M/s. Associated Ceramics Ltd., , Kolkata V. JCIT, Range - 2, Kolkata , Kolkata

ITA 396/KOL/2018

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 2103 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 3 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-06-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Appeal Filed On: 09-03-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MADHU MALATI GHOSH
• Assessee Lawyers: S K TULSIYAN
• Keywords: Earning of tax free income; Bad and doubtful debts; Rule 8D
• Section: 143(3); 14A; 28; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B, BENC H KOLKATA BEFORE SHRI S.S.GODARA, JM &DR. A.L.SAINI, AM ./ITA NO.396/KOL/2018 ( / ASSESSMENT YEAR: 2012-13) M/S ASSOCIATED CERAMICS LTD. 17, GANESH CHANDRA AVENUE, 4 TH FLOOR, KOLKATA-700013 VS. JCIT, RANGE-2, KOLKATA ./ ./PAN/GIR NO.: AABCA 9234 A (ASSESSEE) .. (REVENUE) ASSESSEE BY : SHRI S.K. TULSIYAN, ADVOCATE RESPONDENT BY : SMT. MADHU MALATI GHOSH, ADDL. CIT SR. DR / DATE OF HEARING : 16/04/2019 /DATE OF PRONOUNCEMENT : 19/06/2019 / O R D E R PER DR. A. L. SAINI: THE CAPTIONED APPEAL FILED BY THE ASSESSEE, PERT AINING TO ASSESSMENT YEAR 2012-13, IS DIRECTED AGAINST THE ORDER PASSED BY TH E COMMISSIONER OF INCOME TAX (APPEAL)-1, KOLKATA, WHICH IN TURN ARISES OUT OF AN ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER U/S 143(3) OF THE INCOME TAX ACT , 1961 (IN SHORT THE ACT) DATED,29/03/2015. 2. GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE A S FOLLOWS: 1A) THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE LD. CIT(A) ERRED IN UPHOLDING THE DISALLOWANCE OF RS.10,00,000 /- MADE BY THE LD. A.O. ON ACCOUNT OF THE AMOUNTS WRITTEN OFF AS IRRECOVERA BLE IN THE BOOKS OF ACCOUNTS OF THE APPELLANT-COMPANY. M/S ASSOCIATED CERAMICS LTD. ITA NO.396/KOL/2018 ASSESSMENT YEAR:2012-13 P PP PA AA AG GG GE EE E | || | 2 22 2 1B) THAT THE LD. CIT(A) FAILED TO APPRECIATE THAT I MPUGNED SUM OF RS. 10,00,000/- WAS ADVANCED BY THE APPELLANT COMPANY T O M/S REFRACTORY SPECIALITIES (INDIA) LTD. AGAINST SUPPLY OF REFRACT ORY MATERIALS IN ORDINARY COURSE OF ITS BUSINESS WHICH SUBSEQUENTLY BECAME IR RECOVERABLE ON ACCOUNT OF LIQUIDATION OF THE SUPPLIER COMPANY AND HENCE CO NSTITUTED LOSS INCIDENTAL TO BUSINESS AND THUS OUGHT TO BE ALLOWED AS DEDUCTI ON WHILE COMPUTING PROFITS & GAINS FROM BUSINESS. 2A) THAT THE LD. CIT(A) ERRED IN PARTLY UPHOLDING T HE DISALLOWANCE OF RS. 30,698/- MADE BY THE LD. A.O. U/S 14A R.W. RULE 8D( II) & 8D(III) OF THE INCOME TAX RULES, 1962 ALTHOUGH NO EXPENSES WERE IN CURRED OR CLAIMED BY THE ASSESSEE IN RESPECT OF EXEMPT-INCOME BEARING IN VESTMENTS AND ACCORDINGLY, NO DISALLOWANCE WAS CALLED FOR U/S 14A OF THE ACT. 2B) THAT THE LD. CIT(A) FAILED TO APPRECIATE THAT N O PART OF THE INTEREST BEARING LOANS WAS UTILIZED IN EXEMPT-INCOME BEARING INVESTMENTS AND AS SUCH, NO DISALLOWANCE WAS CALLED FOR UNDER RULE 8D( II) OF THE INCOME TAX RULES, 1962. 