2023 (7) TMI 130 - AT - Income Tax

Disallowance of expenses u/s 37(1) - expenses towards general public utility - HELD THAT - As present assessee made payment towards general public utility to various schools, welfare bodies, religious samitiee s etc in the locality where its factories or other business premises are located. These expenses ultimately help/benefit in carrying on the business of the assessee. Thus, we hereby direct the AO to delete the addition made by him. Decided in favour of assessee. Disallowance on account of loss of loans advances - assessee in accordance with the arbitration award has written of the sum being difference between amount due as per books of assessee and claim awarded by the arbitrator in the profit and loss account of as not recoverable - HELD THAT - Loss to the assessee was known at the time of signing the audited financial statements. The accounting principles also provide if it is likely that a contingency will result in a loss to the enterprise, then it is prudent to provide for that loss in the financial statements. Thus, the assessee cannot be denied the deduction as discussed above merely for the reason that the order of the arbitrator was passed after the balance sheet date. Thus, it is transpired that the assessee was known to the fact of the loss in accordance with the award of the arbitration before filing the return of income. Therefore, the event for writing off the loss certainly occurred after the balance sheet date but before signing the financial statements and filing the income tax return. Whether the loan advanced by the assessee to Shri Babubhai Ramanlal Patel who is engaged in the activity of structural engineering works is capital in nature or it is trading advance? - The act of advancing loan on interest is one of the business activities of the assessee. Moreover, we note that even advances given in the year 1996-97 and the element of interest thereon has been offered to tax under the head business which was also accepted by the revenue in the earlier years. Thus, in the year consideration, it cannot be said that the advances given by the assessee based on interest was on capital account. Assessee is engaged in the business of moneylending and therefore once the amount lent in normal course of business become irrecoverable/bad. The benefit of deduction as business loss to the assessee cannot be denied on the reasoning that there was no license available to it for carrying out the money-lending business. As the assessee extended loans and advances to impugned party in earlier years and charged interest at specified rate and account of the party was further debited with accrued interest. Now the assessee has written off part amount as irrecoverable in the books of account. As in the case of T.R.F. Ltd 2010 (2) TMI 211 - SUPREME COURT held that the assessee is not required to establish that the debt has become irrecoverable as such mere writing off as irrecoverable is sufficient to claim the deduction - assessee cannot be denied the claim merely on the reasoning that the assessee has not been able to take necessary steps for the recovery of the loan/interest from the party. Whether the assessee has adopted the colourable device by writing off the loan/interest as not recoverable to avoid the tax liability? - From the reading of the order of the AO, no detail is forthcoming about the land purchased by the group of the assessee at the alleged nominal price. AO was expected to prove the impugned transaction of the purchase of land by the group company of the assessee based on the documentary evidence suggesting that the land has been purchased by the group company at the nominal price which has ultimately resulted the low-income tax liability on the assessee. Thus, in the absence of necessary details, we re not inclined to confirm the order of the authorities below. Accordingly, we set aside the finding of the learned CIT-A and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee hereby allowed. Disallowance on account of provision for doubtful loans and advances - HELD THAT - In the case of the present assessee both the lower authority being the AO and CIT(A) have given concurrent finding that the amount claimed as deduction represents provision only and no amount of bad debt or part thereof is written off as irrecoverable in the books of account. Thus, considering the fact that the amount of bad debt or part thereof was not written off as irrecoverable in the year consideration therefore we hold that the assessee is not eligible to claim the deduction of bad debt in the year under consideration. However, the assessee will be eligible to claim deduction of the same in the year in which bad debts actually written off as irrecoverable i.e. A.Y. 2010-11 as claimed by the learned AR subject to verification. Hence, the grounds of the appeal of the assessee is hereby dismissed in the light of the above discussion. Deduction u/s 80IA - deduction not claimed at the time of filing the return of income since total income was declared at Rs. NIL - HELD THAT - Only AO who has no power under the statute to entertain a claim of deduction otherwise than by filing a revised return. However, there is no restriction on the power of the CIT(A) and ITAT being quasi-judicial authority. Thus, CIT(A) should have accepted the claim of the assessee by extending the benefit of deduction envisaged under the provisions of section 80IA of the Act. Accordingly, we set aside the finding of the learned CIT(A) and direct the AO allow the deduction to the assessee under section 80IA of the Act as per the provisions of law. Hence, the ground of appeal of the assessee is hereby allowed. Exclusion of sales tax benefit from the computation of minimum alternate tax under the provisions of section 115JB - HELD THAT - As decided in Ankit Metal Power Ltd 2019 (7) TMI 878 - CALCUTTA HIGH COURT once any receipt which is not income under the provision of section 2(24) of the Act i.e. not liable to be tax then such receipt cannot be included in the book profit under section 115JB - thus we direct the AO to exclude the sales tax benefit from the computation of book profit