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2020 (6) TMI 526 - AT - Income TaxDisallowance u/s 35DD - Amortisation of expenditure in case of amalgamation or demerger - 1/5 of demerger expenses incurred by the appellant - as per CIT in terms of section 35DD demerger expenses are allowable only in the hands of the demerged company and not in the hands of the resultant company - HELD THAT - In our opinion the language of the section is clear and there is no ambiguity, as who is entitled to claim the said deduction. In case of demerger, where the undertaking(s) which get demerged, may result in new entity and in said circumstances, the resultant company cannot incur expenditure before its birth. It is the parent entity, who initiates demerger of the undertaking(s) and incur expenditure for legal and professional expenses in relation to such demerger. The resultant company, come into existence as a result of demerger only, the word assessee in section 35DD of the Act cannot mean to include the resultant company. The decision relied upon by the assessee in the case of CIT Vs Bombay dyeing and manufacturing company limited 1996 (2) TMI 8 - SUPREME COURT relates to period prior to insertion of section 35DD of the Act, wherein the expenses related to amalgamation were allowed to the assessee as incurred wholly and exclusively for the purpose of the business of the assessee.. In the said case the issue was of whether the legal and professional expenses incurred in relation to the amalgamation were revenue or capital in nature. The ratio of the said decision cannot be applicable over the facts of the instant case in view of the specific provision of section 35DD of the Act introduced. As far plea of rule of consistency is concerned, we may like to refer to the decision of the Hon ble Supreme Court in the case of Distributors (Baroda) P. Ltd. Vs. Union Of India Ors. 1985 (7) TMI 1 - SUPREME COURT where it is observed if any wrong has been committed, same should not be perpetuated. We reject the contention of the assessee to allow the deduction under section 35DD of the Act, following rule of the consistency. - Decided against assessee Disallowance u/s 14A - disallowance towards indirect interest expenditure and towards administrative expenses - AO has expressed dissatisfaction on the claim of the assessee that no expenses were incurred for earning the exempt income - HELD THAT - In view of above decision of Indiabull Financial Services Ltd. 2016 (11) TMI 1369 - DELHI HIGH COURT we reject the contention of the assessee that no dissatisfaction was recorded by the Assessing Officer while invoking section 14A of the Act for computing disallowance towards earning the exempt income. Whether no disallowance should be made for interest expenditure in view of sufficient own funds available with the assessee? - As relying on RELIANCE UTILITIES POWER LTD. 2009 (1) TMI 4 - BOMBAY HIGH COURT there are sufficient interest-free funds in the form of share capital and reserves available to explain the investment in mutual funds. In view of no interest expenditure relatable to investment in assets yielding exempt income, the disallowance sustained by the Ld. CIT(A) is deleted. Regarding the administrative expenses for earning the exempt income respectfully, following the decision of the Hon ble Delhi High Court in the case of ACB India Ltd 2015 (4) TMI 224 - DELHI HIGH COURT and special bench Tribunal in the case of Vireet Private Limited 2017 (6) TMI 1124 - ITAT DELHI we direct the Assessing Officer to restrict the disallowance at 0.5 % of the value of assets which has yielded exempt income during the year under consideration. The ground of the appeal of the assessee is accordingly partly allowed. Bad debt claim in respect of the amount due from Government Agencies and other parties - HELD THAT - The finding of the Assessing Officer of requirement of establishing whether the debt become bad has already been rejected by the Ld. CIT(A) and Revenue is not an appeal on that issue. The Ld. CIT(A) has sustained the disallowance in absence of the information provided by the assessee regarding existence of the debt in respect of the parties as on 31/03/2006. Now, the assessee has given undertaking to provide all the details in respect of the existence of the debt as on 31/03/2006. In the interest of justice, we feel it appropriate to restore this issue to the file of the Ld. CIT(A) for deciding a fresh. Disallowance of deduction under 10B - As per first the profit of the business has to be computed under the head profit and gains of the business or profession and in then profit is to be apportioned between the export turnover and the local turnover - HELD THAT - As relying on assessee's own case 2019 (3) TMI 378 - ITAT DELHI wherein held deduction u/s 1OA was to be allowed at the source itself. - Decided against revenue Nature of expenditure - revenue or capital expenditure - One-time lease rental charges paid by the assessee to Greater Noida Industrial Development Authorities (GNIDA) for taking plot of land on lease for development of IT Park for a period of 90 years - HELD THAT - Expenditure incurred by the assessee is not capital expenditure. The expenditure was to be incurred on year to year basis for the period of lease of 90 years. The lesser gave the assessee two option. The first option was to pay on year to year basis and claim the same as revenue expenditure. The second option was provided by the lessor was to pay a composite amount for the period of lease as onetime payment. The lessor provided some benefit for making onetime payment. The assessee has chosen the second option and paid the entire lease rent of 90 years as composite onetime payment. Thus liability of 90 years has been paid in one year only. Liability of lease rent relatable to year under consideration would be 1/90th of the amount paid and balance amount would be pre-paid advance rent only. The assessee is entitled to claim 1/90th of the amount every year till the period of lease of 90 years as revenue expenditure. Even according to the matching principles of income and expenditure the entire expenditure is not justified for allowance in one year (i.e. the year under consideration) when the income corresponding to expenditure of subsequent years will be reflected in relevant year only. The expenditure not being relatable to the year under consideration cannot be allowed as revenue expenditure in the instant year. For the year under consideration, only 1/90th of the amount of ₹ 77,98,042/- has been incurred wholly and exclusively for the purposes of the business for the year under consideration. Accordingly, we allow 1/90th as revenue expenditure in the year and balance be characterized as advance rent in the financial statement as on 31.03.2007. Addition u/s 14A r.w.r. 8D - HELD THAT - Indirect interest expenses under Rule 8d(2)(ii) are deleted and disallowance under Rule 8D(2)(iii) are restricted to 0.5 % of the assets which has yielded exempted income during the year under consideration.
