2016 (1) TMI 1028 - AT - Income Tax

Addition on reversal of income arising on cancellation of sales tax assignment - Held that - The reversal of the amount on cancellation of such assignment consequent upon the amalgamation of M/s Visaka Cement Industry Ltd with assessee-company is only a loss in the course of normal business, therefore, as rightly found by the CIT(A), it has to be allowed. The loss resulted to the assessee is due to cancellation of assignment of sales tax deferred. Since the profit resulting from the agreement has already been treated as income of the assessee, this Tribunal is of the considered opinion that the loss arising out of the cancellation of the agreement has also to be treated as loss in the course of regular business. Therefore, this Tribunal do not find any reason to interfere with the order of the CIT(A) on this issue and the same is confirmed. - Decided against revenue Addition being notional interest - CIT(A) deleted the addition - Held that - As rightly submitted by the assessee even if the borrowed funds were diverted for making advances to subsidiary companies, this Tribunal is of the considered opinion that there cannot be any addition of notional interest since it is not the case of the Revenue that the subsidiary companies had misused the funds for any other purpose. In other words, since the subsidiary companies used the funds for their business this Tribunal is of the considered opinion that in view of the judgment of the Apex Court in S.A Builders (2006 (12) TMI 82 - SUPREME COURT) there cannot be any addition in the hands of the assessee. A bare reading of the order of the CIT(A) shows that similar addition was made by the Assessing Officer in assessment years 2003-04 and 2004-05. The CIT(A), however, deleted the addition correctly - Decided against revenue Computation of book profit u/s 115JB - Held that - While entering into an agreement with M/s Trishul Investment Pvt. Ltd. assigning the sales tax liability, the assessee has taken the amount as income and it was charged to the Profit & Loss Account. Therefore, when the assignment was cancelled, the income which was already credited in the books of account and charged to the Profit & Loss Account has to be reversed. Therefore, this Tribunal is of the considered opinion that once the amount was reversed and it was considered to be a loss in the business, therefore, it has to be deducted while computing the book profit u/s 115JB of the Act. Therefore, as rightly submitted by the ld. Counsel, the judgment of the Apex Court in Apollo Tyres Ltd (2002 (5) TMI 5 - SUPREME Court ) supports the case of the assessee. This Tribunal do not find any infirmity in the order of the CIT(A) - Decided against revenue Interest on the advances made to subsidiary companies - Held that - The subsidiary companies used the funds advanced by the assessee for business purposes. Therefore, in view of the judgment of the Apex Court in S.A. Builders Ltd (supra) even if the borrowed funds were diverted for making advances to subsidiary companies, there cannot be any disallowance of interest. In view of the above, this Tribunal is of the considered opinion that the CIT(A) has rightly deleted the addition made by the Assessing Officer to the extent of ₹ 20.08 crores.- Decided against revenue Disallowance of depreciation on the franchisee fee paid by the assessee - Held that - the cost of franchise rights would be reduced to the extent of subsidy or discount, if any, given to the assessee. It is an admitted case of both parties that the cost of ₹ 364 crores was to be paid in 10 equal installments. Therefore, the cost of asset is ₹ 364 crores and not Rs. ₹ 36.4 crores. When the cost of block of assets was increased to the extent of ₹ 364 crores, this Tribunal is of the considered opinion that depreciation has to be allowed on the cost of block of assets increased. Therefore, the Assessing Officer is not justified in restricting the depreciation at ₹ 36.4 crores which was said to be paid during the year under consideration. This Tribunal is of the considered opinion that the entire cost of the franchise rights has to be taken into consideration for computation of depreciation. The assessee also filed appeal against the order of the CIT(A), restricting the depreciation on the amount actually paid by the assessee during the year under consideration. While adjudicating the assessee s appeal at para 34 hereunder this Tribunal found that the assessee is entitled for depreciation on the cost of ₹ 364 crores. Accordingly, the order of the CIT(A) is modified and the Assessing Officer is directed to allow depreciation on the entire cost of ₹ 364 crores. - Decided in favour of assessee Disallowance of provision for leave encashment - Held that - Sec. 43B(f) clearly says that the amount payable by the