2018 (9) TMI 2118 - AT - Income Tax

Write off advances - Disallowance u/s 36(1)(vii) read with section 36(2) - HELD THAT - Assessee had duly credited its profit and loss account in the earlier years either by offering the income or reducing its expenses thereby making it eligible for deduction u/s 36(1)(vii) read with section 36(2) of the Act. Certain advances were actually made in the normal course of its business which was meant wholly and exclusively for the purpose of its business. Certain amounts lying in the advances recoverable became irrecoverable for quite a long time and the assessee had consciously taken a call to write off the same during the year under consideration which would be squarely allowable as trading loss. Reliance placed by the ld AR on the decision of CIT vs Mysore Sugar Co. Ltd 1962 (5) TMI 3 - SUPREME COURT and CIT vs Rohtas Industries Ltd 1978 (1) TMI 8 - CALCUTTA HIGH COURT are very well founded, among others - no infirmity in the order of the ld CITA granting relief to the assessee. Deduction u/s 80IA - certain items like interest on security deposits / loans, interest on delayed payment by customers, charges towards warehousing of cargo, revenue profit on disposal of fixed assets, sale of tender documents etc. were not derived from the industrial undertaking of CFS activity and denied the deduction u/s 80IA - HELD THAT - For net realization from auction of cargo argued that the credit balances written back and forfeiture of deposit represents advances and deposits received from customers which were treated as no longer payable and hence written back to income. When asked for the details for the same, the ld AR prayed for one opportunity before the ld AO for furnishing the same. Accordingly we direct the ld AO to verify this aspect in order to ascertain whether the same relates to CFS activity so as to fall within the expression derived from from the details to be filed by the assessee in this regard. Income derived from disposal of pallets / garbages - We find that the pallets are not owned by the assessee but the same are owned by the customers who stack their products in the pallets. While removing the goods from the warehouse of the assessee, the assessee stated that the pallets are left by the parties, which were unnecessarily occupying the space of the assessee and hence the same were disposed off. We find that this does not have any first degree nexus with the CFS activity of the assessee and cannot be construed as income derived from the said undertaking. Hence we hold that the ld AO had rightly denied deduction u/s 80IA of the Act for the same. Income earned on net realization from auction of cargo - The assessee at best would be entitled for claiming demurrage for storing the goods beyond the prescribed time which would be construed as first degree nexus with the CFS activity. Moreover, these are extraneous circumstances which the assessee would not undergo in the normal course of its business. Assessee did not furnish any evidence on record to prove that it has got lien over the goods stored in the CFS unit. In any case, the proceeds realized were only from auction of goods and not from storage of goods and hence the first degree nexus with the CFS activity is conspicuously absent. Hence we hold that the ld CITA erred in granting relief to the assessee in this regard. Interest on security deposits - We find that the ld AR fairly stated that this tribunal in assessee s own case for the earlier year had held that it is not derived from CFS unit and accordingly not eligible for deduction u/s 80IA of the Act. Accordingly, we do not find any infirmity in the order of the ld CITA denying relief to the assessee in this regard. Revenue profit on sale of fixed assets - The same would take the character of sale of scrap as it is not in dispute that the fixed assets were utilized by the assessee only in its CFS unit and the sale thereon would have first degree nexus with the said unit and accordingly would be eligible for deduction u/s 80IA. Rent receipts - As we find that the same is similar to demurrage claims of the assessee and hence has got first degree nexus with the CFS unit and eligible for deduction u/s 80IA of the Act. Accordingly we direct the ld AO to grant deduction u/s 80IA of the Act for the same. Hire charges received on assets - We find that the assessee had provided refrigerators, generator sets and personal computers to the customers who had stored the goods in the godown / warehouse of the assessee and had collected hire charges. These assets are given to the customers as part and parcel of the CFS activity carried on by the assessee for smooth and effective storage of the goods and income derived thereon in the form of hire charges is inextricably linked with the CFS activity carried on by the assessee. Hence we direct the ld AO to grant deduction u/s 80IA. Sale of tender documents - The tender documents were printed by the assessee and had incurred expenses for the same. These tender documents, when remaining unutilized, were sold by the assessee in order to recover its cost / expenses incurred thereon. Hence it would only tantamount to recovery of expenses incurred directly in connection with the CFS unit. We find that the reliance has been rightly placed by the ld AR on the decision of Meghalaya Steels Ltd 2016 (3) TMI 375 - SUPREME COURT in this regard. Hence we direct the ld AO to grant deduction u/s 80IA of the Act for the same. Disallowance of Prior period expenses - HELD THAT - We find that the entire details of prior period expenses are enclosed in paper book. It is not in dispute that these details were also filed before the lower authorities. From the perusal of the said details, we are convinced of the fact that the liability for such expenses had crystallized during the year excluding depreciation and hence we hold that the ld CITA had rightly granted relief to the assessee in this regard. Accordingly, the Ground raised by the revenue dismissed. Disallowance of lease premium - assessee had claimed the proportionate premium on lease hold land as advance rent payable by it in accordance with the terms of the lease agreement as business expenditure allowable u/s 37 - AR argued that there is a difference between the term rent and premium and the payment made for getting into a premises is called premium - HELD THAT - Admittedly, the payments made during the year contains payment towards lease rent for fresh lease and for existing leases. Obviously differential treatment need to be given for both in the light of difference between the term rent and premium as the said difference has been duly noted in the case of CIT vs Panbari Tea Company Ltd 1965 (4) TMI 19 - SUPREME COURT In the absence of proper finding in the order of the authorities below with regard to the same, we deem it fit and appropriate, in the interest of justice and fairplay, to remand this issue to the file of ld AO for denovo adjudication of the issue afresh and pass orders in accordance with law. Disallowance u/s 14A r.w.r. 8D - HELD THAT - Since the assessee company is having sufficient own funds, by placing reliance on the decision of Reliance Utilities and Power Ltd 2009 (1) TMI 4 - BOMBAY HIGH COURT , we direct the ld AO not to make any disallowance of interest under second limb of Rule 8D(2) of the Rules. With regard to the disallowance under third limb of Rule 8D(2) of the Rules, in consonance with the decision of this tribunal in the case of REI Agro Ltd 2013 (9) TMI 156 - ITAT KOLKATA we direct the ld AO to consider only investments (excluding foreign investments) that had yielded dividend income should be considered for working out the disallowance under third limb of Rule 8D(2) of the Rules.

