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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Before: SHRI N.K. BILLAIYA & SHRI PAWAN SINGH
O R D E R
PER N.K. BILLAIYA, AM:
This appeal by the Revenue is preferred against the order of the Ld. CIT(A)-20,Mumbai dated 28.10.2014 pertaining to Assessment year 2011-12.
The Revenue has raised 2 substantial grounds of appeal. The first grievance relates to the deletion of the addition made u/s. 14A read with Rule 8D of the Act and the second grievances relates to the deletion of the addition made on account of disallowance of bad debts.
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.
Aggrieved by this, the assessee carried the matter before the Ld. CIT(A). The Ld. CIT(A) has considered this issue at para-5.1 of his order and at para-5.2, the First Appellate Authority has narrated the correct fact which relate to the business advance of Rs. 1.25 crores given by cheque to Brushman India Ltd for supply of Dyestuff Chemicals used for yarn dyeing. M/s. Brushman India Ltd was to supply the material within 45 days. Since it failed to supplys the material on reminder, the materials were subsequently supplied but were not as per the specifications. The assessee refused to take the delivery and requested to refund the entire advance of Rs. 1.25 crores. The said supplier initially refused to refund the advance but subsequently agreed to refund 50% i.e. Rs. 62.50 lakhs. On this stipulation, the assessee wrote off Rs. 62.50 lakhs as irrecoverable advance and claimed it as business expenditure allowable either as a bad debt u/s. 36 of the Act or u/s. 37 of the Act. The First Appellate authority was convinced by this and directed to allow the claim of deduction of Rs. 62.50 lakhs u/s. 37 of the Act being revenue loss to the assessee.
Aggrieved by this, the Revenue is before us.
The Ld. Departmental Representative strongly supported the findings of the AO.
The Ld. Counsel for the assessee reiterated what has been submitted before the lower authorities.
We have given a thoughtful consideration to the factual matrix of the case. As mentioned elsewhere, there is no dispute that the advance given was in pursuance to business transaction for the purchase of material. It is also an undisputed fact that the supplier M/s. Brushman India Ltd did not supply the materials as per the stipulation and it is also an undisputed fact that the said supplier did not refund the advance given by the assessee. In such circumstances, the write off is a business expenditure and has to be allowed as such therefore no interference is called for. Ground No. 2 is accordingly dismissed.
In the result, the appeal filed by the Revenue is dismissed. Order pronounced in the open court at the time of hearing on 3rd December, 2015.