2015 (11) TMI 747 - AT - Income Tax

Disallowance of part of interest expenditure on the ground that the assessee has diverted interest bearing funds to its subsidiary companies - Held that - As the sources of funds that were given to each of the subsidiary companies during the relevant years under consideration requires to be examined in order to find out about the diversion of interest bearing funds. Hence, in our view, this issue requires fresh examination at the end by the Assessing Officer Disallowance of licence fee paid - Held that - This issue is covered by the decision of the co- ordinate Benches rendered in the assessee s own case in the earlier years 2012 (9) TMI 510 - ITAT, COCHIN wherein the co-ordinate Bench of the Tribunal has examined this payment and has taken the view that this expenditure is allowable and it was so held by the Tribunal in more than one year. Hence, we are inclined to follow the view consistently taken by the Tribunal. - Decided in favour of assessee. Disallowance of employees provident fund, labour welfare fund and employees State insurance on account of delayed remittance, i.e., beyond the date prescribed in the respective enactments - Held that - Assessing Officer has not given the details of date of payment of the employees provident fund/employees State Insurance, etc., in the assessment order. The learned Commissioner of Income-tax (Appeals) has also not examined the same.Since the details of dates of payment are not available on record, we are of the view that this issue requires fresh examination in all the years. If the payments have been made before the due date prescribed under section 139(1) of the Act for filing return of income, no disallowance is required to be made. Otherwise, the disallowance should be made in respect of the amounts paid after the due date prescribed under section 139(1) of the Act. Accordingly, we set aside the order of the learned Commissioner of Income-tax (Appeals) on this issue in all the years referred to above and direct the Assessing Officer to examine the same Addition of the amount realised on sale of old and unyielding rubber trees - applicability of rule 7A of the Income-tax Rules - CIT(A) deleted the addition - Held that - Commissioner of Income-tax (Appeals) has taken the view with regard to the application of rule 7A, which is identical with the view expressed by us in the earlier paragraph, i.e., it applies only to a person who carries on the combined activity of growing rubber trees and also manufacturing or processing of field latex or coagulum obtained from rubber plants. The dominant purpose of growing rubber trees is to obtain liquid latex from them. The rubber trees are not used as it is for the purpose of manufacturing or processing, but only the latex obtained from them. Hence, the sale value of old rubber trees cannot be considered as salvage value obtained from the exhausted stock. Since the rubber trees continue to be the capital asset. Accordingly, the examples of sale of old gunny bags or old bottles quoted by the Assessing Officer are not applicable to the case of rubber trees. Hence, the decision of the Supreme Court in the case of Kalpetta Estates Ltd. v. CIT 1996 (7) TMI 4 - SUPREME Court in holding that the rubber trees constitute capital assets shall hold good even after the introduction of rule 7A in the Income-tax Rules. In view of the above, we agree with the views expressed by learned Commissioner of Income-tax (Appeals) on this issue. Assessment of sale of Grevillea trees under the head capital gains tax - Held that - This issue has also been decided in favour of the assessee by the learned Commissioner of Income-tax (Appeals) by following the decision rendered by the Tribunal in the assessee s own case in the assessment year 2006-07 as noticed that the Assessing Officer was taking consistent stand in the earlier years that no capital gain or capital loss can be computed on sale of Grevelia trees, as the cost of acquisition could not be ascertained in a reason able manner. Provision of gratuity cannot be added for computing book profit under section 115JA/JB of the Act. Provision for doubtful debts/advances - Held that - As Commissioner of Income-tax (Appeals) has deleted this disallowance without discussing anything about the same we restore this issue to the file of the Commissioner of Income-tax (Appeals) with the direction to examine the issue afresh in accordance with law and after affording reasonable opportunity of being heard to the assessee.

Summary

Issues Involved:
1. Disallowance of interest expenditure due to diversion of interest-bearing funds to subsidiary companies.
2. Disallowance of license fee paid to M/s. RPG Enterprises.
3. Disallowance of employees' provident fund, labor welfare fund, and employees' State insurance due to delayed remittance.
4. Taxability of the amount realized on the sale of old and unyielding rubber trees.
5. Assessment of sale of Grevillea trees under the head "capital gains tax."
6. Addition of provision of gratuity for computing book profits under section 115J/JB.
7. Addition of provision for doubtful debts/advances in the assessment year 2007-08.