u/s 115JB - additional ground of appeal of the assessee allowed. Disallowances of interest expenses on deep discount bonds (DDBs) - CIT(A) deleted the disallowance - HELD THAT - The issue on hand is covered in favour of the assessee by the order of this tribunal in its own case of the assessee for A.Y. 2002-03 held that assessee is entitled to proportionately claim the expenditure discount/interest on the DDBS on accrual basis in the year under appeal, we direct the AO to correctly work out the amount of deduction to the extent it relates to the year under appeal. Addition of interest written back in the books on repurchase of DDBs - assessee before the CIT(A) contended that interest expenses claimed in earlier years on pro-rata basis has been allowed by the ITAT - HELD THAT - As AO while passing effect giving order has not allowed the excessive claim - CIT(A) in view the above directed the AO to verify the fact whether interest was allowed more than actual cost, then the same should be added to the income of the year otherwise no addition is to be made. No infirmity in the order of the learned CIT(A). As such, the learned CIT(A) rightly held that if claim of interest on 175 DDB allowed is more than actual interest cost incurred on buyback, then such excess interest should be added to the total income otherwise no addition is required to be made on the same if the interest claimed is not more than actual interest cost. Hence, the ground of appeal of the Revenue is hereby dismissed. Disallowance of sales tax benefit - HELD THAT - As decided in assessee own case 2016 (6) TMI 1023 - GUJARAT HIGH COURT wherein issues involved in these appeals are squarely covered by the decisions of this Court in Birla VXL Ltd. 2013 (7) TMI 655 - GUJARAT HIGH COURT and in Munjal Auto Industries Ltd 2013 (10) TMI 650 - GUJARAT HIGH COURT . Therefore, the questions of law posed for our consideration in these appeals are answered in favour of the assessee. Addition on account of set-off of losses and unabsorbed depreciation of a unit of Core Healthcare Ltd. merged with the assessee - HELD THAT - Issue decided in favour of assessee as in own case AY 2005-06 . TDS u/s 194C - Disallowance of transportation charges u/s 40(a)(ia) - transportation charges paid by the assessee to the GAIL - HELD THAT - Transportation charges paid by the assessee to the GAIL is not in the nature of work contract for the purpose of section 194C of the Act, therefore no default committed by the assessee. Hence the ground of appeal of the revenue is hereby dismissed. Disallowance of depreciation on heavy vehicles - HELD THAT - We uphold the order of the ld. CIT-A and direct the AO to allow the depreciation to the assessee on closing WDV as decided in A.Y. 2003-04. Addition for the waiver of the loan - whether the waiver of loan is chargeable in the hands of the assessee either under the provisions of section 28(iv) of the Act or section 41(1) ? - HELD THAT - There remains no ambiguity to the fact that the waiver of loan cannot be made subject to tax under the provisions of section 28 (iv) of the Act. Whether such waiver of loan can be brought to tax under the provisions of section 41(1)? - To bring any item under the net of income in pursuance to the provisions of section 41(1) of the Act, there has to be recovery either in cash or in-kind in respect of loss, expenditure or trading liability which was allowed as deduction in any of the assessment year. Thus, first, we have to see whether the waiver of loan in the given case represents the loan for the acquisition of the capital assets or it represents the working capital loan. Again, if the loan is capital loan, used for the purpose of the fixed assets, then the assessee cannot be made subject to tax under the provisions of section 41(1) of the Act. CIT(A) held that no addition is required to be made either under section 28(iv) or under section 41(1) of the Act. The finding of learned CIT(A) has nowhere been controverted by the learned DR based on cogent material. Hence, considering the finding of learned CIT(A) that the nature of loan was for capital assets, we hold that no addition under section 41 of the Act is required to made on waiver of such capital loan. With regards to the interest, the assessee has clearly stated before the authorities below that the assessee was not allowed the deduction of unpaid interest expenses by virtue of the provisions of section 43(B). It is the precondition for attracting the provisions of section 41(1) of the Act that the assessee must have been allowed the deduction in respect of any expenditure, loss, or trading liability. But in the given case such condition was not complied with as far as unpaid interest is concerned and therefore, we are of the view that the assessee cannot be made subject to tax on account of waiver of interest on the loan as it was never allowed deduction to the assessee in any of the assessment year. Decided against revenue. Addition on account of liabilities transferred to capital account - assessee during the year under consideration, on merger transferred the liabilities being custom duty, demurrage and detention and sales tax liabilities to capital reserve - whether the writing off the statutory liabilities being custom duty, demurrage, detention, and sales tax amounting is chargeable in the hands of the assessee either under the provisions of section 28(iv) of the Act or section 41(1) of the Act? - HELD THAT - To bring any item under the net of income in pursuance to the provisions of section 41(1) of the Act, there must be recovery either in cash or in-kind in respect of loss, expenditure or trading liability which was allowed as deduction in any of the assessment year. CIT(A) has given clear finding that the deduction on account of impugned statutory liability was never allowed to the assessee. Thus, the very first precondition to invoke the provision of section 41(1) of the Act is not satisfied. Therefore, we do not find any infirmity in the order of the learned CIT(A). Hence the ground of appeal of the Revenue is hereby dismissed. Addition on account of difference between assets and liabilities taken on merger - HELD THAT - Surplus of assets cannot be taxed under section 28(iv) because firstly, such surplus does not arise from carrying on the business, secondly, it is not in the nature of income to be covered u/s 2(24), thirdly, increase in assets and liabilities creating some benefit to the transferee is in the capital field as it is relatable to the non-trading assets and it only affects capital structure of the transferee company. Disallowance u/s 14A r.w. rule 8D - sufficiency of own funds - HELD THAT - As in the case on hand the assessee company has an interest free fund more against the total investment yielding exempted income. Thus, considering the above discussion, no disallowances of interest expense in warranted in the given facts. Disallowance of administrative expenses - The contention of the assessee cannot be accepted that no expenditure in relation to the investment was incurred. Therefore, the disallowance of administrative as per rule 8D of the income tax rule needs to be made but such disallowances cannot exceed the amount of exempted income. Therefore, we direct the AO to restrict the disallowance of administrative expenses as per rule 8D of income Tax Rules. Hence, the ground appeal of the revenue is partly allowed. Disallowance of product registration expense - HELD THAT - We note that issue on hand is covered in favour of the assessee by the order of Torrent Pharma Ltd. 2013 (4) TMI 570 - GUJARAT HIGH COURT held that expenses for foreign country registration was for business purpose only, because the same helped the assessee in marketing its products in the foreign countries and promoting the sales. Calculating the income under MAT on account of the disallowance under section 14A of the Act - HELD THAT - Special Bench in the case of ACIT vs. Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI has held that the disallowance made u/s 14A r.w.r. 8D cannot be the subject matter of disallowance while determining the net profit u/s 115JB of the Act. Thus we hold that the disallowances made under the provisions of Sec. 14A r.w.r. 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB. Determine the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently - As there is no mechanism provided under the clause (f) to Explanation-1 of Sec. 115JB of the Act to make the disallowance independently. Therefore our action for restoring back the issue to the file of AO would unnecessarily cause further litigation. Thus we limit the disallowance on an ad-hoc basis @ 1 % of the exempted income as per the clause (f) to Explanation-1 of Sec. 115JB of the Act subject to the maximum adjustment made by the AO. Thus, the ground of appeal of the Revenue is partly allowed. TP Adjustment - Addition of guaranteed fee - international transaction or not? - HELD THAT - We find that in the case of PCIT vs. Redington 2020 (12) TMI 516 - MADRAS HIGH COURT has held that corporate guarantee is covered under the limb of international transaction and having bearing on profit and loss account. Bank/corporate guarantee is an international transaction. Therefore, the same has to be bench marked for determining the ALP. Determine the benchmarking for working out the ALP of the impugned international transaction - As extension of corporate/guarantee to AEs is an international transaction which needs to be benchmarked and in view of several order of the tribunal as referred above 0.5% commission on the value of corporate/ bank guarantee will serve the justice to both the assessee and the Revenue. Thus, in view of the above, the ground of appeal of the revenue is hereby partly allowed. Disallowance of project expense paid IFCI - HELD THAT - Appellant is one of the leading manufacturer of Soda Ash in the country. Accordingly, ash is generated in large quantity which will be used in production of cement as backward integration, hence which is part of the same business. We are not inclined to agree with the contentions of the Id.A.O. as appellant paid consultation fee to IFCI regarding feasibility of study to know updated status of cement industry in India. Accordingly, payment made to IFCI is rightly claimed by the appellant as consultation expenses.The assessee is eligible for the deduction of such expenses under the provisions of section 37. Delayed employee contribution towards ESI/EPF - HELD THAT - Payment under section 36(1)(va) would be allowed in respect to the payment of employee contribution towards ESI/EPF if such payment is made on/before due date as specified under the relevant Act (i.e. 15 days from the month for which salary is due). Thus, the payment made by the assessee on account of employee contribution towards ESI/EPF after the due date stands disallowed in view of the judgment in the case of M/s Checkmate Facility and Electronics Solutions Pvt. Ltd. 2018 (10) TMI 994 - GUJARAT HIGH COURT . We uphold the order of the lower authorities. Hence the ground of appeal of the assessee is dismissed. Disallowance of previous year adjustment - HELD THAT - In the present case, The assessee is only claiming expenditure, which was left out at the time of filing of original income tax return and in any event, the Assessing Officer has power to make upward or downward adjustments in the income returned filed by the assessee and when the assessee had not claimed certain expenditures clearly evident from the records and it comes to the knowledge of the Assessing Officer at the time of assessment proceedings, the AO should grant relief to the assessee. Likewise, CBDT's in its Circular No.14 (XL-35), dated April 11, 1955, directed that the Assessing Officer must not take advantage of the ignorance of the assessee as to his rights. In view of the above and after considering the facts in totality, we set aside the finding of the ld. CIT-A and direct the AO to delete the addition made by him. Hence, the ground of appeal of the assessee is hereby allowed. Interest under section 244A - HELD THAT - As relying on case of Karsanbhai Kacharabhai Patel HUF 2022 (12) TMI 1083 - ITAT AHMEDABAD assessee is entitled to additional compensation of interest under section 244A of the Act on account of delay in the issue of refund