2C) THAT WITHOUT PREJUDICE TO THE ABOVE, THE LD. CI T(A) FURTHER ERRED IN OVERLOOKING THE FACT THAT STRATEGIC INVESTMENTS IN GROUP COMPANIES AND INVESTMENTS WHICH DID NOT YIELD ANY EXEMPT INCOME W ERE ERRONEOUSLY INCLUDED BY THE LD. A.O. WHILE COMPUTING DISALLOWAN CE UNDER RULE 8D(II) & 8D(III) OF THE INCOME TAX RULES, 1962 R.W.S 14A OF THE INCOME TAX ACT, 1961. 3) THAT THE APPELLANT CRAVES LEAVE TO ADD, AMEND AN D/OR ALTER ANY OF THE FOREGOING GROUNDS AND SUCH OTHER GROUNDS AS MAY BE URGED AT THE TIME OF HEARING. 3. GROUNDS NO. 1 RAISED BY THE ASSESSEE RELATES TO ADVANCE GIVEN TO M/S REFRACTORY SPEACLITIES (INDIA) LTD. AT RS.10,00,000/- (INTERES T ACCRUED RS.55,360/-) AND WRITTEN OFF AS IRRECOVERABLE IN THE BOOKS OF THE AS SESSEE. 4. BRIEF FACTS QUA THE ISSUE ARE THATDURING ASSESSM ENT PROCEEDINGS THE A.O. NOTICED THAT IN THE PROFIT AND LOSS ACCOUNT, THE ASSESSEE H AD CLAIMED TO HAVE WRITTEN OFF RS.10,55,360/-, AS BAD DEBTS. THE ASSESSEEHAD EXPLA INED THE ASSESSING OFFICER THAT THE AMOUNTOF RS.10,55,360/- WAS RECEIVABLE FROM REF RACTORY SPECIALTIES (INDIA) LTD. THE SAID AMOUNT HAD BECOME IRRECOVERABLE, SINC E 1998, ASTHE COMPANY WAS UNABLE TO PAY THE AMOUNT DUE TO ITS BAD FINANCIAL P OSITION. THE A.O NOTED THAT ONLYTHE MONEY LENT IN THE ORDINARY COURSE OF BUSINE SS CAN BE ALLOWED AS M/S ASSOCIATED CERAMICS LTD. ITA NO.396/KOL/2018 ASSESSMENT YEAR:2012-13 P PP PA AA AG GG GE EE E | || | 3 33 3 DEDUCTION.THE A.O. THUS DISALLOWED THE IMPUGNED LOA N AMOUNT OF RS. RS.10,55,360/-. 5. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A), WHO HAS CONFIRMED THE ADDITION MADE BY THE ASSESSING OFFICER. AGGRIEVED BY THE ORDER OF THE LD . CIT(A), THE ASSESSEE IS IN APPEAL BEFORE US. 6. SHRI S.K. TULSIYAN, THE LD. COUNSEL FOR THE ASSE SSEE, BEGINS BY POINTING OUT THAT THE AMOUNT WAS WRITTEN OFF IN THE BOOKS, AS THE COM PANY WAS NOT ABLE TO RECOVER THE SUM OF RS.10,55,360/ -RECEIVABLE FROM REFRACTOR Y SPECIALTIES (INDIA) LTD. THE SAID AMOUNT WAS DUE SINCE 1998. THE AMOUNT BECOME I RRECOVERABLE AS THE COMPANY WAS NOT ABLE TO PAY THE AMOUNT DUE TO ITS B AD FINANCIAL POSITION,AND DUE TO WHICH IT HAD APPLIED FOR LIQUIDATION.THE SAID AM OUNT WAS INITIALLY PAID TO REFRACTORY SPECIALTIES (INDIA) LTD IN THE YEAR 1998 FOR SUPPLY OF REFRACTORY MATERIALS, BUT IT COULD NOT SUPPLY THE MATERIALS AS PER CONTRACT. LATER ON, THE SAID COMPANY BECAME SICK AND WENT INTO LIQUIDATION BUT A SSURED THE APPELLANT TO REFUND THE MONEY IN FUTURE ALONG WITH INTEREST. HOWEVER, A FTER WAITING FOR A LONG PERIOD THE APPELLANT COULD NOT RECOVER THE SAID SUM FROM T HE PARTY AND-WROTE OFF THE SAID SUMINTHEF.Y.2011-12. AS THE SAID SUM WAS GIVEN TO T HE PARTY IN THE ORDINARY COURSE OF BUSINESSOF MANUFACTURING AND TRADING OF R EFRACTORY MATERIALS AND BEING UNABLE TO RECOVER THE SAID SUM WAS WRITTEN OFF. THU S, THE ASSESSEE HAS FULFILLED THE INGREDIENTS OF SECTION 36(2)OF THE ACT. HENCE, THE APPELLANT IS ENTITLED TOA DEDUCTION EQUIVALENT TO THE AMOUNT OF WRITE OFF DEB T.THEREFORE, LD COUNSEL PRAYED THE BENCH THAT THE ADDITION OF RS.10,55,360/-, IS LIABLE TO BE DELETED. 