Living Media India Ltd., New Delhi vs Department Of Income Tax

ACIT Vs. Living Media India Ltd. Circle - 4(1), Room No. 407, 9K- Block, Connaught Place C.R.Building, I.P.Estate New Delhi New Delhi AAACL0087H Pin : 110001 (Appellant) (Respondent)

ITA No. 5501/ Del/ 2011 Assessment Year : 2008-09

Living Media India Ltd. Vs. ACIT 9K- Block, Connaught Place Circle - 4(1), Room No. 407, New Delhi C.R.Building, I.P.Estate AAACL0087H New Delhi

(Appellant ) (Respondent )

Appellant by : Sh. Salil Agarwal, Adv. Shailesh Gupta Respondent by : Sh. Gaurav Dudeja , Sr. Dr, Adv. 2 5386/ Del/2011 & 5501/Del/2011

Date of hearing : 03.03.2015 Date of pronouncement : 15 .05.2015

ORDER

Per N.K.Saini, A. M. :

These cross appeals by the department and the assessee are

directed against the order dated 20.10. 2011 of CIT(A)- VII New

Delhi.

2. First we will deal with the appeal of the department in ITA No.

5386/Del/2011. Only effective ground has been raised in this appeal

read as under :-

"1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the disallowance of the claim of bad debts to the tune of Rs. 40,16,401/- made by the assessee."

3. From the above ground, it would be clear that the only grievance

of the department relates to deletion of disallowance of Rs.

40,16,401/- made by the AO on account of claim of bad debts.

4. The facts related to this issue in brief are that the A.O. during the

course of assessment proceedings noticed that the assessee had

claimed bad debt written off amounting to Rs. 40,16,401/- in the P &

L Account. The AO asked the assessee to justify the claim of bad 3 5386/ Del/2011 & 5501/Del/2011

debts. The AO observed that some of the bad debts were related to

the sister concerns which by no stretch of imagination could be said

to be bad debts. According to the AO, the assessee had not

furnished any convincing explanation and had not established that

the requisite conditions of Section 36(1) (vii) read with Section 36 (2)

of the IT act 1961 (hereinafter referred to the Act) have been

satisfied, so as to ponder over the allowability of the assessee's

claim. The AO held that the claim of the assessee in respect of these

amounts was pre-mature as the assessee by writing off of these

debts in its books of accounts could not show the good debts as bad.

Accordingly he disallowed a sum of Rs. 40,16,401/- and added back

the same to the total income of the assessee reliance was placed on

the following case laws :-

"Travancore Tea Estates Co. Ltd. Vs. CIT (1992) 198 ITR 528 (Kerla) CIT vs. Coats of India Limited (1998) 232 ITR 324."

5. Being aggrieved the assessee carried the matter to the Ld.

C.I.T.(A) and submitted as under :

"The statement given by Ld. Assessing Officer that "No evidence has been produced so as to explain the contention of the assessee that these debts become bad in this year or in the earlier year" is wrong statement.

We are enclosing herewith the party wise detail of bad debts written off along with the years in which the bad debts 4 5386/ Del/2011 & 5501/Del/2011

has been accounted as "income" in the books of accounts [ annexure - B] As per section 36(1) of the IT Act 1961, the deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28.

(i) ..(ii)...(vii) subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year:

Further as per sub section (2) of section 36 of the Income tax act, 1961 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;]

(ii) ..........

(iii) . . . ."

In this regard we would like to point out that these bad debts have been actually written off in the books of account of the assessee company and also these amounts have been taken in to account in computing the income of the assessee company in earlier previous years.

We are relying on the judgment given by Supreme Court of India in the case of TRF Ltd vs. Commissioner of Income Tax, 230 CTR (SC) 14 where in the court has held that after 1st April 1989, it is not necessary for the assessee to establish that the debt, in fact has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee.

