2015 (1) TMI 157 - AT - Income Tax

Validity of additions of share application money received Whether the assessee had been able to furnish proof of existence of the investors, their creditworthiness and genuineness of the transaction, which an assessee is required to establish to get rid of the application of the provisions u/s 68 - Revenue was of the view that these investments are nothing but incomes generated in defence contracts in India received outside and brought into India in the garb of investments, including in the appellant company - Held that - In order to provide satisfactory explanation as to the nature and source of a sum found credited in his books, the initial burden is on the assessee and the assessee is required to prove identity of the shareholder, creditworthiness of the shareholder, and genuineness of the transaction - the assessee had furnished proof of existence of the investor, proof that the money have come from the investor and has also provided financial statement of the investors, details of the investments by the investors - the statement given by the assessee to the DIT Investigation, New Delhi on 8.3.2007 does not better the case of the Revenue, as the assessee has claimed that his interest in M/s. Claridges Hotels P. Ltd. is only by way of investments made through M/s. UBS, Mauritius, in which company he has only 20% stake. Simply because the assessee is the Chairman of M/s. Claridges Hotels Pvt. Ltd. and because his son was Managing Director of the company, it does not support the addition as the investment in the hotel is made by M/s. UBS Ltd., Mauritius in while the company which the assessee controls it is a minority shareholder - assessee has demonstrated that he controls only 20% stake holder in M/s. UBS LTd., Mauritius similar issue has been decided in M/s Russian Technology Centre (P) Ltd. Versus Dy. CIT, New Delhi 2013 (4) TMI 659 - ITAT DELHI - moneys were received through regular banking channels, from UBSM, who was the holding company of the assessee - being the holding company, the inclusion of the shares in earlier years was proved, established and accepted by the revenue authorities - during the year, the assessee received further sums towards allotment of shares and the assessee has filed various documents in evidence to establish the identity (already accepted), creditworthiness and genuineness of the transaction Decided against revenue. Applicability of section 68 - Receipt of money towards share capital from non-resident Held that - Relying upon M/s Russian Technology Centre (P) Ltd. Versus Dy. CIT, New Delhi 2013 (4) TMI 659 - ITAT DELHI - the assessee has been able to establish the identity, creditworthiness of the share applicants and the genuineness of the transaction by furnishing several documents in evidence in support on the basis of which the CIT(A) has righty deleted the addition made u/s 68 Decided against revenue. Disallowance made u/s 14A Held that - The provisions laid down under Rule 8D of the Income-tax Rules, 1962 are applicable from the AY 2008-09, which has now been upheld in Maxopp Investment Ltd. vs. CIT 2011 (11) TMI 267 - Delhi High Court - the AO noted that the assessee had investment in subsidiary companies and holding that section 14A can be applied for disallowance, even if there is no exempt income, he made disallowance of ₹ 4,37,36,365 - CIT(A) set aside the matter to the AO to consider whether the amount of ₹ 9 crores share application money should be excluded from investment and if so recompute the disallowance under Rule 8D - both the authorities below have ignored this undisputed material fact that during the assessment year there was no exempt income, thus, there was no question of making any disallowance of expenditure under sec. 14A read with Rule 8D thus, the AO is directed to delete the disallowance. Disallowance on claim of deduction on bad debt written off in the books of account u/s 36(1)(vi) deleted Held that - After amendment in section 36(1)(vii) of the Act w.e.f. 01.04.1989, in order to obtain a deduction in relation to bad debt, it is not necessary for the assessee to establish that the debt in fact, has become irrecoverable, it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee - since the AP has not denied this material fact that the bad debt has been written off in the accounts of the assessee, the CIT(A) has rightly allowed in claimed deduction Decided against revenue. Disallowance of depreciation on health equipments Equipments installed at the residence of MD of assessee hotel Held that - As decided in assessee s own case for the earlier assessment year, it has been held that when the holding company was paying for renovation made in the assessee company, there was no commercial expediency or reason for the assessee to enter into an agreement with its holding company to pay for certain services as it was simultaneously receiving substantial more capital/services by way of renovation/consultancy free of any cost from the same holding company - the agreement between the assessee and UBSM, vide which the impugned payments were made was providing understanding between two closely linked entities and was also abruptly terminated - as the expenditure was not based on commercial expediency, it was rightly disallowed Decided against assessee. Disallowance of repair and maintenance expenses Held that - The claimed expenses are on repairing of Chiller Colling Tower Platform already in existence, time office ruffin, boiler pump, fabrication, fixing of angles, grating and miscellaneous repair on the already existing structure/building which requires frequent upgradation, considering the nature of the business of the assessee - keeping in view the nature of the expenditure in mind on the above items, details of which have been reproduced by the AO and the AO is directed to delete the addition of ₹ 12,97,394 made on account of disallowance of expenditure claimed by the assessee as Revenue expenditure Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of additions made by the Assessing Officer (AO) on account of share application money received.
2. Disallowance under Section 14A of the Income-tax Act, 1961.
3. Disallowance of bad debt written off.
4. Disallowance of depreciation on health equipment.
5. Disallowance of consultancy fees.
6. Disallowance of repair and maintenance expenses.
7. Validity of proceedings under Section 153A and/or 143(2).

