2018 (2) TMI 1734 - AT - Income Tax

Addition made on account of valuation of closing stock of land - Held that - To maintain the rule of consistency, we are of the view that the addition made by the AO for the under year under consideration is dependent on the outcome to the addition made by the AO on this account in the earlier year. Therefore, in the facts and circumstances of the case we set aside this issue to the record of the Assessing Officer for deciding the same afresh in terms of the directions as given by the Tribunal for the A.Y. 2007-08. Maintenance expenses in respect of transferred industrial areas - Held that - Beginning the assessee has been incurred expenditure for maintenance of the transferred area and showing the same as receivable from Government. Against which the State Government has permitted adjustment of liability of deposit of development charges and economic are not maintenance expenses. Even otherwise as per terms of transfer of these areas the assessee is under obligation to maintain the industrial area transferred from State Government and the Government is allowing the grant from time to time and also allowing the assessee to adjust these liability against amounts payable to the government on account of lease rentals as well as development charges received from allottees. Prior period expenses disallowance - Held that - CIT(A) has allowed the claim of the assessee by following the decision of this Tribunal in assessee s own case. Therefore, we do not find any error or illegality in the order of the ld. CIT(A) qua this issue. We further note that the Hon ble jurisdiction High Court in case of Pr. CIT vs. Rajasthan state Seed Corporation Ltd. 2016 (9) TMI 59 - RAJASTHAN HIGH COURT has also decided this issue an identical issue in favour of the assessee. Disallowance of contribution to State Renewal Fund - contribution made to State Renewal fund is allowable u/s 37(1) Deduction u/s 80IA in respect of the interest and penal interest income - Held that - Hon ble Gujarat High Court in case of CIT vs. Suzlon Engery Ltd. (2013 (7) TMI 697 - GUJARAT HIGH COURT) we hold that the interest and penal interest received from debtor due to late payment is part of profit of industrial undertaking eligible for deduction u/s 80IA of the Act. When all these services are rendered for and closely connected with the main activity then the income from these services/activities would be included in the profit of undertaking eligible for deduction u/s 80IA of the Act - the income from all these activity associated with main activity of the assessee is eligible for deduction u/s 80IA of the Act. Hence, we decide the issue in favour of the assessee Contribution to Centre for Development of Stones - Held that - Following the decision of Hon ble jurisdiction High Court in case of Rajasthan State Mines & Minerals Ltd. ACIT 2003 (10) TMI 10 - RAJASTHAN HIGH COURT and having regard to the facts that the contribution is made for development and promotion of industries in the State of Rajasthan through Centre for Development of Stones which is promoted by the assessee along with the State Government of Rajasthan we are of the view that the said contribution made by the assessee is an allowable expenditure u/s 37(1) Contribution for construction of the Rajasthan Bhawan in Mumbai - Held that - In view of the said letter dated 24.10.2017 it is clear that the assessee got the rebate of 75% as well as the right to use the accommodation by its officers/employees visiting at Mumbai. Accordingly, in view of the earlier decision of this Tribunal in assessee s own case as well as in view of the fact that the assessee has received the benefit in the shape of accommodation against the said expenditure for construction of Rajasthan house we hold that the claim of the assessee is an allowable expenditure u/s 37(1) of the Act. Disallowance made u/s 14A - Held that - No disallowance u/s 14A is called for in respect of the shares and securities held as stock in trade. The investment made by the assessee through Rajasthan Venture Capital funds cannot be taken as stock in trade and therefore, disallowance on account of indirect common administrative expenses under Rule 8D(2)(iii) has to be worked out by considering the average investment in Rajasthan Venture Capital Fund only. Accordingly, we direct the AO to recomputed the disallowance u/s 14A r.w.r 8D(2)(iii) only in respect of investment through Rajasthan Venture Capital Fund. Hence, the ground of the assessee s appeal is partly allowed Claim under the head Corporate Social Responsibility expenses (CSR) - Held that - Expenditure incurred in the said case was towards primary level society member which it is engaged in procurement of milks and therefore, the purpose of incurring the expenditure was for increasing procurement of milks and protecting the dairy farmers. On the other hand in the case of the assessee there is no nexus between the expenditure and the objects and business activity of the assessee. The expenditure has no direct connection/nexus with the business activity of the assessee then, in the absence of any provisions in the Income Tax Act the same cannot be allowed prior to the insertion of explanation 2 to section 37(1) w.e.f. 01.04.2015. No error or illegality in the order of the authorities below qua this issue.

