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2021 (12) TMI 754 - AT - Income TaxAccrual of income - interest received on bank Deposits - grant received from Government of Karnataka - AO noticed that the assessee has earned interest income on deposits, but did not declare the same as its income - case of the assessee that it is receiving grants from State Government of Karnataka and it was a condition that, if any part of the grant is kept in deposits, the interest earned thereon would also be treated as grant - HELD THAT - CIT(A) referred to the decision rendered in the case of CIT Anr. Vs. Karnataka Urban Infrastructure Finance Corporation 2006 (2) TMI 114 - KARNATAKA HIGH COURT wherein held that interest accrued on bank deposits could not be treated as income of the assessee as interest was earned out of money given by Government of India for purpose of implementation of Mega City Scheme and interest earned was also utilised for implementation of Mega City Scheme. Also referred to the decision rendered in the case of Karnataka Municipal Data Society vs, ITO 2016 (11) TMI 119 - KARNATAKA HIGH COURT wherein the Hon ble High Court held that Government money was released to assessee society for utilizing it in Government schemes and interest was accrued on grant money. In such case neither grant amount nor interest thereon could be held as income of assessee as Assessee-society held fund only as a custodian and full command for utilisation remained with Government. Thus interest earned on deposits made out of Government grants was held to be not income of the assessee. Since the Ld CIT(A) has deleted this addition in all the years following the binding decision rendered by jurisdictional High Court, we do not find any reason to interfere with his decision rendered on this issue in all the years under consideration. - Decided in favour of assessee. Disallowance of Repairs and Maintenance expenses - claim of the assessee under the head repairs and maintenance in all the three years referred above, was disallowed by the AO holding it as capital in nature - A.R contended that these expenses are in the nature of replacement of air conditioners, construction of car and two wheelers garages in leased premises, repair renovation of premises etc. Accordingly, the Ld A.R contended that these expenses are in the nature of revenue expenses only - HELD THAT - In our considered view, this issue requires fresh examination at the end of the AO applying the principles explained by Hon ble Supreme Court in the case of Saravana Spinning Mills Ltd 2007 (8) TMI 16 - SUPREME COURT in all the three years under consideration. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore this issue to the file of AO in all the three years. Disallowance of bad debts claimed - AO noticed that the assessee has written off a sum being excess expenditure incurred in respect of Additional Housing Scheme 1 (AHS 1), since the Government of Karnataka did not reimburse above expenses - HELD THAT - We have earlier upheld the claim of the assessee that the interest income earned on deposits made out of Government grants is not taxable in the hands of the assessee, since the said interest income is also treated as government grant only, as per the directions of Government of Karnataka. Further, the above said view has also got support of Hon ble High Court of Karnataka. As noticed that the interest earned on deposits has been directed to be treated as part of grant amount. Hence, on a combined reading of various directions given by the Government of Karnataka, it is discernible that the Government, instead of reimbursing the additional amount, has directed the assessee to offset the same against interest earned on deposits, which was also considered to be Government grant. In effect, the Government of Karnataka has actually reimbursed the additional amount out of interest income (grant amount). Hence, we are of the view that the tax authorities are justified in holding that the assessee cannot claim the additional expenses separately. Accordingly, we confirm the order passed by Ld CIT(A) on this issue. Addition of expenditure incurred on skill development of children of Police Personnel - AO considered this expenditure as an expenditure on Corporate Social Responsibility - AO also held that this expenditure is not related to the business activities of the assessee, viz., construction of buildings for police and allied departments and project monitoring - CIT(A) also confirmed the same - HELD THAT - The assessee could claim this expenditure u/s 37(1) of the Act, as per which the expenditure should be laid out or expended wholly and exclusively for the purpose of business. We notice that the tax authorities have given a specific finding that this expenditure is not related to the business activities of the assessee, viz., construction of buildings for police and allied departments and project monitoring. The contentions of Ld A.R are that the children trained under skill development scheme could be employed by the Civil Contractors, which will in turn facilitate the business activities of the assessee - connection with the business activities of the assessee sought to be established by Ld A.R is far fetched one. Accordingly, we are of the view that the assessee has failed to show that this expenditure has been incurred wholly and exclusively for the purpose of business. Accordingly, we confirm the order passed by Ld CIT(A) on this issue. Disallowance of claim of bad debts - AO noticed that the assessee has claimed Provision towards bad debts as deduction need to be disallowed - HELD THAT - The orders of tax authorities that they have disallowed only Provision towards bad debts . Admittedly, the provision for bad debts is not allowable as deduction under the provisions of Income tax. Accordingly, we confirm the disallowance made by the tax authorities. Disallowance of Leave encashment expenses - HELD THAT - We do not find any such disallowance in the assessment order. The Ld A.R also did not advance any arguments on this issue. Accordingly we reject this ground.
