2010 (10) TMI 1084 - AT - Income Tax

Deduction on account of write off of the outstanding loans - Payment towards compliance of the Rehabilitation Scheme - investment made in GPEL - business loss u/s.28(1) or bad debt u/s.36(1)(vii) or a revenue expenditure u/s.37 - Provision towards payment of bonus - Allocation of overhead expenses - computation of the profits of an undertaking eligible for deduction u/s.80IA - Book profits u/s 115JB - HELD THAT - The payment made by the assessee is, in fact, towards compliance of the Rehabilitation Scheme. It clearly shows that the assessee company was trying to rehabilitate the operations of the GPEL but still the same could not be revived. Therefore, in addition to the above compulsions by the order of the BIFR, the assessee company was further required to defend its reputation by paying to the financial institutions and bankers towards discharge of its guaranteed liabilities and other liabilities as proposed by the BIFR. Failure to pay these liabilities would have exposed the assessee company of getting black listed and losing the face from financial institutions and banks for its future projects. In fact, when the whole situation is looked from this angle, it seems that the assessee company had no choice but to pay the amount. Even the delay for making these payments would have led the assessee company into further trouble in the sense that liabilities of financial institutions and banks would have gone up further. Thus, it is clear that payments were made out of the commercial expediency and as observed by the Hon'ble Supreme Court in the case of in the case of S. A. Builders 2006 (12) TMI 82 - SUPREME COURT that even if there is no necessity to make the payments and such payments are made voluntarily on the grounds of commercial expediency, then such claim has to be allowed. Thus, it become clear that claim has to be allowed even if it is not necessary to make such payments if the payments had been made voluntarily on the grounds of commercial expediency. Further it is not necessary that such business should be that of assessee itself. In the case before us though the amounts have been made in respect of GPEL but basically assessee was trying to establish the new business through GPEL and was also trying to achieve the larger business interest by establishing further factory in the State of Gujarat and it has been done also by establishment of tyre manufacturing unit at Limda near Baroda. In fact, as pointed out by the ld. counsel of the assessee, the whole exercise was not done for the sake of fun or with an altruistic motive. But the assessee was trying to achieve a large business interest. Here it would be pertinent to note that this exercise is not being done up with the purpose of siphoning off the money or parking of the funds in the private companies of the promoters. This is so, because, GIIC is a government company being an organisation promoted by the State of Gujarat for establishment and encouragement of new industrial projects in the State of Gujarat. Moreover, the effective management of GPEL was with the assessee company and the Chairman and Managing Director also belonged to the assessee company. Then viewing it from this angle, which we have observed earlier also, that after all it was a case of saving of reputation of assessee company by meeting the liabilities of banks and financial institutions which were in pursuance of Rehabilitation Scheme. One more objection was taken by the AO as well as the ld. CIT DR that since Board s resolution was passed on 26-6-2002, therefore, liabilities cannot be claimed in this year. Firstly, we agree with the submissions of the ld. counsel of the assessee that in the case of company accounts are not closed on the last day of business but they are generally finalised much after that and, therefore, assessee company had the right to claim this amount before the accounts were finalised. Thus, it is clear that a company is entitled in law to finalise the accounts later as to what was the position of its account upto a particular date. Therefore, we find no merit in this objection. From the above it is clear that the claim was made only as a bad debt. No other provision was relied on. Moreover, there was no privity of contract or any legal relationship between the assessee and the selling agent. There was no statutory provision or contractual obligation by which the assessee was bound to pay the guaranteed loan and it was not authorised by the memorandum of association of the company. In the case before us, as pointed out by the ld. counsel of the assessee, the same is authorised by clause-6 of ancillary object. With GPEL assessee is clearly related as a promoter and major shareholder towards diversification of its business. Moreover, the payments have been made under the legal compulsion in terms of Rehabilitation Scheme formulated by BIFR. ld. CIT(A) held that - '' the amount being advance made to Gujarat Prestrop Electricals Ltd. GPEL towards the liability of financial institutions, was for business purpose and that the claim of write off of the same was admissible. The learned CIT(A) also erred in allowing write off on account of reduction in the value of equity investments in the said Gujarat Prestrop Electricals Ltd. The CIT (Appeals) ought to have appreciated that the assessee company had no normal business transactions with GPEL''. Thus, we confirm the order of the ld. CIT(A). Provision towards payment of bonus - The proviso to sec.43B gives further concession that if payment in respect of any of the items referred in sec.43B is made in a particular year before the due date of filing of the income tax return, then such claim can be made in the earlier year also for which return is due to be filed. This seems to be only a further concession and cannot be read as a restriction that necessarily deduction has to be claimed in the earlier year which AO had interpreted. The deduction relates to payment of bonus which has been actually paid in the present year and deduction has been claimed as per sec.43B. Such deduction has been claimed on consistent basis in the year of payment and, therefore, no adverse inference should have been taken. Thus, we find nothing wrong in the order of the ld. CIT A and confirm the same. Allocation of overhead expenses - Profits of DG Power Generation unit - manufacturing unit - We are of the view that if a sum of ₹ 10 lakhs is allocated out of the expenses of this power unit that would meet the ends of justice. However, in addition to this, interest has also to be allocated. For this purpose, we set aside the order of the ld. CIT A and remit the matter back to the file of the AO with a direction to ascertain whether any direct borrowings were made for the purpose of acquire the machinery for power generation unit, then such interest may be allocated. If the investment has been made out of the common funds then interest may be allocated on the basis of the turnover which the AO has already adopted for allocation of the expenses. Thus, this ground is partly allowed. Book profits - Interestingly, AO and ld. CIT DR as well as the Ld.counsel of the assessee have all relied on the decision of the Hon ble Supreme Court in the case of Apollo Tyres Ltd. Vs. CIT 2002 (5) TMI 5 - SUPREME COURT . Therefore, we deem it fit to discuss that decision because it cannot support both sides. Thus, from the above, it is clear that Hon ble Supreme Court has laid down a very simple principle that normally the assessing authority is bound to assess accounts prepared as per the requirements of Parts II and III of Schedule VI of the Companies Act and the book profits declared therein cannot be tinkered with except in the circumstances prescribed under the Act. Now Explanation 1 prescribes various adjustments by which profits can be increased as well as decreased. Now when clause (i) of Explanation 1 to sec.115JB which we have already reproduced above specifically provides for reduction of the amounts withdrawn from any reserve or provision, then such amounts have to be reduced from the book profits unless it is hit by the proviso to that clause. Admittedly, the profits credited in earlier year have already suffered tax though under normal provisions and, therefore, same is not hit by the proviso. In these circumstances, we are of the view, that assessee has correctly reduced the amount of general reserve which was duly withdrawn and reflected in the profit loss account. Thus, we confirm the order of the ld. CIT(A). In the result revenue s appeal is partly allowed

