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2011 (7) TMI 1252 - AT - Income TaxDisallowance u/s 14A - Retrospective effect of Rule 8D - AO relying on the decision of Special Bench in the case of INCOME-TAX OFFICER, WARD 6 (2) (2), MUMBAI VERSUS DAGA CAPITAL MANAGEMENT (P.) LTD. 2008 (10) TMI 383 - ITAT MUMBAI , held that Rule 8D had to be retrospectively applied and disallowed the claim - HELD THAT - Hon'ble Bombay High Court in the case of GODREJ AND BOYCE MFG. CO. LTD. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER 2010 (8) TMI 77 - BOMBAY HIGH COURT had overturned the decision of Special Bench upon which AO relied, and held that Rule 8D could be applied only prospectively from 2008 when it came to be notified. Nevertheless, Bombay High Court also held that If the assessee could show that no expenditure whatsoever was incurred, directly or indirectly in relation to earning of dividend income for periods prior to applicability of Rule 8D, there could not have been any disallowance under Section 14A of the Act. We are of the opinion that these aspects have not been verified by the A.O. or ld. CIT(Appeals). Hence, we set aside the orders of lower authorities in this regard and remit the issue back to the file of the A.O. for consideration afresh de novo in accordance with law - Matter Restored back. Disallowance u/s 40(a)(ia) - Sub-contract to Main Contract - Assessee deducted tax only at 1% on the payments explaining that it had given the catering contract only as a sub-contract of its main contract with ONGC - AO deducted TDS at 2% stating that catering charges directly spent by the assessee HELD THAT - It is observed that, unless assessee was given contracts for exploration by ONGC or similar companies who had licence from the Government, it could not operate a rig on its own nor extract any oil from the wells drilled by it. Thus, the rigs employed by the assessee in offshore drilling were all based on its contract with ONGC and similar companies licenced by the Government to do so. Hence, it could not be considered that the assessee had entered into a catering contract as an independent contract having no relation whatsoever with main contract it had with oil companies. In our opinion, assessee can only be considered as a sub-contractor engaged for carrying out a part of the work undertaken by the assessee. We are, therefore, of the opinion that assessee had correctly deducted relevent percent from its payment made on catering contract considering such catering contract to be a sub-contract - Decision in favour of Assessee. Payments made to non-residents without deduction of TDS - Disallowance u/s 40(a)(i) - Assessee provided some services to non residents - On such payments, Assessee deducted tax at 4% to fall under Section 44BB - As per AO, Assessee can't decide the applicability of Section 44BB - HELD THAT - Assessee admittedly was engaged in exploration of oil on offshore basins and drilling was undertaken on contracts received from entities like ONGC. Such offshore drilling was for crude oil and crude oil is definitely a mineral oil. Therefore, services rendered by a non-resident entity for rental and repairs to machinery used in offshore drilling and also for drilling services can only be considered as services or facilities in connection with prospecting for, or extraction or production of mineral oil. Hence assessee had sufficient reason to have a bonafide belief that Section 44BB would apply to non - residents. We are, therefore, of the view that assessee was right in effecting deduction of tax at source considering Section 44BB - Decision in favour of Assessee. Rental Income - Income from House Property or Income from Business - Assessee had let out a portion of its building, but the rental income therefrom was shown under the head profits and gains from business - AO said such rental income could be considered only under the head income from house property - CIT(A) upheld the decision of AO by following the decision of SHAMBHU INVESTMENT P. LTD. VERSUS COMMISSIONER OF INCOME-TAX 2003 (1) TMI 99 - SC ORDER and COMMISSIONER OF INCOME-TAX VERSUS CHENNAI PROPERTIES AND INVESTMENTS LTD. 2003 (3) TMI 28 - MADRAS HIGH COURT HELD THAT - What was let out was building and not plant, machinery or any other asset. It is settled law that when a building is let out, the income has to be computed as income from house property. It was not letting out of a complex nature involving machinery and services - CIT(A) decision is therefore, upheld - Decision against Assessee. Disallowance u/s 94(7) - AO noted that assessee had claimed short term capital loss arising out of sale of units of mutual funds which were held for a period of less than three months - Disallowance was made u/s 94(7) - HELD THAT - It is for the assessee to show that the short term capital loss claimed by it were all on mutual investments, for which there was no record date. Assessee could not produce any details. In fact, nothing was brought on record to show how the computation made by the Assessing Officer was not acceptable. We are, therefore, of the opinion that the disallowance was rightly done - Decision Against Assessee. Claim made otherwise than by way of Revised Return - Assessee made a claim for amortization of preference share issue expenses when put on notice that the said amount could not be allowed as revenue expenditure. HELD THAT - Assessee had never made a claim for amortization of preference share issue expenses in its return of income, but had chosen to make such a claim when put on notice that the said amount could not be allowed as revenue expenditure. In so far as contention of learned D.R. that assessee could not prefer such a claim, but through