2019 (4) TMI 2064 - AT - Income Tax

Disallowance of amount of expenditure held to be relatable to dividend income while determining the book profits chargeable to tax u/s 115JB - HELD THAT - A perusal of the audited accounts of the assessee-company clearly indicates that the company has its own funds aggregating to Rs.2596.58 crores more than the borrowed capital of Rs.1, 060.71 crore whereas the investment portfolio is just Rs.555.68 crores. We further find that on identical facts in AY 1992-93 the Tribunal has decided the issue in favour of the assessee and held that there is no scope for allocation of interest expenses towards investment income. Also in AY 1993-94 and AY 1994-95 in assessee s own case on similar facts the Tribunal held that no interest is to be allocated towards investment income. The department s reference to the High Court on the issue and SLP to Supreme Court has been rejected. Facts being identical we follow the above orders of the Co-ordinate Bench in assessee s own case and allow the 1st ground of appeal. Disallowance in respect of Contribution to Tatachem DAV public School - HELD THAT - Similar issue has been decided in favour of the assessee-company in AYs 1992-93 to 2001-02 wherein the orders of AY 1992-93 have been confirmed in appeal by the High Court. It is stated that the Department s SLP to Supreme Court does not contain this ground. Further it is stated that payment to Tatachem DAV School has been specifically considered in AY 1996-97 1997-98 and 2000-01 as reflected in the CIT(A) s order for the said years. Disallowance of in respect of Prior Period Expenses - HELD THAT - A perusal of the accounts clearly indicates that the delay in booking of the expenses was due to the late receipt of bills or events occurring during the year for which the liability had crystallized after the balance sheet date. Further we find that each of the above expenses were incurred to earn income which was accounted and offered for tax during the current year. Similar issue arose before the Tribunal in assessee s own case for AY 1986-87 2014 (5) TMI 956 - ITAT MUMBAI AY 1993-94 AY 1996-97 and AY 1997-98 - We find that the above issue has been decided in favour of the assessee by the Tribunal in the aforesaid orders. Therefore facts being identical we follow the said orders of the Co-ordinate Bench in assessee s own case and allow the 3rd ground of appeal. Disallowance of various expenses - HELD THAT - It is found that during the year under consideration M/s L T was awarded a contract for expansion of the assessee s existing Cement facilities. The proposal of expansion was dropped and the contract was cancelled. In terms of agreement L T asked for compensation for cancellation of contract and a sum of Rs.1, 62, 25, 000/- was paid to them. The payment to L T was made for expansion in existing line of business. However due to change in market conditions the contract was cancelled and the assessee-company had to pay compensation towards cancellation. In view of the above factual scenario the cancellation of contract was for business reasons. Therefore we hold that the same is allowable as revenue expenses u/s 37(1) of the Act. In respect of the expenses of Rs.5, 08, 200/- it is found that a sum of Rs.5, 08, 200/- was paid by the assessee-company to M/s N.M. Raiji Co. for carrying out due diligence i.e. of financial records of Paradeep Phosphates and National Fertilizers Ltd. (both Government of India Companies). It is no way connected with the acquisition of these companies. Hence we hold the above as allowable as business expense u/s 37(1) of the Act. As regards the expenses of Rs.31, 41, 657/- we find that during the year under consideration the above amount was paid to ING Bank for working out final viability and financial tie-up for Paradeep Phosphates. The project was finally not awarded to the assessee-company as its offer was below the bid price. Also it is found that the payment was only towards financial arrangement. Thus it is deductible u/s 36(1)(iii) of the Act. Similar is the payment of Rs.1, 15, 000/- to SBI Capital Market and Rs.15, 00, 000/- to Bank of America towards fees for NFL Project and thus allowable as revenue expenses. As regards the expense of Rs.66, 000/- it is seen that the same was paid towards interior designing of MD s office at Lovedale. No new capital was created. Hence we hold the same as allowable expense u/s 37(1) of the Act. As regards the expense of Rs.66, 69, 101/- it was spent towards basic engineering fees for expansion in Cement Division and making certain technological changes. The project was ultimately dropped since it required heavy capital investment. Also it is seen that the design and drawing were received by the assessee-company in a book form. We agree with the contentions of the Ld. counsel that design and drawing represents some technical information which keeps on changing. Hence we hold the above expenses as allowable u/s 37(1) of the Act. Finally regarding expenses of Rs.41, 50, 756/- it is found that as per the directions of the Pollution Control Board the assessee-company