2019 (4) TMI 1809 - AT - Income Tax

Disallowance of depreciation on residential property - whether the assessee has claimed standard deduction as provided u/s 24(a) of the Act or not in respect of income from house property in addition to depreciation and other maintenance expenses claimed? - HELD THAT - In assessee s own case for AY 2004-05 had considered an identical issue and after considering the relevant facts, held that with introduction of concept of block of assets, an individual assets losses its identity, therefore, no segregation thereof could be done notwithstanding the fact that the income from certain property was offered under the head income from house property . However, when the Bench has posed specific question to the Ld. AR for the assessee to the effect that whether the assessee has claimed standard deduction as provided u/s 24(a) of the Act or not in respect of income from house property in addition to depreciation and other maintenance expenses claimed, the Ld. AR for the assessee, fairly accepted that this aspect has not been examined by the authorities below and also there is no finding from the Tribunal in the earlier years. Therefore, the issue may be set-aside to the file of the AO for verification of facts with regard to standard deduction claimed u/s 24(a) of the Act and further if at all the assessee has claimed deduction u/s 24(a) of the Act, it amounts to double deduction and the same may be directed to be disallowed. Therefore, consistent with view taken by the Co-ordinate Bench for earlier years, we direct the AO to allow depreciation as claimed by the assessee on residential premises, but verify the fact with regard to deduction claimed u/s 24(a) in the light of our discussions given hereinabove. In case, the assessee claimed deduction u/s 24(a), then the same needs to be disallowed. Disallowance of the amortization of premium paid on leasehold land - HELD THAT - e ITAT had considered identical issue and by following certain judicial precedence including the decision of the Hon ble Delhi High Court in case of Rajesh Projects (India) Pvt. Ltd. vs CIT 2017 (2) TMI 1109 - DELHI HIGH COURT held that the amortization of lease premium over the lease period was capital in nature and hence not allowable as deduction. Disallowance of expenditure incurred in relation to exempt income u/s 14A - quantification of average value of investment considering the investment made in group/associate concerns for strategic investment purpose and also the element of commercial expediency in making investment - HELD THAT - As in the case of Maxopp Investment Ltd. vs CIT 2018 (3) TMI 805 - SUPREME COURT had considered the issue of disallowance of expenses incurred in relation to exempt income including interest in light of arguments of the assessees that strategic investments made in group/associate concerns for the purpose of holding controlling interest cannot be considered for determination of average value of investments and held that even though investment are made in group/associate concerns for the purpose of holding strategic investment disallowances contemplated u/s 14A of the Act triggers the moment the assessee earned exempt income. Hon ble Court has not touched the concept of commercial expediency and consideration of disallowance on actual dividend yielding investment. Further, various Hon ble Court including the High Court of Bombay in number of cases had held that only investment which yield exempt income needs to be included in average value of investment for the purpose of determination of interest expenditure and other expenditure. Therefore, we are of the considered view that the issue needs to be go back to the file of the AO for the purpose of determination of average value of investment and also quantum of disallowance of interest expenditure and other expenditure. Disallowance of lease equalisation reserve - assessee is giving assets on lease and collects lease rentals from the clients, which comprises recovery of cost of asset and finance charges - HELD THAT - Tribunal in asessee s own case for AY 2004-05 after considering relevant facts held that lease equalisation reserve is an allowable deduction, however, for the purpose of computation of quantum of allowances, lease equalisation reserve should be computed on the basis of tax depreciation instead of book depreciation. Hon ble Supreme Court has considered an identical issue in light of accounting standard prescribed by ICAI and held that lease equalisation reserve computed as per accounting standards prescribed by ICAI is an allowable deduction because there is no express bar in the IT Act, 1961 regarding application of such accounting standards. The Hon ble Court further held that only real income i.e. finance income should be taxed for the purpose of Income Tax which can be arrive only after applying such method which is prescribed in the guidance note. Therefore, we are of the considered view that prima-facie, the issue is settled by the decision of the Hon ble Supreme Court, however, consistent with view taken by the Co-ordinate Bench for earlier years, we restore this issue to the file of the AO and direct him to decide computation of lease equalisation reserve in accordance with the direction of Hon ble Supreme Court in the case of Virtual Soft Systems Ltd. 2018 (4) TMI 1472 - SUPREME COURT Disallowance of dividend income earned from Venture Capital Trust u/s 14A - HELD THAT - Issue requires re-examination / re-adjudication at the level of Ld. AO since the assessee is earning income from two types of Trusts-one exempt u/s 10(23FB) and the other not exempt u/s 10(23FB) and therefore, the provisions of Section 115U and 161 are applicable to them. The assessee is directed to substantiate its claim in this regard including justification of management fees and indirect expenses incurred by the Trust towards earning of the income, which as per revenue are mainly incurred towards earning of dividend income. Therefore, the matter is set aside for fresh adjudication keeping all the issues alive which results into assessee s grounds of appeal being allowed for statistical purposes. Disallowance of depreciation on toll road - HELD THAT - Since the assessee is not the owner of the toll road, depreciation thereupon could not be allowed to him in terms of decision of Hon ble Bombay High Court in North Karnataka Expressway Ltd. Vs. CIT 2014 (11) TMI 351 - BOMBAY HIGH COURT . However, depreciation on the same as intangible assets being any other business or commercial rights of similar