7. ON THE OTHER HAND, THE LD. DR FOR THE REVENUE H AS PRIMARILY REITERATED THE STAND TAKEN BY THE ASSESSING OFFICER WHICH WE HAVE ALREAD Y NOTED IN OUR EARLIER PARA AND THE SAME IS NOT BEING REPEATED FOR THE SAKE OF BREVITY. 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL AVAILABLE ON RECORD. WE NOTE THAT IN THE COURSE OF ASSESSMENT PROCEEDING S, THE ASSESSING OFFICER NOTED M/S ASSOCIATED CERAMICS LTD. ITA NO.396/KOL/2018 ASSESSMENT YEAR:2012-13 P PP PA AA AG GG GE EE E | || | 4 44 4 THAT FOR THE YEAR UNDER CONSIDERATION THE ASSESEE H AD WRITTEN OFF RS. 10,55,360/- AS IRRECOVERABLE IN ITS PROFIT & LOSS ACCOUNT UNDER TH E HEAD EXCEPTIONAL ITEMS. THE ASSESSEE EXPLAINED THAT THE SAID AMOUNT REPRESENTED ADVANCE OF RS.10,00,000/- PAID BY THE ASSESSEE COMPANY TO M/S. REFRACTORY SPE CIALITIES (INDIA) LTD. AGAINST SUPPLY OF REFRACTORY MATERIALS IN THE NORMAL COURSE OF ITS BUSINESS OF TRADING AND MANUFACTURING OF REFRACTORIES AND WAS PENDING SINCE THE YEAR 1998. COPY OF THE RELEVANT VOUCHER SHOWING ADVANCE OF RS. 10 LAKHS MA DE BY THE ASSESSEE COMPANY TO M/S. REFRACTORY SPECIALITIES (INDIA) LTD. WAS PL ACED BEFORE THE AO. THE SAID COMPANY HOWEVER FAILED TO SUPPLY THE REFRACTORY MAT ERIALS AS PER THE CONTRACT ON ACCOUNT OF VARIOUS BUSINESS EXIGENCIES AND FINANCIA L CONSTRAINTS, BUT ASSURED THE ASSESSEE THAT IT WOULD REFUND THE ENTIRE AMOUNT IN FUTURE ALONG WITH INTEREST. THE ASSESSEE ACCORDINGLY, CHARGED INTEREST OF RS. 55,36 0/- AND ADDED THE SAME TO THE OUTSTANDING AMOUNT. HOWEVER, DUE TO ITS CONTINUOUSL Y DETERIORATING FINANCIAL POSITION, THE SAID COMPANY BECAME SICK AND WENT INT O LIQUIDATION. IN SUPPORT OF THE AFORESAID, THE SCREENSHOT FROM THE WEBSITE OF T HE MINISTRY OF CORPORATE AFFAIRS SHOWING THE STATUS OF THE SAID COMPANY AS 'UNDER LI QUIDATION` WAS PLACED BEFORE THE BENCH. THUS, AFTER WAITING FOR A CONSIDERABLE P ERIOD OF TIME WHEN THE ASSESSEE LOST ALL HOPES OF RECOVERING THE SAID AMOUNT, THE E NTIRE SUM OF RS. 10,55,360/- WAS WRITTEN OFF AS IRRECOVERABLE IN THE PROFIT & LOSS A CCOUNT IN THE F. Y. 2011-12. SINCE THE SAID AMOUNT REPRESENTED TRADING ADVANCE A GAINST SUPPLY OF MATERIALS MADE IN NORMAL COURSE OF BUSINESS WHICH SUBSEQUENTL Y BECAME IRRECOVERABLE, THE SAME PARTOOK THE NATURE OF LOSS INCIDENTAL TO BUSIN ESS AND ACCORDINGLY, LD COUNSEL IS OF THE VIEW THAT THE SAME IS ALLOWABLE U/S 28 OF THE ACT. 9. WE NOTE THAT LD COUNSEL ALSO EXPLAINED BEFORE US