Detailed Analysis:

1. Disallowance of Interest Expenditure:
The first issue pertains to the disallowance of part of the interest expenditure on the grounds that the assessee diverted interest-bearing funds to its subsidiary companies. The Tribunal referenced its previous decision in the assessee's case, noting that the Assessing Officer had mechanically disallowed the interest without considering commercial expediency or the actual diversion of funds. The Tribunal found merit in the assessee's argument of commercial expediency and sufficient interest-free funds to support the investments in subsidiaries. However, the jurisdictional High Court of Kerala, in a related case, emphasized that diversion of loan funds meant for business purposes to subsidiaries would not constitute commercial expediency. The Tribunal remanded the issue to the Assessing Officer for fresh examination in light of the High Court's decision, requiring detailed analysis of the funds' movement and sources.

2. Disallowance of License Fee:
The second issue concerns the disallowance of the license fee paid to M/s. RPG Enterprises. The Tribunal noted that this issue had been consistently decided in favor of the assessee in previous years by both the Commissioner of Income-tax (Appeals) and the Tribunal. The Tribunal reiterated that the existence of an agreement and the facts surrounding the expenditure supported the claim of commercial expediency, following its earlier decisions. The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision, as there was no contrary decision from the High Court.

3. Disallowance of Employees' Provident Fund, Labor Welfare Fund, and Employees' State Insurance:
The third issue involves the disallowance due to delayed remittance of employees' provident fund, labor welfare fund, and employees' State insurance. The Tribunal observed that the assessee claimed these payments were made before the due date for filing the return of income under section 139(1). The Tribunal noted that neither the Assessing Officer nor the Commissioner of Income-tax (Appeals) had verified the payment dates. The Tribunal remanded the issue for fresh examination, directing the Assessing Officer to verify the payment dates and apply relevant judicial decisions if payments were made before the due date.

4. Taxability of Amount Realized on Sale of Old and Unyielding Rubber Trees:
The fourth issue pertains to the taxability of the amount realized from the sale of old and unyielding rubber trees. The Tribunal referenced its previous decision, which held that Rule 7A of the Income-tax Rules does not apply to the sale of old rubber trees. The Tribunal agreed with the Commissioner of Income-tax (Appeals) that rubber trees are capital assets and the sale proceeds do not constitute taxable income under Rule 7A. The Tribunal upheld the decision of the Commissioner of Income-tax (Appeals), noting no contrary decision from the High Court.

5. Assessment of Sale of Grevillea Trees:
The fifth issue involves the assessment of the sale of Grevillea trees under "capital gains tax." The Tribunal noted that the Assessing Officer had previously disallowed the claim of capital loss on the sale of Grevillea trees, following judicial precedents that the cost of acquisition could not be ascertained with reasonable accuracy. The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision that the amount received from the sale of Grevillea trees was a capital receipt and not taxable, as the consistent stand over the years could not be changed without new facts or legal views.

6. Addition of Provision of Gratuity for Computing Book Profits:
The sixth issue relates to the addition of the provision of gratuity for computing book profits under section 115J/JB. The Tribunal referenced its previous decision, which held that the provision for gratuity liability cannot be added for computing book profit. The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision, following judicial precedents that support this view.

7. Addition of Provision for Doubtful Debts/Advances in Assessment Year 2007-08:
The seventh issue involves the addition of the provision for doubtful debts/advances. The Tribunal noted that the Commissioner of Income-tax (Appeals) had deleted this disallowance without discussing it. The Tribunal remanded this issue to the Commissioner of Income-tax (Appeals) for fresh examination in accordance with the law, after providing the assessee an opportunity to be heard.

Conclusion:
The Tribunal partly allowed the appeals for statistical purposes, remanding several issues for fresh examination and upholding the Commissioner of Income-tax (Appeals)'s decisions on others. The order was pronounced on May 14, 2015.