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Income Tax Appellate Tribunal, “B” BENCH, KOLKATA
IN THE INCOME TAX APPELLATE TRIBUNAL, “B” BENCH, KOLKATA BEFORE SRI ABY T.VARKEY, JM AND SHRI WASEEM AHMED, AM I.T. A. No. 297/Kol/2014 Assessment Years: 2010-11
DCIT, Circle-6, Kolkata. Universal Industrial Fund Ltd. -Vs- [PAN :AAACU4032H] (Appellant) (Respondent) For the Appellant Anand Baiwar ,CIT-DR For the Respondent Shri D S Damle, FCA & Sri A. Dudhewala, ACA Date of Hearing 07.02.2017 Date of Pronouncement 24.03.2017
ORDER Per Aby T. Varkey, JM
This is an appeal preferred by the Revenue against the order of the Ld. CIT(A)-VI,
Kolkata, dt.23.11.2013 for assessment year 2010-11.
The first ground of the Revenue is against the deletion of Rs.3,41,87,613/- which
was claimed by the assessee as debt written off.
Brief facts of the case is that the assessee company, which is a Non-Banking
Financial Company (NBFC), in its computation of return of income claimed deduction of
debt written off Rs.3,41,87,163/-. On being asked by the AO it was explained that since
the assessee is a NBFC company engaged in the business of granting loans and
advances and that the assessee had granted loan to a party named M/s Dhanani
International Ltd., almost 10 years back and interest was charged on the said loan
amount. Subsequently, it was found that the said party was not regular in paying
interest and later on, the debt became bad debt and, therefore, it was categorized as
2 ITA No.297/Kol/2014 Universal Industrial Fund Ltd., AY 2010-11
Non-Performing Asset. It was brought to the knowledge of the AO that since the loan
given to M/s. Dhanani International Ltd. became bad consequently the debt and the
interest thereon was written off in the books in the instant assessment year. The AO
rejected the claim of writing off of debt on the ground that it was not sundry debtor and
interest was not being accounted for past several years. Aggrieved by the aforesaid
order of the AO, the assessee preferred an appeal before the Ld. CIT(A), who was
pleased to allow the appeal of the assessee and deleted the addition. Aggrieved by the
decision of the Ld. CIT(A), the revenue is in appeal before us.
We have heard rival submissions and perused the material available on record.
We take not that the assessee is a NBFC duly authorized by Reserve Bank of India. As a
NBFC it is engaged in the business of granting loans and investments in shares and
securities. The assessee has given loan to M/s. Dhanani International Ltd. in the course
of its business. The assessee in the instant year has written off bad debt of
Rs.3,41,87,163/- in its books of account, which was rejected by the AO on the ground
that it was not a sundry debtor and that interest was not being accounted for past
several years. On appeal, the ld. CIT(A) was pleased to allow the claim of the assessee
vide para 3.2 of his order by holding as under:
“3.2. I have carefully considered the facts of the case. The appellant is the NBFC duly authorized by RBI. As a NBFC, it is engaged in the business of, inter alia, lending of money. The loan given to M/s. Dhanani International Limited was advanced in Course of its principal business giving loans. The assessing Officer has rejected the claim of write off on the ground that it was not sundry debtor and interest was not being accounted for past several years. Allowance for write off of a bad debt is governed by provision of section 36(1 )(vii) read with section 36(2). Clause (i) of sub-section (2) of section 36 states that 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 2
3 ITA No.297/Kol/2014 Universal Industrial Fund Ltd., AY 2010-11
