2011 (6) TMI 875 - AT - Income Tax

Issues Involved:
1. Disallowance of deduction under Section 36(1)(viii) of the Income Tax Act.
2. Disallowance of grant as deductible expenditure under Section 36(1)(xii).
3. Disallowance under Section 14A for expenses related to tax-free income.
4. Disallowance of employees' contribution to PF/ESI paid beyond the grace period.
5. Additional grounds of appeal regarding depreciation, interest income, and contribution to Employees' Recreation Trust.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction under Section 36(1)(viii):
The assessee's claim for deduction under Section 36(1)(viii) amounting to Rs. 5,28,36,280 was disallowed. The Tribunal had previously ruled against the assessee in Assessment Year (A.Y.) 2003-04, determining that the assessee's activities did not qualify as providing long-term finance for industrial or agricultural development. The CIT (A) upheld this decision, noting that the facts remained unchanged from A.Y. 2003-04. The assessee conceded that the facts were identical and the matter was pending in the High Court. Consequently, the Tribunal dismissed this ground of appeal, following the precedent set in A.Y. 2003-04.

2. Disallowance of Grant as Deductible Expenditure under Section 36(1)(xii):
The assessee challenged the addition of Rs. 2,29,25,823 as deductible expenditure under Section 36(1)(xii). The AO had previously disallowed similar expenses in A.Y. 2003-04, and the Tribunal had upheld this decision. The CIT (A) followed this precedent, noting that the assessee's Miscellaneous Application for rectification in A.Y. 2003-04 was pending. The Tribunal agreed to remand the matter back to the AO for reconsideration, as the Tribunal had recalled its earlier order for A.Y. 2003-04 and the issue was still pending before the AO.

3. Disallowance under Section 14A for Expenses Related to Tax-Free Income:
The AO disallowed Rs. 2,95,89,940 under Section 14A by applying Rule 8D, which the AO believed had retrospective effect. The CIT (A) upheld this decision, relying on the Special Bench decision in Daga Capital Management Pvt. Ltd. However, the Tribunal noted that the Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT had ruled that Rule 8D was not retrospective and applicable from A.Y. 2008-09. The Tribunal remanded the matter to the AO for reconsideration, directing the AO to determine if any expenditure was incurred in relation to tax-free income and to adopt a reasonable basis for apportionment.

4. Disallowance of Employees' Contribution to PF/ESI Paid Beyond the Grace Period:
The AO disallowed Rs. 2,06,934 as employees' contribution to PF/ESI paid beyond the grace period. The CIT (A) allowed deductions for payments made within the grace period but disallowed those made beyond it. The Tribunal directed the AO to verify if the contributions were made before the due date for filing the return under Section 139(1) and to grant relief accordingly, following the decisions of the Delhi High Court in CIT vs. P.M. Electronics Ltd. and the Supreme Court in CIT vs. Vinay Cement.

5. Additional Grounds of Appeal:
- Depreciation on Closing Written Down Value: The Tribunal noted that no facts were available on record to adjudicate this issue, as it was raised for the first time before the Tribunal.
- Interest Income on North Kerala Project Development Fund: The Tribunal observed that the assessee had conceded the issue during assessment proceedings and had not obtained COD approval for appeal in earlier years. The Tribunal declined to admit this ground.
- Contribution to Employees' Recreation Trust: The Tribunal noted that this issue had been decided against the assessee in A.Y. 2003-04 and the assessee had conceded the taxability of the contribution. The Tribunal declined to admit this ground as well.

Conclusion:
The Tribunal dismissed the appeal on the disallowance under Section 36(1)(viii), remanded the issues under Sections 36(1)(xii) and 14A to the AO for reconsideration, and directed the AO to verify the PF/ESI contributions. The additional grounds of appeal were not admitted. The appeal was partly allowed for statistical purposes.

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