We are also relying on the following judgment to substantiate of our claim in this regard CIT vs. Vistar Construction Pvt. Ltd, [2010 - TMI - 201401 Delhi High Court ] CIT vs. Modi Telecommunication Ltd, [2010] 325 ITR 291 (Delhi High Court) 5 5386/ Del/2011 & 5501/Del/2011

CIT vs. Bonanza Portfolio Ltd, [2010] 320 ITR 178 (Delhi High Court ) Star Drugs & Research Labs ltd. vs. ACIT [ITA No. 848 / Mad / 2007 dated 15.01.2010"

6. The Ld. CIT(A) after considering the submissions of the assessee

deleted the addition by observing in para 5.1. of the impugned order as

under : -

"I have carefully considered the submissions made on behalf of the appellant, the findings of the Assessing Officer in the assessment order and the facts and circumstances of the case. The position in law is well-settled as far as the provisions of section 36(1) (vii) read with section 36(2) of the Act are concerned. After 1-4-1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee, subject to the provisions of section 36(2) that 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. If the income which is earlier recognized is not to be allowed to be reversed in the subsequent assessment years, in any case it is permissible for the assessee to write off such an income in the concerned assessment years when it was found that the amount was not recoverable. Reference in this connection can be made to the judgments of the Supreme Court in the case of Vijaya Bank v. CIT [2010] 323 ITR 166/190 Taxman 257 and T.R.F. Ltd. v. CIT [2010] 323 ITR 397/190 Taxman 391. In view of the aforesaid, the disallowance of Rs. 40,16,401/- on account of bad debts written off is directed to be deleted. As a result, the Ground of appeal no. 4 raised by the appellant is accordingly allowed."

6 5386/ Del/2011 & 5501/Del/2011

7. Now the department is in appeal. The Ld. DR reiterated the

observations made by the AO and strongly supported the

assessment order dated 23.12.2010. In his rival submissions, the Ld.

Counsel for the assessee reiterated the submissions made before the

authorities below.

8. We have considered the submissions of both the parties and

carefully gone through the material available on the record. In the

present case, it is an admitted fact that the assessee had written off

debts in its books of accounts and it is not the case of the AO that the

debts written off were not related to the business of the assessee. On

a similar issue the Hon'ble Supreme Court in the case of TRF Ltd. v.

CIT [2010] 323 ITR 397 has held as under :-

"After 1st April 1989, it is not necessary for the assessee to establish that the debt, in fact has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee."

9. We, therefore, keeping in view the ratio laid down by the Hon'ble

Supreme Court in the aforesaid referred to case, do not see any valid

to interfere with the findings of the Ld. CIT on this issue. Accordingly

we do not see merit in this appeal of the department.

7 5386/ Del/2011 & 5501/Del/2011

10. Now, we will deal with the appeal of the assessee in ITA

No. 5501/Del/2011. Following grounds have been raised in this

appeal :-

"1. That the order of the Ld. Commissioner of Income tax (appeals) is bad in law on the facts and circumstances of the case and is required to be quashed;

2(a) That the Ld. Commissioner of Income tax (Appeals) has gone wrong in disallowing expenses for earning Dividend Income to the extent of Rs. 4,41,02,912/-; 2(b) That the Ld. Commissioner of Income tax (Appeals) has gone in disallowing expenses for earning dividend Income to the extent of Rs. 4,41,02,912/- by considering those Investment on which no dividend has been received by the assessee company during the year;

2(c) That the Ld. Commissioner of Income tax (Appeals) has gone wrong in disallowing expenses for earning Dividend Income to the extent of Rs. 4,41,02,912/- by considering bank charges as interest;

2(d) That the Ld. Commissioner of Income tax (Appeals) has gone wrong in disallowing expenses for earning Divident Income to the extent of Rs. 4,41,02,912/- by considering interest paid on loan taken specifically for business purpose; 2(e) That the Ld. Commissioner of Income tax (Appeals) has gone wrong in disallowing expenses to the extent of Rs. 4,41,02,912/- for earning of dividend income of Rs. 2,72,25,894/-;

2(f) That the Ld. Commissioner of Income tax (Appeals) has gone wrong in not considering the submission made by the assessee that during last 18-20 year the assessee company has not made any investment out of borrowed fund but has utilized its internal revenue generation; 2(g) That the Ld. Commissioner of Income tax (appeals) has gone wrong in passing a non-speaking order on the submitted issues;

2. That the appellate reserve the right to add, amend, later, delete, any/all grounds of appeal either before or at the time of the hearing of the appeal."

8 5386/ Del/2011 & 5501/Del/2011

11. From the above ground it is gathered that the grievance of

the assessee relates to the sustenance of the addition to the extent of

Rs. 4,41,02,912/- on account of expenses for earning dividend.

12. The facts related to this issue in brief are that the AO during the

course of assessment proceedings noticed that the assessee

received dividend income of Rs. 2,72,25,894/-. He asked the

assessee to show cause as to why disallowance u/s 14A of the Act

read with Rule 8D of the Income-Tax Rules 1962 should not be

made. In response, the assessee furnished the written submission

along with the detailed working of disallowance u/s 14A of the Act.

