2014 (1) TMI 1597 - AT - Income Tax

Interest on non-business advances Held that - there being no nexus between the borrowed funds and the alleged advances, there is no justification in disallowing the interest presuming that the advances were instead out of borrowed funds - the receivables are more than payables, therefore, even no such disallowance can be contemplated from any angle. Disallowance u/s 40A(2)(b) - Related parties transactions comparison of rentals between bare premises let out by the assessee with full facilities loaded business premises hired by it - Held that - Sec. 40(A)(2b) mandates a comparison based on same set of facilities and not of incomparable - The non-maintenance of register cannot be a fatality in as much as revenue has not denied the existence of assets, their disclosure in books, schedule of fixed assets and balance sheet, depreciation expenditure has been duly allowed thereon. Purchase of UPS and repairs to building Capital or revenue in nature - Held that - Decision of CIT(A) wherein he held that UPS is a part of computer peripheral, depreciation @ 60% should be allowed confirmed. Antivirus software expenses Held that - The expenditure is to be allowable revenue in nature - There is no concept of deferred revenue expenditure under the Act - Decision in CIT v. Asahi India Safety Glass Ltd. 2011 (11) TMI 2 - DELHI HIGH COURT followed. Addition on account of Fresh cash Credits u/s 68 Held that - Compliance with RBI regulations and KYC norms was reasonable discharge of the assessees onus u/s 68 - There is no basis to hold that assessee was instigating depositor to be non-cooperative - Compliance of summons cannot be enforced by assessee - sec. 68 cannot be applied in estimated, ad hoc or generalized manner Decision in Commissioner of Income Tax Versus SAHARA INDIA FINANCIAL CORPORATION LTD. 2012 (9) TMI 845 - DELHI HIGH COURT followed. Change in rate of interest, whether amount to change in method of accounting - Held that - Assessee has discretion to change the rate of interest including with retrospective effect on outstanding balances depending on circumstances. Thus change in rate of accrual of interest cannot tantamount to change in method of accounting - Claim of assessee qua provision of interest is fully justified - CIT(A) should not have retained part of provision by applying cash system of accounting for interest provision and indirectly converting it into hybrid system is not permissible u/s 145. Outstanding creditors u/s 41(1) Held that - Decision in the case of Commissioner of Income Tax v. Shri Vardhman Overseas Limited 2011 (12) TMI 77 - DELHI HIGH COURT followed - The assessee had not unilaterally written back the accounts of the sundry creditors in its Profit Loss Account - The liability was shown in the balance sheet - The amount was not assessable under section 41(1). Disallowance of expenditure incurred on employee for their visits to zonal/regional offices Held that - The expenditure in question was incurred wholly and exclusively for the business of the appellant on its employees and expenses are actually incurred by the assessee - Claim is further supported by code numbers of employees and Form -16 issued by the appellant. Disallowance of expenditure in relation to disproportionate allocation of advertisement expenses Held that - AO was not correct in comparing BCCI fee with neon sign advertisement - Both modes are entirely different and extent of one mode of expenditure cannot be applied to other on surmises and conjectures - CIT(A) has given detailed and justifiable reasons to allow them. Pre-acquisition interest incurred at the time of purchases Held that - The amount paid for acquiring securities consists of two distinct elements, cost price of the security and future interest due thereon - Due to advance payment of interest some discount etc. is transacted depending on the market conditions qua the interest element - After acquisition assessee on matching principle debits the cost of security to investment a/c and interest component to interest a/c, the due interest when received is credit to interest a/c - AO failed to appreciate the effect of components of amount paid for transfer of securities. Prior Period Expenses Held that - merely because periodical supply or up gradation of software was governed by an earlier agreement, will not detract from the fact that it is supplied in this year - The liabilities crystallized in this year and disallowances being revenue neutral as the assessee and department are in perpetual litigation. Write-off of principal amount of NCD's Held that - As a RNBFC the assessee has to carry on the business of investment in RBI approved investments - It is in this year only the advance is finally treated as bad and written off, therefore, it is eligible to be allowed in this year - CIT(A) was right in holding it to be business investment Decision in TRF Ltd. v. CIT 2010 (2) TMI 211 - SUPREME COURT followed - Any loss of business investment or stock is allowable as write off or loss in the year of write-off. Provision for diminution in investment Held that - Investments are in the nature of stock-in-trade for the business of the appellant - Assessee follows this method consistently - Diminution in the value of business investments is an allowable business expenditure u/s 28 or u/s 37(1) - CIT(A) was right in holding that in any case, revenues interest is protected by the write back of increase in value up to cost-level, and booking of income at sale minus cost on disposal Decision in CIT v. State Bank of Patiala and American Express International Banking Corporation 2002 (9) TMI 96 - BOMBAY High Court followed. Additions of interest earned on non-performing assets not recognized as income Held that - The advances/loans in question had become NPA and sticky there is no dispute on these facts - Advances becoming NPAs on the concept of real income, prudential RBI norms and relevant AS issued by ICAI No Addition. Disallowance under section 14A Held that - Relying upon Chandigarh Bench of the Tribunal in the case of ACIT v. Punjab State Co-op. Marketing Federation Ltd. 2011 (9) TMI 187 - ITAT Chandigarh in any case the disallowance u/s 14A cannot exceed tax free income of the assessee. If mechanical method of rule 8D is applied - As the interpretation of provisions of sec. 14A r/w rule 8D is leading to unanticipated absurdities which cannot be the intention of legislature - it will be reasonable to estimate and disallow, 50% of exempt income. Interest on FDRs Held that - Mere existence of alternate remedy cannot be a ground to deny the due relief when the eligibility to relief is also expressed by CIT(A) The court is of the view that this type of relief based on consideration of avoiding unnecessary exercise in case of revenue neutral issues has been granted to assessee Decision in CIT v. Excel Industries 2013 (10) TMI 324 - SUPREME COURT followed.

