IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "A", MUMBAI
BEFORE SHRI B R BASKARAN, ACCOUNTANT MEMBER
AND SHRI VIVEK VARMA, JUDICIAL MEMBER
ITA No. : 5382/Mum/2010
(Assessment year: 2005-06)
Asia Investments Pvt Ltd, Vs ACIT(OSD) I, City -2,
4th Floor, Magnet House, Aayakar Bhavan,
Dougall Road, Mumbai
Mumbai -400 038
.:PAN: AAACA 4539 K
(Appellant-Cross Objector) ×(Respondent)
Appellant by : Shri Rajesh Hiavale
Respondent by : Shri Pitamabar Das
/Date of Hearing : 14-08-2014
/Date of Pronouncement : 12-11-2014
^ [, Û.
PER VIVEK VARMA, J.M.:
The appeal is filed by the assessee against order of CIT(A) -4,
Mumbai, dated 24.04.2010, wherein the following grounds have been
"Being aggrieved by the order passed by the Commissioner of Income
Tax (Appeals)-4 [CIT(A), for short], Mumbai, your appellant submits the
following grounds of appeal for your sympathetic consideration.
1. The learned CIT(A) erred in giving direction to the Assessing Officer
to disallow interest and administrative expenditure under Sec. 14A
read with Rule 8D alleging that the same was incurred for earning
2. The learned CIT(A) further erred in confirming the disallowance of
advance Written off as bad debt amounting to Rs. 2,01,79,541/-.
3. The learned CIT(A) further erred in confirming the action of
assessing officer of treating repairs and maintenance expenditure
as capital expenditure amounting to Rs. 25,400/-.
Your appellant reserves the right to add, to alter or amend any of the
above grounds, if necessary".
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2. The assessee, later on filed additional grounds of appeal, which
are as under:
"The Appellant craves leave to raise the following additional ground of
appeal as under:
1) Without prejudice to the ground no. 2 raised in the original grounds
of appeal, the learned CIT(A) erred in not directing the assessing
officer to allow write off of advance amounting to INR 2,01,79,541/-
as trading loss under Section 28 of the Income Tax Act.
2) Without prejudice to the above, the learned CIT(A) erred in not
directing the assessing officer to allow write off of advance as a
The appellant reserves the right to add, alter or amend the grounds of
3. The assessee is a company which is in the business of making
investments in shares of other companies to acquire controlling
interest therein. The AO observed that the assessee had investments
portfolio at Rs. 112,15,37,427/-, on which it earned dividend of Rs.
5,20,67,801/- and also earned interest of Rs. 24,95,775/- and certain
4. The assessee claimed exemption under section 10(33) on
dividend income. Besides this, the AO observed that the assessee
incurred interest expense at Rs. 3,96,66,350/- and administrative
expense of Rs. 7,00,70,691/-. Taking into consideration the above
facts, the AO called for an explanation, as to why the interest
expenditure and administrative expenditure relatable to earning
dividend income be not disallowed under section 14A.
5. The assessee responded to the above query, wherein, it was
explained that the assessee, as per its object clause invests its funds
in various equity shares, both quoted and unquoted and its income is
from the sale of these shares held as investments, dividend and other
incomes. The assessee, therefore, utilizes its funds from its business
activity, for the smooth functioning of its business, it utilizes certain
borrowed funds, on which it pays interest. Since the acquiring of
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investments and sale thereof is the business of the assessee, therefore,
one to one correlation could not be done, which is relatable towards
borrowed funds, because as such, the assessee has common pool of
funds. It was further explained to the AO that where borrowings are
for the purposes of activities of business, then apportionment of
interest expense for disallowance, is not called for. The assessee,
placed reliance on a number of decisions on this issue,
Sr.No. Case Law Citation
1 Reckitt & Coleman of India Ltd 135 ITR 658 (Cal)
2 Indian Explosives Ltd. vs CIT 147 ITR 392
3 Alkali & Chemical Corp. Ltd. vs 190 ITR 196 (Cal)
4 Woolcombers of India Ltd. vs CIT 134 ITR 291 (Cal)
6. The assessee also placed reliance on the decisions of ITAT
Mumbai Benches in the cases of
Sr.No. Case Law ITA
1 Taj Trade & Investment Ltd vs ITA 3374 to
2 Mafatlal Holdings Ltd. vs ACIT ITA 2935/M/2002
7. It was explained that in the case of Mafatlal Holdings Ltd.
(supra) that if the activity was business then provisions of section 14A
would not be applicable.
