2016 (7) TMI 1650 - AT - Income Tax

Nature of expenditure - disallowance being payment made to NHAI towards land acquisitio n - assessee had claimed the entire expense as revenue expenditure which was related to construction of an elevated corridor from Beach road to Maduravoil in Chennai which has been approved by the Central Government - AO rejected the claim of the assessee for treating it as revenue expenditure and held the expenditure to be in the nature of capital expenditure - HELD THAT - Assessee had incurred the expenditure only with the primary motive of facilitating its business and earning more revenue. Just because the benefit of the expenditure incurred by the assessee also flows to some unrelated parties, the expenditure cannot be disallowed under section 37(1) of the Act. This is a conscious decision taken by the assessee in concurrence with the Central Government and State Government. See AIRPORT AUTHORITY OF INDIA VERSUS COMMISSIONER OF INCOME TAX 2011 (12) TMI 114 - DELHI HIGH COURT The only purpose of the expenditure is to generate more profit and the benefit of which will overflow to subsequent years and the period is unknown. Hence, the expenditure incurred by the assessee is nothing but deferred revenue expenditure and accordingly the same has to be allowed as deduction under section 37(1) in the year in which it is incurred. Therefore, we hereby direct the learned Assessing Officer to treat the expenditure as revenue expenditure and allow deduction accordingly. - Decided in favour of assessee. Disallowance being expenditure incurred towards strengthening and realigning of the tracks in the harbor - As per AO assessee has claimed deduction being the expenditure incurred towards strengthening and realigning of shed line-II and connecting lines at inner harbor - AO held the expenditure incurred by the assessee as capital expenditure and therefore, disallowed the same as allowable deduction either under section 31 or under section 37(1) - CIT-A agreed with the view of AO and directed the Assessing Officer to allow depreciation on the same - HELD THAT - We find that it is necessary for the assessee to incur these expenditures in order to carry out its business activities. Further, by incurring such expenditure a new asset is not created but only the existing assets are reconditioned by carrying out extensive repairs. In such circumstances, the expenses incurred by the assessee will purely amount to revenue in nature and therefore allowable as deduction under section 37(1) On a similar situation that of the present assessee also in the case of COATS VIYELLA INDIA LTD. 2000 (11) TMI 24 - MADRAS HIGH COURT it was categorically held that contribution made to Govt. for building a new bridge in place of old one with a view to provide access to factory for workmen and goods though not owned by the assessee and when there is no addition to value of any of its assets would be treated as a revenue expenditure. Similarly, the Hon ble High Court of Delhi in the case of Airport Authority of India Vs. CIT ( 2011 (12) TMI 114 - DELHI HIGH COURT also held the issue in favour of the assessee. - Decided in favour of assessee. Disallowance u/s 14A read with Rule 8D - As per AO Assessee has invested in equity shares of certain corporation limited companies, the dividend earned from which is exempt from tax - HELD THAT - As relying on relevant portion of the decision of this Tribunal in the case of Kamarajar Port 2016 (5) TMI 315 - ITAT CHENNAI we hereby hold this issue in favour of the assessee, subject to verification that all such investments are made in sister concerns / associate concerns / companies owned by the Government. Thus, this issue is also decided in favour of the assessee.

Summary

Issues Involved:
1. Disallowance of ?52,52,37,562/- as capital expenditure for payment made to NHAI towards land acquisition.
2. Disallowance of ?1,83,09,555/- as capital expenditure for strengthening and realigning tracks in the harbor.
3. Addition of ?1,08,47,500/- under Section 14A of the Income Tax Act read with Rule 8D for expenses incurred to earn exempt dividend income.

Issue-wise Detailed Analysis:

1. Disallowance of ?52,52,37,562/- as capital expenditure for payment made to NHAI towards land acquisition:

During the assessment proceedings, the Assessing Officer (AO) observed that the assessee claimed ?52,52,37,562/- as revenue expenditure for constructing an elevated corridor. The assessee argued that the expenditure was for the business's smooth conduct and profitability, did not create any asset, and was necessary for cargo movement. They cited the Delhi High Court's decision in Airport Authority of India Vs. CIT, which allowed similar expenses as revenue expenditure. However, the AO treated it as capital expenditure, citing various Supreme Court decisions, and disallowed the claim under Section 37 of the Act, adding the amount to the assessee's income.

On appeal, the Commissioner of Income Tax (Appeals) upheld the AO's decision, stating the expenditure was not governed by Sections 30 to 36 of the Act, was not wholly and exclusively for business purposes, did not create any asset, and the assessee still had to pay tolls.

The Tribunal, after hearing both parties, determined that the expenditure was incurred to facilitate business and generate more revenue. It was a conscious decision involving the Central and State Governments. The Tribunal found the Delhi High Court's decision in Airport Authority of India Vs. CIT applicable and ruled that the expenditure was deferred revenue expenditure, allowable under Section 37(1) in the year incurred. The Tribunal directed the AO to treat the expenditure as revenue and allow the deduction.

2. Disallowance of ?1,83,09,555/- as capital expenditure for strengthening and realigning tracks in the harbor:

The AO observed that the assessee claimed ?1,83,09,558/- for strengthening and realigning tracks as revenue expenditure. The AO rejected this, stating the expenditure was capital in nature, involving extensive replacement of a 40-year-old railway line, and did not qualify as current repairs under Section 31. The AO cited several Supreme Court decisions to support this view.

The Commissioner of Income Tax (Appeals) agreed, noting the expenditure involved complete revamping and was not current repairs. However, the Commissioner directed the AO to allow depreciation on the capital expenditure.

The Tribunal found that the expenditure was necessary for business activities and did not create new assets but reconditioned existing ones. The Tribunal cited decisions from the Madras High Court and Delhi High Court, which allowed similar expenditures as revenue. The Tribunal directed the AO to allow the deduction under Section 37(1).

3. Addition of ?1,08,47,500/- under Section 14A of the Income Tax Act read with Rule 8D for expenses incurred to earn exempt dividend income:

The AO observed that the assessee had investments generating exempt dividend income and invoked Section 14A read with Rule 8D to disallow ?1,08,47,500/- as expenses incurred to earn this income. The Commissioner of Income Tax (Appeals) upheld the AO's decision, stating the investment decisions involved the top management and could not be viewed in isolation.

The Tribunal noted the assessee's argument that investments were made in associate Government companies for strategic reasons and cited a recent Tribunal decision in a similar case, which held that Section 14A does not apply to strategic investments made with interest-free funds. The Tribunal directed the AO to verify if all investments were in sister concerns or Government-owned companies and, if so, to delete the addition. If investments were made from borrowed funds, Section 14A would apply, and the AO should compute the disallowance accordingly.

Conclusion:
The Tribunal allowed the appeal, directing the AO to treat the ?52,52,37,562/- expenditure as revenue, allow the ?1,83,09,558/- expenditure as repairs and maintenance, and delete the ?1,08,47,500/- addition under Section 14A, subject to verification of the nature of investments.