nature as per Section 32 would be available to the assessee in terms of decision of Special Bench of the Tribunal, Hyderabad rendered in Progressive Constructions Ltd. Vs. ACIT 2017 (3) TMI 1167 - ITAT HYDERABAD Respectfully following the cited decision, we direct so. The Ld. AO is directed to re-compute the same and grant depreciation thereupon as intangible assets. The assessee is also directed to substantiate his claim in this regard. The grounds of assessee s appeal stands allowed for statistical purposes Disallowance of expenses incurred for increase in authorized share capital u/s 35D - AO has disallowed expenditure on the ground that conditions as prescribed in section 35D(1)(ii) was not fulfilled, the same was confirmed by the Ld. CIT(A) - HELD THAT - Restore this issue back to the file of AO with a direction to examine whether the assessee is an industrial undertaking within the meaning of section 35D of the Act, which makes it eligible to claim expenditure. The AO is also directed to consider the issue in light of findings recorded by the Tribunal for AY 2004-05 Levy of interest u/s 234B - HELD THAT - This issue is consequential and mandatory in nature. The AO shall compute interest as applicable for the relevant period as per provisions of section 234B of the Act after determining total income of the assessee. Accordingly, the ground taken by the assessee is dismissed. Provision for non-performing assets while computing book profit u/s 115JB - assessee has claimed deduction on account of provisions for nonperforming asset while computing book profit - AO has denied the deduction and added back the same while computing book profit on the ground that it is mere provision, therefore, the same should be added back to book profit - HELD THAT - We find that this is a recurring issue which is subject matter of discussions by the Tribunal right from AY 2002-03. The Tribunal had considered an identical issue in the light of provisions of section 115JB of the Act, and held that provisions made for non-performing assets needs to be added back while computing book profit u/s 115JB of the Act. Therefore, consistent with view taken by the Tribunal for earlier years, we dismissed ground taken by the assessee. Disallowance u/s 14A - HELD THAT - Issue is covered in favour of the assessee by the decision of ITAT Delhi Special Bench in the case of ACIT vs Vireet Investment Pvt Ltd. 2017 (6) TMI 1124 - ITAT DELHI . But, fact remains that the issue of disallowance contemplated u/s 14A of the Ac read with Rule-8D has already been discussed by us in preceding paras in ground no. 4, 5, 7 and 10 of assessee s appeal, where the matter has been restored back to the file of the AO to recompute disallowance of expenditure by excluding investment which do not yield exempt income. The issue of computation of book profit with reference to 14A disallowance is bearing on the outcome of computation of disallowance u/s 14A of the Act in light of our discussions given in the grounds of appeal taken for the assessee s in its appeal. Therefore, we restore this issue back to the file of the AO and direct him to first re-compute disallowance contemplated u/s 14A Addition towards income earned from loan given to Tamilnadu Road Development Co. Ltd. and Mahendra Industrial Park u/s 10(23G) - HELD THAT - Since, it was an admitted fact that the assessee is an infrastructure capital company and the long term finance given to a company which is also engaged in the business of infrastructure development , then whatever income earned from such company including interest income is exempt u/s 10(23G) of the Act, because the approval if any required u/s 10(23G) is for the company which is developing infrastructure facilities, but not to a company which is providing long term loan or investment to an infrastructure development company. Since, Tamilnadu Road Development Co. Ltd. has been approved u/s 10(23G) of the Act, the assessee is eligible for exemption in respect of interest income from that company u/s 10(23G) of the Act even though such approval was granted subsequently. Therefore, we direct the AO to delete the addition made towards disallowance of interest income from Tamilnadu Road Development Co. Ltd. u/s 10(23G) of the Act. Deduction towards interest income earned from Mahendra Industrial Park, at the time of hearing, the Ld. AR for the assessee submitted that he do not want to press this issue in respect of interest income received from Mahendra Industrial Park, therefore, we are of the considered view that the AO was right in making addition towards interest income from long term finance given to Mahendra Industrial Park. Accordingly, we uphold the additions made by the AO. Disallowance of Software Development Expenses - AO has disallowed Expenses on the ground that no details has been furnished to justify deduction claimed towards Software Development Expenses - HELD THAT - The Tribunal has considered an identical issue for AY 2004-05 where it was held that Software Development Expenses is debited under the head miscellaneous expenses are in the nature of AMC Charges, internet access charges, lease line expenses, anti-virus expenses and other software expenses for accounting package, therefore, being revenue in nature and allowable as deduction. Expenditure incurred on club facilities is revenue in nature, which is allowable deduction - See OTIS ELEVATOR COMPANY (INDIA) LIMITED VERSUS COMMISSIONER OF INCOME-TAX 1991 (4) TMI 53 - BOMBAY HIGH COURT Disallowance made on account of lease equalisation reserve on of book profit u/s 115JB - HELD THAT - This issue has been considered by the Tribunal for AY 2004-05, where, in respect of normal provisions of lease equalisation reserve, the issue has been restored back to the file of the AO to re-compute lease equalisation reserve, considering tax depreciation instead of book depreciation. However, in respect of determination of book profit and the relevancy of computation of lease equalisation reserve by taking note of depreciation as per Income Tax may not be appropriate. But fact remains that since the Tribunal has already considered this issue, we do not want to deviate from the findings recorded by the Tribunal for AY 2004-05. Hence, we restore this issue also to the file of the AO and direct him to recompute book profit by taking note of findings of the Tribunal in assessee s own case for AY 2004-05 and also considering the latest judgment of Hon ble Supreme Court in the case of CIT vs Virtual Soft Systems Ltd. 2018 (4) TMI 1472 - SUPREME COURT