The AO observed that the assessee had not maintained separate

bank accounts in respect of investment and other activities and that

there was no feature distinguishing the funds used for investing in

shares. He did not accept this contention of the assessee that there

was common pool of funds and it could not be ascertained whether

investments were made out of internal accruals or from borrowed

funds. The A.O. was of the view that had the company not made

investment, the total borrowings would have been lower leading to

reduction to the interest costs. He also observed that there were 9 5386/ Del/2011 & 5501/Del/2011

certain expenses for earning exempt income and was of the view that

the administrative expenses should have been attributable towards

earning of dividend. The AO made a disallowance of Rs.

4,41,02,912/- u/s 14A of the Act read with Rule 8 D of the Income-

Tax Rules in the following manner :-

S. Disallowance Amount(Rs.) No. 1. The amount of expenditure directly 0 relating to income which does not form part of total income 2. In a case where the assessee has A= 8,80,48,978/- incurred expenditure by way of B= 77,73,84,314/- interest during the previous year C= 1,65,85,27,372/-

which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula-

AX B/C Hence, disallowance= Where 4,12,70,283/-

A= amount of expenditure by way of interest other than the amount of interest included in clause (1) incurred during the previous year B= the average of value of investment, income from which does not or shall not form part of the total income appearing in the balance sheet of the assessee, on the last day and the last day of the previous year C= the average value of total assets as appearing in the balance sheet of the previous year.

3. An amount equal to on half percent of ½ % of average 10 5386/ Del/2011 & 5501/Del/2011

the average of the value of investment of Rs. investment, income from which does 77,73,84,314/-= not or shall not form part of the total 38,86,921/-

income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year Total disallowance Rs. 4,51,57,204/-

Amount disallowed by the assessee Rs. 10,54,292/- Further disallowance to be made Rs. 4,41,02,912/-

13. Being aggrieved the assessee carried the matter to the Ld.

CIT(A) and submitted as under :-

" During the Assessment Year 2008-09 the assessee has received dividend of Rs. 2,72,25,894/- mainly from its subsidiary Companies. In these Companies investments have been made for business purposes and not for earning dividend;

The assessee company has not incurred any direct expenditure for earning the said dividend income; The totalinvestment made by the assessee company as on 31.03.2007 and 31.03.2008 is as under :-

i Investment as on 31.03.2007 Rs. 90,93,44,814/- ii Investment as on 31.03.2008 Rs. 64,54,23,814/- During the current assessment year i.e. AY 2008-09 the assessee company has sold investment in M/s Thomson Press(India) Limited and out of the sale proceeds it made fresh investment as under :-

iii Investment in M/s ITAS Media Pvt. Ltd. Rs. 1,00,000/- iv.Investment in M/s Today Retail NetworkPvt.Ltd. Rs. 1,00,000/- During last 18-20 years the assessee company has not made any investment out of borrowed funds which is quite evident from the year wise investment chart [Copy of the same is attached herewith as Annexure-A]; From the Year wise investment chart it is quite evident that no investment has been made by the assessee company from borrowed funds and accordingly interest and finance 11 5386/ Del/2011 & 5501/Del/2011

charges should not be considered for the purpose of calculation of disallowance u/s 14A read with Rule 8D;

In the case of Siva Industries & Holding Ltd. [ITA No. 2148/Mds/2010 dated 20.05.2011] Chennai Tribunal held that only those investments on which dividend is received during the year are required to be considered for the purpose of disallowance u/s 14A and not all the investments on which no dividend is received during the year. Chennai Tribunal has given its decision after considering the cases of Godrej & Boyce Mfg Co. Ltd. [328 ITR 81 (Bom)] and Walfort Share and Stock Brokers Pvt. Ltd. 233 CTR 42 (SC)."

14. The Ld. CIT(A) after considering the submissions of the

assessee observed that the issue involved in the appeal was decided

by Delhi Special Bench of the ITAT in the case of Cheminvest Ltd.

Vs. ITO (2009) 121 ITD 318 (Delhi) (SB). He also referred to the

judgment of the Hon'ble Supreme Court in the case of CIT, Mumbai

vs. M/s. Walfort Share & Stock Brokers Pvt Ltd. (2010) 41 DTR(SC)

233 and Hon'ble Bombay High Court in the case of Godrej & Boyce

Manufacturing Co. Ltd. Mumbai vs. DCIT(2010) 328ITR81(Bom).