a revised return, no doubt, in the case of GOETZE (INDIA) LIMITED VERSUS COMMISSIONER OF INCOME-TAX 2006 (3) TMI 75 - SUPREME COURT , Hon'ble Apex Court held that an A.O. could not entertain a claim made otherwise than by way of revised return. However, here the assessee had claimed the whole of the amount as revenue expenditure. The letter filed by the assessee was only an alternative claim that amount if not allowed in one go, it should be considered amortization under Section 35D. Assessee might have made a claim under a particular Section, but if the claim though not allowable under that section, but was allowable under another section, then it cannot be considered as a fresh claim, though the allowance under the latter Section could be given only in a gradated manner. The claim, nevertheless, was always there and we cannot consider it as claim of allowance made for the first time. In any case, AO himself had considered the claim of the assessee under Section 35D. He did not allow the claim as assessee, according to him, was not an industrial undertaking and assessee had not completed extension of its industrial undertaking by purchase of rig. AO never declined to consider the claim for a reason it was made otherwise than through a revised return. Amortization of Preference Share Issue Expenses u/s 35D - Now coming to the merits, the purchase of a rig might result in extension of its industrial undertaking. But, the deduction under Section 35D would be allowable for ten successive years beginning with the year in which extension of industrial undertaking is complete. It is an admitted position that the rig was under refurbishment and was not put to use. It is also an admitted position that assessee itself had shown it as a part of capital work in progress. Hence, extension of the industrial undertaking cannot be considered as complete in the relevant previous year. Ld. CIT(Appeals) was justified in denying assessee claim u/s 35D of the Act - Decision against Assessee.
Issues Involved:
1. Depreciation allowance on windmills. 2. Disallowance under Section 14A of the Income-tax Act. 3. Disallowance under Section 40(a)(ia) for non-deduction of tax on payments to catering contractors. 4. Disallowance under Section 40(a)(i) for payments made to non-residents without proper TDS. 5. Classification of rental income as "income from house property" vs. "income from business." 6. Disallowance under Section 94(7) for short-term capital loss on mutual fund units. 7. Amortization of preference share issue expenses under Section 35D. Detailed Analysis: 1. Depreciation Allowance on Windmills: The Revenue's appeal contested the deletion of a depreciation disallowance of Rs. 4,67,74,780/- on windmills. The Tribunal noted that the CIT(A) relied on a previous Tribunal decision favoring the assessee for the assessment year 2003-04, and no new contrary evidence was presented. Hence, the Tribunal dismissed the Revenue's ground. 2. Disallowance under Section 14A: The Revenue challenged the deletion of a disallowance of Rs. 30,12,454/- under Section 14A. The Tribunal observed that the CIT(A) had deleted the disallowance based on the assessee's cash flow statement, showing that interest-free funds were used for investments. The Tribunal remitted the issue back to the Assessing Officer (A.O.) for fresh consideration, noting that the Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd. v. DCIT clarified that Rule 8D could not be applied retrospectively but allowed for apportionment of expenses. 3. Disallowance under Section 40(a)(ia) for Catering Contractors: The Revenue disputed the deletion of a disallowance of Rs. 62,21,744/- for non-deduction of tax on payments to catering contractors. The Tribunal upheld the CIT(A)'s decision, agreeing that the catering contract was a sub-contract under the main contract with ONGC, and the assessee correctly deducted TDS at 1%. 4. Disallowance under Section 40(a)(i) for Payments to Non-Residents: The Revenue contested the deletion of a disallowance of Rs. 2,11,02,509/- for payments made to non-residents without proper TDS. The Tribunal found that the assessee had a bona fide belief that Section 44BB applied, allowing for a lower TDS rate. The Tribunal upheld the CIT(A)'s decision, referencing a coordinate Bench decision supporting the assessee's position. 5. Classification of Rental Income: The assessee's appeal challenged the classification of rental income as "income from house property" instead of "income from business." The Tribunal upheld the CIT(A)'s decision, citing precedents that rental income from buildings should be assessed as "income from house property." 6. Disallowance under Section 94(7) for Short-Term Capital Loss: The assessee contested the disallowance of Rs. 91,423/- under Section 94(7) for short-term capital loss on mutual fund units. The Tribunal upheld the CIT(A)'s decision, noting the assessee failed to provide evidence that the investments had no record date. 7. Amortization of Preference Share Issue Expenses under Section 35D: The assessee appealed the disallowance of amortization of preference share issue expenses of Rs. 4,13,25,000/-. The Tribunal agreed with the CIT(A) that the extension of the industrial undertaking was not complete as the purchased rig was not put to use and classified as "capital work in progress." The Tribunal dismissed the assessee's claim for the relevant assessment year. Summary of Results: - Appeals of the Revenue in I.T.A. No. 1542/Mds/10 and 1543/Mds/10 are partly allowed for statistical purposes. - Appeals of the assessee in I.T.A. No. 1381/Mds/10 and 1382/Mds/10 are dismissed. The order was pronounced on 15th July, 2011.
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