Detailed Analysis:

1. Validity of Additions on Account of Share Application Money:
The primary issue across all assessment years was the validity of additions made by the AO regarding share application money received by the assessee from Paradigm Hotels Pvt. Ltd. (PHPL) and Universal Business Solutions (UBSM), a company incorporated in Mauritius. The AO claimed these investments were incomes generated in defense contracts in India, brought into India as investments. The assessee countered by submitting all requisite evidence to discharge its onus under Section 68 of the Income-tax Act, 1961. The Tribunal found that the assessee had sufficiently established the identity, creditworthiness of the investors, and genuineness of the transactions. The Tribunal upheld the CIT(A)'s deletion of the additions, noting that the AO's findings were based on mere surmise and conjecture without substantive evidence.

2. Disallowance under Section 14A:
The AO made disallowances under Section 14A read with Rule 8D for various assessment years, arguing that the assessee incurred expenditure in earning exempt dividend income. The CIT(A) allowed relief, and the Tribunal upheld this, noting that Rule 8D is applicable from the assessment year 2008-09 onwards. For years without exempt income, the Tribunal held that no disallowance could be made, aligning with the decisions of various High Courts that Section 14A cannot be invoked in the absence of exempt income.

3. Disallowance of Bad Debt Written Off:
The AO disallowed the bad debt written off, but the CIT(A) allowed the deduction. The Tribunal upheld the CIT(A)'s decision, referencing the settled legal position that after the amendment to Section 36(1)(vii) effective from 01.04.1989, it is sufficient if the bad debt is written off in the accounts of the assessee.

4. Disallowance of Depreciation on Health Equipment:
The AO disallowed depreciation claimed on health equipment installed at the residence of the Managing Director, considering it for personal use. The Tribunal set aside the matter to the AO to examine if the facility was part of the perquisite and decide afresh.

5. Disallowance of Consultancy Fees:
The AO disallowed consultancy fees paid to UBSM, questioning the genuineness and commercial expediency. The CIT(A) upheld the AO's decision. The Tribunal found no reason to interfere, noting that the agreement between the assessee and UBSM was abruptly terminated and lacked commercial expediency.

6. Disallowance of Repair and Maintenance Expenses:
The AO treated certain repair and maintenance expenses as capital in nature. The Tribunal, upon examining the nature of expenses (e.g., replacement of tiles, hinges, etc.), held them to be revenue in nature and directed the AO to delete the disallowance.

7. Validity of Proceedings under Section 153A and/or 143(2):
The assessee questioned the validity of proceedings under Section 153A and/or 143(2), but this ground was not pressed during the hearing. Consequently, the Tribunal rejected this ground as withdrawn.

Conclusion:
The Tribunal upheld the CIT(A)'s deletion of additions on account of share application money and disallowances under Section 14A for years without exempt income. It also upheld the allowance of bad debt written off and directed the AO to delete disallowances of repair and maintenance expenses. The Tribunal set aside the issue of depreciation on health equipment for fresh examination and upheld the disallowance of consultancy fees. The validity of proceedings under Section 153A and/or 143(2) was not pressed and thus rejected.