2022 (5) TMI 1596 - AT - Income Tax

Nature of expenses - Club Entrance/Subscription fees as made to promote business interest is an allowable expenditure - See assessee own case by following the decision of Otis Elevator Co (I) Ltd. v. CIT 1991 (4) TMI 53 - BOMBAY HIGH COURT . Capital gain tax liability - Amount received on surrender of transferable Development Right - Determination of value as determined by valuer - HELD THAT - The opinion expressed by the valuer in the valuation report submitted by the Assessee has its basis in the practical difficulties faced while valuing the capital assets acquired before 1981 on the basis of instances of sale. This was also recognized by the legislature. In order to remove the genuine difficulties in computing the capital gains in respect of transfer immovable property including property acquired before 01.04.1981 due to non-availability of relevant information for computation of fair market value of such asset as on 01.04.1981, Section 55 of the Act was amended by the Finance Act, 2017 shifting the base year from 1981 to 2001 with effect from Assessment Year 2018-19. In our view, AO erred in simply rejecting the valuation report without point out any flaw in the methods adopted by the valuer to estimate the fair market value and/or bringing on record any material to support that value of INR 260 per Sq Mrts adopted by the AO represents the fair estimation of market value. We hold that the AO was not justified in rejecting the valuation report submitted by the Assessee. Accordingly, we direct the AO to determine the capital gains tax liability of the Assessee by taking the value of INR 2,29,81,000/- Per Sq. Mtrs determined by the valuer in the valuation report dated 08.07.2006 submitted by the Assessee as the cost of acquisition of TDRs. Nature of receipts - Sales tax subsidy taxability in computing the total income under normal provisions - Relevance of judicial precedents - HELD THAT - Judicial precedents rendered in the context of an assessee enjoying incentives under scheme offered by one state cannot be applied in case of another assessee availing benefit of scheme of another state unless the purpose and provisions of scheme are similar which can be determined on examination of the schemes. In identical facts and circumstances, the Tribunal has, for the Assessment Year 2002-03 held that the CIT(A) fell in error in adjudicating the issue without first examining/analyzing the nature of incentive scheme which pertain to different states and has set aside the issue to the file of AO. We are agreement with the aforesaid decision of the Tribunal. Accordingly, we set aside the issue to the file of CIT(A) for fresh adjudication after calling remand report from the AO and giving reasonable opportunity of being heard to the Assessee. MAT computation - inclusion/exclusion of Sales Tax Subsidy while computing book profit u/s 115JB - HELD THAT - We have remanded the issue to the file of CIT(A) for determination of the nature of Sales Tax Subsidy being capital or revenue in nature for the purpose of computing income under the normal provision of the Act. The determination of this issue would be relevant for adjudication of Additional Ground No. 2. Accordingly, this issue is also remanded to the file of CIT(A) for adjudication. Nature of expenses - expenditure on Jukehi Raod at Kymore - HELD THAT - As the impugned expenditure did not result in creation of any asset of enduring nature to the appellant since the ownership vests with the Government of Madhya Pradesh. Therefore, respectfully following the decision of Hon‟ble Apex Court in the case of Associated Cement Companies Ltd 1988 (5) TMI 2 - SUPREME COURT and the orders of my predecessor from A.Y. 1994-95 to AY 1998-99 as well as my own order for A.Y. 2001-02, the addition made by Assessing Officer is deleted and Assessing Officer is directed to withdraw depreciation allowed @ 5% in the assessment order. Hence this ground of appeal is allowed. Nature of expenses - Expenditure of Dry Fly Ash Handing System at Madukkarai - HELD THAT - Admittedly the Assessee is not the owner of the Dry Flash Ash Handling System. The expenditure did not result in creation of any asset of enduring nature and was incurred for smooth running of the business. Accordingly, applying the principles laid down in the CIT Vs. Associated Cement Companies Ltd 1988 (5) TMI 2 - SUPREME COURT , and CIT v. Madras Auto Services (P) Ltd 1998 (8) TMI 1 - SUPREME COURT , we confirm the order of CIT(A) of allowing deduction holding the same to be revenue in nature. Provision for Director's Retirement Benefit - We confirm the order of CIT(A) of allowing deduction holding the same to be a liability in praesenti to be discharged at future, capable of being estimated with reasonable certainty. Addition made in respect of provision for bad and doubtful debts in computation of book profit u/s 115JB - HELD THAT - We remand this issue to the file of Assessing Officer for fresh determination, keeping in view, the provisions of clause (i) to Explanation 1 to Section 115JB(2) inserted by the Finance Act, 2009, with retrospective effect from 01.04.2001, and the principles enunciated in the case of CIT v. Vodafone Essar Gujarat Ltd. 2017 (8) TMI 451 - GUJARAT HIGH COURT In view of the aforesaid directions, Ground stands disposed off. Addition of Wealth-Tax in computation of Book Profit u/s 115JB is to be deleted. Claim of provision for normal additional gratuity in computation of book profit u/s 115JB - Provision for Normal/Additional Gratuity is in the nature of provision for an ascertained liability and is, therefore, not required to be added back while computing Book Profits in terms of Clause (c) of Explanation 1 to Section 115JB(2). Leave Encashment in computation of book profit u/s 115JB - CIT(A) has granted relief to the Assessee by following the judgment of the Hon‟ble Supreme Court in the case of Bharat Earth Movers 2000 (8) TMI 4 - SUPREME COURT and Echjay Forgins (P) Ltd. 2001 (2) TMI 56 - BOMBAY HIGH COURT No infirmity in the order passed by the CIT(A) to the extent it holds that provision for Leave Encashment is in the nature of provision for ascertained liability created on the basis of actuarial valuation and is, therefore, not required to be added back