8. On these arguments, the assessee pleaded before the AO that no
disallowance was called for, for any interest or expenditure under
section 36(1)(iii) or any other provisions of the Act.
9. The AO considered the replies of the assessee and held that if
the provisions of sections 14A and 10 are read together then, any
expenditure relatable to earn tax free income has to be disallowed. To
come to this conclusions, the AO referred to a number of case laws,
which we have taken into consideration.
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10. The AO, after coming to the conclusion that interest and
expenditure incurred for earning exempt income has to be
proportionately excluded and disallowed. He, therefore, took the
proportion of dividend and interest to total income, according to him,
the proportionate expense came to Rs. 3,47,63,119/-, which he
disallowed and added back to the income of the assessee under
11. Besides the above, the AO also disallowed Rs. 10,41,356/-,
being expenses relatable to dividend income.
12. Aggrieved by this order, the assessee approached the CIT(A).
Before the CIT(A), the assessee reiterated its submissions on the issue
made before the AO. The CIT(A), after considering the submissions
"I do not agree with the submission of the AR. The Hon'ble
ITAT, Mumbai, in the case of ITO vs Daga Capital Management
(P) Ltd 26 SOT 603/119 TTJ 289 (Mum) has already decided
this issue that Rule 8D is retrospective in nature. Hence the AO
is justified in disallowing expenditure incurred by the assessee
for earning dividend income which is exempt. However, I find
that the AO has not applied Rule 8D but proportionately
disallowed certain expenditure for earning the exempt income.
The AO is directed to apply Rule 8D and make suitable
disallowance u/s 14A read with Rule 8D. These grounds of
appeal are partly allowed".
13. Aggrieved with this decision of the CIT(A), the assessee is now
before the ITAT.
14. Before us, the AR submitted that the orders of both the
authorities are infirm and otherwise also they were inconsistent.
15. The DR, on the other hand placed heavy reliance on the
decisions of the revenue authorities.
16. We have heard the parties and have perused the orders and the
material placed before us. We are of the view that both the revenue
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authorities have made inconsistent observations to come to a finding
that the interest and expenses have to be disallowed.
17. We are in any case not in agreement that the application of Rule
8D has retrospective effect, as the CIT(A) relied on the S B decision of
Mumbai ITAT in the case of ITO vs Daga Capital Management (P) Ltd,
reported in 26 SOT 603. This decision, in any case has been rendered
incorrect, because Hon'ble Bombay High Court in the case of Godrej &
Boycee Mfg. Co Ltd vs JCIT, reported in 328 ITR 81 has clearly laid
down that Rule 8D shall be applicable with effect from 2008-09 and
18. In such a case, the effect of the Rule 8D and section 14A have
been thawed, in so far as the assessment year under consideration in
the instant appeal, which is assessment year 2005-06.
19. Now the only issue left before us, as to what should be
disallowance to be made u/s 14A, as Rule 8D is inapplicable. In the
instant year, i.e. 2005-06, only the provisions of section 14A existed,
which prescribed expense not to be allowable in case of earning tax
20. We have been consistently holding that a reasonable
disallowance out of tax free income would suffice. We, therefore, set
aside the order of the CIT(A) on this issue and restore the issue of
disallowance to be made to the AO, with the direction that certain
reasonable amount, as per the trends of movements of funds through
banking channels, may be made on the dividend income, claimed to be
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21. Ground no. 1 is therefore, allowed for statistical purposes.
22. Ground no. 2 pertains to disallowance of bad debts amounting
to Rs. 2,01,79,541/-. The assessee company being in the business of
investment in shares and taking controlling interest thereon, invested
in Dytek India Ltd., a Bangalore based company, in the business of
design and manufacture of press tools, used in automotive, electric
machines and appliances industries. This company was ultimately
brought under the assessee company's fold and became a subsidiary
there of. In the subsequent period, the business of Dytek stopped
completely and the company had to be disposed off.
