2017 (12) TMI 1214 - AT - Income Tax

Upfront Fees or as licence fee - nature of expenditure - capital in nature or is on revenue count - Held that - Mere entry in the books of accounts and classifying the said payment as capital, i.e., it has been capitalised in the books will not at all be determinative as it has to be seen on the facts whether such a payment or expenditure falls in the capital filed or revenue field. If the assessee had acquired any right by making payment of ₹ 150 crores, then under the terms of OMDA it is clearly stipulated that the payment of annual fee of 45.99% of the gross revenue of the year is not made continuously then the OMDA agreement will come to an end. On this fact also the assessee has not acquired any licence or right by making the payment of ₹ 150 crores. Thus, on this count also it cannot be held that the said sum is for acquiring any licence or right. In view of the aforesaid discussion and analysis we are of the opinion that the payment of ₹ 150 crores is to be treated as revenue expenditure and order of the Ld. CIT (A) allowing such expenditure is affirmed and grounds taken by the revenue is dismissed. Nature of expenses - repair and maintenance of building, plants and others - revenue or capital expenditure - Held that - Since, AO has himself has not classified or distinguished as to which repairs is for new infrastructure or for construction of new structure, therefore, we are unable to give any finding that any of the expenditure as noted above pertains to new construction. As he himself has treated to be revenue, then in that case, we hold that the entire expenditure under the head repair and maintenance is allowable as revenue expenditure in the year in which it is claimed. The judgements relied upon by the Ld. CIT DR would not apply under such facts and circumstances of the case. However, we agree with one of the contentions of the Ld. CIT DR that an amount debited under this head cannot be treated as expenditure on repair and maintenance and therefore, AO is directed to remove this expenditure from the head repair and maintenance of building etc. With this direction, ground No. 2 as raised by the revenue is partly allowed. Disallowance u/s 14A to the tune of 5% of the dividend income - Held that - In view of various judicial pronouncements as relied upon by the Ld. Sr. Counsel above, which carves out the proposition that in such a situation it can be presumed that such an investment has been made out of own funds/interest free funds and therefore, on this count also, we do not find any reason for any disallowance of interest. Coming to the reasonableness of disallowance made by the Ld. CIT (A) who had disallowed 5% of the dividend income out of indirect expenditure, we find that the said conclusion of the Ld. CIT (A) is not only reasonable but also is in consonance with the certain judicial precedent and therefore, we do not find any reason to interfere in such a finding and same is affirmed accordingly ground No. 3 as raised by the revenue is dismissed. Eligible business specified in section 80IA(4)(i) - Held that - No the assessee is carrying on the business of operating and maintaining of airport which is an eligible business specified in section 80IA(4)(i) for which assessee is eligible for claim for deduction u/s 80IA. In support of the claim, audit report in prescribed form had already been obtained. The said claim was not made in the return of income, because there was a huge loss of more than ₹ 155.55 crores. It was only when huge income was assessed at positive figure; assessee has made its claim for deduction u/s 80IA. In light of this background, the direction of the Ld. CIT (A) to the AO is in accordance with the law and no interference is called. Disallowance of payment made by AAI in respect of CWIP - revenue or capital expenditure - Held that - In light of the categorical stipulation with regard to the treatment of capital work in progress, it is ostensibly clear that it was the CWIP which was taken over by the assessee by making such payment of ₹ 45.50 crores and assessee itself has capitalised the said amount under the head capital-work-inprogress in the subsequent year also. On the completion of CWIP the same was stipulated to be transferred to the concerned completed work assets and depreciation was to be allowed on such assets. Thus, in light of these documents and facts, we hold that Ld. CIT (A) has rightly held that payment of ₹ 45.50 crores to AAI in respect of work in progress is clearly capital expenditure and same cannot be allowed as revenue expenditure. Thus, order of the Ld. CIT (A) on this score is affirmed and the ground raised by the assessee is dismissed. Penalty proceedings u/s 271(1)(c) - Held that - Merely because assessee has made a claim for revenue expenditure which later on has been held to be capital in nature does not mean that assessee is guilty of either furnishing of inaccurate particulars of income or concealment of income. Though the finding in the quantum proceedings are of great pervasive value, however such a finding alone in the quantum side does not leads to conclusion that penalty is to be levied or confirmed automatically. What is to be seen is, whether the assessee s claim was otherwise allowable under the law or not. Here in this case at the stage of AO itself, part of the expenditure has been treated as revenue, therefore, in such a situation it cannot be held that assessee has furnished any inaccurate particulars of income or assessee s explanation has been found to be false or unsustainable in law. The finding of the Ld. CIT (A) that assessee has made full disclosure and merely because the claim has been found to be unsustainable by the appellate authorities it does not mean that assessee has furnished inaccurate particulars of income and in such a situation the principle and laid down in the judgment of Hon ble Supreme Court in the case of CIT vs. Reliance Petroproducts Pvt. Ltd. (2010 (3) TMI 80 - SUPREME COURT) is clearly applicable.

