2015 (2) TMI 1 - AT - Income Tax

Addition on interest receivable from GSI - accrual of interest - appellant had advanced a loan had accrued to appellant this year - Held that - Going through the orders of authorities below and Co-ordinate D Bench decision in assessee s own case for A.Y. 05-06, facts are similar and matter has been set aside by the Co-ordinate D Bench on similar issue to the A.O. for re-examination of explanation given by the appellan. As before us that the interest up to the end of the year has already been provided/accrued in excess, then no interest income is required to be accrued during the year. Accordingly, the matter is set aside to the A.O. on similar directions as given for A.Y. 05-06. - Decided in favour of assessee for statistical purposes. Disallowance of consumption of stores and spares - Held that - This replacement of stores and spares can be used independently and its of replacement of plant and machinery. As per A.O s. observation it has endorsing benefit to the assessee. The matter is required to re-examine with reference to addition confirmed by the CIT(A). The A.O. is directed to re-examine the nature of expenditure item-wise and take decisions as per law. - Decided in favour of assessee for statistical purposes. Disallowance of advances - assets leased by the appellant to Western Railway - Held that - The appellant had 6000 employees. For them, there is a Staff Credit & Consumers Co-operative Society. The appellant had obligation to provide certain facilities to the employees to motivate them as per management principle to get committed services from them. The appellant does not have any hope of recovery of this amount. Therefore, we reverse the order of CIT(A) on this ground. - Decided in favour of assessee. Interest claimed u/s. 36(1)(iii) - diversion of borrowed funds to subsidiary and associate concerns - CIT(A) deleted addition - Held that - When no interest bearing funds have been diverted to the sister concern by way of interest free advances. The question of going into the commercial expediency of such loans would not arise. In fact, in the light of the findings the question as formulated while admitting the appeals would not arise as on facts there is no diversion of interest bearing funds to interest free advances. Disallowance made under section 36(1)(iii) of the Act correctly deleted.- Decided in favour of assessee. Expenses on protecting the assets of M/s. Gujarat Narmada Auto Ltd. (GNAL), a sister concern of the assessee disallowed - Held that - The Hon ble Tribunal in assessee s own case for A.Y. 03-04 to 05-06 has deleted the disallowance of expenditure on maintenance of assets of GNAL. It is a covered matter by the earlier decision of the Co-ordinate Bench. Facts are identical. Expenses were incurred for business expediency. Thus, we delete the addition and confirm the order of the CIT(A). - Decided in favour of assessee. Deduction by the CIT(A) for Information Technology Related Services paid to M/s. Infinium (India) Ltd. - Held that - on ble Tribunal in assessee s own case in A.Y. 03-04 to 05-06 had deleted the disallowance of expenditure incurred in IT business. After following the Co-ordinate Bench decision for A.Y.05-06 in assessee s own case. The presumption of the A.O. that these expenses were not recovered from M/s. Infinium (India) Ltd. without any basis. He has not brought on record any contradictory evidence to show that the expenses claimed by the assessee are not genuine. Therefore, we do not find any infirmity in the order of the CIT(A) and confirm the order of CIT(A). - Decided against revenue. Disallowance u/s.14A - CIT(A) deleted the addition - Held that - was invested out of surplus fund of the part and for it no borrowing had been made during the year the appellant had re-paid the loan on ₹ 95 crore. There is no dividend income during the year from the company. The Hon ble tribunal in assessee s own case for A.Y.03-04 to 05-06 had deleted the disallowance u/s.14A. The issue is identical. The appellant had surplus fund no nexus has been established by the A.O. that borrowed fund had been utilized in purchase of shares. After considering the facts and arguments from both the sides, we do not find any infirmity in the order of the CIT(A). - Decided against revenue. Disallowances u/s. (40)(a)(ia) on account of non deduction of TDS on CHA-charges - Held that - There was no question of deduction tax at source when the payment made by the agent is reimbursed to it. The Circular mentioned by the ld. A.O. is applicable for payment made to principal to principal. The nature of payment is reimbursement of actual expenses incurred by the agent which necessary evidence has been filed before us. The agent had deducted the TDS on these payments and paid to the exchequer within prescribed time. Thus, we do not find any reason to intervene in the order of CIT(A). - Decided against revenue.