assessee as an employer in lieu of any leave at the credit of his employee cannot be allowed unless it is actually paid . In this case, admittedly, the amount is not paid and remains to be payable . Therefore, it cannot be allowed u/s 43B(f) of the Act. - Decided against assessee Claim of the assessee for depreciation @ 25% - Franchise rights acquired by the assessee of Chennai Superking - Held that - When the intangible asset was introduced for the first time, the cost of block of asset was increased to ₹ 364 crores and it may not be right to say that the assessee is entitled for depreciation only to the extent of amount paid by the assessee during the year under consideration. This Tribunal is of the considered opinion that the value of block of asset was increased to the extent of cost of asset introduced irrespective of the amount paid by the assessee during the year under consideration. When the cost of the asset is ₹ 364 crores, this Tribunal is of the considered opinion that the value of the asset increased by ₹ 364 crores. Therefore, depreciation has to be allowed on the value of the capital asset and not on the amount paid by the assessee. Hence, the observation made by the CIT(A) that the payment made by the assessee for the subsequent year has to be allowed u/s 37 may not be a correct legal position. Accordingly, the order of the CIT(A) is set aside and the Assessing Officer is directed to allow depreciation @ 25% on the entire amount. Expenditure on vastu services - Held that - Once the assessee believes that the expenditure incurred by the assessee would increase the production and profit and also improve the harmony among the workers of the company, this Tribunal is of the considered opinion that there is no reason the disallow the claim of the assessee. However, the claim of ₹ 2,50,00,000/- is highly excessive. Irrespective of the belief and faith, the payment shall be reasonable. This Tribunal is of the considered opinion that vastu is just like astrology and the opinion of an expert in the field may be one of the guiding factors. Therefore, the payment for such opinion shall not be unreasonable and arbitrary. The claim of ₹ 2,50,00,000/- is highly excessive and unreasonable. However, this Tribunal is of the considered opinion that the claim to the extent of ₹ 50,00,000/- may be reasonable. Accordingly, the orders of the lower authorities are set aside and the Assessing Officer is directed to allow the claim of the assessee u/s 37 of the Act to the extent of ₹ 50,00,000/-. Hence, the disallowance to the extent of ₹ 2,00,00,000/- is confirmed. - Decided partly in favour of assessee. Disallowance of notional expenditure u/s 14A - CIT(A) deleted the addition - Held that - The assessee being a corporate entity, without engaging manpower, would not have earned ₹ 2,11,76,000/- during the year under consideration. Therefore, a part of the expenditure incurred in the manpower and infrastructure facilities diverted for earning exempted income has to be disallowed. As rightly submitted by the ld. DR, the Assessing Officer has computed 0.5% of the average investment as expenditure by applying third limb of Rule 8D. Rule 8D(2)(iii) provides for disallowance of an amount equal to 0.5% of the average value of investment, income from which does not form part of the total income, shall be disallowed. Accordingly, the orders of the lower authorities are modified and the Assessing Officer is directed to disallow 0.5% of the average value of investment, the income from which does not form part of the total income.- Decided partly in favour of assessee. Disallowance of lease rent paid by the assessee u/s 40(a)(ia) - Held that - It is not in dispute that the assessee has taken heavy earth moving equipment on lease from M/s SERI Infrastructure Finance Ltd. and paid a sum of ₹ 11,16,400/-. However, no tax was deducted. The assessee claims that it is not an operational lease but it is only a finance lease. In the case of finance lease, assessee would borrow money and the asset would be purchased in the name of the assessee . The fact remains that the asset was acquired on right to use basis, therefore, what was paid by the assessee is in the nature of rent. Hence, this Tribunal is of the considered opinion that the assessee has to deduct tax while making the payment to M/s SERI Infrastructure Finance Ltd.. Therefore, the CIT(A) has rightly confirmed the addition made by the Assessing Officer - Decided against assessee Addition of expenditure attributable to earning exempt income while computing the book profit u/s 115JB - Held that - Since the disallowance under rule 8D was confirmed at 0.5% of the average value of investment, income from which does not form part of total income, both for regular computation as well as computation u/s 115JB of the Act, the