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2013 (1) TMI 182 - AT - Income TaxClub expenses - Disallowance as in the assessment year 1999-2000 Commissioner (Appeals) has confirmed the said disallowance - Held that - As in assessee s own case in the assessment year 1997-98 to 2000-01 the Tribunal after following the judgment in case of Otis Elevator Company (India) Limited Versus CIT (1991 (4) TMI 53 - BOMBAY HIGH COURT) held that the expenditure towards club expenditure are allowable as business expenditure and allowed the assessee s claim - as there is no change in the facts and circumstances of the case in present AY direction to delete the disallowance - in favour of assessee. Addition on account of unutilized MODVAT credit on the closing stock - Held that - From the plain reading of the provisions of section 145A, it is evident that for the purpose of valuation of purchase and sale of goods and inventories, adjustment on account of tax, duty, cess or fee actually paid or incurred by the assessee has to be made. Excise duty component in the form of MODVAT in the raw materials has to be included while valuing the purchases and sales of goods and inventories, as it has a direct bearing on valuation of stock. Thus, that the matter needs to be restored back to the file of the Assessing Officer to carry out necessary valuation on account of MODVAT credit on purchases and inventories in accordance with the provisions contained in section 145A. The assessee will provide necessary details and working to the Assessing Officer to this effect, who will verify the same - the corresponding adjustment in the opening stock should also be made in view of the principles laid down in case of Mahalaxmi Glass Works P. Ltd. (2009 (4) TMI 182 - BOMBAY HIGH COURT)- partly in favour of assessee for statistical purposes. Disallowance of interest and expenses u/s 14A r.w.r. 8D - assessee contested that no disallowance u/s 14A where no income is earned by the assessee - Held that - Commissioner (Appeals) that Rule 8D is applicable in this year, cannot be sustained in view of the judgmentin the case of Godrej Boyce (2010 (8) TMI 77 - BOMBAY HIGH COURT), wherein it has been held that Rule 8D cannot be applied retrospectively i.e., prior to assessment year 2008-09 - unable to accept this contention of the assessee that funds in the form of accumulated depreciation should be treated as available funds because the actual figure, as given in the balance sheet has to be taken into account. As it is noticed that the assessee has earned dividend income of Rs. 6,14,300 and it cannot be said that the assessee has no exempt income forming part of the total income. Secondly, the Delhi Special Bench of the Tribunal in the case of Cheminvest Ltd. Vs. ITO (2009 (8) TMI 126 - ITAT DELHI-B) wherin held that even if no income was received, expenditure incurred can be disallowed under section 14A - matter needs to be restore back to the file of the AO to examine the availability of assessee s own funds and any other interest bearing funds in view of the principles laid down in Reliance Utilities & Power Ltd 2009 (1) TMI 4 - HIGH COURT BOMBAY that if the assessee has own funds and non-interest bearing funds, the presumption can be drawn that investments have been made from these funds - partly in favour of assessee statistical purposes. Disallowance of prior period expenses - Held that - The Tribunal for the assessment year 2000-01, in assessee s own case, has given a direction to allow these expenditure in the assessment year 2000-01. In view of this fact that these prior period expenses have been directed to be allowed in the assessment year 2000-01, hence, the same cannot be allowed in this year. Disallowance of interest receivable written-off - assessee has written off this amount of interest in the account as irrecoverable as per the decision taken by the board of directors in resolution in May 2002 - whether the decision to write-off the amount after the close of the financial year can be done and treated to be written off in the accounts of the assessee for the previous year - Held that - As decided CIT v/s United Bank of India 1990 (11) TMI 348 - CALCUTTA HIGH COURT subsequent resolution by the board of directors approving the bad debt relates back to the date of finalization of accounts - in present case even the board resolution was passed in May 2002, with regard to the approval of writing off the amount as irrecoverable in the accounts, it will relate back to that previous year in which it is being treated as irrecoverable and written off in the accounts of the assessee. There is no such condition in the said clause i.e., clause (vii) of sub section (1) of section 36 that the decision for treating debt as bad or irrecoverable should be taken in the previous year itself. If the books of account are not closed and completed, it is permissible to make adjustments before being finally adopted - there is also a categorical finding by the Tribunal in assessment year 2000 01 that interest income has always been treated as business receipts by the AO, thus, once the interest income has been offered on accrual basis, which has been debited in the Profit & Loss account as business income and the same has been written off as irrecoverable in the accounts in this year, the same has to be allowed as bad debt fairly settled in the case of TRF Ltd 2010 (2) TMI 211 - SUPREME COURT - in favour of assessee. Disallowance of Inter Corporate Deposit (ICD) along with the interest written off - Held that - Assessee had shown interest on ICDs on accrual basis in the Profit & Loss account in the earlier years. Also the amount received under one time settlement with the companies, the assessee has adjusted the same against the principal amount first. The interest portion has mostly been written off. Insofar as the Commissioner (Appeals) s finding that the amount received should have been first adjusted against the accrued interest and then towards principal, cannot be upheld as there is no such law which permits that adjustment should be first made against the interest and not towards the principal amount unless the parties have agreed to otherwise - it is not disputed that in all these years, the assessee had shown accrued interest on ICDs in the Profit & Loss account and has been offered for tax as business income also been accepted by the Department, therefore, once interest income has been taxed as business income, Commissioner (Appeals) cannot say that lending of money in the form of ICDs was not part of the business activities. Once the assessee has written off this amount as irrecoverable, the same has to be allowed as bad debt under section 36(1)(vii) r/w section 36(2) as all the conditions laid down therein stands fulfilled - in favour of assessee. Capitalization of interest expenditure in the books of account however claimed the same as deduction while computing its taxable income - AO has disallowed the said expenditure on the ground that proviso added to section 36(1)(iii) though brought in statute w.e.f. 1st April 2004 is clarificatory in nature - Held that - This issue is now covered by the judgment of Core Health Care (2008 (2) TMI 8 - SUPREME COURT OF INDIA) that provision for capitalization of such interest is prospective in nature and will apply w.e.f. A.Y. 2005 06.
