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2019 (9) TMI 493 - AT - Income TaxBusiness expenditure allowability - Expenditure debited on account of penalty levied by foreign airports for not found in possession of proper or sufficient documents of the passengers on arrival at foreign airports, enabling them to enter in such foreign countries - HELD THAT - Assesses had not committed any infraction of law but the assessee is required to bear the amount of such penalty/fine levied at foreign airports for certain deficiencies in the records/passports/visa of the passengers carried by the assessee and in accordance with International Air Transportation Laws and/or for commercial expediency and such penalties or fines are borne by the assessee though the assessee itself has not made any infraction of law. At this juncture, a distinction is justified between the case of a deliberate violation of law and one which is innocent and unintended. Case of the assessee for allowance of payment of penalty/fines is on a very strong footing as in the assessee's case the assessee had neither committed any violation of law nor any breach or infraction of the law. As noted earlier the expenses incurred by the assessee on fines/penalties at foreign airport is also in the nature of loss incurred in the carrying on assessee's business and it is incidental to carrying on of such business of International Air transportation of passengers. In the case of Ramchand Shrinarayan Vs. CIT 1977 (11) TMI 2 - SUPREME COURT held that if there is a direct and proximate nexus between the business operations and the Loss and it is incidental to its business operation and doing all that is incidental for profit earning, such losses would be allowable as a business loss u/s.28 of the Act. We noted that on the above mentioned facts in the assessee's case the penalty/fine paid at the foreign airports has a direct and proximate nexus between the business operations and the loss (penalty or fine) and such penalty or fine is incidental to the carrying on of the assessee's business in ordinary course of business and hence it is allowable to the assessee as a business loss also Characterization of income - income derived from interest - income from other sources or business income - HELD THAT - We noted that this issue is squarely covered in favour of assessee and against the Revenue and respectfully following the view taken in AY.2001-02 by the Hon'ble Bombay High Court, we reverse the order of lower authorities and allow this issue of assessee s appeal. Disallowance u/s 14A - proof of exempt income received or receivable- HELD THAT - As relying on BALLARPUR INDUSTRIES LIMITED 2016 (10) TMI 1039 - BOMBAY HIGH COURT provisions of Section 14A of the Income Tax Act, 1961 would not apply to the facts of this case as no exempt income was received or receivable during the relevant previous year. It is not the case of the Assessing Officer that any actual income was received by the assessee and the same was includible in the total income. In the facts of the case, the Authorities held that since the investments made by the assessee in the sister concerns were not the actual income received by the assessee, they could not have been included in the total income Disallowing the provision made in respect of accounts of Frequent Flyer Programme - HELD THAT - As decided in own case 2016 (4) TMI 1370 - ITAT MUMBAI there is uncontroverted finding that the liability in respect of FFP miles accrues simultaneously with a passenger undertaking travel on a fare paying ticket, therefore, it cannot be a contingent liability. - decided against revenue Addition made to income in respect to disputed bills - HELD THAT - Assessee before us now claimed that the authorities have rejected the entire invoice value for overhaul of engine to the extent of ₹ 105.90 Million and settled such invoices towards ferry cost only partly to the extent of ₹ 4.53 Million for the FY.2008-09, relevant to AY.2009-10. It was also explained that on settlement of claim in October, 2008, such amount of ₹ 4.53 Million was accounted in the year 2008-09. When these facts were asked to file in details, assessee as well as the CIT-DR agreed that this matter can be restored back to the file of AO for fresh verification and adjudication. In terms of concession given by both the sides, we restored this issue back to the file of AO, who will consider the issue as per law. This issue is accordingly treated as allowed for statistical purposes. Addition made on account of excess provision for obsolescence or write back the provisions - HELD THAT - As provisions was never allowed as deduction in earlier years, any amount transferred to the credit of P L Account from such Provisions for Obsolescence could not be added to the income of the appellant and accordingly the Assessing Officer is directed to delete the addition made in respect of Provisions for Obsolescence
Issues Involved:
1. Disallowance of penalty expenditure. 2. Classification of interest income. 3. Applicability of Section 14A to dividend income. 4. Disallowance of provision for Frequent Flyer Programme. 5. Addition of disputed bills to income. 6. Excess provision for obsolescence. Detailed Analysis: 1. Disallowance of Penalty Expenditure: The assessee, engaged in international transportation, claimed penalties paid to foreign airports under Section 37 of the Income-tax Act, 1961. The Assessing Officer (AO) disallowed the claim, citing Explanation 1 of Sub-section (1) of Section 37, which prohibits deductions for expenditures incurred for purposes that are offenses or prohibited by law. The CIT(A) upheld the AO's decision, referencing previous ITAT rulings against the assessee. However, the assessee argued that such penalties were business expenditures, citing the Madhya Pradesh High Court's decision in CIT Vs. Khemchand Motilal Jain, which allowed ransom payments as deductible. The Tribunal, considering the penalties as business expenses incurred to avoid operational disruptions and maintain business reputation, ruled in favor of the assessee, allowing the deduction. 2. Classification of Interest Income: The assessee declared interest income from short-term deposits as 'business income.' The AO reclassified it as 'income from other sources.' The Tribunal, referencing its earlier decisions and the Bombay High Court's affirmation, held that the interest income, derived from business receipts and used for business purposes, should be classified as 'business income.' The Tribunal directed the AO to treat the interest income accordingly. 3. Applicability of Section 14A to Dividend Income: The AO applied Section 14A to disallow expenses related to dividend income, which the assessee claimed as exempt. The Tribunal noted that a significant portion of the dividend was foreign and not exempt. Citing the Bombay High Court's decision in Pr.CIT Vs. Ballarpur Industries Limited, the Tribunal ruled that Section 14A does not apply if no exempt income is received. Thus, the Tribunal decided in favor of the assessee, disallowing the application of Section 14A. 4. Disallowance of Provision for Frequent Flyer Programme: The AO disallowed a provision of ?115.90 million made for the Frequent Flyer Programme, considering it contingent. The Tribunal, referencing its earlier decision in the assessee's favor, ruled that the liability under the Frequent Flyer Programme accrues with each fare-paying journey and is not contingent. Consequently, the Tribunal allowed the provision as a deductible expense. 5. Addition of Disputed Bills to Income: The AO added ?116.3 million to the assessee's income based on a Government Auditor's note regarding unaccounted revenue from invoices raised. The assessee argued that the bill was for reimbursement claims settled in the subsequent year. The Tribunal restored the issue to the AO for verification, directing a fresh adjudication based on the settlement details provided by the assessee. 6. Excess Provision for Obsolescence: The AO added ?358.50 crores credited to the Profit & Loss Account from the provision for obsolescence, treating it as contingent liability. The CIT(A) deleted the addition, noting that such provisions were consistently excluded from taxable income in previous years. The Tribunal upheld the CIT(A)'s decision, emphasizing consistency and the absence of any appeal by the Department in earlier years. The Tribunal confirmed the deletion of the addition, ruling in favor of the assessee. Conclusion: The Tribunal allowed the assessee's appeals on penalty expenditure, interest income classification, Frequent Flyer Programme provision, and excess provision for obsolescence. It restored the issue of disputed bills to the AO for fresh verification and ruled against the applicability of Section 14A to the dividend income, given the absence of exempt income. The Revenue's appeal was dismissed, and the assessee's appeal was partly allowed.
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