Issues Involved:
1. Treatment of interest income on bank deposits. 2. Disallowance of bad debts. 3. Disallowance of repairs and maintenance expenses. 4. Disallowance of skill development expenses. 5. Disallowance of provision for leave encashment. Issue-wise Detailed Analysis: 1. Treatment of Interest Income on Bank Deposits: The primary issue raised by the revenue in all four appeals was whether the interest received on bank deposits could be treated as the assessee’s income. The Assessing Officer (AO) contended that the interest income earned on deposits should be taxable under Section 56 of the Income Tax Act. However, the Commissioner of Income Tax (Appeals) [CIT(A)] held that the interest earned on fixed deposits should be treated as funds of the Government of Karnataka, as per the Government orders. The CIT(A) referred to decisions by the Karnataka High Court, which stated that interest accrued on bank deposits from government grants should not be treated as income of the assessee. The Tribunal upheld the CIT(A)’s decision, agreeing that the interest income earned on deposits made out of government grants was not the income of the assessee. 2. Disallowance of Bad Debts: For the assessment year 2012-13, the AO disallowed the bad debts claimed by the assessee, amounting to ?2,27,56,882, which were excess expenditures incurred on a housing scheme and not reimbursed by the Government of Karnataka. The CIT(A) confirmed this disallowance. The Tribunal upheld the disallowance, noting that the government had directed the assessee to manage the additional expenses from the interest earned on deposits, which was treated as part of the government grant. 3. Disallowance of Repairs and Maintenance Expenses: The AO disallowed the repairs and maintenance expenses claimed by the assessee, treating them as capital in nature. The CIT(A) confirmed this disallowance. The Tribunal noted that the principles relating to "current repairs" as explained by the Supreme Court in the case of CIT vs. Saravana Spinning Mills Ltd (293 ITR 201)(SC) should be applied. The Tribunal set aside the CIT(A)’s order and directed the AO to re-examine the issue, applying the principles laid down by the Supreme Court. 4. Disallowance of Skill Development Expenses: For the assessment year 2014-15, the AO disallowed the skill development expenses incurred for training the children of police personnel, considering it as Corporate Social Responsibility (CSR) expenditure and not related to the assessee’s business activities. The CIT(A) confirmed this disallowance. The Tribunal upheld the disallowance, agreeing that the expenditure was not incurred wholly and exclusively for the purpose of the assessee’s business. 5. Disallowance of Provision for Leave Encashment: For the assessment year 2014-15, the AO disallowed the provision for leave encashment claimed by the assessee. The CIT(A) confirmed this disallowance. The Tribunal upheld the disallowance, noting that the provision for bad debts is not allowable as a deduction under the provisions of the Income Tax Act. Conclusion: In conclusion, the Tribunal dismissed all the appeals of the revenue and the appeal of the assessee for AY 2013-14. The appeals of the assessee for AY 2012-13 and 2014-15 were treated as partly allowed, and the appeal of the assessee for AY 2015-16 was treated as allowed. The Tribunal upheld the CIT(A)’s decisions on the treatment of interest income and disallowance of bad debts and skill development expenses while directing the AO to re-examine the disallowance of repairs and maintenance expenses.
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