THAT IF THE IMPUGNED AMOUNT WRITE OFF OF RS. 10,00,000/- IS NOT ALLOWABLE BY WA Y OF BAD DEBT UNDER SECTION 36(L)(VII) R.W.S 36(2) OF THE ACT, THEN IT SHOULD B E TREATEDIN NATURE OF A LOSS INCIDENTAL TO BUSINESS AND HENCE ALLOWABLE AS DEDUC TION WHILE COMPUTING INCOME OF THE ASSESSEEU/S 28 OF THE ACT. THE FACTUAL MATRI X IN SUPPORT OF THE SAID CLAIM OF THE ASSESSEE WAS SUBMITTED BY LD COUNSEL AS UNDER: (I).THAT DURING THE YEAR UNDER CONSIDERATION, THE A SSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURE AND TRADING OF REFRACTORIES , FIRE BRICKS ETC. M/S ASSOCIATED CERAMICS LTD. ITA NO.396/KOL/2018 ASSESSMENT YEAR:2012-13 P PP PA AA AG GG GE EE E | || | 5 55 5 (II). THAT IN COURSE OF CARRYING ON OF SUCH BUSINES S, THE ASSESSEE HAD ADVANCED RS. 10,00,000/- TO M/S. REFRACTORY SPECIALITIES (INDIA) LTD. FOR SUPPLY OF REFRACTORY MATERIALS. (III). THAT THE SAID REFRACTORY SPECIALITIES (INDIA ) LTD. ON ACCOUNT OF VARIOUS BUSINESS EXIGENCIES AND FINANCIAL CONSTRAINTS FAILE D TO SUPPLY THE IMPUGNED MATERIALS AS PER THE CONTRACT AND UNDERTOOK TO REPA Y THE ENTIRE ADVANCE ALONG WITH INTEREST IN THE NEAR FUTURE. (IV). THAT ACCORDINGLY, THE ASSESSEE REFLECTED THE SAID IMPUGNED OUTSTANDING ADVANCES UNDER LOANS AND ADVANCES AND CHARGED INTER EST RECEIVABLE THEREON AMOUNTING TO RS. 55,360/-. HOWEVER, LATER ON SINCE THE RECOVERY OF PRINCIPAL AMOUNT OF THE ADVANCE APPEARED DOUBTFUL, THE ASSESS EE STOPPED CHARGING INTEREST ON THE SAID ADVANCE. (V).THAT SUBSEQUENTLY, THE SAID REFRACTORY SPECIALI TIES (INDIA) LTD. ON ACCOUNT OF ITS CONTINUOUSLY DETERIORATING FINANCIAL POSITION B ECAME SICK AND WENT INTO LIQUIDATION. (VI). THAT THE ASSESSEE LOST ALL HOPES OF RECOVERY AND AFTER WAITING FOR A CONSIDERABLE PERIOD OF TIME FINALLY WROTE OFF THE E NTIRE AMOUNT OF RS. 10,55,360/- AS IRRECOVERABLE IN THE F.Y. 2011-12. (VII).THAT SINCE THE SAID TRADE ADVANCE WAS MADE DU RING THE ORDINARY COURSE OF ITS BUSINESS BY THE ASSESSEE, ANY LOSS ON ACCOUNT OF IT S NON-RECOVERABILITY WOULD BE A LOSS INCIDENTAL TO BUSINESS AND HENCE ALLOWABLE AS DEDUCTION AS A REGULAR TRADING LOSS UNDER SECTION 28 OF THE ACT. WE NOTE THAT THE HON'BLE SUPREME COURT IN THE CASE OF BADRIDASDAGA V. CIT [1958] 34 ITR 10, HAS HELD THAT IN ASSESSING THE AM OUNT OF PROFITS AND GAINS LIABLE TO TAX, ONE MUST NECESSARILY HAVE REGARD TO THE ACC EPTED COMMERCIAL PRACTICE THAT DEDUCTION OF SUCH EXPENSES AND LOSSES IS TO BE ALLO WED, IF IT ARISES IN CARRYING ON BUSINESS AND IS INCIDENTAL TO IT. THE QUESTION BEFO RE THE HON'BLE APEX COURT PERTAINED TO WHETHER MONIES EMBEZZLED BY THE AGENT OR EMPLOYEE ARE ALLOWABLE AS DEDUCTION IN COMPUTING THE PROFITS OF BUSINESS UNDE R SECTION 10 OF THE 1922 ACT. IN RESPONSE, THE HON'BLE COURT HAS CLEARLY AND LUCIDLY ENUNCIATED THE PRINCIPLE OF LOSS M/S ASSOCIATED CERAMICS LTD. ITA