2013 (9) TMI 1071 - AT - Income Tax

Addition u/s 14A - interest attributable to investment in shares - interest on term loans, bank charges and guarantee fees - Held that - The investments were in the form of shares of subsidiary companies as part of the financial restructuring plan approved by the Government of Gujarat which was integral to the demerger - decision of Hon ble Bombay High Court pronounced in the case of Godrej & Boyce Mfg. Co. Ltd. Muimbai vs. Dy.CIT 2010 (8) TMI 77 - BOMBAY HIGH COURT - AO is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income - AO should provide a reasonable opportunity to the assessee of producing its accounts - Remanded back for statistical purpose. Addition made u/s. 43B - contribution to PF - Held that - AO has not properly examined the facts of the case - date of payments as declared by the assessee - assessee produced all details before CIT(A) - held that there was no payment beyond the due date but deposited in advance - Decided in favor of Assessee Income over expenditure materialized during the year but not offered for taxation in case of demerger - whether the expenses and income could be considered as income and expenses of the successor - Held that - the income arising after the demerger is the responsibility of the resulting company to be taxed as per law - assessee to place the relevant evidence before the AO through which it can be demonstrated that amount had already been offered to tax - Remanded back for statistical purpose. Addition of ₹ 6,60,52,000/- being total legal and preparation fees treated as capital expenditure - Held that - None payments can be categorized as capital in nature since no enduring benefit was derived and nor any asset was brought into existence - expenditure was connected with the business activity of the assessee - Decided in favor of Assessee Exclusion under provisions for gratuity - which is an unascertained liability for computation of book profit u/s.115JB - Held that - provision for gratuity was made on acturial valuation; hence, it was not an unascertained liability - Decided in favor of Assessee Adjustment of book profit u/s. 115J - Held that - AO to do afresh adjudication - Remanded back for statistical purpose.

Issues Involved:
1. Deletion of addition under Section 14A of the Income Tax Act.
2. Deletion of addition under Section 43B of the Income Tax Act.
3. Deletion of addition of net income over expenditure.
4. Deletion of addition of legal and professional fees treated as capital expenditure.
5. Adjustment of book profit under Section 115JB of the Income Tax Act.

Detailed Analysis:

1. Deletion of Addition under Section 14A of the Income Tax Act:

The Revenue raised an additional ground of appeal regarding the deletion of Rs. 187.97 crores under Section 14A on account of interest attributable to investment in shares. The Revenue argued that the CIT(A) erred in deleting the addition without appreciating that the assessee should have provided evidence that all borrowings were used for business purposes and not for investments earning exempted income. The Tribunal admitted the additional ground for adjudication, noting that the AO had made the addition without discussing the applicability of Section 14A, and the CIT(A) had deleted the addition without such discussion. The Tribunal emphasized the need to examine the scheme of demerger and the correctness of the interest expenditure claim. It was noted that the AO should have examined the sources of funds used for investments and whether they were from interest-bearing borrowings. The Tribunal referred to the Bombay High Court decision in Godrej and Boyce, which requires the AO to determine if any expenditure was incurred in relation to exempt income and to adopt a reasonable basis for apportionment. Consequently, the issue was remanded back to the AO for fresh determination.

2. Deletion of Addition under Section 43B of the Income Tax Act:

The AO had disallowed Rs. 143.83 crores under Section 43B, arguing that the assessee had not furnished payment details and dates during the assessment proceedings. The CIT(A) found that the AO had not properly examined the payment dates and that the payments were made before the due date. The Tribunal upheld the CIT(A)'s findings, noting that the assessee had provided detailed payment information and that there was no evidence from the Revenue to contradict the CIT(A)'s findings. Thus, the Tribunal confirmed the deletion of the addition.

3. Deletion of Addition of Net Income Over Expenditure:

The AO added Rs. 15.15 crores, representing net income over expenditure materialized during the year but not offered for taxation. The CIT(A) upheld the addition, noting that the income and expenses related to the erstwhile GEB should be included in the taxable income of the successor company. However, the CIT(A) also noted that the provision for doubtful debts had already been taxed in earlier years and should be excluded from the current year's income. The Tribunal found that the Revenue's ground was incorrectly worded, as the CIT(A) had upheld the addition. The Tribunal remanded the issue back to the AO to verify if the provision for doubtful debts had already been taxed and to ensure no double taxation.

4. Deletion of Addition of Legal and Professional Fees Treated as Capital Expenditure:

The AO disallowed Rs. 6.60 crores claimed as legal and professional fees, treating it as capital expenditure. The CIT(A) found that the payments were for services related to the business activities of the assessee and did not result in an enduring benefit or asset creation. The Tribunal agreed with the CIT(A), noting that the expenditure was connected with the business and was not capital in nature. The Tribunal upheld the CIT(A)'s decision to delete the disallowance.

5. Adjustment of Book Profit under Section 115JB of the Income Tax Act:

The CIT(A) directed the AO to exclude the provision for gratuity of Rs. 3.02 crores from the computation of book profit under Section 115JB, as it was not an unascertained liability. The Tribunal found no error in the CIT(A)'s decision, noting that the provision was based on actuarial valuation. The Tribunal also noted that the adjustment of book profit was consequential to the findings on the net income over expenditure issue, which was remanded to the AO. Therefore, the Tribunal restored this ground to the AO for fresh adjudication.

Conclusion:

The Tribunal partly allowed the Revenue's appeal, remanding certain issues back to the AO for fresh determination and confirming the CIT(A)'s decisions on other issues.

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