ITO 13(3)(3), MUMBAI vs. VYPAR INDUSTRIES LTD, MUMBAI

O R D E R

PER N.K. BILLAIYA, AM:

3. The assessee is engaged in the business of export of yarn and accessories. While scrutinizing the return of income, the Assessing Officer found that there is no dividend income earned during the year though there were investments in the shares of companies capable of yielding dividend income. The assessee was asked as to why disallowance should not be made as per provisions of Sec. 14A r.w. Rule 8D. The assessee explained that during the year it has not received any income which is exempt from tax and therefore the provisions of Sec. 14A are not applicable. This explanation of the assessee did not find favour with the AO who proceeded by computing the disallowance as per Rule 8D and the disallowance so computed was at Rs. 20,82,682/-.

4. The assessee carried the matter before the Ld. CIT(A) and reiterated its claim. After considering the facts and the submissions, the Ld. CIT(A) found that the entire investment is made from interest free fund and further the Ld. CIT(A) observed that the AO has presumed that in future dividend will be earned by the assessee. The Ld. CIT(A) directed the AO to delete the disallowance of presumed expenditure.

5. Aggrieved by this, the Revenue is before us. It was brought to the notice of the Ld. DR the decision of the Hon’ble Delhi High Court in the case of Cheminvest Ltd. Vs CIT 378 ITR 33 wherein the Hon’ble High Court has held that when there is no exempt income earned by the assessee and the genuineness of the expenditure incurred was not in doubt, no disallowance could be made u/s. 14A of the Act.

6. Now that this issue has been well settled in favour of the assessee and against the Revenue. We do not find any justification in the disallowance made by the AO u/s. 14A of the Act when there is no exempt income earned by the assessee during the year under consideration. We, therefore, decline to interfere with the findings of the Ld. CIT(A). Ground No. 1 is dismissed.

7. Ground No. 2 relates to the deletion on account of disallowance of bad debts of Rs. 62.50 lakhs.

7.1. While scrutinizing the profit and loss account, the AO noticed that the assessee has debited an amount of Rs. 62.50 lakhs towards bad debts. The assessee was asked to furnish complete details within the meaning of provisions of Sec. 36(2) of the Act. Vide letter dated 3.12.2013, the assessee explained that the debts have been written off on account of advances given to Brushman India Ltd who was to supply dying colours of particular shade and quality within the stipulated time. It was explained that the said Brushman India Ltd failed to supply the dying colours on time therefore was asked to refund the advances. Since the said party did not refund the advances, the same has been written off.

7.2. This explanation of the assessee did not find favour with the AO who was of the firm belief that the amount so written off has never routed through the profit and loss account and offered as income. Hence, the basic condition to write it off as a bad debts has not been fulfilled within the meaning of Sec. 36(2) of the Act. According to the AO, this was a balance sheet item and therefore it was a capital loss. The AO proceeded by disallowing the claim and made an addition of Rs. 62.50 lakhs.