Issues Involved:
1. Disallowance under Section 35DD of the Income Tax Act. 2. Disallowance under Section 14A of the Income Tax Act. 3. Disallowance of bad debts. 4. Deduction under Section 10B of the Income Tax Act. 5. Treatment of one-time lease rental charges. Analysis: Disallowance under Section 35DD: Issue: The assessee claimed a deduction under Section 35DD for demerger expenses, which was disallowed by the Assessing Officer (AO) and upheld by the CIT(A). Findings: The AO disallowed the deduction on the grounds that Section 35DD allows demerger expenses only to the parent company (NIIT Ltd.), not the resultant company (the assessee). The CIT(A) supported this view, citing the clear language of Section 35DD and relevant case law. The Tribunal upheld this view, rejecting the assessee's arguments about legislative intent and consistency. Conclusion: The Tribunal upheld the disallowance, agreeing with the CIT(A) that Section 35DD clearly allows such deductions only to the parent company. Disallowance under Section 14A: Issue: The AO disallowed ?82,05,031 under Section 14A, which was partially upheld by the CIT(A). Findings: The AO invoked Rule 8D to compute the disallowance. The CIT(A) reduced the disallowance to ?82,05,031, excluding certain interest expenditures. The Tribunal found that the AO had expressed dissatisfaction with the assessee's claim of no expenses incurred for earning exempt income, which is sufficient under Section 14A(2). The Tribunal also noted that the assessee had sufficient own funds to cover the investments, thus no interest expenditure should be disallowed. For administrative expenses, the Tribunal directed the AO to restrict the disallowance to 0.5% of the value of assets yielding exempt income. Conclusion: The Tribunal deleted the disallowance of interest expenditure and directed the AO to restrict the administrative expense disallowance to 0.5% of the value of assets yielding exempt income. Disallowance of Bad Debts: Issue: The AO disallowed the assessee's claim of bad debts amounting to ?3,59,27,941, which was upheld by the CIT(A). Findings: The AO disallowed the claim due to lack of evidence that the debts were taken into income in earlier years and that they had become bad. The CIT(A) upheld the disallowance due to the assessee's failure to provide evidence that the debts were shown as good debts in earlier years. The Tribunal remanded the issue back to the CIT(A) for fresh consideration, directing the assessee to provide the necessary details. Conclusion: The Tribunal remanded the issue back to the CIT(A) for fresh consideration with directions to the assessee to provide required details. Deduction under Section 10B: Issue: The AO disallowed the deduction under Section 10B, which was allowed by the CIT(A). Findings: The AO argued that the assessee's units were not operating in isolation and did not maintain separate books of accounts. The CIT(A) allowed the deduction, following the Tribunal's decision in the previous year (AY 2006-07), which held that separate books of accounts were not mandatory. The Tribunal upheld the CIT(A)'s decision, noting that the issue was already settled in the previous year's appeal. Conclusion: The Tribunal upheld the CIT(A)'s decision to allow the deduction under Section 10B. Treatment of One-Time Lease Rental Charges: Issue: The AO treated the one-time lease rental charges as capital expenditure, which was allowed as revenue expenditure by the CIT(A). Findings: The AO considered the lease rental charges for 90 years as enduring in nature. The CIT(A) allowed the expenditure as revenue, distinguishing it from capital expenditure based on judicial precedents. The Tribunal partially upheld the CIT(A)'s decision, allowing 1/90th of the amount as revenue expenditure for the year and treating the balance as advance rent. Conclusion: The Tribunal allowed 1/90th of the one-time lease rental charges as revenue expenditure for the year and treated the balance as advance rent. Separate Judgments: - The Tribunal delivered a consolidated judgment for both assessment years (2007-08 and 2008-09), addressing the identical issues in both years. - For AY 2008-09, the Tribunal followed its findings from AY 2007-08 for issues under Sections 35DD and 14A. - The Tribunal dismissed the Revenue's appeal for AY 2008-09, following its findings from AY 2007-08.
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