Thereafter the Ld. CIT(A) observed that from the conjoint reading of

the above judgments the following propositions emerged:

(a) when the dividend is not taxable at all, the expenditure on rent,

taxes, salaries, interest, etc. pertaining to that would also not be

allowable because there is no taxable income of the assessee

against which such expenditure can be allowed;

12 5386/ Del/2011 & 5501/Del/2011

(b) the disallowance under section14A could be made in a year in

which no exempt income had been earned or received by the

assessee;

(c) the allowance of expenditure in relation to dividend income would

not be admissible in computing the income of an assessee under the

Act in both the situations, whether the shares are held as investment

or held on trading account as stock-in-trade'and

(d) the provisions of Rule 8D of the Income Tax Rules which have

been notified with effect from 24 March 2008 shall apply with effect

from Assessment Year 2008-09.

15. The Ld. CIT(A) further observed that the assessment year in

the present case is 2008-09, therefore, the AO was justified in

applying Rule 8D of the Income-Tax Rules 1962 to quantify the

disallowance u/s 14A of the Act and the case of Siva Industries &

Holding Ltd. vs. ACIT(2011) 46 SOT112 relied by the assessee was

distinguishable because in the said case the assessment year

involved was 2006-07. The Ld. CIT(A) by relying the decision of the

Delhi Special Bench of the ITAT in the case of Cheminvest Ltd. vs.

ITO (Supra) held that the disallowance u/s 14A could be made in a

year in which no exempt income had been earned or received by the 13 5386/ Del/2011 & 5501/Del/2011

assessee. Accordingly, the disallowance made by the AO was

confirmed.

16. Now the assessee is in appeal. The Ld. Counsel for the

assessee reiterated the submissions made before the authorities

below and further submitted that the AO wrongly worked out the

disallowance u/s 14A of the Act read with Rule 8D of the IT Rules. It

was, further, submitted that the assessee correctly worked out the

figure of disallowance in accordance with the Rule 8D at Rs.

8,70,491/-, a reference was made to page no. 111 of the assessee's

paper. It was further, submitted that the assessee had not incurred /

debited the direct expenditure to Profit & Loss Account, for earning

exempt income. It was pointed out the assessee had already added

back a sum of Rs. 10,54,292/- in respect of expenditure relating /

attributable to exempt income, in the computation of taxable income

which has also been confirmed by the auditor in clause 17 (k) of tax

audit report. It was submitted that only those investment which

earned the income could have been considered by the AO while

making the disallowance, however, the AO did not appreciate the

facts in right prospective. It was pointed out that for the year under

consideration the investment of Rs. 2,00,000/- only was made and no 14 5386/ Del/2011 & 5501/Del/2011

borrowing was taken. It was further stated that from the investment

chart it was quite evident that no investment had been made by the

assessee from borrowed funds and accordingly interest and financial

charges should not have been considered for the purpose of

calculation of disallowance u/s 14A of the Act read with Rule 8D. It

was further, submitted that the Ld. CIT(A) had also not considered

the facts in right prospective and wrongly applied the decision of the

ITAT. It was submitted that those investment on which no dividend

income was received by the assessee in current year should have

been excluded from the investment while calculating the

disallowance u/s 14A of the Act. The reliance was placed on the

judgment of the Hon'ble Delhi High Court in the case of CIT vs.