NO.396/KOL/2018 ASSESSMENT YEAR:2012-13 P PP PA AA AG GG GE EE E | || | 6 66 6 INCIDENTAL TO BUSINESS, AND THE FACTORS RELEVANT TO WARDS DECIDING THE SAME IN THE FOLLOWING MANNER: ' 4 THE CONTROVERSY THEREFORE NARROWS ITSELF TO THE QUESTION WHETHER AMOUNTS LOST THROUGH EMBEZZLEMENT BY AN EMPLOYEE ARE A TRAD ING LOSS WHICH COULD BE DEDUCTED IN COMPUTING THE PROFITS OF A BUSINESS UND ER S. 10(1). IT IS TO BE NOTED THAT WHILE S. 10(1) IMPOSES A CHARGE ON THE PROFITS OR GAINS OF A TRADE, IT DOES NOT PROVIDE HOW THOSE PROFITS ARE TO BE COMPUTED. SEC. 10(2) ENUMERATES VARIOUS ITEMS WHICH ARE ADMISSIBLE AS DEDUCTIONS, BUT IT IS WELL SETTLED THAT THEY ARE NOT EXHAUSTIVE OF ALL ALLOWANCES WHICH COULD BE MADE IN ASCERTAINING PROFITS TAXABLE UNDER S. 10(1). IN CIT VS. CHITNAVIS (1932) LR 59 I A 290, THE POINT FOR DECISION WAS WHETHER A BAD DEBT COULD BE DEDUCTED UNDER S. 1 0(1) OF THE ACT, THERE HAVING BEEN IN THE ACT, AS IT THEN STOOD, NO PROVISION COR RESPONDING TO S. 10(2)(XI) FOR DEDUCTION OF SUCH A DEBT. IN ANSWERING THE QUESTION IN THE AFFIRMATIVE LORD RUSSELL OBSERVED: ALTHOUGH THE ACT NOWHERE IN TERMS AUTHORIZES THE D EDUCTION OF BAD DEBTS OF A BUSINESS, SUCH A DEDUCTION IS NECESSARILY ALL OWABLE. WHAT ARE CHARGEABLE TO INCOME-TAX IN RESPECT OF A BUSINESS A RE THE PROFITS AND GAINS OF A YEAR; AND IN ASSESSING THE AMOUNT OF THE PROFI TS AND GAINS OF A YEAR ACCOUNT MUST NECESSARILY BE TAKEN OF ALL LOSSES INC URRED, OTHERWISE YOU WOULD NOT ARRIVE AT THE TRUE PROFITS AND GAINS. 6. THE RESULT IS THAT WHEN A CLAIM IS MADE FOR A DE DUCTION FOR WHICH THERE IS NO SPECIFIC PROVISION IN S. 10(2), WHETHER IT IS ADMISSIBLE OR NOT WILL DEPEND ON WHETHER, HAVING REGARD TO ACCEPTED COMMER CIAL PRACTICE AND TRADING PRINCIPLES, IT CAN BE SAID TO ARISE OUT OF THE CARRYING ON OF THE BUSINESS AND TO BE INCIDENTAL TO IT. IF THAT IS ES TABLISHED, THEN THE DEDUCTION MUST BE ALLOWED, PROVIDED OF COURSE THERE IS NO PROHIBITION AGAINST IT, EXPRESS OR IMPLIED, IN THE ACT. 7. THESES BEING THE GOVERNING PRINCIPLES, IN DECIDI NG WHETHER LOSS RESULTING FROM EMBEZZLEMENT BY AN EMPLOYEE IN A BUS INESS IS ADMISSIBLE FROM EMBEZZLEMENT BY AN EMPLOYEE IN A BUSINESS IS A DMISSIBLE A DEDUCTION UNDER S. 10(1) WHAT HAS TO BE CONSIDERED IS WHETHER IT ARISES OUT OF THE CARRYING ON OF THE BUSINESS AND IS IN INCIDE NTAL TO IT. VIEWING THE QUESTION AS A BUSINESSMAN WOULD, IT SEEMS DIFFICULT TO MAINTAIN THAT IT DOES NOT. A BUSINESS ESPECIALLY SUCH AS IS CALCULATED TO YIELD TAXABLE PROFITS HAS TO BE CARRIED ON THROUGH AGENTS, CASHIERS, CLERK AN D PEONS. SALARY AND REMUNERATION PAID TO THEM ARE ADMISSIBLE UNDER S. 10(2)(XV) AS EXPENSES INCURRED FOR THE PURPOSE OF THE BUSINESS. IF EMPLOY MENT OF AGENTS IS INCIDENTAL TO THE CARRYING ON OF BUSINESS, IT MUST LOGICALLY FOLLOW THAT LOSSES WHICH ARE INCIDENTAL TO