while computing Book Profits in terms of Clause (c) of Explanation 1 to Section 115JB(2). Provision for Director's Retirement Benefit in computation of book profit u/s 115JB - HELD THAT - As provision for director‟s retirement benefit cannot be considered as unascertained liability since the same has been calculated on the basis of actuarial valuation and is squarely covered by the decision of Bharat Earth Movers 2000 (8) TMI 4 - SUPREME COURT . Therefore, provision for director‟s retirement is an allowable deduction in computing profits and gains of business or profession. Further, additions made in computing book profit u/s 115JB on the ground that the same has been added back in the computing total income under normal provisions of the Act is not tenable. Thus addition made by the Assessing Officer is deleted Provision for Contingencies in computation of book profit u/s 115JB - We remand the issue back to the file of the AO for fresh adjudication keeping in view the provisions of Clause (i) to Explanation 1 to Section 115JB(2) of the Act and after giving Assessee an opportunity of being heard. Provision for Technical Fees, Royalty and Interest is not required to be added back while computing Book Profit under Section 115JB - In the present case the books of accounts have been accepted by the Assessing Officer and therefore, the AO only has limited power to increase/decrease of book profits in terms of Explanation to Section 115JB of the Act. Provision for Technical Fees, Royalty and Interest is not a provision made for unascertained liability and does not fall within the ambit of any of the clauses of Explanation to Section 115JB of the Act. Addition made in respect of revenue generated from trial run production in computation of book profit u/s 115JB is to be deleted as Expenditure incurred during the construction period which is issued by the Institute of Chartered Accountant of India, which is an authoritative body in the matter of laying down the accounting standard. That being so addition made by the Assessing Officer on the ground that the same has been added back in computing income under normal provisions of the Act and the said amount should have been credited in the profit and loss account is neither justified nor tenable. Expenses on VRS pertaining to earlier years in computation of book profit u/s 115JB is to be allowed as applying the principles laid down in the case of Apollo Tyres Ltd. 2002 (5) TMI 5 - SUPREME COURT he accounts of the Assessee have been prepared in accordance with Parts II and III of Schedule VI to the Companies Act and the same has been duly certified by the statutory auditors, and therefore, in absence of any specific clause in Section 115JB(2) of the Act providing for increase of Book Profits by the amount of VRS expenses, no further adjustment is called for on this account. In the immediately preceding assessment year (AY 2003-04) 2019 (3) TMI 2041 - ITAT MUMBAI identical issue has been decided in favour of the Assessee Capital expenditure debited to Profit Loss Account is not required to be added back while computing book profits u/s 115JB . Deferred revenue expenditure debited to Profit Loss Account is not required to be added back while computing book profits u/s 115JB. Profit on sale of fixed assets in computation of book profit u/s 115JB - HELD THAT - Since this issue has been decided against the Assessee in the assessee‟s own case 2019 (3) TMI 2041 - ITAT MUMBAI therefore, the finding of the CIT(A) on this issue is hereby ordered to be set aside and we allow the claim of the revenue for the addition of said amount while computing the book profit u/s 115JB. Expenditure on Jukehi Road, at Kymore and Dry Fly Ash Handing System at Madukkarai in computation of book profit u/s 115JB - While disposing of Ground No. 4 and 5, we have confirmed the order of CIT(A) holding that the aforesaid expenditure are not capital in nature and therefore, deduction for the same is allowed while computing income under normal provisions of the Act. The very basis on which the Assessing Officer had added the aforesaid expenditures while computing book profits under Section 115JB of the Act does not hold good. In view of the aforesaid, we confirm the order passed by CIT(A) on this issue. Amount transferred from Share Premium Account to the profit loss account was correctly reduced from Book Profits by the Assessee while computing book profit as per the provisions of Clause (i) of Explanation to Section 115JB(2). Provision for additional gratuity is a provision for ascertained liability. CIT(A) has not erred in allowing the assessee's claim of additional gratuity Disallowance u/s 14A - HELD THAT - We note that the CIT(A) has, while granted relief to the Assessee has, after taking into account details of investments, own funds and borrowed funds furnished by the Assessee, returned a factual finding that the dividend income received during the year pertained to investments made by the Assessee in the earlier years out of its own funds and therefore the question of assuming that the such dividend income pertained to investments made from borrowed funds does not arise. In the appellate proceedings before us, nothing has been placed before us to establish that the aforesaid finding returned by CIT(A) is incorrect/perverse. Accordingly, we confirmed the order of CIT(A) on this issue. Setting off of unabsorbed depreciation of the current previous year with long term capital gain of the current previous year instead of setting it off with long term capital loss brought forward from earlier years - HELD THAT - The assessee wanted to set off in future but the Assessing Officer declined the claim of the assessee on account of this fact that the claim is against provision of income tax. The CIT(A) has also declined the claim of the assessee on the basis of this fact that Section 71 deals with inter head adjustment and have precedence over section 74 of the Act. Nothing seems to contrary to the law. No law in support of the claim of assessee has been produced before us, therefore, taking into account, all the facts and circumstances, we are of the view that the CIT(A) has decided the matter of controversy judiciously and correctly which is not liable to be interfere with at this appellate stage.

