and bank charges debited to the P & L account. I have carefully considered the facts of the case, remand report of the AO and submissions & rejoinder of the appellant. The AR contended that sum borrowed by the appellant on whom interest has been debited as expenditure was utilized for business purposes. It was argued that the interest expenditure in respect of the loan taken for business purposes Page 3 of 7 has been debited to the P & L a/c; therefore, the interest payable on business loan disallowed by the AO is not justified. It was submitted that for interest payment to bank, the copy of the bank account is more than the sufficient to justify the expenditure as no further supporting documents as mentioned by the AO is required. Expenditure under the head "interest", being revenue and non-penal in nature, is dealt with by section 36 of the Act. Section 36(l)(iii) deals with the allowability of deduction with regard to interest paid in respect of capital borrowed. According to section 36(l)(iii), for claiming deduction in respect of interest on the borrowings, the assessee has to fulfill three conditions, viz:

1. 1. The money, that is capital, must have been borrowed by the assessee.

2. It must have been borrowed for the purpose of business.

3. The assessee must have paid interest on borrowed amount. 7.1 The interest expenditure to the extent and in respect of advance Rs. 85,49,10,000/- (supra) is held non-allowable as business expenditure u/s 36(l)(iii) of the Act as the business nexus of the advanced have not been established by the appellant. In this case, the disallowance of interest on advance of Rs. 85,49,10,000/- is thus held justified on prorating of the direct and or indirect expenditure also. The words used in section 14A are in respect of expenditure incurred by the assessee in relation to income, which does not form part of total income under this Act. These words encompass within their ambit direct as well as indirect expenses. In fact, provisions of law as contained in section 14A(3) make it clear that indirect expenses also come within the purview of section 14A because the situation dealt with by this sub-section can arise only in respect of indirect expenses. Section 14A does not say that interest/expenditure relating to current year loan used to earn income not chargeable to tax/NIL income is only disallowable. It talks about all direct and or indirect expenditure. The one and only one principle is required to be looked into is that the expenditure relating to any income that is not includible in total income cannot be allowed as deduction under section 14A. 7.2 Section 14A does not say that interest/expenditure relating to loan used to earn tax free income is only disallowable. It talks about all direct and or indirect expenditure. Here, the advance of Rs. 85,49,10,000/- has resulted indirect expenditure in the form of interest on loan taken by the appellant. The one and only one principle is required to be looked into is that the expenditure relating to any income that is not includible in total income cannot be allowed as deduction under section 14A. In case, no tax free income has been earned, then also disallowance u/s 14A can be made is based on the correct appreciation of law. If the intention of the legislature was to confine applicability of section 14A limited to actual receipt of non taxable income/income exempted income as specified in chapter III, there was no need to have sub-section (3) in section 14A of the Act. The dispute is likely to arise in cases where an expenditure is incurred in relation to income which is not appearing in the P & L account or not actually received or not enumerated in chapter III but not includible in total income. Therefore, the very existence of sub-section (3) of section 14A shows the legislative intention to disallow expenditure in relation to income not includible in total income. This can be well understood by an example: A situation may arise where an assessee engaged in various business activities including investment in shares may take interest bearing loan for investing in shares of its group company, Page 4 of 7 which would never declare dividend and the assessee can claim interest payable against that loan against its other business receipts. But it is not justified as it is not the intention of the legislature. If provisions of law contained under section 14A and diction of section 14A is perused, it is clear that section 14A codifies the well accepted principle of taxation that if income is not taxable, no expenditure either direct and or indirect what so ever, in relation to such income can be claimed against taxable income. The section 14A codifies the well recognized principle of taxation which is as per norms of accountancy and law which may be culled out from various decisions of the Hon'ble Courts and it encompasses any expenditure incurred in relation to income which is not includible in total income. Such income not includible in total income may be subject matter of exemption, deduction or may be otherwise, non-taxable. 7.3 When a person borrows funds he exposes himself to certain risks by way of obligation to repay capital, to pay interest on such monies borrowed. When a person borrows funds obviously he sees himself as a businessman because he anticipates that what he borrowed can be utilized more fruitfully in the sense that he expects this money to yield return which is more than the interest that he is paying on the capital that he has borrowed. Ultimately the essence of business is profit motive. He would therefore seek to invest funds with a view not only to make profits but to make profits in the time frame that he has to pay interest so that the principal sum borrowed is serviced through payment of interest and through repayment out of returns on the monies borrowed in accordance with the terms of agreement of borrowing. On the other hand, when a person is investing his own capital he is averse to take risks and would therefore, essentially be an investor who would seek to minimize his losses and in the process perhaps also minimize his gains. These are the hallmarks of investment as opposed to say speculation. 7.4 In Metro Exporters Ltd. v. ITO (2009) 29 SOT 531 (Mum.)/ the assessee borrowed money from a company belonging to the same group. Interest paid on such borrowing was disallowed by the AO for the reason that the assessee had given interest-free loans to an allied concern. It was held that so long as the amount borrowed is used for business, interest on such borrowing is eligible to be deducted while computing the income from business. It was held that the object of section 36(1)0") is not to enable the assessee to make large borrowings and create interest liability in the year of borrowal and in subsequent years and divert the borrowed sums by giving it free of interest to its group concerns, relatives and personal use of the borrower. There is no necessity to correlate the borrowal to investments when the appellant Is having flowing funds. 7.5 Hence interest payable on the loan to the extent of advance of Rs. 85,49,10,000/- has created interest liability in the year of borrowal and in subsequent year, which is against the object of section 36(l)(iii). Following the decision, Metro Exporters Ltd. v. ITO (2009) 29 SOT 531 (Mum.), it is hereby held that the interest paid on borrowal is not allowable 36(l)(iii) of the Act, The disallowance of bank interest and bank charges of Rs. 41,62,324/- is thus sustained.” On perusal of the detail at page No. 45 of the paper book of the assessee assessee has debited total expenditure of Rs. 6 009 304.60 comprising of interest charges of Rs. 5 413768 and bank charges of Rs. 5 95536/–. Out of the above expenditure the Ld. assessing officer has disallowed Rs. 3 937208 out of Page 5 of 7 interest expenditure and a sum of rupees to 25116 out of the bank charges for which the details were not submitted by the assessee. The assessee has contested before us that the interest charges paid by the assessee are account of the pecking credit loan obtained from the bank and therefore it should have been allowed. On verification of the details of disallowance made by the ld AO it is apparent that disallowance has not been made of such expenditure for which the details have already been filed before the assessing officer. Merely because the interest has been debited in the bank account it does not become allowable as such unless it satisfies the condition of section 36 (1) (iii) of the act. In absence of any details filed before the lower authorities as well as before us we are not inclined to interfere in the orders of the lower authorities. In view of this we confirm the finding of the lower authorities in disallowing a sum of Rs. 4162324/-out of interest expenditure. In the result ground No. 5 and 6 of the appeal of the assessee is dismissed.