SUCH EMPLOYMENT ARE ALSO INCIDENTAL TO THE CARRYING ON OF THE BUSINESS. HUMAN NATURE BEING WHA T IT IS, IT IS IMPOSSIBLE TO RULE OUT THE POSSIBILITY OF AN EMPLOYEE TAKING A DVANTAGE OF HIS POSITION AS SUCH EMPLOYEE AND MISAPPROPRIATING THE FUNDS OF HIS EMPLOYER AND THE LOSS ARISING FROM SUCH MISAPPROPRIATION MUST BE HEL D TO ARISE OUT OF THE CARRYING ON OF BUSINESS AND TO BE INCIDENTAL TO IT. AND THAT IS HOW IT WOULD BE DEALT WITH ACCORDING TO ORDINARY COMMERCIAL PRIN CIPLES OF TRADING. M/S ASSOCIATED CERAMICS LTD. ITA NO.396/KOL/2018 ASSESSMENT YEAR:2012-13 P PP PA AA AG GG GE EE E | || | 7 77 7 8. AT THE SAME TIME, IT SHOULD BE EMPHASIZED THAT T HE LOSS FOR WHICH A DEDUCTION COULD BE MADE UNDER S. 10(1) MUST BE ONE THAT SPRINGS DIRECTLY FROM THE CARRYING ON OF THE BUSINESS AND IS INCIDEN TAL TO IT AND NOT ANY LOSS SUSTAINED BY THE ASSESSEE, EVEN IF IT HAS SOME CONN ECTION WITH HIS BUSINESS.(EMPHASIS SUPPLIED) THEREFORE, IN THE LIGHT OF THE FACTS NARRATED ABOVE , WE NOTE THAT THE LOSS OF RS.10,55,360/-MUST BE HELD TO ARISE OUT OF THE CARR YING ON OF BUSINESS AND TO BE INCIDENTAL TO IT AND THAT IS HOW IT WOULD BE DEALT WITH ACCORDING TO ORDINARY COMMERCIAL PRINCIPLES OF TRADING, HENCE IT IS AN AL LOWABLE BUSINESS LOSS. 10. OUR VIEWS ARE FORTIFIED BY THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. NAINITAL BANK LTD. 55 ITR 707 (SC) WHEREIN IT WAS HELD THAT UNDER SECTION 10(1) OF INDIAN INCOME TAX ACT, 1922 (WHICH IS SIMILAR / IDENTICAL TO SECTION 28 OF THE 1961 ACT), THE TRADING LOSS OF A BUSINESS IS DEDUCTIBLE IN COMPUTING THE PROFITS EARNED BY A BUSINESS. HOWEVE R, EVERY LOSS IS NOT DEDUCTIBLE UNLESS IT IS INCURRED IN CARRYING OUT THE OPERATION OF A BUSINESS AND IS INCIDENTAL TO THE OPERATION.WHETHER LOSS IS INCIDENTAL TO THE OPE RATION OF A BUSINESS OR NOT, IS A QUESTION OF FACT TO BE DECIDED ON FACTS OF EACH CAS E, HAVING REGARD TO THE NATURE OF THE OPERATION CARRIED ON AND THE NATURE OF RISK INV OLVED IN CARRYING THEM OUT. THE DEGREE OF THE RISK OR ITS FREQUENCY IS NOT MUCH REL EVANT BUT ITS NEXUS TO THE NATURE OF THE BUSINESS IS MATERIAL. WE NOTE THAT ON THE SIMILAR FACTS, THE HONBLE APEX COURT IN THE CASE OF RAMCHANDER SHIV NARAYAN VS. CIT, 111 ITR 263 (SC) H AS HELD THAT LOSS IS DEDUCTIBLE WHERE THERE IS A DIRECT AND PROXIMATE NE XUS BETWEEN THE OPERATION AND THE LOSS OR WHERE THE LOSS IS INCIDENTAL TO IT, AS, WITHOUT THE BUSINESS OPERATION AND DOING ALL THAT IS INCIDENTAL TO IT, NO PROFIT CAN B E EARNED. THEREFORE, BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AS NARRATED ABOVE, WE DELETE ADDITION OF RS.10,55,360/- AND ALLOW GROUND NO. 1 RAISED BY THE ASSESSEE. 