Summary

Issues Involved:
1. Write off of advances
2. Deduction under Section 80IA of the Income Tax Act
3. Disallowance of prior period expenses
4. Disallowance of lease premium
5. Disallowance under Section 14A read with Rule 8D

Issue-wise Detailed Analysis:

1. Write off of Advances – Rs 12,92,000/-

The assessee, a Government of India Enterprise, wrote off advances amounting to Rs 12,92,000/- as business loss. The AO disallowed the claim under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961, stating that these advances were not accounted as income in earlier years. The CIT(A) allowed the claim, following precedents from earlier years. Upon appeal, the Tribunal found that the advances were indeed made in the normal course of business and had become irrecoverable over time. Citing decisions from the Supreme Court and the Jurisdictional High Court, the Tribunal upheld the CIT(A)’s decision, dismissing the revenue's appeal.

2. Deduction under Section 80IA of the Act

The assessee claimed a deduction of Rs 17,95,43,785/- for its Container Freight Station (CFS) activity. The AO disallowed Rs 80,01,000/- of this claim, arguing that certain incomes were not derived from the CFS activity. The CIT(A) partially allowed the claim, excluding items like interest, profit on disposal of assets, rent, hire charges, and sale of tender documents. Both parties appealed. The Tribunal upheld the CIT(A)’s partial allowance but remanded the issue of credit balances written back and forfeiture of deposits for further verification. The Tribunal denied deductions for disposal of pallets and auction of cargo, as they lacked a direct nexus with the CFS activity. The Tribunal allowed deductions for rent receipts and hire charges, finding them directly linked to CFS operations. The Tribunal also allowed deductions for revenue profit on sale of fixed assets and sale of tender documents, directing the AO to verify and grant deductions accordingly.

3. Disallowance of Prior Period Expenses

The AO disallowed Rs 14,04,000/- of prior period expenses, arguing they should have been claimed in the respective years. The CIT(A) allowed Rs 6,83,527/- of these expenses, stating that the liabilities crystallized during the year. The Tribunal upheld the CIT(A)’s decision, noting that the details provided justified the crystallization of liabilities within the year, excluding depreciation of Rs 7,16,473/-. The Tribunal dismissed the revenue's appeal.

4. Disallowance of Lease Premium

The AO disallowed Rs 45,58,305/- claimed as lease premium under Section 37, treating it as a capital expenditure due to the long lease periods. The CIT(A) followed a previous Tribunal decision against the assessee. The Tribunal remanded the issue for fresh adjudication, noting that the assessee presented new facts distinguishing the current year from earlier assessments. The Tribunal directed the AO to re-examine the nature of payments, differentiating between rent and premium as per Supreme Court guidelines.

5. Disallowance under Section 14A read with Rule 8D

The AO made a disallowance of Rs 36,90,606/- under Rule 8D(2), which the CIT(A) partially upheld. The Tribunal admitted the assessee’s additional ground for appeal, noting the assessee’s sufficient own funds and directing the AO to exclude foreign investments and consider only dividend-bearing investments for disallowance. The Tribunal applied the decision in Reliance Utilities and Power Ltd, directing no disallowance of interest under Rule 8D(2) and limiting disallowance to investments yielding dividend income.

Summary of Appeals:

- 2010-11:
- Revenue’s Appeal (ITA No. 496/Kol/2014): Partly allowed for statistical purposes.
- Assessee’s Appeal (ITA No. 483/Kol/2014): Allowed for statistical purposes.

- 2011-12:
- Revenue’s Appeal (ITA No. 471/Kol/2016): Partly allowed for statistical purposes.
- Assessee’s Appeal (ITA No. 421/Kol/2016): Allowed for statistical purposes.

Order pronounced in the Court on 05.09.2018