2016 (4) TMI 215 - AT - Income Tax

Disallowance of interest on timeshare deposits - Held that - We find that as per the orders of the Hon ble Bombay High Court, Himco had amalgamated with the assessee, that it had taken over all the liabilities and assets of amalgamated company, that both the companies were following different system of accounting, that following the directions of the Hon ble High Court and the mandate of the Act and the Companies Act the assessee had made provision for liability towards interest accrued on 25% of refundable deposits of 30/06/2005, that the assessee had given proper treatment to the amount in question in its books of accounts. In our opinion, if a liability can be ascertained on a scientific basis then it cannot be termed a contingent liability. We have also taken cognizance of the fact that the amalgamation scheme was approved by the Hon ble Bombay High Court and assessee had Acted in pursuance of the order of the court. The payment of interest payable to the sole selling agents, for, the parties must be assumed to be in full knowledge of the affairs of the erstwhile firm. Therefore, the liability to pay the sum was a trading liability and was allowable as a deduction. - Decided in favour of assessee Disallowance u/s 14A - quantification of disallowance - Held that - We find that in the case of Godrej Agrovet (2014 (8) TMI 457 - BOMBAY HIGH COURT ), the Hon ble Court had held that percent of exempt income would constitute a reasonable estimate for making disallowance in the years earlier to 2008- 09. Following the same, we direct the AO to restrict the disallowance to 2% of the exempt income.- Decided in favour of assessee in part Determination of income as per the provisions of section 115 JB - Held that - We find that the AO not given any reasons for adding certain items while determining the income u/s. 115JB of the Act, that the FAA has rejected the claim of the assesse. He had not adjudicated the issue of accrued interest calculated on the interest bearing deposits to time sharing-members for the purposes of calculating the book profit. The assessee had made submissions in that regard. Even if it was a new claim, the FAA was supposed to decide the issue for computing book profit for the year under consideration. Though the AO cannot accept a new claim without a revised return of income. But, the appellate authorities are not bound by such restrictions. The FAA should have decided the issue on merits. Therefore, we are of the opinion that, in the interest of justice, matter should be restored back to the file of the FAA for adjudication of the issue raised by the assessee. Here, we would like to mention that allowability of expenditure u/s. 37 has been dealt by us , while deliberating upon the ground no. 1. As far as FBT is concerned we want to mention that the CBDT, vide its circular no. 8/2005 (F. No. 142/21/2005TPL, dtd. 29. 08. 2005) has dealt the issue in answer to question no. 103. It has been clarified by the Board that FBT was an allow able deduction in the computation of books profit u/s. 115JB of the Act. Considering the above facts, we are reversing the order of the FAA. - Decided in favour of assessee in part

Summary

Issues Involved:
1. Disallowance of interest on timeshare deposits.
2. Disallowance under Section 14A of the Income Tax Act.
3. Determination of income as per the provisions of Section 115JB of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Interest on Timeshare Deposits:
The primary issue was the disallowance of ?1.07 crores claimed as interest on timeshare deposits. The Assessing Officer (AO) disallowed the amount, stating that the liability was contingent and not an actual business expenditure. The Assessee argued that the liability was taken over from Himco under a scheme of amalgamation approved by the Bombay High Court, and the interest liability was an existing obligation. The First Appellate Authority (FAA) upheld the AO's decision, noting that the provision was notional and no actual payment had been made.

Upon appeal, it was argued that the liability was quantified and provided for as per Accounting Standard 14 and approved by the High Court. The Tribunal found that the liability was ascertainable on a scientific basis and thus could not be termed contingent. Referring to the Supreme Court's principles in Rotork Controls India P. Ltd., the Tribunal concluded that the obligation arose from a past event and required an outflow of resources. The Tribunal reversed the FAA's order, allowing the interest claim as a business expenditure.

2. Disallowance under Section 14A of the Income Tax Act:
The AO disallowed ?6.53 lakhs under Section 14A, related to the exempt dividend income of ?21,509/-. The Assessee argued that the investments were made from interest-free funds and no expenditure was incurred to earn the dividend. The FAA, referencing the Godrej and Boyce Mfg. Co. Ltd. case, restricted the disallowance to ?1 lakh, stating that Rule 8D was not applicable for the relevant year.

The Tribunal, considering the Godrej Agrovet Ltd. case, directed the AO to restrict the disallowance to 2% of the exempt income, thus partially allowing the Assessee's appeal.

3. Determination of Income as per Section 115JB:
The AO made certain additions while calculating book profits under Section 115JB, which the Assessee contested, arguing that the AO overlooked the scheme of amalgamation and relevant published accounts. The FAA upheld the AO's additions, stating they fell within the provisions of Section 115JB.

The Tribunal noted that the AO did not provide reasons for the additions and that the FAA did not adjudicate the issue of accrued interest on deposits for calculating book profits. The Tribunal restored the matter to the FAA for adjudication on merits, emphasizing that appellate authorities are not restricted by the requirement of a revised return for new claims. The Tribunal also referred to CBDT Circular No. 8/2005, which clarified that FBT is an allowable deduction in the computation of book profits under Section 115JB. Consequently, the Tribunal reversed the FAA's order in part, directing a fresh adjudication.

Conclusion:
The appeal was partly allowed, with the Tribunal reversing the FAA's decisions on the disallowance of interest on timeshare deposits and the computation of book profits under Section 115JB, while partially allowing the disallowance under Section 14A. The matter regarding book profits was remanded back to the FAA for a fresh decision.