2020 (8) TMI 125 - AT - Income Tax

I nterest receipt from FDRs place with its banks - Income from other sources - CIT(A) in bringing to tax as income under the head income from other sources rather than reducing it from the capital cost of construction of the roads for the period prior to commencement of commercial operations of the roads - claim of the assessee is that this relates to seven road stretches which were under construction during the year and the total expenditure including the interest paid on borrowed funds net of interest income earned on these deposits is inextricable linked to these seven road stretches which are capitalized under the head Project work in progress and the same is the consistent position of the assessee which has been followed and accepted by the Tribunal and the Hon ble High Court in the earlier years - HELD THAT - Following the principle of consistency and respectfully following the decision of the Hon ble Rajasthan High Court in assessee s own case 2017 (7) TMI 1359 - RAJASTHAN HIGH COURT the matter is decided in favour of the assessee and against the Revenue. In the result, the ground of appeal is allowed. Disallowance u/s 14A - HELD THAT - Undisputedly, no exempt income has been earned by the assessee during the year under consideration. Further, there is no fresh investment which has been made by the assessee company during the year and the assessee has contended that the investment so made in the earlier year has also been made out of its own funds and not out of the borrowed funds. Given that no borrowed funds have been utilized for making investment and the fact that no income has been earned during the under consideration, the disallowance U/s 14A r.w.r. 8D is not justified and the same is directed to be deleted. - Decided in favour of assessee. Disallowance of share issue expenses - not allowing the alternative contention of allowing the said expenditure U/s 35D - HELD THAT - Firstly, we are unable to agree to the contention of the assessee company that the aforesaid expenditure incurred in connection with increase in the capital base of the company by way of increase in the authorized capital as well as increase in paid capital be allowed as revenue expenditure as it is a settled proposition that such an expenditure was connected with increase in capital base of the company and thus, a capital expenditure. Expenditure incurred towards increase in the authorized and paid up capital which has resulted in increase in capital base of the assessee company has rightly been treated by the Assessing officer as a capital expenditure and the contention advanced by the assessee company to treat the same as revenue expenditure therefore cannot be accepted. Expenditure should be allowed to be amoritised over the period of time in terms of section 35D - Assessee is held eligible for amortization of the expenses incurred in terms of fees paid to Registrar of companies towards the increase in authorized and paid up capital as per the provisions of section 35D of the Act and the Assessing officer is directed to allow the same. In the result, the ground of appeal is allowed in favour of the assessee and against the Revenue. Disallowance of professional and legal fees incurred to bring IPO which was subsequently abandoned - HELD THAT - These expenses have been incurred by the assessee company in connection with the IPO which ultimately got aborted due to unfavourable market conditions which is beyond its control. By incurring such expenditure, no new asset has come into existence or any enduring benefit has accrued to the assessee company. As far as red hearing prospectus is concerned, we find that it is a document which is prepared and submitted to SEBI for its approval seeking permission to raise funds through an IPO and is thus a regulatory requirement which would be required to be submitted every time the company wishes to raise the funds in future and requires to contain latest data, statistics and declarations about the company, its promoters, past filings and financials and utilization of the proceeds of the IPO and therefore, it cannot be said that once such a document is prepared, it can be used subsequently for any future IPO. Therefore, the stand of the Assessing officer that such a document will provide an enduring benefit to the assessee company cannot be accepted. In light of aforesaid discussions and respectfully following the decision of the Hon ble Bombay High Court in case of Nimbus Communication (supra) and in absence of any contrary authority, the expenses incurred in connection with aborted IPO are allowed as revenue expenditure. The alternate contention regarding amortization u/s 35D has thus becomes infructious and is not adjudicated upon. The matter is thus decided in favour of the assessee and against the Revenue. Lower grant of interest u/s 244A - HELD THAT - We deem it appropriate that the claim so made by the assessee company is verified as the same is a matter of record. The matter is accordingly set-aside to the file of the Assessing officer to verify and examine the claim of the assessee regarding short grant of interest u/s 244A and decide as per law. In the result, the ground is allowed for statistical purposes. Depreciation on account of Toll Buildings under the block of Building - HELD THAT - In light of the fact that such Toll building is part of the building block of the assets and in the earlier years, the depreciation on such building block including Toll building has been allowed by the Revenue, the Assessing officer is hereby directed to allow the depreciation on Toll building after due verification. In the result, the ground of appeal is allowed. Disallowance of socio-economic expense u/s 37 - assessee company has undertaken HIV-AIDS awareness and prevention programme among the drivers and other people living in the vicinity of various road highways stretches developed and operated by it - HELD THAT - Assessee company has put up sign boards along the highways and has also undertaken various community reach and awareness programmes among the drivers and local people. We find that besides educating the drivers about such disease and the consequent health hazards, what the assessee company is also trying to do is protect the local inhabitants, who are staying in the vicinity of various road highways stretches developed and operated by it, from the floating population of drivers who are prone to such diseases and build a more conducive and healthy environment for smooth functioning of road stretches and has thus established a necessary nexus with its business activities. Such an activity and consequent incurrence of expenditure is also in consonance with the partnership and development agreement signed by the assessee company with the Government of Rajasthan where the assessee company is obliged to carry out such activities. The expenditure so incurred is directed to be allowed in the hands of the assessee company as an allowable expenditure and the matter is allowed in favour of the assessee company - Decided in favour of assessee.