HOLCIM INDIA P. LTD. reported at [(2014) 90CCH0081 (Delhi)],

copy of the said order is placed at page no. 71 to 77 of the

assessee's compilation. The reliance was also placed on the

following case laws :-

1. DCIT vs. Jindal Photo Ltd. in ITA No. 4539/Del/2010.(ITAT Delhi)

2. CIT vs. Jindal Phto Ltd. in ITA No. 87/2012 ( Delhi, HC)

3. DCIT vs. Jindal Photo Ltd. in ITA No. 814/Del/2011 (ITAT Delhi)

4. DCIT vs. M/s Orient Craft Ltd. 148TTJ 213 (ITAT Delhi)

5. ACIT vs. M/s Sil Investment Ltd. 148TTJ213 (ITAT Delhi)

6. ITO vs. M/s Arihant Advertising P. Ltd. ITA No. 2750/Del/2011 (ITAT Delhi).

7. Sam P. Barucha in ITA No. 3889/Del/2011. (ITAT Mumbai)

15 5386/ Del/2011 & 5501/Del/2011

8. Siva Industries Holdings Ltd. vs. ACIT 145 TTJ 497 (ITAT Chennai)

9. M/s Mercantile Capital & Finance Services P. Ltd. ITA No. 2571 / Del/ 2011 (ITAT Delhi)

10. M/s DCIT vs. REI Agro Ltd. 144 ITD 141 (ITAT Kolkata)

11. CIT vs. Consolidated Photo & Finvest Ltd. 358ITR310 (HC Delhi)

12. CIT vs. REI Agro Ltd. ITA No. 161 of 2013 (HC Calcutta)

13. CIT vs. Holcim India P. Ltd. in ITA No. 486 of 2014 (HC Delhi)

14. Delite Enterprises in ITA No. 110 of 2009.

15. CIT vs. Winsome Textiles Ltd. 319 ITR 204 (Punjab & Haryana High Court)

16. CIT vs. Corrtech Energy (P) Ltd. 233 Taxman 130. (Gujarat High Court)

17. CIT vs. M/s Shivam Motors (P) Ltd. ITA No. 88 of 2014 (Allahabad High Court)

18. CIT vs. M/a Lakhani Marketing Incl. Ltd. ITA No. 970 of 2008 (P & H High Court)

19. M/s JM Financial Limited vs. ACIT ITA No. 4521/Mum/2012 (ITAT Mumbai)

20. M/s EIH Associated Hotels vs. DCIT In ITA No. 1503/Mds/2012 (ITAT Chennai)

21. CIT vs. Oriental structural Engineers Ltd. In ITA No. 605/2012 (Delhi High Court)

22. M/s GDA Finvest & Trade P. Ltd. in ITA No.3353/Del/2013 (Hon'ble ITAT)

23. CIT vs. Gujarat Narmada Valley Fertilizers Co. Ltd. (2014) 42 taxmann.com 270.

24. CIT vs. UTI Bank Ltd. (2013) 32 taxmann. Com 370. (Gujarat High Court)

25. ACIT vs. Champion Commercial co. Ltd. ITA No. 644/Kol/2012 (ITAT Kolkata)

26. M/s DCIT vs. REI Agro Ltd. in 160 TTJ 107. (ITAT Kolkata)

17. In his rival submissions, the Ld. DR supported the orders of

the authorities below and reiterated the observations in the 16 5386/ Del/2011 & 5501/Del/2011

assessment order made by the AO and in the impugned order by the

Ld. CIT(A).

18. We have considered the submissions of both the parties and

careful gone through the material available on the record in the

present case, it appears that the AO had included all the investment

while working out the average investment for the purposes of

calculating the disallowance u/s 14A of the Act read with Rule 8D of

the ITA rules. He also included those investment on which no

dividend income was received by the assessee during the year

consideration. The Ld. CIT(A) also rejected the explanation of the

assessee, without pointing out any defect in the amount of

disallowance worked out by the assessee (copy of which is placed at

page no. 111 of the paper book). In the present case it seems that

neither the AO nor the Ld. CIT(A) considered the facts of the present

case in right prospective. We, therefore, deem it appropriate to

remand this issue back to the file of the AO to be decided afresh in

accordance with law after providing due to a reasonable opportunity

being heard to the assessee. He is also directed to consider the

various case laws relied by the Ld. Counsel for the assessee while

deciding the issue afresh.

17 5386/ Del/2011 & 5501/Del/2011

19. In the result, the appeal of the department is dismissed and that

of the assessee is allowed for statistical purposes.

(Order pronounced in open court on 15th May, 2015.)

Sd/- Sd/-

(A.T.Varkey) (N.K.Saini) Judicial Member Accountant Member

Dated 15th May, 2015 B.Rukhaiyar

Copy forwarded to 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. CIT (ITAT), New Delhi. AR, ITAT

N. Delhi 18 5386/ Del/2011 & 5501/Del/2011

Sl. Description Date No. 1. Date of dictation by the Author 11.05.2015

2. Draft placed before the Dictating 13.05.2015 Member

3. Draft placed before the Second Member

4. Draft approved by the Second Member

5. Date of approved order comes to the Sr. PS

6. Date of pronouncement of order 15.05.2015

7. Date of file sent to the Bench 15.05.2015 Clerk

8. Date on which file goes to the Head Clerk

9. Date of dispatch of order