Summary

Issues Involved:
1. Disallowance of interest expenditure.
2. Disallowance under section 40A(2)(b).
3. Capital vs. Revenue Expenditure.
4. Disallowance of antivirus software expenses.
5. Depreciation on UPS and Printers.
6. Addition on account of unexplained deposits.
7. Disallowance on account of change in accounting policy for interest.
8. Disallowance under section 41(1).
9. Disallowance of expenses related to associate concerns.
10. Disallowance of advertisement expenses.
11. Disallowance of sponsorship payment to BCCI.
12. Disallowance of pre-acquisition interest.
13. Disallowance of prior period expenses.
14. Disallowance of bad debts.
15. Disallowance of diminution in value of investment.
16. Disallowance under section 40(a)(ia).
17. Addition of interest on NPAs.
18. Disallowance of diminution in value of investment.
19. Disallowance of expenditure on stationery.
20. Disallowance under section 14A.

Detailed Analysis:

1. Disallowance of Interest Expenditure:
The AO disallowed Rs. 26,66,105/- as interest expenditure on non-business advances. The CIT(A) deleted the disallowance, holding that the advances were backed by business exigencies and sufficient interest-free funds were available. The ITAT upheld the CIT(A)'s decision, noting that the assessee had sufficient interest-free funds and the advances were for business purposes.

2. Disallowance under Section 40A(2)(b):
The AO disallowed Rs. 6,62,19,260/- under section 40A(2)(b) for excessive payments to related parties. The CIT(A) deleted the disallowance, observing that the payments were justified and at market rates. The ITAT upheld the CIT(A)'s decision, noting that the AO did not provide any comparable evidence to prove the payments were excessive.

3. Capital vs. Revenue Expenditure:
The AO treated the replacement of UPS and repairs to buildings as capital expenditure. The CIT(A) allowed the depreciation on UPS and treated the repairs as revenue expenditure. The ITAT upheld the CIT(A)'s decision, noting that the repairs did not create any new asset and the UPS was a replacement of an existing asset.

4. Disallowance of Antivirus Software Expenses:
The AO treated the antivirus software expenses as deferred revenue expenditure. The CIT(A) allowed the entire expenditure as revenue expenditure. The ITAT upheld the CIT(A)'s decision, noting that there is no concept of deferred revenue expenditure under the Act.

