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2017 (10) TMI 53 - AT - Income TaxPayment of gas transmission charges are not subject to levy of TDS, there is no question of disallowance u/s 40(a)(ia) of the Act Education cess - whether a disallowable expenditure u/s 40(a)(ii) and not allowable expenditure u/s 37 - Held that - The basis character of education cess as intended by the legislature is tax which is levied on the profits or gains of the business and given that such tax has already been provided in section 40(a)(ii) as not an allowable deduction, there was nothing more that was required or expected from the legislature. The levy of wealth tax, securities transaction tax and fringe benefit tax are not on the profits or gains of business or profession, hence, there was a necessity felt by the legislature and which was specifically provided for.In light of above discussions and the facts and circumstances of the case, we are of the view that ld CIT(A) has rightly disallowed the claim of education cess as an allowable deduction under section 40(a)(ii) of the Act. In the result, ground taken by the assessee is dismissed Disallowance of expenses claimed to be crystallized during the year under consideration - Held that - Firstly, regarding amount of ₹ 9,43,693, it relates to income under the co-marketer arrangement which was booked in excess in the previous financial year and now been reversed during the current financial year. It is thus not an expense but a reversal of income excess booked earlier and now been rectified during the year under consideration. There is thus no question of disallowance of the same. The other expense relates to godown rent for which a request was made by the assessee to NAFED for waive off in the previous financial year however, the final decision of NAFED was received by the assessee during the subject financial year wherein NAFED refused to waive off the rent. Since the assessee didn t lift the material from the godown of NAFED during the previous financial year, it was contesting its liability to pay the godown rent which was finally crystallised during the year under consideration and accordingly, the same was claimed as an allowable expenditure. Similar is the position regarding travel bill the same was finally traced and processed in December 2008. There is no dispute that all these expenses have been incurred for the purposes of the business and all are duly supported by verifiable documentation which has been produced and available on record. Further, it is not the case of the Revenue that the tax rates have changed from last year and any prejudice have been caused to the Revenue. In the entirety of facts and circumstances of the case, we set-aside the order of the lower authorities and the AO is directed to allow these expenses as an allowable expenditure Deduction against sale proceeds of mining rights - Held that - Directions of the Coordinate Bench in AY 2009- 10 have to be read and understood as directing the AO to verify the claim of the assessee as to whether such cost are included in the overall cost of mining rights or not and where it is found to be so included, allow the claim of the assessee to claim deduction of such costs against the sale of mining rights. Such directions are therefore directions subject to necessary verification at the end of the AO. Given that, in the instant case, the AO has not verified the said expenses but the ld CIT(A) has carried the necessary verification and has come to correct conclusion that ₹ 86,08,460/- related to deep excavation and road work were related to mining operation and treated as included in sale of mining rights whereas misc. capital expenses of 87,45,400/- in absence of details cannot be treated as related to mining rights. We therefore do not see any infirmity in the order of the ld CIT(A) and the same is sustained. Disallowance of interest on loan on account of investment in Mutual Funds - Held that - Borrowed funds in form of NCDs and cash credit facility have been utilised to an extent for the purposes of making investment in the mutual funds units and a clear nexus has thus been established between the borrowed funds and the investment in the mutual fund units. Determination of interest on such borrowed funds which have been utilised for making the investments in the mutual fund units - As gone through the findings of the ld CIT(A) and confirm his findings regarding disallowance of ₹ 683,736 for the reason that no specific source has been pointed out by the assessee for making the subject investments in the mutual fund units and it has been established that the amount so invested has been drawn out of the borrowed funds withdrawn from the cash credit account. We also confirm the findings of the ld CIT(A) regarding disallowance of ₹ 387,800 which is the actual interest charged by the HDFC bank on the cash credit account during the period Dec 2008 to March 2009 when the major investment has been made by the assessee in the mutual fund units and the funds have been withdrawn from the cash credit account. Disallowance of interest on NCD - Held that - We find that the ld CIT(A) has worked out the interest without taking into consideration the fact that these NCDs of ₹ 60 Crores were availed on 10.12.2008 and were repaid between 11th to 15th December and NCD s of ₹ 50 crores were availed on 29.01.2009 and were repaid on 9th February 2009. The interest disallowance has therefore to be restricted for the period NCDs were availed and repaid. The matter is accordingly set-aside to the file of the AO for the limited purposes of working out the interest on NCDs and limit the disallowance to that extent in relation to NCDs. Addition of interest - nexus between the borrowed funds and the investments in the subsidiary company - Held that - As gone through SBH s bank statement for 19.08.2008 available at APB 242 and find that both opening and closing balances on 19.08.2008 were negative which means that there were withdrawals in form of borrowings from the bank for the purposes of making the subject investment. Further, regarding investment of ₹ 5.24 crores which was made on 03.04.2008, the assessee has submitted that the same has resulted into a negative balance of ₹ 2.13 crore on that day in the bank account. We have gone through SBI bank statement for 03.04.2008 available at APB 219 and find that there was positive bank balance on 03.04.2008 of ₹ 3,10,91,392 prior to making investment of ₹ 5.23 Cr and after the investment, the bank balance was turned into negative figure of ₹ 2,13,02,722 which means that there were withdrawals in form of borrowings from the bank to the extent of ₹ 2,13,02,722 as per assessee s own submissions. No infirmity in the findings of the ld CIT(A) who has rightly established the necessary nexus between the borrowed funds and the investments in the subsidiary company and has disallowed the interest of ₹ 37,65,316 on such borrowed funds.
