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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI A.MOHAN ALANKAMONY & SHRI DUVVURU RL REDDY
आदेश / O R D E R
Per A. Mohan Alankamony, AM:-
This appeal by the assessee and the Revenue are directed against the order passed by the learned Commissioner of Income Tax (Appeals)-15, Chennai dated 11.08.2016 in for the assessment year 2013-14 passed U/s.250(6) r.w.s. 143(3) of the Act.
The assessee has raised several grounds in its appeal; however the cruxes of the issues are as follows: i. The Ld.CIT(A) has erred in confirming partly the order of Ld.A.O towards disallowance U/s.14A of the Act read with 8D of the Rules. ii. The Ld.CIT(A) has erred in confirming the order of the Ld.AO who had disallowed the claim of bad debts amounting to Rs.1,78,57,131/-.
iii. The Ld.CIT(A) has erred in confirming the order of the Ld.AO who has levied interest U/s.234D of the Act, for Rs.2,97,711/-. :- Since levy of interest U/s.234D of the Act, is consequential in nature as rightly held by the Ld.CIT(A), we hereby confirm the order of the Revenue authorities on this issue. iv. Ground with respect to computation of income U/s.115JB of the Act:- At the time of argument, the Ld.AR submitted that the assessee has wrongly raised this ground and therefore sought to withdrawal the same.
The Ld.DR did not express any objection.
Accordingly, this ground raised by the assessee is treated as withdrawn.
The Revenue has also raised several elaborate grounds, and they are briefly stated herein below for adjudication:- i. The Ld.CIT(A) has erred in deleting the addition made
towards royalty though it is capital expenditure. ii. The Ld.CIT(A) has erred in directing the Ld.AO to exclude the investment made by the assessee in subsidiary companies which did not yield taxable income while computing the disallowance U/s.14A r.w.r. 8D of the Rules. iii. The Ld.CIT(A) has erred in deleting the addition made U/s.14A r.w..r. 8D while calculating book profit U/s.115JB of the Act being expenditure incurred for earning exempt income.
The brief facts of the case are that the assessee is a limited company engaged in the business of stock broking, filed its return of income for the assessment year 2013-14 on 25.09.2013. The case was selected up for scrutiny under CASS and finally orders U/s. 143(3) was passed on 24.03.2016 wherein the Ld.AO made several additions and disallowance.
Assessee’s Appeal in 5.1 Ground No.i : Partly confirming the disallowance U/s.14A of the Act:- It was observed by the Ld.AO that the assessee has made investments in shares of associate companies, other companies, Government securities and Mutual Funds. Further, the assessee had received dividend aggregating to Rs.1,01,71,198/- from such investments. The assessee by virtue of Section 14A of the Act, suo-moto disallowed Rs.7,200/- as expenses pertaining to exempt income. However, the Ld.AO invoked Rule 8D(2)(iii) of the Rules and computed the disallowance at Rs.7,13,309/-. Since the assessee had already disallowed Rs.7,200/- excluding the same from Rs.7,13,309/-, the Ld.AO further disallowed Rs.7,06,109/- and added to the income of the assessee. Before the Ld.CIT(A), it was submitted that the investment of Rs.87,21,000/- was made in wholly owned subsidiary companies viz, Insight Commodities & Future Pvt. Ltd. The Ld.CIT(A) relying on the decision of the Chennai Bench of the Tribunal in the case of EIH Associated Hotels Ltd. Vs. DCIT in ITA No.1503/Mds/2012, order dated 17.07.2013 held that the investment made in subsidiary companies has to be excluded while computing disallowance U/s.14A r.w.r. 8D of the Act. These above stated facts in the present case before us are not disputed by both the parties. Now the grievance of the assessee is that the Ld.CIT(A) has confirmed the disallowance U/s.14A of the Act with respect to investment made in other companies and mutual funds. We find on this identical issue it has been categorically held by the Chennai Bench of the Tribunal that with respect to investment in mutual fund and other companies wherein the income derived is exempt from tax provisions of Section 14A of the Act would be applicable. The gist of the relevant decision is reproduced herein below for reference:
M/s. SIDD Life Sciences in order dated 10.04.2017:-
8. Therefore, following the aforesaid decision of the Tribunal, we hereby direct the learned Assessing Officer to delete the addition made on account of section 14A where investments are made in sister concerns such as equity shares and share application money. However, if the investments are made from borrowed funds, section 14A of the Act would be applicable and learned Assessing Officer shall compute the disallowance under section 14A read with rules 8D in accordance with law.”
6.1 Accordingly we hereby remit back the matter to the file of the Ld. AO to consider the issue afresh in the light of the above order of the Tribunal and pass appropriate order in accordance with merits and law. We also make it clear that for the investments made in mutual funds, provisions of Section 14A read with Rule 8D will be applicable since the assessee would incur some expenditure at least for the decision making process as to in which mutual fund the investment has to be made and at what point of time exit from such funds. It is ordered accordingly.