was required to grow trees all around its Cement Plant. The expenses were incurred towards growing of plantations making drainage system for watering those trees. Definitely by growing the trees around the Cement Plant the assessee-company did not acquire any capital asset. As this is only for Pollution Control we hold it as allowable u/s 37(1). Disallowance u/s 14A - HELD THAT - As noted the assessee s own funds during the impugned assessment year is much more than the investment. Thus the disallowance of interest expenses u/s 14A does not arise. Before us the Ld. counsel submits that the assessee-company accepts the disallowance of Rs.5, 98, 950/- u/s 14A as determined by the Ld. CIT(A) as reasonable and does not press the above ground of appeal. Interest income as disallowable while determining the deduction u/s 80HHC - HELD THAT - We set aside the order of the Ld. CIT(A) on the above issue and restore the matter to the file of the AO to re-compute the deduction u/s 80HHC by following the above decision in ACG Associated Capsules ( 2012 (2) TMI 101 - SUPREME COURT -Thus this ground appeal is allowed for statistical purposes. Disallowance in respect of Machinery Hire Charges - Assessee argued the same were allowable on the matching concept for use asset used for the purpose of business - HELD THAT - In the instant case in the financial year 1994-95 the assessee entered into sale and lease back agreements with L T Bajaj Auto and HDFC Ltd. The lease agreements provided for certain lease deposit and annual rent. During the year under reference an amount of Rs.2, 58, 92, 853/- was amortized and provided towards lease deposit. We find that on the basis of above facts the present case is distinguishable from the above case laws relied on by the Ld. counsel. We are of the considered view that the amount paid as consideration for obtaining the lease is for the acquisition of a capital asset which enables the lessee to carry on its business. It is a capital expenditure. It cannot be split up into the number of years of the duration of the lease in order to claim a proportionate fraction as revenue expenditure each year. The acquisition is of exclusive right or privilege over the lease it a strong point that the consideration paid is on capital account. Receipts and payments in connection with acquiring or disposing of lease are usually on capital account. Treatment of sale of assets as a slump Sale and subjecting the same to Tax as a Short Term Capital Gain - HELD THAT - Having perused the documents we find that in the instant case the sale of individual assets for a lump sum consideration cannot be treated as a slump sale. The fact remains that such itemized sale is essentially different from sale of an entire going concern (including all assets and liabilities). As the basic conditions for transfer of undertaking for treating the sale as a slump sale is not satisfied we hold that the provisions of section 2(42C) are not applicable in the present case. Claim of the assessee of loss on sale of right in lease hold land of detergent division as capital loss we find that the assessee has acquired the right to use the lease hold land in the financial year 1991-92. In the instant case the conditions stipulated in section 45 of the Act so as to bring a transaction chargeable under the head capital gains are fulfilled and therefore the gains/loss arising on transfer of such right would be liable to capital gains. Accordingly the assessee has rightly claimed the loss on sale of right in the lease hold land as a capital loss. Disallowance made u/s 40A(9) being payments made to various institutions - these expenses were not wholly and exclusively incurred for the business purpose and does not directly relate to the business activity of the assessee - CIT-A deleted the addition - HELD THAT - We find that the above issues have been decided by the ITAT in favour of the assessee in assessee s own case for earlier assessment year. Disallowance of preliminary expenses and share issue expenses - addition on the ground that these are capital in nature - In respect of preliminary expenses claimed u/s 35D the AO held that the conditions of section 35D are not satisfied - HELD THAT - It is found that these expenses pertained to Babrala Fertilizer Division which commenced production effective from 20.12.1994 and for the first time claim was made in the AY 1995-96. The total expenses incurred on initial share issue and preliminary expenses in year 1990-91 were of Rs.67, 45, 825/- and were treated as miscellaneous expenses and shown under separate head of balance sheet. When the project commenced production on December 1994 deduction @ 1/10 th was claimed. The cost of Fertilizer project was more than Rs.1, 400/- crore and this amount of Rs.65, 00, 000/- is less than 0.10%. This claim was allowed in the very first year i.e. AY 1995-96. Additions for subscription of brand equity treating it as business expenditure - HELD THAT - CIT(A) following the order of the Tribunal in assessee s own subsidiary i.e. Rallies India Ltd. correctly allowed the appeal filed by the assessee.