10. Ground No. ground No. 7 of the appeal of the assessee is with respect to not taking a sum of Rs. 8039120/- as income from business of export being the only business carried on by the appellant deduction under section 80 HHC of the act should have been allowed to the assessee. On examination of the detailed it was noted that the above sum represent the provisions for liabilities written off by the assessee. The Ld. assessing officer has disallowed the above sum for working out deduction under section 80 HHC of the income tax act no arguments were advanced before us by the Ld. authorized representative and therefore this ground of appeal

is dismissed.

11. Ground No. 8 and 9 of the appeal of the assessee is with respect to the disallowance of sum of Rs. 81387721/- written off. The claim of the assessee is that above sum was due from a German party whom export sales have been made on such export sales have been accounted as sales of the assessee. The amount due from them was written off as the said party became insolvent and such sum was debited to the profit and loss account by crediting the party account. The Ld. CIT (A) has confirmed the above disallowance because of the reason that appellant has failed to established the help of the documentary evidence that there was no hope of recovery of the above sum is the sale is also pertaining to the same year. Before us the Ld. authorized representative reiterated the same arguments, which were raised before the lower authorities, and the Ld. departmental representative supported the orders of the lower authorities.

Page 6 of 7 12. We have carefully considered the rival contentions and per used the relevant details furnished by the assessee. The Ld. CIT (A) has dealt with this issue is under:- “6. The next issue is in respect of disallowance of bad debts of Rs. 8,13,87,721/-. The appellant has claimed bad debts of Rs. 8,13,87,721/- written off in its P & L account with notes to account stating: "the concern has filed an application dated 29.02.1998 and 26.02.1998 before the RBI for net write off of Rs. 8,13,87,721/- against export proceeds as bankruptcy proceedings Were instituted against export.....,." (Point 11 of notes of accounts under the heading "Provision for bad debts"). This debt pertains to the sale of the relevant year, which was required to be received/remitted for claiming deduction u/s 80HHC by 31.09.1996 as per law. Thus it is unbelievable that any prudent business man would write off before its sale proceeds with in the same financial year especially when the hope of recovery is very high. The appellant has failed to establish with the help of the documentary evidence that the there was no hope of recovery of Rs. 8,13,87,721/- by 31.03.1996. The solvency proceedings were not initiated against the debtor in German Court in the relevant year as evident from the details furnished before me. Since the appellant's account was audited after the date of letter addressed to the RBI in 1998. Therefore, the debt has been shown bad and written off in the P & L account though actually, it has not become bad liable for written off by 31.03.1996. Thus, the AO's finding disallowing the bad debts of Rs. 8,13,87,721/- cannot be faulted. In view of the foregoing discussion and on facts of the case, it is held that the AO is justified in drawing adverse inference and disallowing the claim of Rs.8,13,87,721/-. Accordingly, the disallowance made by the AO is upheld.”