2015 (4) TMI 92 - AT - Income Tax

Pre-operative income - Held that - Assessee was in receipt of ₹ 38 lacs prior to commencement of operation which was adjusted against the capital expenditure. By applying the decision of Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (1997 (7) TMI 4 - SUPREME Court), the A.O. has taxed the same as income from other sources . The ld. A.R. has relied on the decision of Triveni Engineering Works Ltd. vs. CIT, 1997 (11) TMI 77 - DELHI High Court , CIT vs. Bokaro Steel Ltd. (1998 (12) TMI 4 - SUPREME Court) and Indian Oil Panipat Power Consortium Ltd. vs. TO (2009 (2) TMI 32 - DELHI HIGH COURT) and contended that such pre-operative receipt was liable to be adjusted against capital receipt. However, the nature of such receipt whether intrinsically connected with the assets acquired for implementation of project has not been explained. In the interest of justice, we restore this issue back to the file of A.O. for deciding the same afresh after considering the nature of receipt vis- -vis intrinsic connection with the capital expenditure incurred by the assessee. - Decided in favour of assessee for statistical purposes. Provident fund dues - disallowance u/s 37 deleted by CIT(A) - Held that - CIT(A) has allowed the claim by applying the provisions of section 43B of the Act wherein deduction n respect of provident fund was allowed on payment basis. The ld. CIT(A) held that the amount has been paid during the year under consideration and therefore deduction has to be allowed during the year itself. We do not find any infirmity in the order of ld. CIT(A) deleting the addition made by the A.O. - Decided in favour of assessee. Disallowance of club entry fee - disallowance u/s 37 deleted by CIT(A) - Held that - CIT(A) for allowing club fees by following the decision of Otis Elevators 1991 (4) TMI 53 - BOMBAY High Court and the decision of Gujarat Estate Export Corporation Ltd. ( 1993 (9) TMI 52 - GUJARAT High Court). As the expenditure was incurred was revenue in nature as held by the Hon ble High Court, we do not find any infirmity in the order of ld. CIT(A) deleting the disallowance - Decided in favour of assessee. Disallowance of brand service fees treated as capital expenditure - Held that - brand servicing fee was paid by the assessee since last several years and in the earlier assessment orders, this expenditure has been held to be revenue in nature by the A.O. himself. No distinguishing feature was brought on record by the A.O. during the year under consideration to justify the disallowance of assessee s claim. Accordingly, we do not find any infirmity in the order of ld. CIT(A) deleting the disallowance of brand servicing fee paid by the assessee insofar as findings recorded by the ld. CIT(A) had not been controverted by the ld. CIT - DR by bringing any positive materials on record. - Decided in favour of assessee. Disallowance of interest for interest free loans advanced to subsidiaries - CIT(A) deleted the disallowance - Held that - found that Tata Group were promoters of idea Cellular Ltd. and they were in land line telephone service in area of Madhya Pradesh. Because of this operation of Tata s in Madhya Pradesh and because of connection between Tata s and assessee company, assessee could not have entered into Mobile telephone services in the area of Madhya Pradesh. However, assessee wanted to enter into Madhya Pradesh for providing Cellular facilities. They have therefore given funds to its own subsidiary. Thus the advances to subsidiaries were out of this commercial consideration. The decision of Hon ble Supreme Court in the case of S.A. Builders 2006 (12) TMI 76 - SUPREME COURT OF INDIA is applicable to the facts of the case. The findings recorded by the ld. CIT(A) with regard to the fact that there was direct commercial expediency in advancing funds to subsidiaries have not been controverted by the Revenue by bringing any positive material on record, therefore do not find any reason to interfere with the order of ld. CIT(A) deleting the disallowance of interest attributable to funds advanced to subsidiaries - Decided in favour of assessee.

Issues Involved:
1. Taxation of pre-operative income.
2. Allowability of Revenue Share License Fees under Section 37(1).
3. Allowability of provident fund dues.
4. Disallowance of club entry fees.
5. Depreciation on license fees.
6. Treatment of brand service fees as capital expenditure.
7. Disallowance of interest on interest-free loans to subsidiaries.

Detailed Analysis:

1. Taxation of Pre-operative Income:
The assessee received Rs. 38 lakhs before the commencement of operations, which was adjusted against capital expenditure. The AO taxed this as 'income from other sources' based on the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. However, the assessee argued for adjustment against capital receipts, citing various High Court and Supreme Court decisions. The Tribunal restored this issue to the AO to reconsider the nature of the receipt and its intrinsic connection with capital expenditure, following the principles in Bokaro Steel Ltd.

2. Allowability of Revenue Share License Fees under Section 37(1):
The assessee raised additional grounds before the CIT(A) for allowing Revenue Share License Fees under Section 37(1). The Tribunal referenced its earlier decision in the assessee's case, where it allowed such claims as revenue expenditure. The Tribunal reiterated that license fees paid under the revenue-sharing scheme are allowable as revenue expenditure, following the Delhi High Court's decision in CIT vs. Bharati Hexacom Ltd.

3. Allowability of Provident Fund Dues:
The CIT(A) allowed the deduction of provident fund dues amounting to Rs. 1,70,388, applying Section 43B, which permits deduction on a payment basis. The Tribunal upheld this decision, finding no infirmity in the CIT(A)'s order.

4. Disallowance of Club Entry Fees:
The AO treated the club entry fee of Rs. 10,08,510 as capital expenditure, but the CIT(A) allowed it as revenue expenditure, citing decisions of the Bombay High Court in Otis Elevators and the Gujarat High Court in Gujarat Estate Export Corporation Ltd. The Tribunal upheld the CIT(A)'s decision, agreeing that the expenditure did not create an asset or advantage of enduring nature.

5. Depreciation on License Fees:
This issue became moot as the Tribunal had already allowed the assessee's claim for license fees paid under the revenue-sharing scheme, making the ground of depreciation on license fees irrelevant.

6. Treatment of Brand Service Fees as Capital Expenditure:
The AO disallowed brand servicing fees of Rs. 86,70,000, treating it as capital expenditure. The CIT(A) allowed the claim, noting that the disallowance was based solely on nomenclature without analyzing the nature of the expenditure. The Tribunal upheld the CIT(A)'s decision, recognizing that the fees were paid annually for using the "AT&T" brand, which did not provide enduring benefits and was consistent with previous years' treatment as revenue expenditure.

7. Disallowance of Interest on Interest-free Loans to Subsidiaries:
The AO disallowed interest of Rs. 32,34,00,000, arguing that interest-bearing funds were diverted to subsidiaries. The CIT(A) allowed the claim, citing commercial expediency and the Supreme Court's decision in S.A. Builders. The Tribunal upheld this decision, noting that the advances were made out of commercial consideration and the CIT(A)'s findings were not contested with positive material by the Revenue.

Conclusion:
The Tribunal allowed the assessee's appeal in part, directing the AO to reconsider the pre-operative income issue and upheld the CIT(A)'s decisions on other issues, including the allowability of license fees, provident fund dues, club entry fees, and brand service fees, as well as the deletion of interest disallowance on loans to subsidiaries. The Revenue's appeal was also allowed in part. The order was pronounced in open court on 11-03-2015.

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