Following the ratio held in the decision cited supra, we do not find any merit in the ground raised by the assessee before us. Accordingly this ground raised by the assessee is dismissed.
5.2 Ground No.2: Bad Debts :- It was observed by the Ld.AO that the assessee had claimed bad debts of Rs.1,94,30,233/- in its Profit & Loss account. It was explained by the assessee that on the direction of its clients the assessee had purchased shares on behalf of its clients but the clients M/s. Nirmala Behen Shah and M/s. Gan Nayak Traders Pvt. Ltd., failed to make payment. Meanwhile the value of the shares had fallen and the clients refused to honor their commitment. Therefore, the assessee treated the fall in value of shares as bad debts. However, the Ld.AO rejected the submission of the assessee and disallowed the claim of bad debts due to the following reasons: 1) The assessee had not written off the bad debts in the books of account. 2) The provisions of Section 36(1)(vii) is not complied with, i.e., the trade receivable was not offered to tax during earlier years. 3) The decision of the Hon’ble Apex court in the case TRF Ltd. vs. CIT reported in 190 taxman 391 was against the case of the assessee. 4) The decision of the Hon’ble Apex Court in the case of Vijaya Bank vs. CIT reported in 190 taxman 257 was not applicable in the case of the assessee because it is not a banking company but only share broking company. 5) The stock which was purchased by the assessee on behalf of its clients was still in possession of the assessee and the assessee owns it. 6) The decision of the case CIT v. Shreyas S. Morakhia reported in 206 taxman 32 was not applicable in the case of the assessee.
Further, by relying on the various other decisions, the Ld.AO disallowed the claim of bad debts and thereby added Rs.1,78,57,131/- to the income of the assessee. On appeal, the Ld.CIT(A) following the decision of the Chennai Bench of the Tribunal in the assessee’s own case in dated 05.05.2016 confirmed the order of the Ld.AO. The gist of the order of the Ld.CIT(A) is reproduced herein below for reference: 6.3 The matter is considered. The Id. Chennai Tribunal, in appellant's own case in ITA No.733,734 &735/Mds/2015 dated 05.05.2016 has held as under on the Issue:
"We have considered the rival submissions on either side and perused the relevant material available on record. Section 36(2)(i) of the Act reads as follows: "36(2) In making any deduction for a bad debt or part thereof, the following provisions shall apply- (i) No such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee.”
In view of the above, it is for the assesse to establish that the bad debt has been taken into account in computing the income of the assessee of any of the previous year or the money was lent in the course of ordinary business of the assessee. In case the money lending is not the business of the assessee, then the assessee has to necessarily establish that the so-called debt was taken as income of the assessee for the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year. There is no material on record to suggest that the amount invested in shares was taken as income of the assessee in any of the previous year. Moreover, as rightly submitted by the Ld.D.R., the shares purchased by the assessee remained with assessee. The price of the share might have gone down considerably, however, the fact remains that the share remained with the assessee and the assessee has a right to hold the same till the payment was made by the respective clients. Therefore, merely because the clients could not honour their respective commitment of paying the purchase price, it does not mean that the assessee suffers loss at this stage. The assessee has to first sell the shares and the assessee could not realise the entire amount invested, then the amount which could not be realized may be claimed as business loss. At no stretch of imagination, it can be said that the amount due from the clients is bad debt. Since the provisions of Section 36(2)(i) was not complied with, this Tribunal is of the considered opinion that the outstanding amount cannot be construed as bad debt. Therefore, there is no question of allowing the same as bad debt. Since the shares remained with the assessee and it can be sold at any time, at the best, it can be claimed as business loss in the year in which those shares are sold provided there is any actual loss. Accordingly, the Assessing Officer shall verify whether the assessee sold the shares during the year under consideration and suffered any loss. If the assessee suffered loss on sale of such shares, the same shall be allowed as business loss (emphasis supplied)."
Respectfully following the decision of Id. Chennai Tribunal on the issue, the disallowance of bad debts made by AO stands confirmed. The grounds of appeal in this regard are dismissed.”
After hearing both sides, we find that the issue is squarely covered by the decision of the Chennai Bench of the Tribunal cited by the Ld.CIT(A) in his order supra. Further the Ld.AO has also considered the issue in detail and relying on the various decision of the higher judiciary and the Hon’ble Apex court supra, rightly disallowed the claim of bad debts made by the assessee. In this situation, we do not find it necessary to interfere with the order of the Revenue authorities on this issue. Accordingly we hereby confirm the order of the Revenue authorities on this issue.
