2003 (1) TMI 654 - AT - Income Tax

Summary

Issues Involved:
1. Committee On Disputes (C.O.D.) approval for grounds Nos. 1 and 2.
2. Deductibility of expenditure incurred under the Technical Assistance Fund (TAF).
3. Exemption u/s 54E of the Income-tax Act for investment in IDBI Capital Bonds.

Summary:

Issue 1: Committee On Disputes (C.O.D.) Approval
- The Tribunal noted that C.O.D. approval had not been granted for grounds Nos. 1 and 2, rendering these grounds infructuous and thus rejected.

Issue 2: Deductibility of Expenditure under TAF
- The assessee challenged the disallowance of Rs. 3,97,63,468 incurred under its Technical Assistance Fund (TAF) as business expenditure.
- The Assessing Officer (AO) observed that the TAF was set up to fulfill statutory obligations and that expenses from TAF were debited in the profit and loss account, but contributions to TAF were not. The AO held that these expenses were applications of income, not business expenses.
- The Commissioner (Appeals) upheld the AO's decision, stating that the expenditure had no direct business necessity and was voluntary, thus not deductible u/s 37(1) of the Income-tax Act.
- The Tribunal, however, found that the TAF was utilized for statutory obligations under section 9 of the IDBI Act, which includes providing technical and administrative assistance. The Tribunal concluded that the expenditure was incurred wholly and exclusively for business purposes and allowed the deduction u/s 37(1).

Issue 3: Exemption u/s 54E for Investment in IDBI Capital Bonds
- The assessee claimed a deduction of Rs. 25 crores u/s 54E for investment in its own IDBI Capital Bonds.
- The AO disallowed the claim, arguing that the investment was merely a book entry and not an actual transfer of funds, as the funds remained within the assessee.
- The Commissioner (Appeals) upheld the AO's decision, stating that the purpose of section 54E was not served as there was no parting with funds.
- The Tribunal disagreed, noting that the assessee had no control over the fund once invested in the bonds, thus meeting the requirements of section 54E. The Tribunal allowed the exemption claimed by the assessee.

Conclusion:
- The appeal was partly allowed, with the Tribunal granting the deduction for TAF expenditure and the exemption u/s 54E for investment in IDBI Capital Bonds.