Assessing Officer has rightly made the addition. However, the orders of the lower authorities are modified and the Assessing Officer is directed to disallow 0.5% of the average value of investment, income from which does not form part of total income. Disallowance of advertisement expenditure - Held that - The assessee is not claiming the entire ₹ 60 crores as deduction. The assessee is only claiming proportionate amount of ₹ 1,59,38,000/-. The next objection of the Assessing Officer is that there was variation in telecasting the advertisement. It is for the assessee and the M/s Kalaignar TV Pvt. Ltd. to decide the time schedule for the advertisement. The Assessing Officer cannot suggest the assessee or M/s Kalaignar TV Pvt. Ltd. when to telecast the assessee s advertisement in their channel. When the assessee and M/s Kalaignar TV Pvt. Ltd. decided to telecast the advertisement in a particular time, the Assessing Officer cannot doubt the genuineness of the transaction. The fact remains that there was a telecast of advertisement in respect of the product manufactured by the assessee. It is also not in dispute that the assessee has paid ₹ 60 crores being the cost of advertisement for five years and the assessee is claiming proportionate cost for the year under consideration. Therefore, the CIT(A) has rightly allowed the claim of the assessee. - Decided in favour of assessee. Revision u/s 263 - Held that - he first issue is with regard to conversion of OCDs/Warrants, second issue is with regard to deduction towards payment of employees benefits superannuation fund and leave encashment and the third issue is unabsorbed loss of ₹ 1,53,16,83,957/-. As rightly submitted by the ld. DR, these issues are not discussed in the assessment order and the Assessing Officer has not made any proper enquiry before allowing the claim of the assessee. This Tribunal is of the considered opinion that the assessment proceedings before the Assessing Officer being a judicial proceeding, the reason for the conclusion reached therein shall be reflected in the assessment order itself. The Assessing Officer is expected to discuss each and every issue arises for consideration and record his own reasoning in the assessment order so as to enable the appellate/revisional authority to appreciate the reason on which the claim was allowed. Since no such exercise was done by the Assessing Officer, the CIT has rightly exercised his power u/s 263 of the Act. Hence, this Tribunal do not find any reason to interfere with the order of the CIT. Accordingly, the same is confirmed. - Decided against assessee Disallowance of lease rental on non deduction of tds - Held that - whether it is a finance lease or operational lease, the assessee is expected to deduct tax. Since the asset was acquired for right to use basis, hence, the payment has to be construed in the nature of rent, therefore, the assessee is very much liable to deduct tax u/s 194I of the Act. This Tribunal do not find any reason to interfere with the order of the CIT(A).- Decided against assessee Disallowance made on brought forwarded losses consequent to amalgamation - Held that - As rightly submitted by the ld. Counsel for the assessee, the unabsorbed losses and depreciation to the extent of ₹ 40.55 crores in the hands of M/s Visaka Cement Industries Ltd. before amalgamation will not get reduced or neutralized on account of revaluation, therefore, the assets and liabilities at the fair value during the course of amalgamation has to be considered in the hands of amalgamated company. In view of the above, this Tribunal is of the considered opinion that the brought forward losses and depreciation to the extent of ₹ 40.55 crores has to be allowed while computing the book profit in the hands of the assesseecompany. Mine development expenses - assessee claimed the same as deferred revenue expenditure - Held that - As rightly observed by the CIT(A), once the assessee incurred the expenditure, the same has to be allowed in the year in which the expenditure was incurred. However, when the expenses were made and the benefits of such expenses would be spread over to following four assessment years, this Tribunal is of the considered opinion that there is nothing wrong in claiming the expenditure proportionately for all the assessment years in which the benefits would accrue to the assessee. Though there is no reference in the Income-tax Act, 1961, the accounting principle recognizes such claim proportionately. Therefore, this Tribunal is of the considered opinion that the assessee has rightly claimed 1/5th of the expenditure during the year under consideration and the balance amount has to be allowed in the next four years in equal installments. Therefore, this Tribunal do not find any reason to interfere with the order of the lower authority.