Issues Involved:
1. Donation to DAV Trust. 2. Depreciation on Catalyst. 3. Club expenses of employees. 4. Rent payment under section 40A(2)(b). 5. Disallowance under section 35D. 6. Pre-payment of deferred sales tax liability. 7. Disallowance of gas transmission charges under section 40(a)(ia). 8. Disallowance of interest on borrowed funds for investment in mutual funds. 9. Disallowance of interest on borrowed funds for investment in subsidiary companies. 10. Deduction against sale proceeds of mining rights. 11. Disallowance of education cess under section 40(a)(ii). 12. Disallowance of previous years' expenses crystallized during A.Y. 2009-10. Detailed Analysis: 1. Donation to DAV Trust: The Tribunal upheld the CIT(A)’s decision, allowing the donation of ?24,56,781/- to DAV Trust as business expenditure. It followed the precedent set in the assessee’s own case for A.Y. 2006-07, where such donations were deemed allowable under Section 37 of the Income Tax Act. 2. Depreciation on Catalyst: The Tribunal upheld the CIT(A)’s decision to allow depreciation on catalyst, following the precedent in the assessee’s own case for A.Y. 2006-07. The Coordinate Bench had previously allowed such depreciation, affirming it as a legitimate business expense. 3. Club Expenses of Employees: The Tribunal upheld the CIT(A)’s decision to allow club expenses of ?2,44,736/-, following the precedent in the assessee’s own case for A.Y. 2005-06. The expenses were deemed necessary for business purposes and thus allowable under Section 37. 4. Rent Payment under Section 40A(2)(b): The Tribunal upheld the CIT(A)’s decision to allow rent payment of ?10,80,000/-, finding no evidence from the Revenue to suggest that the rent paid was excessive. The CIT(A) had determined the rent was reasonable and incurred for business purposes. 5. Disallowance under Section 35D: The Tribunal upheld the CIT(A)’s decision to delete the disallowance of ?60,72,592/- under Section 35D. The expenses were not found to fall under the mischief of Section 35D, and there was no evidence to suggest they were related to the shipping division subject to the Tonnage Scheme. 6. Pre-payment of Deferred Sales Tax Liability: The Tribunal upheld the CIT(A)’s decision, treating the incentive of ?3,15,62,138/- received on pre-payment of deferred sales tax liability as income for A.Y. 2005-06, following the precedent set in the assessee’s own case for A.Y. 2005-06 and 2007-08. 7. Disallowance of Gas Transmission Charges under Section 40(a)(ia): The Tribunal upheld the CIT(A)’s decision to delete the disallowance of ?1,58,71,98,115/-, following the Rajasthan High Court’s ruling that gas transmission charges are not subject to TDS under Section 194J, thus no disallowance under Section 40(a)(ia) was warranted. 8. Disallowance of Interest on Borrowed Funds for Investment in Mutual Funds: The Tribunal upheld the CIT(A)’s partial disallowance of ?1,79,04,632/- out of the total disallowance of ?12,90,03,457/-. The CIT(A) had correctly identified the nexus between borrowed funds and investments in mutual funds, but limited the disallowance to the actual interest paid on such borrowings. 9. Disallowance of Interest on Borrowed Funds for Investment in Subsidiary Companies: The Tribunal upheld the CIT(A)’s partial disallowance of ?37,65,316/- out of the total disallowance of ?78,47,330/-. The CIT(A) had correctly identified the nexus between borrowed funds and investments in subsidiary companies, but limited the disallowance to the actual interest paid on such borrowings. 10. Deduction against Sale Proceeds of Mining Rights: The Tribunal upheld the CIT(A)’s decision to allow a deduction of ?86,08,460/- out of the total claim of ?1,73,53,860/-. The CIT(A) had verified the expenses and found that only ?86,08,460/- related to mining operations and was thus allowable. 11. Disallowance of Education Cess under Section 40(a)(ii): The Tribunal upheld the CIT(A)’s decision to disallow the claim of ?3,05,18,573/- for education cess, following the precedent set in the assessee’s own case for A.Y. 2008-09, where such cess was deemed non-deductible under Section 40(a)(ii). 12. Disallowance of Previous Years' Expenses Crystallized during A.Y. 2009-10: The Tribunal allowed the assessee’s claim of ?25,00,816/- for previous years' expenses crystallized during A.Y. 2009-10, finding that these expenses were incurred for business purposes and were duly supported by documentation. Conclusion: The Tribunal dismissed the Revenue’s appeal on all grounds, while allowing the assessee’s appeal on the grounds of previous years' expenses and partial disallowance of interest on borrowed funds for investment in mutual funds. The Tribunal upheld the CIT(A)’s decisions where they were found to be in line with precedents and supported by evidence.
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