The assessee has submitted an additional ground for the relevant assessment year vide letter dated 11.05.2017 after the date of hearing which states as follows:- “The Hon’ble ITAT may be pleased to direct the Assessing Officer to deduct the claims payable amount of Rs.50,23,360/- included by the assessee as income in the return of income for the Assessment Year 2013-14 though the same amount had been brought to tax by the Assessing Officer in the Assessment Year 2010-2011 and confirmed in appeal”
However, Rule 11 of the Income Tax Appellate Tribunal mandates that the Tribunal shall not decide any ground without providing opportunity to the other side of being heard. Therefore it is clear that an additional ground filed by either party after the date of hearing cannot be entertained. Accordingly, this additional ground raised by the assessee after the date of hearing does not survive.
7 Revenue Appeal in 7.1 Deleting the addition made by disallowing the royalty expenditure of Rs.43,36,271/- by treating it as revenue expenditure: The assessee had claimed an amount of Rs.43,36,271/- as royalty expenses. On query it was explained that the aforesaid amount was paid to M/s. Shriram Ownership Trust for using the copyright logo as per the agreement dated 22.07.2011. The assessee further pointed out that on the identical issue in the case of group company viz., Shriram City Union Finance Ltd in ITA No.1899/Mds/2015 vide order dated 11.04.2013, the Chennai Bench of the Tribunal allowed the claim of royalty expenses as revenue expenditure. The assessee also relied on the decision of the Hon’ble Apex court in the CIT vs. Wavin (India) Ltd reported in 236 ITR 314, wherein the identical issue was held in favour of the assessee. However, the Ld.AO rejected the claim of the assessee and disallowed the royalty expenses by treating it as capital expenditure but allowed depreciation @ 25% by observing as under: “Further, though the issue of royalty payments has been held in favour of the assessee’s group company by the ITAT, Chennai, with due respect to the Appellate Authorities, the same has not been accepted and the department has filed further appeal to Honourable Madras High Court. However, the matter has not reached its finality as on date. Therefore, the claim of the assessee is not entertained and royalty payment of Rs.32,52,204/- is disallowed after allowing the eligible depreciation @25% on Rs.43,36,271/-. Accordingly depreciation of Rs.10,84,067/- is allowed.”
On appeal, the Ld.CIT(A) following the decision of the Chennai Bench of the Tribunal deleted the addition made by the Ld.AO and allowed the claim of royalty expenditure as revenue expenditure by observing as under: “The matter is considered. The ld. Chennai Tribunal in its decision in the case of Shriram City Union Finance Ltd in IUTA No.868 & 869/Mds/2015 dated 29.01.2016 has categorically held that disallowance of Royalty is not warranted. Respectfully following the binding judicial precedence of ld. Chennai Tribunal on the issue, the disallowance made by the Assessing Officer on account of royalty payments stand deleted. This ground is allowed.”
After hearing both parties and perusing the issue in detail, we do not find it necessary to interfere with the order of the Ld.CIT(A), because on the identical issue, the matter has been already decided in favour of the assessee by the Chennai Bench of the Tribunal which the Ld.CIT(A) has only judiciously followed.
Therefore we hereby confirm the order of the Ld.CIT(A) on this issue.
7.2 Direction of the Ld.CIT(A) to exclude the investment made in sister companies earning exempt income while computing disallowance U/s.14A r.w.r. 8D of the Rules:- Since the Ld.CIT(A) has followed the ratio laid down in the decision of the Chennai Bench of the Tribunal in the case of M/s. SIDD Life Sciences cited supra in the assessee’s appeal para 5.1 , we do not find it necessary to interfere with the order of the Ld.CIT(A) on this issue. Therefore this ground raised by the Revenue does not have merit and will not survive.
7.3 Deletion of the addition made to book profits U/s.115JB of the Act:- The Ld.AO while computing the book profit of the assessee U/s.115JB of the Act made addition by disallowing the expense U/s.14A of the Act of Rs.7,06,109/-. On appeal the Ld.CIT(A) deleted the addition following the decision of the Chennai Bench of the Tribunal on the identical issue in the case of associated company M/s. Shriram Capital Limited in dated 26.06.2015, wherein it was held that disallowance made U/s.14A of the Act, read with rule 8D cannot be added to the book profit U/s.115JB of the Act. Since the Ld.CIT(A) has only followed the decision of the Chennai Bench of the Tribunal on the identical issue, we do not find it necessary to interfere with the order of the Ld.CIT(A) on this issue. It is also worthwhile to mention at this juncture that while interpreting fiscal statutes, on a provision of the Act with friction, another provision of the Act with friction cannot be superimposed. Therefore this ground raised by the Revenue also does not have merit and will not survive.
In the result appeal of the assessee as well as that of the Revenue are dismissed.
Order pronounced in the court on the 08th June, 2017.