2018 (3) TMI 1686 - AT - Income Tax

Addition on accrued interest on Inter Corporate Deposits (ICDs) - accrual of income - Held that - CIT(A) after appreciating the facts of the present case has rightly concluded that although the assessee has earned dividend income @ 5% on the debentures, but the assessee has not offered the interest income on the ground that the concerned party has requested to waive the interest. From the records, we also noticed, that though the assessee has not waived interest, as there is no such board s resolution, but the assessee has preferred not to charge interest in the books of account. As per the assessee no interest income has accrued, therefore the interest income has not been shown. We also noticed that the money lent as debentures have become NPA (Non-performing Asset), an aspect which has not been challenged by the revenue before us. Therefore as per AS-9, no interest is to be charged on such an investment. - Decided against revenue Disallowance of legal and professional fees - revenue or capital expenditure - Held that - CIT(A) after appreciating the facts of the present case has rightly concluded that the assessee has incurred legal and professional charges in connection with the business of assessee. The assessee incurred total expenses of ₹ 31,75,043/- being the amount of legal expenses and other expenditure like labor matters, the assessee has incurred an amount of ₹ 3,06,536 and retainership fees and others amounting to ₹ 10,21,849/- as expenses in connection with business of the assessee. The said expenses have also been allowed by the AO in the earlier years in assessment u/s 143(3) - Decided against revenue. Treating the profit on sale of shares - as Capital gain OR business income - intention of the assessee to earn business profits - Held that - CIT(A) after appreciating the facts of the present case has rightly concluded that the assessee has been showing investment in the balance sheet as investments only. We have also noticed that the assessee has not treated the shares as stock-in-trade, hence the intention of the assessee is to earn capital gain on sale of shares. From the facts of the case, the assessee has not used any borrowed funds for the purpose of purchasing the shares - consistency has to be maintained in Income tax proceedings if in earlier years, the claim of the assessee was accepted as capital gain, the same cannot be changed in this year on the same set of facts and circumstances of the case. Disallowance u/s 14A read with rule 8D - expenses were incurred for earning tax-free income - Held that - Remit the matter back to the file of AO for passing afresh order to apply provision of section 14A r.w. rule 8D of I.T. Act only in relation to the income which does not form a part of the total income under the Act. It is needless here to mention that before passing the order of assessment, the AO shall provide sufficient opportunity of hearing to the assessee.

Issues Involved:
1. Deletion of addition of ?12,50,000/- being accrued interest on Inter Corporate Deposits (ICDs).
2. Disallowance of ?17,72,620/- as capital expenditure out of total disallowance of ?62,76,048/- made by the Assessing Officer being legal and professional fees.
3. Treatment of profit on sale of shares of ?2,47,49,139/- as Capital gain versus business income.
4. Treatment of rental income as income from business and profession versus income from house property.
5. Disallowance of ?18,30,157/- under section 14A read with rule 8D of the Income Tax Act, 1961.
6. Deletion of additions of ?12,50,000 being accrued interest on inter-corporate deposits (ICDs).

Issue-wise Analysis:

1. Deletion of addition of ?12,50,000/- being accrued interest on Inter Corporate Deposits (ICDs):
The CIT(A) deleted the addition of ?12,50,000/- made by the Assessing Officer (AO) on the grounds that the assessee had not received the interest for the last three years, and the money lent as debentures had become a non-performing asset (NPA). The CIT(A) relied on the principle that income should not be recognized if there are uncertainties, as per AS-9 and supported by the Delhi High Court decision in CIT vs. Vasisth Chay Vyapar and the ITAT decision in ACIT v. Ruby Mills Ltd. The Tribunal upheld the CIT(A)'s decision, noting that no new facts or contrary judgments were presented to challenge the findings.

2. Disallowance of ?17,72,620/- as capital expenditure out of total disallowance of ?62,76,048/- made by the Assessing Officer being legal and professional fees:
The CIT(A) allowed ?31,75,043/- as business expenditure incurred on legal proceedings and other business-related expenses but disallowed ?17,72,620/- as capital expenditure related to recovering a flat from an ex-director's son. The Tribunal agreed with the CIT(A)'s findings, noting that the legal and professional charges were rightly categorized, and no new facts or contrary judgments were brought forward to challenge the decision.

3. Treatment of profit on sale of shares of ?2,47,49,139/- as Capital gain versus business income:
The CIT(A) treated the profit on the sale of shares as capital gain, noting that the assessee had shown the shares as investments in the balance sheet and had not used borrowed funds for purchasing the shares. The CIT(A) relied on the ITAT Mumbai decision in Janak S. Rangwala v. ACIT, which held that the frequency of transactions should not determine the nature of income if the intention was to earn capital gain. The Tribunal upheld the CIT(A)'s decision, emphasizing the consistency in income tax proceedings.

4. Treatment of rental income as income from business and profession versus income from house property:
The CIT(A) treated the rental income as income from business and profession, following the decision in the assessee's own case for previous years. However, the Tribunal noted that the Coordinate Bench of ITAT had treated the rental income as income from house property in the previous years. The Tribunal allowed the assessee to submit additional evidence, including orders from the Civil Court, Bombay High Court, and Estate Officer, and restored the matter to the AO for fresh consideration, emphasizing judicial consistency.

5. Disallowance of ?18,30,157/- under section 14A read with rule 8D of the Income Tax Act, 1961:
The CIT(A) upheld the AO's disallowance under section 14A read with rule 8D. However, the Tribunal found that the AO had mechanically applied rule 8D without recording satisfaction regarding the correctness of the assessee's claim. The Tribunal set aside the CIT(A)'s order and remitted the matter back to the AO for fresh consideration, emphasizing that satisfaction regarding the correctness of the claim should be based on the assessee's accounts.

6. Deletion of additions of ?12,50,000 being accrued interest on inter-corporate deposits (ICDs):
For AY 2009-10, the Tribunal applied the same findings as in the case for AY 2008-09, maintaining judicial consistency and dismissing the revenue's appeal.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions on several grounds, emphasizing the importance of judicial consistency and proper application of accounting principles and tax laws. The matters were remitted back to the AO for fresh consideration where necessary, ensuring that the decisions were based on a thorough evaluation of the facts and applicable legal precedents.

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