2016 (4) TMI 1370 - AT - Income Tax

Addition u/s 14A r.w. 8D - HELD THAT - Necessary details was very much made available before the AO/ CIT (Appeal). The investment was made out of own funds for the purposes of earning dividend. The availability of funds, details of capital share and reserve and surplus is even available at page-6 of the impugned order. So far as, applicability of rule-8D is concerned, so far as, assessment year involved is 2007-08, therefore, rule 8D is applicable but at the same time it cannot be applied mechanically. The assessee invested ₹ 5 crore in equity share capital of CIAL and further invested ₹ 5 crore in the equity share capital, therefore, in the absence of any contrary material and since the own funds were invested and no expenses were claimed, the disallowance is not justified, consequently, this ground of the assessee is allowed. Disallowance of prior period expenses - argument on behalf of the assessee that in earlier assessment years, no such disallowance was made and in the present assessment year, the facts are identical - HELD THAT - The relief was denied to the assessee on the plea (para 5.5 of the impugned order) that the assessee could not produce the evidence with respect to these liabilities whether crystallize during the year. However, the assessee drew our attention with respect to rejections/refunds and we found the explanation of the assessee to be correct.Considering the facts and the explanation of the assessee, this ground is allowed. The appeal of the assessee, is, therefore, allowed. Interest income - treated as short term deposits as business income OR income from other sources - HELD THAT - Deposits are kept in Current Accounts or in short term deposits for their immediate use for business purposes. On these facts it is to be held that the funds are being used in the business and the incidental business income on the short term deposits abroad are to be considered as business receipts only. This view is also supported by the action of the CBOT in taking up the assessee's case before the inland revenue authorities of UK when the same was being taxed as Income from Other Sources not covered by the OTAA between UK and India. These facts are established in the order for the assessment year 1993-94 of the CIT(A) and as submitted by the assessee, the matter was not challenged and accepted upto Assessment Year 1996-97. For these reasons, we are of the opinion that the interest earned on short terms deposits is to be considered income from business . Consequently, the Assessing Officer is directed to treat the interest income as income from business. The assessee s grounds are allowed on this issue Disallowance on account of frequent flier program (FFP) - HELD THAT - Liability in respect of FFP miles accrues simultaneously with a passenger undertaking travel on a fare paying ticket, therefore, it cannot be a contingent liability.

Summary

Issues:
1. Applicability of section 14A of the Income Tax Act to the exempted income.
2. Disallowance of prior period expenses.
3. Treatment of interest income on short-term deposits.
4. Disallowance under section 14A of the Act for exempted income.
5. Disallowance of expenses related to frequent flier program (FFP).

Issue 1: Applicability of section 14A of the Income Tax Act to the exempted income:
The assessee contested the disallowance of 5% of exempted income under section 14A. The Assessing Officer disallowed the claim as the assessee failed to prove that the investment was made from own funds. However, it was argued that the investment was made from own funds for earning dividends. The Tribunal found that the necessary details were provided to the authorities, and since no expenses were claimed and own funds were invested, the disallowance was not justified. Thus, the ground of the assessee was allowed.

Issue 2: Disallowance of prior period expenses:
The assessee challenged the disallowance of prior period expenses amounting to ?337.10 million. The authorities denied the relief as the assessee couldn't provide evidence of the liabilities crystallizing during the year. However, the Tribunal noted the correct explanation provided by the assessee regarding the rejections/refunds, leading to the allowance of this ground in favor of the assessee.

Issue 3: Treatment of interest income on short-term deposits:
The Revenue appealed the treatment of interest income on short-term deposits as business income instead of income from other sources. The Tribunal upheld the decision based on previous orders and the fact that the funds were used in business activities abroad, justifying the income as business receipts. The lack of contrary facts or decisions led to the dismissal of the Revenue's appeal.

Issue 4: Disallowance under section 14A of the Act for exempted income:
The Tribunal affirmed the decision to restrict the disallowance to 5% of the exempted income and held that rule 8D was applicable from Assessment Year 2008-09. This decision was supported by the findings made while adjudicating the appeal of the assessee in a previous issue, and hence, no infirmity was found in the Commissioner of Income Tax (Appeal)'s conclusion on this matter.

Issue 5: Disallowance of expenses related to frequent flier program (FFP):
The Revenue challenged the deletion of disallowance of ?455.28 lakhs related to the frequent flier program. The Tribunal found that the liability for FFP miles accrues simultaneously with passenger travel, making it non-contingent. Relying on a previous decision and absence of contrary facts, the Tribunal upheld the deletion of the disallowance, leading to the allowance of the assessee's appeal and the dismissal of the Revenue's appeal.

In conclusion, the Tribunal addressed various issues related to income tax assessments for the year 2007-08, providing detailed analyses and justifications for the decisions made in favor of the assessee and against the Revenue. The judgment covered aspects such as applicability of tax provisions, treatment of income and expenses, and adherence to legal principles and precedents.