2014 (9) TMI 389 - AT - Income Tax

Validity of notice u/s 143(2) Held that - The contention of the assessee if the case is selected for scrutiny with the aid of computer then there is no application of mind by the AO as required u/s 143(2)(i) of the Act cannot be accepted - the thrust is on voluntary compliance of the tax payer and by ensuring that some deterring measures are taken that too in a taxpayer friendly manner of promoting the assessee to file returns without attaching any paper and then selecting only very small number of cases for scrutiny with the aid of computer and certain generally formed guidelines - it cannot be said that the decision of the AO to select the case for scrutiny in this system is not an independent decision of the AO Decided against assessee. Deduction u/s 80IA Interest received from units - Whether the receipts of the assessee can be said to be income derived from this activity of the assessee company Held that - For the purpose of allowing deduction u/s 80IA, only those income are to be considered which are derived from the eligible activity and not those income which are in relation to the eligible activity - it includes Processing fees, Misc. receipt, Interest money & premium forfeiture, Use & occupation charges, Rent received, time extension fee, Interest on FDR, sub Letting charges, Interest on sewerage charges, sales of application forms/TEF etc, rent received on Flattered factory etc. - The deduction u/s 80IA has been claimed by the assessee in respect of developing infrastructure facility as per sub section (4) of section 80IA - it cannot be said that these receipts are derived from the activity of the assessee company regarding development of infrastructure facility - At the best, it can be said that these receipts are in relation to this activity of the assessee company but it cannot be accepted that these receipts are derived from this activity of the assessee company regarding development of infrastructure facility - Therefore, these receipts are not eligible for deduction u/s 80IA the order of the CIT(A) is upheld Decided against assessee. Prior paid expenses Water charges paid Held that - CIT(A) rightly held that the interest income had accrued to the assessee in earlier years and had also been offered to tax in those years - the assessee has not established that it has written off alleged interest in the ledger account of the respective allottees - no evidence has been brought on record to establish that the interest receivable having been accrued in the earlier year has been written off in the books of account - Regarding the water charges payable to Jal Sansthan, CIT(A) has directed the AO to verify the demand raised by Jal Sansthan and in case it is found that such demand was raised during the year under reference, the amount would stand allowed as deduction the order of the CIT(A) is upheld Decided against assessee. Adhoc disallowance u/s 14A r.w. Rule 8D Held that - The AY involved is 2007-08 whereas Rule 8D has been made applicable from next year i.e. AY 2008-09 and therefore, Rule 8D is not applicable CIT(A) rightly relied upon Godrej & Boyce Manufacturing Co. Ltd. vs DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT - Rule 8D could not be invoked by the A.O. for the A.Y. 2007-08, however, there is no embargo on the A.O. in computing the disallowance under Sec. 14A on a reasonable and fair basis - ₹ 1 lac disallowance is reasonable because the disallowance worked out by the AO as per Rule 8D being 0.5% of average investment Decided against assessee. Entitlement for deduction u/s 36(1)(viii) Notice for enhancement issued Held that - In a paper book submitted by the assessee, only one sample lease deed executed by the assessee in favour of the allottees - The lease deed is dated 27/12/2004 and as per clause (1) of this lease deed, the outstanding premium was to be repaid by the allottee in 10 equal installments along with the interest @15% per annum - even if it is accepted that allowing installment facility to the allottee of lease by the assessee company is giving loans and advances then also, this is not a long term finance as per clause (h) of explanation to section 36(1)(viii) because as per this explanation, long term advance has been defined as any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years - the repayment is to be made in a period less than five years and this cannot be accepted as long term finance - Since only a sample copy of only one lease deed is made available to us, all other lease deeds are similar - the assessee is not eligible for deduction u/s 36(1)(viii) of the Act Decided against assessee.

Summary

Issues Involved:
1. Validity of notice under Section 143(2) of the Income Tax Act.
2. Addition on account of leasing of industrial sites/plots.
3. Disallowance of contribution to LIC under Group Gratuity Insurance Scheme.
4. Deduction under Section 80IA for interest income.
5. Deduction of prior period expenses.
6. Ad-hoc disallowance under Section 14A.
7. Deduction under Section 36(1)(viii).

Detailed Analysis:

1. Validity of Notice under Section 143(2)
The appellant contended that the notice issued under Section 143(2) was invalid as there was no application of mind by the Assessing Officer (AO) and it was merely a computer selection. The Tribunal examined various judicial pronouncements cited by the appellant but found that none of them supported the appellant's contention. The Tribunal concluded that the AO's action was valid even if the case was selected for scrutiny with the aid of a computer, as the ultimate decision remained with the AO. Therefore, the grounds were rejected.

2. Addition on Account of Leasing of Industrial Sites/Plots
The appellant argued that the premium received from entrepreneurs for allotment of industrial sites was not income chargeable to tax. The Tribunal noted that this issue had been decided against the appellant in earlier years and no new material was presented to warrant a different view. Consequently, the Tribunal upheld the addition of Rs. 10,24,41,424/- made by the AO.

3. Disallowance of Contribution to LIC under Group Gratuity Insurance Scheme
The appellant claimed that the contribution made to LIC under the Group Gratuity Insurance Scheme should be allowed as a deduction. The Tribunal found that this issue was also decided against the appellant in earlier years and no new arguments were presented. Therefore, the Tribunal upheld the disallowance of Rs. 99,60,538/-.

4. Deduction under Section 80IA for Interest Income
The appellant contended that interest income earned by its eligible units should qualify for deduction under Section 80IA. The Tribunal noted that the interest income could not be treated as "income derived from eligible business" and upheld the CIT(A)'s direction to exclude the interest income from the computation of eligible profit. The Tribunal emphasized that only income directly derived from the eligible activity qualifies for deduction under Section 80IA.

5. Deduction of Prior Period Expenses
The appellant argued that prior period expenses accrued as a liability in the year under appeal and should be allowed as a deduction. The Tribunal found that the appellant had not established that the interest receivable written off was reflected in the ledger accounts of the respective allottees. Regarding water charges payable to Jal Sansthan, the Tribunal upheld the CIT(A)'s direction to verify the demand raised during the year under reference. Consequently, these grounds were rejected.

6. Ad-hoc Disallowance under Section 14A
The appellant contended that the adhoc disallowance of Rs. 1,00,000/- was unsustainable. The Tribunal noted that Rule 8D was not applicable for the assessment year 2007-08, but the AO could still compute disallowance under Section 14A on a reasonable basis. The Tribunal found the disallowance of Rs. 1,00,000/- reasonable and upheld the CIT(A)'s order.

7. Deduction under Section 36(1)(viii)
The appellant claimed that it was entitled to deduction under Section 36(1)(viii) as a company engaged in providing long-term finance. The Tribunal examined a sample lease deed and found that the repayment period was less than five years, which did not meet the definition of long-term finance under Section 36(1)(viii). Therefore, the Tribunal concluded that the appellant was not eligible for the deduction and upheld the CIT(A)'s order.

Conclusion
The appeal of the assessee was dismissed, and all the grounds raised were rejected based on the detailed analysis and precedents cited. The Tribunal upheld the decisions of the CIT(A) on all issues.