Summary

Issues Involved:
1. Treatment of "Upfront Fees" as revenue or capital expenditure.
2. Treatment of ?24 crore expenditure on repair and maintenance as revenue or capital expenditure.
3. Disallowance under Section 14A of the Income Tax Act.
4. Claim of deduction under Section 80IA.
5. Penalty under Section 271(1)(c) for disallowance of ?45.50 crores as capital work-in-progress.

Issue-wise Detailed Analysis:

1. Treatment of "Upfront Fees" as Revenue or Capital Expenditure:
The assessee, a joint venture company formed to modernize and manage the Delhi International Airport, paid an "Upfront Fee" of ?150 crores to the Airport Authority of India (AAI). The Assessing Officer (AO) treated this payment as a capital expenditure, allowing only 1/30th of it as a deduction for the year, spreading the rest over the 30-year lease period. The assessee contended that this fee was akin to advance rent and should be treated as revenue expenditure. The CIT (A) and the Tribunal agreed with the assessee, noting that the fee was for the lease of the airport site and not for acquiring any capital asset. The Tribunal emphasized that the payment was for securing a lease and not for acquiring any enduring benefit, thus qualifying as revenue expenditure.

2. Treatment of ?24 Crore Expenditure on Repair and Maintenance:
The AO treated the ?24 crore spent on repair and maintenance of buildings and other structures as capital expenditure, allowing only 1/30th of it as a deduction. The assessee argued that these expenses were for maintaining existing assets and did not result in the creation of new assets. The CIT (A) and the Tribunal agreed with the assessee, noting that the expenses were for current repairs and maintenance, which are allowable as revenue expenditure. The Tribunal also directed the AO to exclude ?1,54,61,755 spent on newspaper advertisements from the repair and maintenance head.

3. Disallowance under Section 14A:
The AO applied Rule 8D to disallow ?85.22 lakhs under Section 14A, attributing interest expenses to the tax-free dividend income earned by the assessee. The CIT (A) restricted the disallowance to 5% of the dividend income, noting that Rule 8D was not applicable for the assessment year 2007-08. The Tribunal upheld this decision, agreeing that the disallowance should be reasonable and confirming that the assessee had sufficient interest-free funds to cover the investments.

4. Claim of Deduction under Section 80IA:
The assessee claimed a deduction under Section 80IA for profits derived from operating and maintaining the airport. The AO did not allow this claim as it was not made in the return of income. The CIT (A) allowed the claim for statistical purposes, noting that the assessee was eligible for the deduction if the assessed income was positive. The Tribunal upheld this decision, confirming that the assessee was engaged in an eligible business and had obtained the necessary audit report.

5. Penalty under Section 271(1)(c) for Disallowance of ?45.50 Crores:
The AO imposed a penalty of ?11,48,64,750 for claiming ?45.50 crores as revenue expenditure instead of capital expenditure. The CIT (A) deleted the penalty, noting that the assessee had made full disclosures and the claim was based on a bona fide interpretation of the law. The Tribunal upheld this decision, emphasizing that the mere disallowance of a claim does not automatically lead to the imposition of a penalty if the claim was made in good faith and with full disclosure.

Conclusion:
The Tribunal's judgment addressed several complex issues regarding the classification of expenditures and the applicability of disallowances and penalties under the Income Tax Act. The decisions were largely in favor of the assessee, emphasizing the importance of full disclosure and the bona fide nature of claims made in tax returns.