Summary

Issues Involved:

1. Legality and factual correctness of the orders passed by the Assessing Officer and CIT(A), Ajmer.
2. Classification of ?1,05,246/- as "Income from Other Sources" instead of reducing it from the capital cost of construction of roads.
3. Disallowance of ?1,00,000/- under Section 14A of the Income Tax Act, 1961.
4. Classification and disallowance of Share Issue Expenses and Professional and Legal fees for IPO.
5. Calculation of interest payable under Section 244A of the Income Tax Act, 1961.
6. Disallowance of depreciation on Toll Buildings.
7. Disallowance of socio-economic expenses under Section 37 of the Income Tax Act, 1961.

Detailed Analysis:

1. Legality and Factual Correctness of Orders:
- Ground No. 1 was deemed general and did not require separate adjudication.

2. Classification of ?1,05,246/- as "Income from Other Sources":
- The Assessing Officer categorized ?1,05,246/- as "Income from Other Sources" based on the decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT. The assessee argued that this amount should be reduced from the capital cost of construction of roads, referencing the Supreme Court's decision in CIT Vs. Bokaro Steels Ltd.
- The Tribunal followed the principle of consistency, referencing earlier years' decisions and the Rajasthan High Court's confirmation, ultimately ruling in favor of the assessee, allowing the amount to be set off against the pre-operative expenditure capitalized under "Capital work in progress."

3. Disallowance of ?1,00,000/- under Section 14A:
- The Assessing Officer disallowed ?1,00,000/- under Section 14A, citing investments and the CBDT Circular No. 5 dated 11.02.2014.
- The Tribunal noted that no exempt income was earned during the year, and the investment was made out of the assessee's own funds, not borrowed funds. Following the decisions in CIT vs. Holcim India Pvt. Limited and Cheminvest Ltd. vs. CIT, the disallowance was deleted.

4. Classification and Disallowance of Share Issue Expenses and Professional and Legal Fees for IPO:
- The Tribunal directed the Assessing Officer to verify and correctly classify the share issue expenses and professional and legal fees for IPO.
- The Tribunal upheld the disallowance of expenses related to the increase in authorized share capital as capital expenditure, following the Supreme Court's decision in Brooke Bond India Ltd. vs. CIT.
- For the alternative plea under Section 35D, the Tribunal allowed the amortization of expenses incurred towards the increase in authorized and paid-up capital, referencing the Rajasthan High Court's decision in CIT vs. Multi Metals Ltd. and the Supreme Court's decision in M/s Shasun Chemicals And Drugs Ltd. vs. CIT.
- The Tribunal allowed the expenses incurred in connection with the aborted IPO as revenue expenditure, following the Bombay High Court's decision in Nimbus Communications Ltd. vs. ACIT.

5. Calculation of Interest Payable under Section 244A:
- The Tribunal directed the Assessing Officer to verify the claim of short grant of interest under Section 244A and decide as per law.

6. Disallowance of Depreciation on Toll Buildings:
- The Tribunal directed the Assessing Officer to allow the depreciation on Toll Buildings after due verification, as the amortization in respect of Toll roads and depreciation on Toll Buildings was a consistent position adopted by the Revenue in earlier years.

7. Disallowance of Socio-Economic Expenses under Section 37:
- The Tribunal allowed the socio-economic expenses incurred by the assessee for HIV-AIDS awareness and prevention programs as revenue expenditure. The Tribunal noted that such expenses were in line with the Partnership and Development Agreement with the Government of Rajasthan and were necessary for the smooth functioning of road stretches. The Tribunal referenced the Gujarat High Court's decision in CIT vs Navsari Cotton and Silk Mills Ltd. and allowed the expenses under Section 37 of the Income Tax Act, 1961.

Conclusion:
The appeals were disposed of in favor of the assessee for most issues, with directions for verification and appropriate classification of expenses by the Assessing Officer where necessary. The Tribunal's decisions were based on consistency with earlier years' rulings and relevant judicial precedents.