Issues Involved:
1. Disallowance of club expenses. 2. Addition of unutilized MODVAT credit to the closing stock. 3. Disallowance of interest and expenses under section 14A of the Income Tax Act. 4. Disallowance of prior period expenses. 5. Disallowance of interest receivable written-off. 6. Disallowance of Inter Corporate Deposit (ICD) along with the interest written-off. 7. Deletion of interest expenditure relating to borrowed funds utilized for the purchase of capital asset. 8. Direction to alter the opening stock by considering unutilized MODVAT credit. Detailed Analysis: 1. Disallowance of Club Expenses: The assessee challenged the disallowance of club expenses amounting to Rs. 96,997. The Assessing Officer disallowed the expenses based on prior years' decisions. The Commissioner (Appeals) upheld the disallowance due to lack of evidence linking the expenses to business purposes. The Tribunal, however, found that the issue had been previously decided in favor of the assessee and allowed the claim, setting aside the impugned order. 2. Addition of Unutilized MODVAT Credit to the Closing Stock: The assessee contested the addition of Rs. 9,49,30,534 on account of unutilized MODVAT credit. The Assessing Officer added this amount to the closing stock, which the Commissioner (Appeals) upheld. The Tribunal restored the matter to the Assessing Officer to revalue the closing stock as per section 145A, ensuring corresponding adjustments in the opening stock, following the principles laid down by the Jurisdictional High Court. 3. Disallowance of Interest and Expenses under Section 14A: The assessee challenged the disallowance of Rs. 5,97,30,707 under section 14A. The Assessing Officer disallowed this amount, attributing it to borrowed funds used for investments. The Commissioner (Appeals) applied Rule 8D, enhancing the disallowance. The Tribunal held that Rule 8D was not applicable retrospectively and restored the matter to the Assessing Officer to examine the availability of interest-free funds and make necessary adjustments. 4. Disallowance of Prior Period Expenses: The assessee contested the disallowance of prior period expenses amounting to Rs. 5,60,55,200. The Tribunal noted that these expenses were directed to be allowed in the assessment year 2000-01 and hence could not be allowed again in the current year. Consequently, the disallowance was upheld. 5. Disallowance of Interest Receivable Written-Off: The assessee challenged the disallowance of Rs. 1,94,49,012 as interest receivable written-off. The Assessing Officer disallowed the claim, arguing that the principal amount was not treated as bad debt. The Tribunal held that the decision to write-off could relate back to the previous year and allowed the claim as bad debt, rejecting the Commissioner (Appeals)'s conclusion. 6. Disallowance of Inter Corporate Deposit (ICD) along with the Interest Written-Off: The assessee contested the disallowance of Rs. 2,51,33,956 on account of ICDs written-off. The Tribunal found that the interest income from ICDs had been treated as business income in earlier years and allowed the claim as bad debt. The principal amount written-off was also allowed as a business loss. 7. Deletion of Interest Expenditure Relating to Borrowed Funds Utilized for the Purchase of Capital Asset: The Revenue challenged the deletion of interest expenditure amounting to Rs. 1,55,99,183. The Tribunal upheld the Commissioner (Appeals)'s decision, noting that the proviso to section 36(1)(iii) was applicable prospectively from A.Y. 2004-05, following the Supreme Court's judgment in Core Health Care. 8. Direction to Alter the Opening Stock by Considering Unutilized MODVAT Credit: The Revenue challenged the direction to alter the opening stock by considering unutilized MODVAT credit. The Tribunal upheld the direction, consistent with its earlier decision to restore the matter to the Assessing Officer with instructions to make corresponding adjustments in the opening stock. Conclusion: The Tribunal provided relief to the assessee on several issues by setting aside the disallowances and restoring matters to the Assessing Officer for revaluation and adjustments as per legal precedents. The Revenue's appeal was dismissed, affirming the decisions in favor of the assessee.
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