23. The assessee company had infused funds in the form of Inter
Corporate Deposits (ICDs) to the extent of Rs. 1,87,30,000/-. This
amount became irrecoverable along with interest thereon, which was
Rs. 14,49,543/- upto 31.03.2004, totaling to Rs. 2,01,79,541/-.
24. The assessee looking at the fate of the company decided by write
off irrecoverable funds, as the entire share capital of Dytek had been
eroded and there was no indication of its revival or recovery of the
debt. The assessee, therefore, acted under section 36(i)(vii) and wrote
off the funds, which, in its opinion was irrecoverable and had become
25. The revenue authorities did not accept the submissions, as
made by the assessee and disallowed the claim of write off. The CIT(A)
held that it was a case of capital loss and not a case of write off.
26. The revenue authorities, therefore, disallowed the claim of the
27. Against this order of the CIT(A), the assessee is before the ITAT.
Along with its primary ground of appeal, raised an additional ground
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that if the write off was not to be allowed then the assessee be allowed
the benefit of capital loss.
28. Before us, the AR reiterated the facts as submitted by it before
the revenue authorities and the DR placed reliance on the orders of
the revenue authorities and pleaded that disallowance is entirely
based on legal provisions.
29. We have heard the rival arguments and have perused the orders
and material placed before us. We notice that the AO has disallowed
the claim mainly on the ground that the assessee did not comply with
the conditions prescribed u/s 36(2) of the Act for allowing the
deduction of bad debt claimed u/s 36(1)(vii), and further the assessee
did not prove its bona fides in making this claim. However, the CIT(A)
has taken an altogether different view of the matter, i.e., the CIT(A) has
held that "Controlling of group companies" cannot be regarded as
business of the assessee, since mere controlling will not generate any
profit or loss, which is sine qua non of any business activity.
Accordingly, the CIT(A), held that the money lost by the assessee by
giving ICDs to its subsidiary is a Capital loss.
30. We notice that M/s Dytek was already a subsidiary of the
assessee company and in order to revive the operations of M/s Dytek,
the assessee had infused funds in the form of ICDs. Since M/s Dytek
could not be revived, the assessee was forced to accept that the of sum
Rs. 2.01 crores was irrecoverable, as referred above. However, we
notice that the assessee has put in new claim before the CIT(A) that it
categorized itself as "Non Banking Financial Company" (NBFC), duly
registered by the Reserve Bank of India and accordingly it is engaged
in the business of lending and borrowing as well as investment. We
notice that the provisions of section 36(1)(vii) read with section 36(2)(i)
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provide for allowing deduction of bad debt, if the same represents
money lent in the ordinary course of the business of banking or money
lending, which is carried on by the assessee. Since the assessee claims
that it is a NBFC and since the revenue authorities have not examined
the claim of the assessee from the angle of NBFC, we are of the view
that this issue requires fresh examination by the AO to determine
whether the ICD, made by the assessee would at all fall in the category
of money lent in the ordinary course of business.
32. From the assessment order, we notice that the assessee has
decided to write off the amount after making one time settlement with
the subsidiary company, by which the subsidiary company paid Rs.
50.00 lakhs to the assessee. However, the assessment order mentions
the subsidiary company has to pay the amount of Rs. 50.00 lakhs as
31.12.2004 in the first paragraph of page 10. In the second paragraph,
the date is mentioned as 31.12.200S. This contradiction of dates,
needs to be verified.
33. Accordingly, we set aside the order of CIT(A) and restore the
matter to the file of the AO with the direction to examine this issue
afresh, in the light of discussions made above, without being
influenced by the discussion/decision of CIT(A).
34. This ground, as filed by the assessee, is treated as allowed for
35. Since, principally, we have allowed the write off of Rs. 2.01
crores, subject to certain verifications, alternate additional ground, for
the time being, becomes academic.
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36. In the result, the appeal, as filed by the assessee is allowed.
Order pronounced in the open Court on 12th November, 2014.
(B R BASKARAN) (VIVEK VARMA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Date: 12th November, 2014
1) /The Applicant.
2) ×/The Respondent.
3) The CIT (A)-4, Mumbai.
4) 2, Mumbai/The CIT-2, Mumbai.
5) "A" ,
The D.R. "A" Bench, Mumbai.
Copy to Guard File.
/ / True Copy / /
*Chavan, Sr. PS