2011 (6) TMI 900 - AT - Income Tax

Issues Involved:
1. Disallowance of expenditure on staff welfare under section 40A(9).
2. Revenue nature of irrecoverable security deposits and other deposits.
3. Disallowance under section 14A without following Rule 8D.
4. Deduction under section 80IA for a power undertaking.
5. Classification of income from sale of clonal plants, coconut, and sugarcane as agricultural income.

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure on Staff Welfare under Section 40A(9):
The assessee appealed against the disallowance of Rs. 9,00,111/- for staff welfare under section 40A(9). The Assessing Officer (AO) disallowed this amount, stating that the payments were for employees' welfare funds, staff clubs, employees' cooperatives, and sports committees, which were not covered under section 36(1)(iv) and (v). The CIT(A) partially allowed the appeal, disallowing Rs. 9,00,111/-. The Tribunal found that the contributions were for welfare activities due to business expediency and were reimbursed expenses, not direct contributions to a fund or trust. It concluded that Rs. 8,74,311/- was allowable under section 37(1) and restricted the disallowance to Rs. 25,800/-.

2. Revenue Nature of Irrecoverable Security Deposits and Other Deposits:
The Department appealed against the CIT(A)'s decision to treat irrecoverable amounts of Rs. 3,93,303/- as revenue in nature. The AO had considered these amounts as capital in nature. The CIT(A) allowed the appeal, stating that these were trade advances given in the normal course of business. The Tribunal upheld the CIT(A)'s decision, agreeing that the deposits were not for acquiring capital assets but were normal business expenses, thus deductible as trading losses.

3. Disallowance under Section 14A without Following Rule 8D:
The Department's appeal included a ground that the CIT(A) erred in allowing the assessee's claim of disallowance under section 14A without following Rule 8D. The AO had disallowed Rs. 4,91,32,442/- under section 14A, but the assessee did not press this ground before the CIT(A) due to a Special Bench decision. The Tribunal noted that Rule 8D was not applicable for the assessment year under consideration and rejected the additional ground taken by the assessee, as it had accepted the disallowance before the CIT(A).

4. Deduction under Section 80IA for a Power Undertaking:
The Department appealed against the CIT(A)'s decision to allow 100% deduction under section 80IA for the power undertaking at Bhadrachalam. The AO had restricted the deduction to 30%, citing that the undertaking commenced operations in FY 1997-98. The CIT(A) held that the assessee first claimed deduction in AY 2002-03, and as per the amended provisions effective from AY 2002-03, the assessee could claim 100% deduction for ten consecutive years within fifteen years from the commencement of operations. The Tribunal upheld the CIT(A)'s decision, agreeing that the assessee was entitled to the amended provisions allowing 100% deduction for ten years.

5. Classification of Income from Sale of Clonal Plants, Coconut, and Sugarcane as Agricultural Income:
The Department appealed against the CIT(A)'s decision to classify Rs. 65,55,048/- from the sale of clonal plants, coconut, and sugarcane as agricultural income. The AO had treated this income as business income, stating that it arose from biotechnological research, not traditional agricultural activities. The CIT(A) allowed the assessee's claim, citing judicial decisions and a CBDT circular that defined agricultural income to include such activities. The Tribunal agreed with the CIT(A), noting that the activities involved basic agricultural operations and subsequent operations on land, thus qualifying as agricultural income under section 10(1).

Conclusion:
The Tribunal allowed the assessee's appeal in part by restricting the disallowance under section 40A(9) and dismissed the Department's appeal on all grounds, upholding the CIT(A)'s decisions. The order was pronounced in the open court on 10.06.2011.

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