2019 (8) TMI 564 - AT - Income Tax

Disallowance u/s 40(a)(ia) - payment of lump sum lease amount in the earlier year for taking a property on lease on 20 years lease - same was amortised over the period of lease - since payment made without TDS, AO disallowed the same - assessee in default u/s 201(1) - effect of second proviso of sec. 40(a)(ia) which was inserted by the Finance Act 2012 w.e.f 1/4/2013 - HELD THAT - The assessee is seeking application of second proviso to sec. 40(a)(ia) to be present issue and further since this claim has not been examined by the AO, we set aside the order passed by ld CIT(A) on this issue and restore the same to the AO for examining the claim of the assessee. Accordingly this issue is restored to the file of the AO. Disallowance of aircraft expenses towards personal use - assessee maintain logbook for journey - HELD THAT - Since the assessee is claiming to be maintaining log book, there is merit in the contentions of the assessee. When the log books is available it should be possible to segregate the use of aircraft for business purposes and personal purposes. In that case, the disallowance should be restricted to proportionate amount attributable to personal use of aircraft. Since this fact require the verification, we set aside the order passed by ld CIT(A) on this issue and restore the same to the file of the AO with the direction to restrict the disallowance to the personal usage of aircraft as per log book records. Disallowance of interest expenditure by capitalizing it towards WIP - addition made in normal computation as well as u/s 115JB also - HELD THAT - We noticed that the own funds available with the assessee is more than the amount of Capital work in progress as on 31/3/2010. It is also the contention of the assessee that the term loans and working capital loans have been used for specific purposes. Be that as it may, if the own funds available with the assessee is in excess of amount of capital work in progress, the presumption that could be drawn is that the assessee has used its own funds for funding the capital work in progress, in which case disallowance of interest is not called for. We notice that these factual aspects have not been examined by the AO. Hence, for the limited purpose of examining the factual aspects, we restore this issue to the file of the AO and direct him to delete the addition on being satisfied that the own funds available with the assessee is in excess of amount of capital work in progress. Disallowance of interest expenditure by capitalizing it towards WIP - addition made u/s 115JB - HELD THAT - We noticed that the ld CIT(A) has taken support of the decision rendered by Hon ble Supreme Court in the case of Apollo Tyres Ltd 2002 (5) TMI 5 - SUPREME COURT , wherein it has been held that the AO is not entitled to make adjustment to the net profit disclosed in the profit and loss account which has been adopted in the annual general meeting of the company. Secondly the impugned interest disallowance is not an item of addition listed in Explanation 1 to sec. 115JB of the Act as an item of addition. We agree with the view taken by the ld CIT(A) that the disallowance of interest expenditure, if any, made while computing total income under normal provisions of the Act cannot be added to the book profit computed u/s 115JB Addition of prior period expenditure while computing book profit u/s 115JB - assessee has shown the prior period expenditure as an item below the line - HELD THAT - We also noticed that the assessee has not claimed the above said amount as deduction while computing total income under normal provisions of the Act. It is also an undisputed fact that the prior period expenses is not an item of deduction listed in Explanation 1 of sec. 115JB in the list of deductions to be made from net profit. In this view of the matter we are of the view that the assessee is not entitled to deduct prior period expenditure of ₹ 12.67 lakhs from the net profit while computing book profit u/s 115JB of the Act. In this view of the matter, we are of the view that the Ld CIT(A) has misdirected himself while placing reliance on the decision of Hon ble Supreme Court rendered in the case of Apollo Tyres Ltd. Accordingly we set aside the order passed by ld CIT(A) on this issue and confirm the disallowance made by the AO.

Summary

Issues:
1. Disallowance u/s 40(a)(ia)
2. Disallowance towards personal usage of Aircraft
3. Disallowance of interest relating to work in progress
4. Disallowance of prior period expenses

Issue 1: Disallowance u/s 40(a)(ia)
The assessee claimed a deduction for a lump sum lease amount paid in an earlier year without deducting tax at source. The AO disallowed the deduction u/s 40(a)(ia), which was confirmed by the CIT(A). The assessee argued for the application of the second proviso to sec. 40(a)(ia) inserted by the Finance Act 2012. The ITAT set aside the CIT(A)'s order, directing the AO to examine the claim.

Issue 2: Disallowance towards personal usage of Aircraft
The AO disallowed a portion of aircraft expenses for personal use without providing a breakdown. The ITAT held that since the assessee maintained a log book for aircraft usage, the disallowance should be based on actual personal use recorded in the log book. The matter was restored to the AO for verification based on log book records.

Issue 3: Disallowance of interest relating to work in progress
The AO disallowed a portion of interest expenditure related to work in progress. The CIT(A) deleted the disallowance, noting that the borrowed funds were not solely used for work in progress. The ITAT directed the AO to verify if the own funds exceeded the work in progress amount before disallowing interest.

Issue 4: Disallowance of prior period expenses
The AO disallowed prior period expenses claimed by the assessee while computing book profit u/s 115JB. The CIT(A) allowed the deduction, but the ITAT disagreed, stating that prior period expenses cannot be deducted from net profit under sec. 115JB. The ITAT set aside the CIT(A)'s decision and confirmed the disallowance.

In conclusion, the ITAT partly allowed both appeals for statistical purposes, emphasizing the need for proper examination and verification of claims related to disallowances and deductions.