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. So far as interest component of the amount written of is concerned, the same was duly taken into account in computing income for those years to which it pertains. Though the appellant has, in the past several years, not accounted for interest income, the interest written off pertains to the years in which such interest had been recognized and taken into accounts income. So far as the principal amount is concerned, it is true that the amount was never considered in computing income of any assessment year. However, the same represents money lent in the ordinary course of business of lending money in form of loan which the principal business of the appellant. The several decisions cited by the appellant, including that of Tulip Star Hotels Limited (supra); also support the appellant's claim for deduction. The jurisdictional bench of tribunal has also taken similar view in the case of Asst. CIT Vs Philips Carbon Black Ltd (ITA No. 1447/Ko1/2006) and the revenue's appeal against the tribunal's order in that case has been dismissed by Hon'ble Calcutta High Court. Considering the aforesaid facts and respectfully following the ratio set by various judicial authorities, including jurisdictional High Court and tribunal, the addition of Rs.3,41 ,87,6131- is deleted. ”
We note that the deduction of bad debt written off in the books of account is
allowable as per the provision of section 36(1)(vii) of the Act. However, the said
provision is subject to the provision of sub-section (2) of section 36 of the Act. On a
plain reading of the provision of section 36(1)(vii) along with section 36(2)(i) of the Act it
is clear that there are two categories of bad debts in respect of which deduction is
allowable viz., (i) debt which has been assessed as income in the previous year or any
preceding previous year which has now become irrecoverable and written off in the
books of account and (ii) money lent in the ordinary course of business of banking or
money lending which is carried on by the assessee and which has become irrecoverable
and has been written off in the books of account. We further note that the assessee a
NBFC has lent and advanced money amounting to Rs.2,07,58,000/- in the ordinary
course of its business. The assessee has credited interest in the assessee’s books in the
FYs 1999-2000 and 2000-01 amounting to Rs.71,99,443/- and Rs.62,98,553/- received
4 ITA No.297/Kol/2014 Universal Industrial Fund Ltd., AY 2010-11
out of which the assessee was able to realize only Rs.68,383/-. In the light of the said
fact, the unrealized interest income which has been booked as income in FYs 1999-2000
and 2000-01 amounting to Rs.1,34,59,613/- attracts the first limb of sub-clause (i) of
clause (2) of section 36 of the Act. The principal amount of Rs.2,07,58,000/- written off
in the books were covered by the second limb of sub-clause (i) of clause (2) of sec. 36
of the Act, being the amount of money lent in the ordinary course of business.
Therefore, in the present case, we note that the debt was taken into account in the
income of the assessee for the AYs 2000-01 and 2001-02 when the interest income
accruing thereon was taxed in the hands of the assessee. The nature of the income
indicated the transactions from which it emerged. The transaction was the debt and the
debt was taken into account in computing the income of the assessee of the relevant
previous year. The principal amount which has been written off attracts clause (i) of
sub-section (2) of section 36 of the Act and, therefore, the conditions specified in section
36(1)(vii) of the Act and requirement of clause (i) of sub-section (2) of sec. 36 of the Act
have been fulfilled and, therefore, the Ld. CIT(A) has rightly deleted the addition and
allowed the claim of the assessee. We do not find any infirmity in the order of the Ld.
CIT(A) and, therefore, we dismiss this ground of appeal preferred by the revenue.
Ground No. 2 reads as under:
“2. That on the facts and circumstances of the case, the CIT(A) erred in holding that if net of interest received and interest paid is positive figure, no part of interest can be disallowed under rule 8D(2)(ii) as attributable to earning tax free dividend, ignoring that fact that the provisions of rule 8D(2)(ii) is restricted to the expense on account of interest attributable to the investment from which tax free income was earned.”