11. GROUNDS NO. 2 RAISED BY THE ASSESSEE RELATES T O ADDITION U/S 14A READ WITH RULE 8D. M/S ASSOCIATED CERAMICS LTD. ITA NO.396/KOL/2018 ASSESSMENT YEAR:2012-13 P PP PA AA AG GG GE EE E | || | 8 88 8 12. BRIEF FACTS QUA THE ISSUE ARE THAT FROM THE PER USAL OF ASSESSEES BALANCE SHEET, IT WAS NOTICED BY ASSESSING OFFICER THAT AN INVESTMENT OF RS.13,33,012/- HAS BEEN MADE BY THE ASSESSEE IN THE UNQUOTED / QUOTED EQUIT Y SHARES. THE AO FURTHER NOTED THAT THE SAID EXPENDITURE WAS INCURRED TO EARN DIVI DEND INCOME, WHICH IS EXEMPT FROM TAX, BUT THE ASSESSEE HAS NOT MADE ANY DISALLO WANCES U/S 14A OF THE I.T. ACT, 1961 IN ITS COMPUTATION. THE ASSESSEE WAS ASKED TO EXPLAIN WHY PROPORTIONATE DISALLOWANCE U/S 14A OF THE I.T. ACT SHOULD NOT BE MADE. IN RESPONSE, THE ASSESSEE HAS FURNISHED THE FOLLOWING EXPLANATION: THE ASSESSEE HAS ADMITTED THAT DISALLOWANCE U/S 14 A READ WITH RULE 8D IS APPLICABLE IN THEIR CASE. THE ASSESSING OFFICER PERUSED THE REPLY OF THE ASS ESSEE AND OBSERVED THAT THE ASSESSEE HAS ITSELF ADMITTED OF DISALLOWANCES U/S 1 4A READ WITH RULE 8D, THEREFORE, THE DISALLOWANCEWERE CALCULATED AS FOLLOWS : I) RULE 8D(2)(I) IS NOT APPLICABLE IN THE CASE OF THE ASSESSEE. II) AS PER RULE 8D(2)(II), INTEREST ALLOCATION WILL BE: A) TOTAL INTEREST / FINANCE COST PAID RS. 55,38,776/ - B) AVERAGE INVESTMENT RS. 13,33,012/- C) AVERAGE OF TOTAL ASSETS RS. 30,7208,586/- [I.E. (RS. 30,76,33,250/- + RS. 30,67,78,3922/-) /2 ] (A) X (B)/(C)=RS. 24,033/- III) AS PER RULE 8D(2)(III) : 0.5% OF AVERAGE INVESTMENT (I.E. RS. 1,333,012/-) = RS. 6665/- THEREFORE, THE TOTAL AMOUNT DISALLOWED U/S 14A READ WITH RULE 8D WAS WORKED OUT BY AO TO THE TUNE OF RS. 30,698/-, WHICH WAS AD DED BACK TO THE TOTAL INCOME OF THE ASSESSEE. 13. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER , THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A) WHO HAS PART LY ALLOWED THE APPEAL OF THE ASSESSEE. AGGRIEVED BY THE ORDER OF THE LD. CIT(A) THE ASSESSEE IS IN APPEAL BEFORE US. M/S ASSOCIATED CERAMICS LTD. ITA NO.396/KOL/2018 ASSESSMENT YEAR:2012-13 P PP PA AA AG GG GE EE E | || | 9 99 9 14. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE HAS REI TERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW. ON THE OTHER HAND, LD . DR HAS PRIMARILY REITERATED THE STAND TAKEN BY THE ASSESSING OFFICER WHICH WE H AVE ALREADY NOTED IN OUR EARLIER PARA AND THE SAME IS NOT BEING REPEATED FOR THE SAKE OF BREVITY. WE NOTE THAT ON A PERUSAL OF BALANCE SHEET OF THE ASSESSEE FOR F.Y. 2010-11 AND 2011-12, ASSESSEE HAS NOT MADE ANY FRESH INVESTMENT S IN SHARES DURING THE IMPUGNED F.Y. 2011-12 OR EVEN DURING THE PREVIOUS F .Y. 2010-11. A COMPARATIVE ANALYSIS OF THE DETAILS OF INVESTMENTS OF THE ASSES SEE OVER THREE YEARS (AS EXTRACTED FROM THE BALANCE SHEETS OF THE RESPECTIVE YEARS) IS AS FOLLOWS: THUS, THE INVESTMENT IN THE EARLIER YEARS HAS BEEN CARRIED FORWARD DURING THE IMPUGNED F.Y 2011-12, AS IT IS EVIDENT FROM THE AFO RESAID PARTICULARS WHERE THE BALANCE