2019 (10) TMI 1553 - AT - Income Tax

Disallowance of prior period expenses - assessee regularly followed mercantile system of accounting - HELD THAT - Coming to the facts of the present appeal we note that the Revenue was unable to bring to our attention any material or fact to disprove the assessee s explanations furnished before the lower authorities in support of its claim that the liability to pay the expenses charged under the head prior period crystallized during the FY 2011-12. We also find from the details of the expenses that the assessee had claimed deduction in respect of items which were revenue in nature and fully allowable in arriving at its business income. Revenue also did not controvert the Ld. AR s submissions that no deduction in respect of these expenses was allowed in the prior years and tax rate in the earlier years and in the current year were same and therefore irrespective of the year of deduction allowed the revenue effect was tax neutral. In this regard the reliance placed by the Ld. AR on the decision of Adani Enterprises Ltd 2016 (7) TMI 1250 - GUJARAT HIGH COURT is found to be relevant. For the reasons set out in the foregoing we do not see any reason to interfere with the order of the Ld. CIT(A) and accordingly we dismiss this ground of the Revenue. Provision for diminution in the value of investments - HELD THAT - As consequent to granting of loans due to extraordinary and compelling circumstances the loan was converted into preference shares but such fact by itself did not change or alter the basic character of the transaction. As apparent that the preference shares in M/s Transafe Services Ltd were not acquired by the assessee for the purpose of earning dividend and capital appreciation. Such preference shares were acquired at the dictate of the CDR cell of the RBI and which was binding on the assessee being the promoter of the subsidiary. We further find that only after it was found that almost entire net worth of the subsidiary was eroded the loss incurred by the assessee was recognized in the books. We therefore find merit in the Ld. AR s submission that even though the nomenclature used was provision for diminution in value of investment the same was in the nature of provision for ascertained business loss and therefore allowable. We find that since the provision was for ascertained loss in Note No. 10 of the audited accounts the value of investment in M/s Transafe Services Ltd was disclosed at Rs.147.63 lacs i.e. after netting off the loss provided in the P L Account of the relevant year. Applying the principle laid down by the Hon ble Apex Court in the case of Vijaya Bank Ltd 2010 (4) TMI 46 - SUPREME COURT we do not find any infirmity in the Ld. CIT(A) s order. In the extraordinary circumstances such loans was converted into preference shares which consequently eroded in the value because of the sustained losses of the subsidiary. Merely because the loss was debited under the nomenclature provision did not alter the basic character of the transaction and the loss incurred due to non-recoverability of the amounts advanced in the ordinary course of business could not be disallowed by the AO. Even with regard to the Revenue s objection to the relief allowed by the Ld. CIT(A) while computation of book profit u/s 115JB we find that the objection of the Ld. CIT DR are soundly countered by the Hon ble Gujarat High Court in their judgment in the case of Pr.CIT Vs Torrent Pvt Ltd 2019 (6) TMI 709 - GUJARAT HIGH COURT - Ground No. 2 of the Revenue is therefore dismissed.

Summary

Issues Involved:
1. Treatment of advance rent as capital expenditure.
2. Disallowance of prior period expenses.
3. Provision for diminution in the value of investments.

Issue-wise Detailed Analysis:

1. Treatment of Advance Rent as Capital Expenditure:

The assessee challenged the CIT(A)'s decision to uphold the Assessing Officer's (AO) action of treating Rs. 79,68,169/- paid as advance rent for leased lands as capital expenditure, thereby disallowing it as business expenditure. The Tribunal noted that this issue had been previously adjudicated in favor of the assessee for AY 2014-15 under similar facts. The Tribunal referenced various judicial decisions, including the Hon'ble Supreme Court's rulings in cases like Aditya Minerals Pvt Ltd Vs CIT, CIT Vs Panbari Tea Co. Ltd, and CIT Vs Associated Cement Co Ltd, which supported the treatment of advance rent as revenue expenditure. The Tribunal also considered the CBDT Circular No. 9/2014 and judgments from the Hon'ble Gujarat High Court and Karnataka High Court, which held that lease premium paid was revenue in nature. The Tribunal concluded that the assessee's claim for amortization of lease premium over the lease period was allowable, thereby dismissing the Revenue's appeal on this ground.

2. Disallowance of Prior Period Expenses:

The AO had disallowed Rs. 4,08,23,000/- claimed as prior period expenses, stating that the assessee did not follow the mercantile system of accounting. The Ld. CIT(A) deleted this disallowance, noting that the liability to pay these expenses crystallized during the relevant year. The Tribunal upheld the CIT(A)'s decision, emphasizing that the expenses were revenue in nature, incurred wholly and exclusively for business purposes, and no deduction was allowed in prior years. The Tribunal also referenced past assessments where similar claims were allowed, and the revenue effect was tax neutral due to consistent tax rates. The Tribunal dismissed the Revenue's appeal on this issue, finding no reason to interfere with the CIT(A)'s order.

3. Provision for Diminution in the Value of Investments:

The AO disallowed Rs. 11,82,37,000/- claimed as a provision for diminution in the value of investments, treating it as a non-allowable expenditure. The CIT(A) deleted this disallowance, citing the Supreme Court's decisions in Vijaya Bank v CIT and Badridas Daga v CIT, which allowed such provisions if they represented ascertained losses. The Tribunal noted that the assessee's investment in its subsidiary was driven by business expediency and was subsequently converted into preference shares due to corporate debt restructuring. The Tribunal found that the provision, though labeled as such, was an ascertained business loss and therefore allowable. The Tribunal also referenced the Gujarat High Court's decision in Pr.CIT Vs Torrent Pvt Ltd, which supported the treatment of such provisions as actual write-offs. Consequently, the Tribunal upheld the CIT(A)'s order, dismissing the Revenue's appeal on this ground.

Conclusion:

The Tribunal partly allowed the assessee's appeal and dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all contested issues. The judgment emphasized the importance of judicial precedents and the principle of matching costs with revenues in determining the allowability of business expenditures.