Summary

Issues:
1. Valuation of closing stock of land under litigation/encroachment.
2. Allowability of maintenance expenses for transferred industrial areas.
3. Allowability of prior period expenses.
4. Allowability of contribution to State Renewal Fund.
5. Deduction under Section 80IA on interest income, penal interest, and other miscellaneous incomes.
6. Contribution to Centre for Development of Stones (CDOS).
7. Contribution for construction of Rajasthan Bhawan in Mumbai.
8. Disallowance under Section 14A.
9. Corporate Social Responsibility (CSR) expenses.

Issue-wise Detailed Analysis:

1. Valuation of Closing Stock of Land Under Litigation/Encroachment:
The assessee valued the land under litigation/encroachment at nil, arguing that it had no realizable value until disputes were resolved. The AO added ?1,42,76,000 to the income, which was upheld by the CIT(A) on the grounds that the stock was not valued as per recognized methods. The Tribunal, following its earlier decision for AY 2007-08, set aside the issue to the AO for fresh consideration, emphasizing the need for consistency and examination of the facts regarding the litigation and encroachment.

2. Allowability of Maintenance Expenses for Transferred Industrial Areas:
The AO disallowed ?3,21,27,000 as maintenance expenses for transferred industrial areas, arguing that no income was received from these areas. The CIT(A) allowed the claim, following the Tribunal's decision for AY 2005-06 and AY 2008-09. The Tribunal upheld the CIT(A)'s decision, noting that the expenses were incurred as part of the assessee's obligation to maintain these areas and were consistent with past practices.

3. Allowability of Prior Period Expenses:
The AO disallowed prior period expenses of ?21,87,382, which the CIT(A) allowed. The Tribunal upheld the CIT(A)'s decision, referencing its earlier rulings that such expenses were allowable, as they were incurred in the regular course of business and had been consistently allowed in previous years.

4. Allowability of Contribution to State Renewal Fund:
The AO disallowed ?10,00,000 contributed to the State Renewal Fund, viewing it as an application of income. The CIT(A) allowed the claim, and the Tribunal upheld this decision, citing its earlier rulings that contributions to the fund were for employee welfare and thus allowable under Section 37(1).

5. Deduction Under Section 80IA on Interest Income, Penal Interest, and Other Miscellaneous Incomes:
The AO denied the deduction under Section 80IA for interest and penal interest income, arguing they were not derived from the eligible business. The CIT(A) allowed the claim for interest and penal interest but not for other miscellaneous incomes. The Tribunal upheld the CIT(A)'s decision, distinguishing between income derived directly from business activities and incidental income. The Tribunal also referenced relevant case law supporting the inclusion of interest and penal interest as business income eligible for Section 80IA deduction.

6. Contribution to Centre for Development of Stones (CDOS):
The AO disallowed ?1 crore contributed to CDOS, viewing it as an application of income. The CIT(A) allowed the claim, noting the contribution was for industrial development in Rajasthan. The Tribunal upheld the CIT(A)'s decision, referencing the jurisdictional High Court's ruling that such contributions were for business purposes and thus allowable under Section 37(1).

7. Contribution for Construction of Rajasthan Bhawan in Mumbai:
The AO disallowed ?2 crores contributed for constructing Rajasthan Bhawan, viewing it as a capital expenditure not related to business. The CIT(A) upheld the disallowance. The Tribunal, however, allowed the claim, noting that the contribution provided the assessee with accommodation benefits for its officers, thus serving a business purpose. The Tribunal referenced its earlier decision in the assessee's case for AY 2003-04, where a similar expenditure was allowed.

8. Disallowance Under Section 14A:
The AO made a disallowance under Section 14A, which the CIT(A) partly deleted, maintaining the disallowance for administrative expenses. The Tribunal upheld the CIT(A)'s decision, noting that the assessee's own funds were sufficient to cover the investments, and thus no interest disallowance was warranted. The Tribunal directed the AO to recompute the disallowance for administrative expenses, considering only the investments through Rajasthan Venture Capital Fund.

9. Corporate Social Responsibility (CSR) Expenses:
The AO disallowed ?53,48,000 incurred on CSR activities, viewing it as an application of income. The CIT(A) upheld the disallowance. The Tribunal also upheld the disallowance, noting that CSR expenses were not allowable under Section 37(1) prior to the insertion of Explanation 2 w.e.f. 01.04.2015, as there was no direct nexus between the expenditure and the business activity of the assessee.

Conclusion:
The Tribunal's judgment addresses multiple issues, providing detailed reasoning for each decision. The key takeaways include the importance of consistency in valuation methods, the allowance of business-related expenses, and the distinction between direct business income and incidental income for tax deductions. The judgment also highlights the evolving nature of CSR expenses in tax law.