Summary

Issues Involved:
1. Depreciation on Building Partly Let Out
2. Disallowance of Club Fee
3. Disallowance of Interest Payments
4. Write-off of Advances to Gujarat Prestrop Electricals Ltd. (GPEL)
5. Payment of Bonus
6. Deduction u/s.80IA for Baroda Unit
7. Addition to Book Profit u/s.115JB
8. Addition to Book Profit on Account of Uncertain Liability
9. Disallowance of Interest u/s.10[34] read with sec.14A
10. Deduction for Provisions for Bonus and Leave Encashment u/s.115JB
11. Interest Levied u/s.234D

Summary:

1. Depreciation on Building Partly Let Out:
The ITAT upheld the AO's decision to disallow depreciation and repair expenses proportionately for the portion of the building let out, following the principle that deductions under a specific head are only allowable for expenses under that head.

2. Disallowance of Club Fee:
The ITAT ruled in favor of the assessee, allowing the club fee expenditure as it was part of the employees' salary package and not of a personal nature, following the Tribunal's earlier decisions.

3. Disallowance of Interest Payments:
The ITAT remitted the matter back to the AO to verify whether the investments in UTI Mutual Fund were held as business assets. If they were, no interest could be disallowed u/s.36(1)(iii). Otherwise, a reasonable expenditure directly attributable to earning such dividend income may be disallowed.

4. Write-off of Advances to GPEL:
The ITAT confirmed the CIT(A)'s order allowing the write-off of the advances made to GPEL, recognizing it as a legitimate business decision and allowable as business expenditure under sections 28, 36(1)(vii), or 37(1) due to commercial expediency.

5. Payment of Bonus:
The ITAT upheld the CIT(A)'s decision to allow the deduction of bonus paid in the current year under sec.43B, emphasizing that the provision does not restrict the deduction to the year of payment if it was made before the due date for filing the return.

6. Deduction u/s.80IA for Baroda Unit:
The ITAT partially allowed the revenue's appeal, remitting the matter back to the AO to ascertain whether direct borrowings were made for the power generation unit. If so, such interest should be allocated accordingly.

7. Addition to Book Profit u/s.115JB:
The ITAT confirmed the CIT(A)'s order allowing the reduction of the amount withdrawn from the general reserve from the book profits, as it was part of the profit & loss account and not hit by the proviso to clause (i) of Explanation 1 to sec.115JB.

8. Addition to Book Profit on Account of Uncertain Liability:
The ITAT remitted the matter back to the AO to verify whether the amount was an actual write-off or a provision. If it was a provision, it should be added back to the book profits.

9. Disallowance of Interest u/s.10[34] read with sec.14A:
The ITAT remitted the matter back to the AO to decide in accordance with the directions contained in the earlier para-17, considering whether the investments were held as business assets.

10. Deduction for Provisions for Bonus and Leave Encashment u/s.115JB:
The ITAT remitted the matter back to the AO to verify the actuarial valuation. If the provisions were based on actuarial valuation, they should not be added back to the book profits.

11. Interest Levied u/s.234D:
The ITAT upheld the CIT(A)'s decision, confirming that interest u/s.234D cannot be charged before 1-6-2003, as per the decision of the Hon'ble Kerala High Court in the case of CIT vs. Kerala Chemicals & Proteins Ltd.