Summary

Issues Involved:
1. Disallowance of Club Entrance/Subscription Fees.
2. Treatment of Transferable Development Rights (TDRs).
3. Taxability of Sales Tax Subsidy.
4. Expenditure on Jukehi Road at Kymore.
5. Expenditure on Dry Fly Ash Handling System at Madukkarai.
6. Provision for Director’s Retirement Benefit.
7. Computation of Book Profits under Section 115JB.
8. Revenue generated from trial run production.
9. Expenses on Voluntary Retirement Scheme (VRS).
10. Capital Expenditure debited to Profit & Loss Account.
11. Deferred Revenue Expenditure of earlier years.
12. Profit on sale of fixed assets.
13. Disallowance under Section 14A.
14. Setting off of unabsorbed depreciation.

Detailed Analysis:

1. Disallowance of Club Entrance/Subscription Fees:
- Facts: The Assessee incurred club entrance and subscription fees which were disallowed by the Assessing Officer as capital expenditure.
- CIT(A) Decision: Held as revenue expenditure for smooth running of business, relying on past Tribunal decisions and Bombay High Court rulings.
- Tribunal Decision: Confirmed CIT(A)’s decision, following jurisdictional High Court rulings and past Tribunal decisions.

2. Treatment of Transferable Development Rights (TDRs):
- Facts: Assessee surrendered land and received TDRs, which were sold. The capital gains were initially offered to tax but later withdrawn in the revised return.
- CIT(A) Decision: Held that the cost of acquisition of TDRs could not be determined.
- Tribunal Decision: Overturned CIT(A)’s decision, holding that the fair market value of the land surrendered as on 01.04.1981 should be adopted as the cost of acquisition of TDRs.