Summary

Issues Involved:
1. Disallowance of expenditure related to dividend income under Section 115JB.
2. Disallowance of contribution to Tatachem DAV Public School.
3. Disallowance of prior period expenses.
4. Disallowance of various expenses debited to the Profit & Loss Account.
5. Disallowance under Section 14A.
6. Deduction under Section 80HHC.
7. Disallowance of machinery hire charges.
8. Treatment of sale of assets as a slump sale.
9. Disallowance under Section 40A(9).
10. Disallowance of preliminary and share issue expenses.
11. Disallowance of subscription to brand equity.

Analysis of the Judgment:

1. Disallowance of Expenditure Related to Dividend Income Under Section 115JB:
The assessee claimed exemption for dividend and mutual fund income, reducing it while determining book profit under Section 115JB. The AO added back expenses for earning exempt income under Section 14A. The CIT(A) directed the AO to verify if own funds were used for investments. The Tribunal found that the assessee had sufficient own funds and followed previous Tribunal decisions favoring the assessee, allowing the appeal.

2. Disallowance of Contribution to Tatachem DAV Public School:
The AO disallowed the contribution to Tatachem DAV Public School, but the CIT(A) confirmed the disallowance. The Tribunal noted that similar issues were decided in favor of the assessee in previous years, allowing the appeal.

3. Disallowance of Prior Period Expenses:
The AO disallowed prior period expenses, which the CIT(A) upheld. The Tribunal found that the expenses crystallized during the year and were incurred to earn taxable income, following previous Tribunal decisions favoring the assessee, allowing the appeal.

4. Disallowance of Various Expenses Debited to Profit & Loss Account:
The AO disallowed several expenses as capital in nature. The CIT(A) confirmed these disallowances but allowed depreciation on some items. The Tribunal found that the expenses were incurred for business reasons and allowed them as revenue expenses under Section 37(1), allowing the appeal.

5. Disallowance Under Section 14A:
The AO disallowed interest expenses related to exempt income under Section 14A. The CIT(A) directed a recalculation based on indirect expenses. The Tribunal found that the assessee had sufficient own funds, negating the need for disallowance of interest expenses, thus partly allowing the appeal.

6. Deduction Under Section 80HHC:
The AO included excise duty, sales tax, and other incomes in the total turnover for deduction computation under Section 80HHC. The CIT(A) directed exclusion of excise duty and sales tax. The Tribunal set aside the CIT(A) order and directed the AO to recompute the deduction following the Supreme Court decision in ACG Associated Capsules.

7. Disallowance of Machinery Hire Charges:
The AO disallowed the provision for lease deposit towards machinery as capital in nature. The CIT(A) confirmed this. The Tribunal upheld the CIT(A) decision, dismissing the appeal.

8. Treatment of Sale of Assets as a Slump Sale:
The AO treated the sale of the detergent division as a slump sale under Section 2(42C). The CIT(A) confirmed this. The Tribunal found that the sale of individual assets for a lump sum consideration did not constitute a slump sale, allowing the appeal and recognizing the capital loss on the sale of leasehold land.

9. Disallowance Under Section 40A(9):
The AO disallowed contributions to various societies/trusts under Section 40A(9). The CIT(A) deleted these disallowances, following Tribunal decisions in earlier years. The Tribunal upheld the CIT(A) decision, dismissing the appeal.

10. Disallowance of Preliminary and Share Issue Expenses:
The AO disallowed these expenses as capital in nature. The CIT(A) deleted the disallowance, following earlier Tribunal decisions. The Tribunal upheld the CIT(A) decision, dismissing the appeal.

11. Disallowance of Subscription to Brand Equity:
The AO disallowed the subscription to brand equity as capital expenditure. The CIT(A) allowed it, following Tribunal decisions in similar cases. The Tribunal upheld the CIT(A) decision, dismissing the appeal.

Conclusion:
The appeal filed by the assessee was partly allowed, and the appeal filed by the revenue was dismissed. The Tribunal provided detailed reasoning for each issue, often relying on precedent and the specifics of the financial records.