Summary

Issues involved:

1. Addition made on account of reversal of income arising on cancellation of sales tax assignment.
2. Addition of notional interest on advances to subsidiary companies.
3. Computation of book profit under section 115JB of the Income Tax Act.
4. Disallowance of depreciation on franchisee fee.
5. Disallowance of provision for leave encashment.
6. Disallowance of payment made to Vastu consultants.
7. Disallowance of lease rent under section 40(a)(ia).
8. Disallowance of advertisement expenses.
9. Revision under section 263 of the Income Tax Act.
10. Disallowance of mine development expenses.

Detailed Analysis:

1. Addition on account of reversal of income arising on cancellation of sales tax assignment:

The Revenue contested the CIT(A)'s decision to allow the assessee's claim of reversal of income arising from the cancellation of the sales tax assignment agreement with M/s Trishul Investments Pvt. Ltd. The Tribunal upheld the CIT(A)'s decision, noting that the reversal was a loss arising in the normal course of business and allowable under section 37 of the Act. The Tribunal confirmed that the loss due to the cancellation of the assignment was part of regular business activities and hence allowable.

2. Addition of notional interest on advances to subsidiary companies:

The Revenue's appeal against the deletion of notional interest on advances to subsidiary companies was dismissed. The Tribunal agreed with the CIT(A) that the advances were for business purposes and cited the Supreme Court's judgment in S.A. Builders vs CIT, which supports the view that such advances do not warrant disallowance of notional interest if used for business purposes.

3. Computation of book profit under section 115JB:

The Tribunal upheld the CIT(A)'s decision that the reversal of income on cancellation of the sales tax assignment should be deducted while computing book profit under section 115JB. The Tribunal noted that the amount was initially treated as income and charged to the Profit & Loss Account, and its reversal upon cancellation was a necessary accounting adjustment.

4. Disallowance of depreciation on franchisee fee:

The Tribunal ruled that depreciation should be allowed on the entire cost of the IPL franchise rights (Rs. 364 crores) rather than on the amount paid during the year. The Tribunal emphasized that depreciation should be computed on the actual cost of the asset as per section 32 of the Act.

5. Disallowance of provision for leave encashment:

The Tribunal confirmed the disallowance of the provision for leave encashment under section 43B(f) of the Act, noting that the provision is still in force despite being challenged in the courts. However, the Tribunal allowed the assessee to revisit the issue if the Supreme Court rules in favor of the assessee in the pending appeal.

6. Disallowance of payment made to Vastu consultants:

The Tribunal allowed the assessee's claim for Vastu consultancy fees to the extent of Rs. 50,00,000, recognizing the expenditure as business-related. However, it disallowed the remaining Rs. 2,00,00,000, deeming the total claim excessive and unreasonable.

7. Disallowance of lease rent under section 40(a)(ia):

The Tribunal upheld the disallowance of lease rent paid for heavy earth-moving equipment due to the assessee's failure to deduct tax at source. The Tribunal rejected the argument that the payment was for a finance lease, concluding it was in the nature of rent.

8. Disallowance of advertisement expenses:

The Tribunal upheld the CIT(A)'s decision to allow the advertisement expenses paid to M/s Kalaignar TV Pvt. Ltd., rejecting the Revenue's objections regarding the choice of the TV channel and the advance payment. The Tribunal emphasized that the assessee's business decisions regarding advertisement should not be questioned by the Assessing Officer.

9. Revision under section 263 of the Income Tax Act:

The Tribunal upheld the CIT's revision order under section 263, directing the Assessing Officer to re-examine issues related to the conversion of OCDs/warrants, deduction towards employee benefits, and unabsorbed losses of the amalgamated company. The Tribunal noted that the Assessing Officer had not made proper inquiries or discussed these issues in the assessment order.

10. Disallowance of mine development expenses:

The Tribunal upheld the CIT(A)'s decision to allow the mine development expenses claimed proportionately over several years. The Tribunal recognized the accounting principle of spreading the expenditure over the years in which the benefits accrue to the assessee.

Conclusion:

The Tribunal dismissed all the appeals of the Revenue and partly allowed the appeals of the assessee in I.T.A.Nos.363 and 1070/Mds/2012 and 160 & 161/Mds/2015. The appeals of the assessee in I.T.A.Nos.925/Mds/2012 and 159/Mds/2015 were dismissed.