Summary

Issues Involved:

1. Accrual of interest receivable from GSIL.
2. Disallowance of consumption of stores and spares as capital expenditure.
3. Disallowance of depreciation on assets leased to Western Railways.
4. Disallowance of advances written off.
5. Deletion of addition made on account of interest claimed under section 36(1)(iii).
6. Allowance of expenses incurred in protecting assets of a subsidiary.
7. Deletion of addition made under section 14A.
8. Deletion of disallowance under section 40(a)(ia) for non-deduction of TDS.

Detailed Analysis:

1. Accrual of Interest Receivable from GSIL:
The appellant, engaged in manufacturing fertilizers and chemicals, had advanced an interest-bearing loan to GSIL in A.Y. 1994-95. The interest was disputed by GSIL, leading to arbitration. The Assessing Officer (A.O.) added Rs. 1,88,87,419 as accrued interest, citing the mercantile system of accounting and section 5 of the Income Tax Act. The CIT(A) upheld this addition, referencing the Gujarat High Court's decision in Sarabhai Chemicals Pvt. Ltd. and other precedents. The ITAT, considering the appellant's arguments and past ITAT decisions, set aside the matter to the A.O. for re-examination to determine if the interest had already been accounted for in previous years.

2. Disallowance of Consumption of Stores and Spares as Capital Expenditure:
The appellant claimed Rs. 5,710.25 lakhs as revenue expenditure for stores and spares. The A.O. capitalized Rs. 2,95,31,766, allowing depreciation instead. The CIT(A) allowed some items as revenue expenditure but upheld the capitalization of others. The ITAT directed the A.O. to re-examine the nature of the expenditure item-wise.

3. Disallowance of Depreciation on Assets Leased to Western Railways:
The appellant claimed depreciation on railway wagons leased to Western Railways. The A.O. treated it as a finance lease and disallowed the depreciation, referencing various judicial decisions. The CIT(A) upheld this disallowance. The ITAT, considering the appellant's arguments and past ITAT decisions, set aside the issue to the A.O. for fresh examination in light of the Special Bench decision in M/s. IndusInd Bank Limited.

4. Disallowance of Advances Written Off:
The appellant wrote off advances totaling Rs. 21,08,918. The A.O. disallowed this, stating the amounts were not irrecoverable and the appellant was not a banking company. The CIT(A) upheld the disallowance, categorizing it as a business loss allowable only when the recovered amount is determined. The ITAT allowed the appeal, recognizing the advances as business losses incurred for employee welfare and business expediency.

5. Deletion of Addition Made on Account of Interest Claimed Under Section 36(1)(iii):
The A.O. disallowed Rs. 3,72,84,754, claiming the appellant used borrowed funds for interest-free advances to subsidiaries. The CIT(A) deleted the addition, referencing past ITAT decisions in the appellant's favor. The ITAT upheld the CIT(A)'s decision, noting the appellant had sufficient interest-free funds and the advances were made for commercial expediency.

6. Allowance of Expenses Incurred in Protecting Assets of a Subsidiary:
The A.O. disallowed Rs. 5,08,764 spent on protecting assets of a subsidiary, GNAL, citing separate legal entity principles. The CIT(A) allowed the appeal, referencing past ITAT decisions. The ITAT upheld the CIT(A)'s decision, recognizing the expenses as incurred for business expediency.

7. Deletion of Addition Made Under Section 14A:
The A.O. disallowed Rs. 1,50,000 under section 14A for investments in Gujarat Green Revolution Company Ltd. The CIT(A) deleted the addition, noting no dividend income was received. The ITAT upheld the CIT(A)'s decision, confirming no nexus between borrowed funds and the investment.

8. Deletion of Disallowance Under Section 40(a)(ia) for Non-Deduction of TDS:
The A.O. disallowed Rs. 6,93,372 and Rs. 76,00,509 for non-deduction of TDS on CHA charges and consignment expenses. The CIT(A) deleted the disallowance, recognizing the payments as reimbursements. The ITAT upheld the CIT(A)'s decision, noting the agents had deducted TDS on the payments.

Conclusion:
The ITAT provided a detailed analysis and directions for re-examination on several issues, while upholding the CIT(A)'s decisions on others, ensuring a thorough and fair resolution of the appeals.