Summary

Issues Involved:
1. Disallowance of depreciation on residential properties.
2. Disallowance of amortization of the premium paid on leasehold land.
3. Disallowance of expenditure incurred in relation to exempt income under Section 14A.
4. Disallowance of lease equalization reserve.
5. Disallowance of dividend income earned from Venture Capital Trust under Section 14A.
6. Disallowance of depreciation on toll road.
7. Disallowance of expenses incurred for the increase in authorized share capital under Section 35D.
8. Levy of interest under Section 234B.
9. Addition made on account of provision for non-performing assets while computing book profit under Section 115JB.
10. Disallowance of provision for diminution in the value of securities while computing book profit under Section 115JB.
11. Addition of the amount disallowed under Section 14A while computing book profit under Section 115JB.
12. Addition towards income earned from loans given to Tamilnadu Road Development Co. Ltd. and Mahendra Industrial Park under Section 10(23G).
13. Disallowance of Software Development Expenses.
14. Disallowance of expenditure on club facilities.
15. Deletion of disallowance made on account of lease equalization reserve while computing book profit under Section 115JB.

Detailed Analysis:

1. Disallowance of Depreciation on Residential Properties:
The assessee claimed depreciation on residential properties leased to employees and outsiders. The AO disallowed depreciation on units leased to outsiders, arguing that income from these units was offered under 'income from house property,' and only deductions under Section 24(a) are allowed. The Tribunal directed the AO to verify if standard deduction under Section 24(a) was claimed and to disallow depreciation if it was, to avoid double deduction.