3. Taxability of Sales Tax Subsidy:
- Facts: Assessee received sales tax subsidies which were treated as revenue receipts by the Assessing Officer.
- CIT(A) Decision: Held the subsidies as capital receipts.
- Tribunal Decision: Remanded the issue to CIT(A) for fresh adjudication after examining the incentive schemes, following past Tribunal decisions.

4. Expenditure on Jukehi Road at Kymore:
- Facts: Assessee incurred expenditure on constructing a road which was claimed as revenue expenditure.
- CIT(A) Decision: Held as revenue expenditure, relying on Supreme Court decision in Assessee’s own case.
- Tribunal Decision: Confirmed CIT(A)’s decision, following past Tribunal decisions and Supreme Court ruling.

5. Expenditure on Dry Fly Ash Handling System at Madukkarai:
- Facts: Assessee incurred expenditure on constructing a handling system which was claimed as revenue expenditure.
- CIT(A) Decision: Held as revenue expenditure, as the system was not owned by the Assessee.
- Tribunal Decision: Confirmed CIT(A)’s decision, applying Supreme Court rulings.

6. Provision for Director’s Retirement Benefit:
- Facts: Assessee made a provision based on actuarial valuation, claimed as deductible.
- CIT(A) Decision: Allowed the deduction, holding it as an ascertained liability.
- Tribunal Decision: Confirmed CIT(A)’s decision, following Supreme Court and past Tribunal decisions.

7. Computation of Book Profits under Section 115JB:
- Facts: Various provisions were added back to the book profits by the Assessing Officer.
- CIT(A) Decision: Deleted the additions, holding them as ascertained liabilities or not covered by Explanation 1 to Section 115JB(2).
- Tribunal Decision: Confirmed CIT(A)’s decision for most provisions but remanded the issue of provision for contingencies back to the Assessing Officer.

8. Revenue generated from trial run production:
- Facts: Revenue from trial run production was added to book profits by the Assessing Officer.
- CIT(A) Decision: Deleted the addition, following accounting standards.
- Tribunal Decision: Confirmed CIT(A)’s decision, following past Tribunal decisions.

9. Expenses on Voluntary Retirement Scheme (VRS):
- Facts: VRS expenses were added back to book profits by the Assessing Officer.
- CIT(A) Decision: Deleted the addition, following Supreme Court ruling in Apollo Tyres Ltd.
- Tribunal Decision: Confirmed CIT(A)’s decision, following past Tribunal decisions.

10. Capital Expenditure debited to Profit & Loss Account:
- Facts: Capital expenditure was added back to book profits by the Assessing Officer.
- CIT(A) Decision: Deleted the addition, following Supreme Court ruling in Apollo Tyres Ltd.
- Tribunal Decision: Confirmed CIT(A)’s decision, following past Tribunal decisions.

11. Deferred Revenue Expenditure of earlier years:
- Facts: Deferred revenue expenditure was added back to book profits by the Assessing Officer.
- CIT(A) Decision: Deleted the addition, following Supreme Court ruling in Apollo Tyres Ltd.
- Tribunal Decision: Confirmed CIT(A)’s decision, following past Tribunal decisions.

12. Profit on sale of fixed assets:
- Facts: Profit on sale of fixed assets was excluded from book profits in the revised return.
- CIT(A) Decision: Deleted the addition, following past CIT(A) orders.
- Tribunal Decision: Overturned CIT(A)’s decision, following past Tribunal decisions against the Assessee.

13. Disallowance under Section 14A:
- Facts: Proportionate interest expenditure was disallowed under Section 14A.
- CIT(A) Decision: Deleted the disallowance, holding that investments were made out of own funds.
- Tribunal Decision: Confirmed CIT(A)’s decision, finding no evidence to contradict CIT(A)’s factual findings.

14. Setting off of unabsorbed depreciation:
- Facts: Issue pertains to setting off unabsorbed depreciation against short-term capital gains.
- CIT(A) Decision: Confirmed the setting off as per Assessing Officer’s computation.
- Tribunal Decision: Confirmed CIT(A)’s decision, following past Tribunal decisions against the Assessee.

Conclusion:
- Revenue’s Appeal: Partly allowed.
- Assessee’s Appeal: Dismissed.