AT THE END OF THE YEAR SHOWS THE SAME INVES TMENT AS APPEARING IN THE EARLIER YEAR(S). ACCORDINGLY, IT MAY SAFELY BE DEDU CED THAT DURING THE YEAR UNDER CONSIDERATION, NO INTEREST BEARING FUNDS WERE DEPLO YED FOR MAKING ANY EXEMPT INCOME BEARING INVESTMENTS.FURTHER, IT IS PERTINENT TO NOTE THAT THE IMPUGNED INTEREST EXPENSES OF RS. 24,24,115/- FOR F.Y. 2011- 12 MAINLY AROSE ON THE CASH CREDITS TAKEN BY THE ASSESSEE FROM THE STATE BANK O F INDIA WHICH WERE FULLY USED TO FINANCE THE WORKING CAPITAL OF THE ASSESSEE COMP ANY. AS SUCH, NO PART OF THE INTEREST BEARING FUNDS WAS USED TO FINANCE THE INVE STMENTS IN SHARES MADE BY THE M/S ASSOCIATED CERAMICS LTD. ITA NO.396/KOL/2018 ASSESSMENT YEAR:2012-13 P PP PA AA AG GG GE EE E | || | 1 11 10 00 0 ASSESSEE, MORE SO, SINCE NO SUCH INVESTMENTS WERE M ADE BY THE ASSESSEE DURING F.Y.2011-12. FURTHER, AS SEEN FROM THE BALANCE SHEE T, THE BALANCES IN SHARE CAPITAL AND RESERVES & SURPLUS AT THE END OF F.Y.20 11-12 WERE RS.4,25,98,050/- AND RS. 14,11,98,435/- RESPECTIVELY WHEREAS THE AGG REGATE INVESTMENT IN SHARES WAS MERELY RS. 13,33,012/-. THUS, THE ASSESSEE COMP ANY HAD SUFFICIENT INTEREST- FREE FUNDS TO MEET ITS INVESTMENTS. THEREFORE, IT M AY BE SAFELY DEDUCED THAT INVESTMENTS IN SHARES WERE FINANCED OUT OF THE INTE REST FREE FUNDS AVAILABLE WITH THE ASSESSEE. ACCORDINGLY, NO DISALLOWANCE IS CALLE D FOR U/S 14A. OF THE ACT. FOR THAT WE RELY ON THE JUDGMENT OF THE HON`BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES & POWER LTD., [20091 313 ITR 340, WHEREIN IT WAS HELD THAT 'IF THERE BE INTEREST-FREE FUNDS AVAILABLE TO AN ASSESSEE SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME THE ASSESSEE HAS R AISED A LOAN IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM THE INTEREST-FREE FU NDS AVAILABLE.' THEREFORE, WE DELETE THE ADDITION UNDER RULE 8D(2) (II) OF THE RULES. 15. SO FAR DISALLOWANCE UNDER RULE 8D (2) (III) IS CONCERNED, WE NOTE THAT AO HAS DISALLOWED RS.6,665/-. WE NOTE THAT THE AO HAS NOT TAKEN INTO ACCOUNT THE DIVIDEND BEARING SECURITIES FOR THE PURPOSE OF COMP UTING AVERAGE INVESTMENT. THEREFORE, TO MEET THE END OF JUSTICE WE DIRECT THE AO TO DISALLOW RS. 5000/- UNDER RULE 8D(2)(III). GROUND NO.2 RAISED BY THE ASSESSEE IS PARTLY ALLOWED. 16. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE COURT ON 19.06.2019 SD/- ( S.S.GODARA ) SD/- (A.L.SAINI) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / DATE:19/06/2019 ( SB, SR.PS ) M/S ASSOCIATED CERAMICS LTD. ITA NO.396/KOL/2018 ASSESSMENT YEAR:2012-13 P PP PA AA AG GG GE EE E | || | 1 11 11 11 1 COPY OF THE ORDER FORWARDED TO: 1. M/S ASSOCIATED CERAMICS LTD. 2. JCIT, RANGE-2, KOLKATA 3. C.I.T(A)- 4. C.I.T.- KOLKATA. 5. CIT(DR), KOLKATA BENCHES, KOLKATA. 6. GUARD FILE. TRUE COPY BY ORDER ASSIST ANT REGISTRAR ITAT, KOLKA TA BENCHES