2. Disallowance of Amortization of Premium Paid on Leasehold Land:
The assessee amortized a one-time lease rent paid for leasehold land over the lease period and claimed it as deferred revenue expenses. The Tribunal, following earlier decisions, held that the amortization of lease premium is capital in nature and not deductible.

3. Disallowance of Expenditure Incurred in Relation to Exempt Income Under Section 14A:
The AO disallowed interest and indirect expenses related to exempt income. The Tribunal, referencing the Supreme Court's decision in Maxopp Investment Ltd. vs CIT, directed the AO to reconsider the disallowance, focusing on investments yielding exempt income and excluding strategic investments.

4. Disallowance of Lease Equalization Reserve:
The AO disallowed the lease equalization reserve, arguing it was not a statutory deduction. The Tribunal, referencing the Supreme Court's decision in Virtual Soft Systems Ltd., directed the AO to recompute the reserve based on tax depreciation instead of book depreciation.

5. Disallowance of Dividend Income Earned from Venture Capital Trust Under Section 14A:
The AO disallowed losses from venture capital funds, attributing them to dividend income. The Tribunal restored the issue to the AO to re-examine the claim, considering the nature of the trusts and the provisions of Sections 115U and 161.

6. Disallowance of Depreciation on Toll Road:
The AO disallowed depreciation on the toll road, arguing it was not a plant and machinery asset. The Tribunal allowed depreciation as an intangible asset (right to collect toll) and directed the AO to estimate income based on arbitration proceedings.

7. Disallowance of Expenses Incurred for Increase in Authorized Share Capital Under Section 35D:
The AO disallowed expenses for increasing authorized share capital. The Tribunal restored the issue to the AO to verify if the assessee qualifies as an industrial undertaking under Section 35D.

8. Levy of Interest Under Section 234B:
The Tribunal noted that the levy of interest under Section 234B is consequential and mandatory, directing the AO to compute interest as applicable.

9. Addition Made on Account of Provision for Non-Performing Assets While Computing Book Profit Under Section 115JB:
The AO added back the provision for non-performing assets while computing book profit. The Tribunal upheld this addition, consistent with earlier decisions.

10. Disallowance of Provision for Diminution in the Value of Securities While Computing Book Profit Under Section 115JB:
The AO disallowed the provision for diminution in the value of securities. The Tribunal restored the issue to the AO to verify the scrip-wise details and allow the provision for those held as stock-in-trade.

11. Addition of the Amount Disallowed Under Section 14A While Computing Book Profit Under Section 115JB:
The AO added the Section 14A disallowance to book profit. The Tribunal restored the issue to the AO to recompute the disallowance and book profit, referencing the Special Bench decision in ACIT vs Vireet Investment Pvt Ltd.

12. Addition Towards Income Earned from Loans Given to Tamilnadu Road Development Co. Ltd. and Mahendra Industrial Park Under Section 10(23G):
The AO disallowed interest income from loans to Tamilnadu Road Development Co. Ltd., arguing the required approval under Section 10(23G) was not obtained. The Tribunal directed the AO to allow the exemption, noting the company's approval under Section 10(23G) for subsequent years.

13. Disallowance of Software Development Expenses:
The AO disallowed software development expenses, considering them capital in nature. The Tribunal upheld the CIT(A)'s decision to allow these expenses as revenue in nature, noting they were for AMC charges, internet access, and other software-related expenses.

14. Disallowance of Expenditure on Club Facilities:
The AO disallowed club membership fees. The Tribunal, referencing the Bombay High Court's decision in Otis Elevator Co. (India) Ltd. vs CIT, allowed the expenditure as revenue in nature.

15. Deletion of Disallowance Made on Account of Lease Equalization Reserve While Computing Book Profit Under Section 115JB:
The AO disallowed the lease equalization reserve while computing book profit. The Tribunal restored the issue to the AO to recompute the book profit, considering the Supreme Court's decision in Virtual Soft Systems Ltd.

Conclusion:
The Tribunal's consolidated order addressed multiple issues, restoring several to the AO for reconsideration and verification, while upholding or modifying decisions based on precedent and statutory interpretation. The focus was on ensuring correct application of tax provisions and consistency with judicial decisions.