5 ITA No.297/Kol/2014 Universal Industrial Fund Ltd., AY 2010-11
The main grievance of the revenue is that the Ld. CIT(A) ignored the fact that the
provisions of Rule 8D(2)(ii) is restricted to the expenses on account of interest
attributable to the investments from which tax free income was earned. The brief facts
of the case as noted by the Ld. CIT(A) reads as under:
“The appellant is engaged in the business of loan financing. During the year the appellant had paid interest of Rs.6,68,38,624/- on the loans obtained and received interest of Rs.7,26,62,380/- on loans advanced in the course of business. Net result was positive interest income of Rs.58,23,756/-. Apart from the interest income, the appellant had also earned dividend of Rs.5,20,74,730/-. In the return of income filed u/s. 139 the appellant suo moto invoked Rule 8D and disallowed a sum of Rs.68,98,734/- under section 14A of the Income-tax Act, 1961. The computation of the said disallowance is as follows: Rule Particulars Amount 8D(2)(i) Expenditure incurred directly in relation NIL to earning dividend income 8D(2)(ii) Interest in relation to dividend income Interest x average value of investments Average Value of total Assets (since net interest is positive income, disallowance is worked out at NIL) 8D(2)(iii) Administrative Expenditure 68,98,734 0.5% of the Average Value of Investments Total Disallowance under section 14A 68,98,734
The AO however in his impugned order objected to the computation of the appellant and disallowed a further sum of Rs.3,91,97,029/- under section 14A of the I. T. Act, 1961.” Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who was pleased to
allow the claim of the assessee and deleted the disallowance of Rs.3,91,97,029/-.
Aggrieved by the said decision of Ld. CIT(A), the revenue is now in appeal before us.
6 ITA No.297/Kol/2014 Universal Industrial Fund Ltd., AY 2010-11
We have heard rival submissions and gone through facts and circumstances of
the case. We note that during the year the assessee has paid interest of
Rs.6,68,38,624/- on the loans obtained and received interest of Rs.7,26,62,380/- on
loans advanced in the course of business. In the P&L Account net interest is reflected
showing a positive interest income of Rs.58,23,756/-. In the year under consideration
apart from the interest income the assessee has earned dividend of Rs.5,20,74,730/-.
The assessee has disallowed in its return of income a sum of Rs.68,98,734/- which was
0.5% of the average value of investment as per Rule 8D(2)(iii). The AO, however,
computed the disallowance as per Rule 8D(2)(ii) and disallowed a further sum of
Rs.3,91,97,029/-. On appeal, the Ld. CIT(A) taking into account the fact that the
assessee’s interest income is higher than interest expenditure and since the net interest
expenditure is negative the assessee has not incurred any net expenditure on interest
and thereafter, the Ld. CIT(A) relied on the decision of the Kolkata Tribunal in the case
of DCIT Vs. Trade Apartment Ltd. in ITA No. 1277/Kol/2011, wherein the Tribunal has
held as under:
“Once there is no net interest expenditure upon setting off interest credited to profit & loss account, no part of interest debited can be disallowed as attributable to earning tax free dividend.”
Following the said order, the Ld. CIT(A) has given relief to the assessee. We note
from the P&L Account of the assessee that the net interest reflected is an interest
income of Rs.58,23,756/-. Rule 8D(2)(ii) cannot be applied when there is no net interest
expenditure upon setting up of interest credited to the P&L Account and, therefore, no
part of interest debited can be disallowed as attributable to earning tax free dividend. 6
7 ITA No.297/Kol/2014 Universal Industrial Fund Ltd., AY 2010-11
The Ld. DR could not controvert this fact and, therefore, the AO erred in computing
disallowance under Rule 8D(2)(ii) and, therefore, the Ld. CIT(A) has correctly allowed
relief to the assessee and we do not find any infirmity in the order passed by the Ld.
CIT(A) on this issue and, therefore, we uphold the impugned order of Ld. CIT(A) and
dismiss this ground of appeal of revenue.
In the result, the appeal of the revenue is dismissed.
Order pronounced in the Court on 24.03.2017
Sd/- Sd/- [Wassem Ahmed] [A.T.Varkey] Accountant Member Judicial Member
Dated :24th March, 2017
{JD, Sr. PS}
Copy of the order forwarded to: 1. Assessee – Universal Industrial Fund Ltd., 31, N. S. Road, Kol-1 2.Revenue- DCIT, Circle-6, Kolkata. 3.CIT(A)- Kolkata. 4.CIT – , Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.