5. Depreciation on UPS and Printers:
The AO allowed depreciation on UPS and printers at 15% instead of 60%. The CIT(A) allowed depreciation at 60%. The ITAT upheld the CIT(A)'s decision, noting that UPS and printers are integral parts of the computer system and eligible for higher depreciation.

6. Addition on Account of Unexplained Deposits:
The AO made an addition of Rs. 1855,58,99,424/- as unexplained deposits under section 68. The CIT(A) deleted the addition, noting that the deposits were collected in the normal course of business and were under RBI supervision. The ITAT upheld the CIT(A)'s decision, noting that the assessee had complied with RBI guidelines and KYC norms.

7. Disallowance on Account of Change in Accounting Policy for Interest:
The AO disallowed Rs. 467,96,79,775/- for change in accounting policy for interest provision. The CIT(A) restricted the disallowance to Rs. 282,94,07,846/-. The ITAT allowed the assessee's appeal, noting that the change was bona fide and in line with RBI directions.

8. Disallowance under Section 41(1):
The AO made disallowances under section 41(1) for cessation of liabilities. The CIT(A) deleted the disallowances, noting that the liabilities were acknowledged in the books. The ITAT upheld the CIT(A)'s decision, noting that there was no cessation of liabilities.

9. Disallowance of Expenses Related to Associate Concerns:
The AO disallowed expenses related to associate concerns. The CIT(A) deleted the disallowance, noting that the expenses were incurred for the assessee's business. The ITAT upheld the CIT(A)'s decision.

10. Disallowance of Advertisement Expenses:
The AO disallowed advertisement expenses. The CIT(A) deleted the disallowance, noting that the expenses were incurred for the assessee's business. The ITAT upheld the CIT(A)'s decision.

11. Disallowance of Sponsorship Payment to BCCI:
The CIT(A) allowed additional relief of Rs. 21,86,37,443/- for sponsorship payment to BCCI. The ITAT set aside the issue to the AO for verification based on the ITAT decision in the case of SICCL.

12. Disallowance of Pre-Acquisition Interest:
The AO disallowed pre-acquisition interest of Rs. 11,86,24,109/-. The CIT(A) deleted the disallowance, noting that the interest was correctly accounted for as per AS-13. The ITAT upheld the CIT(A)'s decision.

13. Disallowance of Prior Period Expenses:
The AO disallowed prior period expenses of Rs. 8,14,000/-. The CIT(A) deleted the disallowance, noting that the expenses crystallized during the current year. The ITAT upheld the CIT(A)'s decision.

14. Disallowance of Bad Debts:
The AO disallowed bad debts of Rs. 70,13,750/-. The CIT(A) allowed the claim, noting that the debts were written off as per the conditions of sections 36(1)(vii) and 36(2). The ITAT upheld the CIT(A)'s decision.

15. Disallowance of Diminution in Value of Investment:
The AO disallowed the provision for diminution in the value of investment of Rs. 46,26,500/-. The CIT(A) allowed the claim, noting that the investments were stock-in-trade. The ITAT upheld the CIT(A)'s decision.

16. Disallowance under Section 40(a)(ia):
The AO made disallowances under section 40(a)(ia) for non-deduction of TDS. The CIT(A) upheld the disallowance on a protective basis and directed verification by the TDS wing. The ITAT extended the time for verification and set aside the issue to the AO.

17. Addition of Interest on NPAs:
The AO added interest on NPAs of Rs. 2,53,43,772/-. The CIT(A) deleted the addition, noting that income on NPAs should be recognized on receipt basis as per RBI guidelines. The ITAT upheld the CIT(A)'s decision.

18. Disallowance of Diminution in Value of Investment:
Similar to issue 15, the ITAT upheld the CIT(A)'s decision allowing the claim for diminution in the value of investment.

19. Disallowance of Expenditure on Stationery:
The AO disallowed expenditure on stationery of Rs. 1,25,45,009/-. The CIT(A) deleted the disallowance, noting that the stationery was a consumable item. The ITAT upheld the CIT(A)'s decision.

20. Disallowance under Section 14A:
The AO made a disallowance under section 14A of Rs. 2,16,51,917/-. The CIT(A) upheld the disallowance with a slight increase. The ITAT partly allowed the assessee's appeal, restricting the disallowance to 50% of the exempt income.