Summary

Issues Involved:
1. Disallowance of expenses under section 37(1) of the Act.
2. Disallowance of bad debts and provision for doubtful debts.
3. Disallowance of interest expenses on Deep Discount Bonds (DDBs).
4. Treatment of sales tax benefit as capital or revenue receipt.
5. Set-off of losses and unabsorbed depreciation from demerged units.
6. Disallowance of depreciation on intangible assets.
7. Disallowance under section 14A of the Act.
8. Deduction under section 80IA of the Act.
9. Addition on account of guarantee fees and benchmarking of loans.
10. Disallowance of product registration expenses.
11. Disallowance of project expenses.
12. Interest under section 244A of the Act.

Summary:

1. Disallowance of Expenses under Section 37(1):
The Tribunal allowed the assessee's claim for general public utility expenses, holding that such expenses were incurred for maintaining good relations and improving the vicinity of the business premises, thus benefiting the business indirectly. The Tribunal directed the AO to delete the disallowance made under section 37(1) of the Act.

2. Disallowance of Bad Debts and Provision for Doubtful Debts:
The Tribunal held that the assessee was engaged in the business of money lending and allowed the deduction for bad debts written off as irrecoverable in the books of accounts. However, the Tribunal disallowed the provision for doubtful debts for the year under consideration but allowed the claim in the year in which the amount was actually written off.

3. Disallowance of Interest Expenses on Deep Discount Bonds (DDBs):
The Tribunal followed its earlier decision and allowed the assessee's claim for proportionate interest expenses on DDBs on an accrual basis. The AO was directed to allow the pro-rata interest expenditure after necessary verification.

4. Treatment of Sales Tax Benefit:
The Tribunal upheld the CIT(A)'s decision to treat the sales tax benefit as a capital receipt not liable to tax, following the Gujarat High Court's decision in the assessee's own case.

5. Set-off of Losses and Unabsorbed Depreciation from Demerged Units:
The Tribunal allowed the assessee's claim for set-off of losses and unabsorbed depreciation from the demerged unit of Core Healthcare Ltd., following its earlier decision in the assessee's case for AY 2005-06.

6. Disallowance of Depreciation on Intangible Assets:
The Tribunal upheld the CIT(A)'s decision to allow depreciation on intangible assets based on the written down value (WDV) determined in the first year of acquisition, following its earlier decision.

7. Disallowance under Section 14A:
The Tribunal held that disallowance of interest expenses under section 14A was not warranted as the assessee had sufficient interest-free funds. However, it directed the AO to make an ad-hoc disallowance of 1% of the exempted income for administrative expenses.

8. Deduction under Section 80IA:
The Tribunal allowed the assessee's claim for deduction under section 80IA for its power generation unit, following its earlier decision in the assessee's case for AY 2006-07.

9. Addition on Account of Guarantee Fees and Benchmarking of Loans:
The Tribunal held that extending a corporate guarantee is an international transaction and directed the AO to benchmark the guarantee fee at 0.5%. It also upheld the CIT(A)'s decision to delete the upward adjustment for benchmarking of interest on loans extended to AE.

10. Disallowance of Product Registration Expenses:
The Tribunal upheld the CIT(A)'s decision to treat product registration expenses as revenue expenditure, following the Gujarat High Court's decision in the case of Torrent Pharma Ltd.

11. Disallowance of Project Expenses:
The Tribunal upheld the CIT(A)'s decision to allow the deduction for project expenses paid to IFCI for a feasibility study, treating it as revenue expenditure.

12. Interest under Section 244A:
The Tribunal directed the AO to grant additional compensation of interest under section 244A for the delay in issuing the refund, following the principle that the amount of refund should first be adjusted against the interest payable to the assessee.

Conclusion:
The appeals were partly allowed in favor of the assessee and partly in favor of the Revenue, with specific directions provided for each issue.