ITO, WD-8(1), KOLKATA, KOLKATA vs. M/S MERLIN RESOURCES (P) LTD, KOLKATA

The assessee in the present case is a company which is engaged in the business of finance and securities. The return of income for the year under consideration was filed by it on 29.09.2009 declaring a total income of Rs. 6,57,656/-. In the profit and loss account filed along with the said return, a sum of Rs. 1,75,00,000/- was debited by the assessee on account of bad debts written off. In this regard, it was noticed by the AO that the loan of Rs. 4 crores was given by the assessee to M/s. Elbee Services Ltd. on 10.05.1997 and the total amount outstanding on account of the said loan along with the interest to the tune of Rs. 9.85 crores as on 31.03.2003 was written off in part by the assessee from A.Y. 2005-06 and 2009-10. When the assessee was called upon by the AO to offer its explanation in the matter, it was submitted by the assessee that efforts were being made for the recovery of outstanding loan from M/s. Elbee Services Ltd. and as agreed mutually between the assessee and the said party, part of the outstanding amount was written off in the relevant years including the year under consideration. According to the AO, any debt written off as per the mutual understanding between the assessee and the concerned debtors would not qualify for deduction u/s 36(1)(vii) and accordingly the claim of the assessee for deduction on account of bad debts written off amounting to Rs. 1,75,00,000/- was disallowed by him.

In the computation of total income filed along with the return, a disallowance of Rs. 2,39,165/- was offered by the assessee u/s 14A on account of expenses incurred in relation to the management of investment, the income of which was exempt from tax. Since the said disallowance was not computed as per Rule 8D, the AO invoked the 3 & 383/Kol/2015 Marlin Resources Pvt. Ltd. said rule and made a disallowance u/s 14A at Rs. 7,66,226/-. Accordingly the total income of the assessee was determined by the AO at Rs. 1,73,69,405/- in the assessment completed u/s 143(3) vide an order dated 28.11.2011.

Against the order passed by the AO u/s 143(3), an appeal was preferred by the assessee before the Ld. CIT (A) and after considering the submissions made by the assessee as well as the material available on record, the Ld. CIT (A) deleted the disallowance made by the AO on account of assessee’s claim for bad debts written off by relying on the decision of Hon’ble Supreme Court in the case of TRF Ltd. vs CIT 323 ITR 397 wherein it was held that the only condition for allowing the deduction on account of bad debts written off as per section 36(1)(vii) as amended from 01.04.1989 is that the relevant debts should be written off in the books of accounts of the assessee. The Ld. CIT (A) however confirmed the disallowance made by the AO u/s 14A by applying Rule 8D by holding that the said rule was mandatory. Aggrieved by the order of the Ld. CIT (A), the revenue and the assessee both are in appeal before the Tribunal on the following grounds . Grounds raised in the assessee’s appeal “1. For that ld. CIT (A) erred in holding the disallowance of Rs. 7,66,226 under Rule 8D(2)(iii) out of administrative expenses. The disallowance/addition made is arbitrary, illegal, unjust and erroneous. The purported findings of the lower authorities in this behalf is without any materials and are contrary to the facts of the case and are arbitrary, unreasonable, erroneous and perverse.