2007 (11) TMI 322 - AT - Income Tax

Depreciable Assets - Setting off of loss on sale of flat (deemed short-term capital gain) - Addition on lease equalization - Cost of acquisition of the shares sold by the assessee company during the impugned assessment year which was acquired by it on purchase from the holding company? - Determination of indexed cost - Treatment of whole lease rent - Disallowance of interest u/s 14A - Computation of book profit u/s 115JA. Depreciable Assets - Setting off of loss on sale of flat (deemed short-term capital gain) - HELD THAT - In the instant case the CIT(A) has disallowed the claim of the assessee under s. 32(1)(iii) of the Act because assessee has not written off the deficiencies in its books of account. During the course of hearing nothing is placed on behalf of the assessee in this regard. He has simply harped upon that its case is covered by s. 50 of the Act and the capital gain includes capital loss whereas s. 50 deals only with those types of cases where the profit accrued, to the assessee on transfer of block of assets. Thus, we are of the view that the CIT(A) has properly adjudicated the issue and we find no infirmity therein. Accordingly we confirm his order. Addition on lease equalization - difference between annual lease charge (i.e. lease rental net of finance charge) and depreciation is debited/credited to the annual lease equalization account in the P L a/c and credited to the lease terminal adjustment account. The balance outstanding in the lease terminal adjustment account is adjusted in the net book value of the leased asset in the balance sheet. This method of accounting is accepted by the AO in earlier years. HELD THAT - During the course of hearing, the ld DR could not explain how the profit of the assessee is being affected by passing these journal entries. Since the assessee has been following this method of accounting for the last so many years, this method cannot be disturbed in the impugned year without establishing that by passing these journal entries the profit of the assessee is being affected. We, therefore, find no merit in this disallowance. Accordingly, we set aside the order of the CIT(A) and delete the addition. Determination of indexed cost in respect of shares of the IL FS - The cost of acquisition adopted by the assessee was not accepted by the Revenue authorities and according to them it is not a case of normal transfer of capital asset by a holding company to a subsidiary company as envisaged in s. 47(iv) of the Act. Cost of acquisition of the shares sold by the assessee company during the impugned assessment year which was acquired by it on purchase from the holding company? - On careful perusal of the order of the CIT(A) we find that the CIT(A) has categorically held that the provisions of s. 47 has no application to the present case as assessee has purchased the shares from its holding company for a price. We find no infirmity in this observation of the CIT(A). The CIT(A) further observed that it is a case of purchase of stock-in-trade by the assessee for a price and in this regard we do not find any fact borne out from the records. Had it been a case of trading of shares and shares were purchased as stock-in-trade there would not be any question of computation of capital gain. At one stage the CIT(A) held this purchase of the shares as stock-in-trade and at other point he computed the capital gain on the sale of shares as per Expln. 5 to s. 48 of the IT Act and finally he has agreed that capital gain is to be computed and for indexation the assessment year would be taken as 1994-95. We agree with this finding of the CIT(A). We accordingly confirm the orders of the lower authorities as they have rightly computed the capital gain accrued on the sale of shares. Treatment of whole lease rent as an income - Since the matter is squarely covered by the earlier order of the Tribunal for 1996-97 to 1999-2000, we, following the same, set aside the order of the CIT(A) and restore the matter to the file of the AO with similar direction that interest income accruing to the assessee may be charged to tax in place of rental income assessed by him as the lease transaction is held to be a financial arrangement, after affording opportunity of being heard to the assessee. Disallowance of interest u/s 14A - In the instant case, Revenue authorities have disallowed the interest on borrowed funds which were invested in shares without looking to the nature of shares whether they were kept as stock-in-trade or as an investment. We, therefore, are of the view that this issue requires fresh adjudication by the AO to identify the borrowed funds, which were invested in shares, held as investment and only with regard to these borrowed funds disallowance under s. 14A can be made. The interest paid on the borrowed funds which were invested in shares kept as stock-in-trade deserves to be allowed as revenue expenditure under s. 36(1)(iii) of the Act. We accordingly set aside the order of the CIT(A) in this regard and restore the matter to the file of the AO with the direction to readjudicate the issue afresh in terms indicated above after affording opportunity of being heard to the assessee. Computation of book profit u/s 115JA - Assessee has maintained an account for NPAs and whatever recovery of the outstanding debts is not properly effected and certain defaults in instalments are committed, assessee put those outstanding dues under the head Non-performing assets and accordingly, he made a provision for NPAs while computing the total income of the assessee. We are of the view that the ratio laid down in the case of Usha Martin Industries Ltd. 2006 (12) TMI 171 - ITAT CALCUTTA by the Special Bench strictly applies to the present case and following the same we hold that the provisions for NPAs is not a provision for liability. As such the question whether it is ascertained or unascertained becomes irrelevant. We therefore set aside the order of the CIT(A) and direct the AO not to increase the net profit shown in the P L a/c for the relevant previous year prepared in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act in order to compute the book profit under s. 115JA of the Act. Accordingly this issue is disposed. In the result, appeal of the assessee is partly allowed for statistical purpose.

Summary

Issues Involved:

1. Setting off of loss on sale of flat (deemed short-term capital gain).
2. Provision for non-performing assets.
3. Addition of Rs. 3,79,303 on account of lease equalization charge.
4. Determination of indexed cost in respect of shares of IL&FS.
5. Treatment of whole lease rent as income.
6. Disallowance of interest under s. 14A of IT Act.
7. Computation of book profits under s. 115JA.

Detailed Analysis:

1. Setting off of loss on sale of flat (deemed short-term capital gain):

The assessee sold a building forming part of a block of assets and incurred a loss of Rs. 34,43,668, claiming it as a deemed business loss. The assessee argued that this loss, although deemed a short-term capital loss under s. 50 of the IT Act, should be set off against business income. The CIT(A) and AO rejected this claim, stating that s. 50 applies only to gains and not losses. The Tribunal upheld this view, emphasizing that the loss should be considered under s. 32(1)(iii) of the Act, which requires the deficiency to be written off in the books of account, a condition not met by the assessee.

2. Provision for non-performing assets:

The assessee's claim for a deduction of Rs. 1,01,40,295 for provisions for non-performing assets was disallowed. The assessee did not press this ground during the hearing, leading to its dismissal.

3. Addition of Rs. 3,79,303 on account of lease equalization charge:

The assessee claimed a deduction for lease equalization, which was disallowed by the AO as a capital expenditure. The CIT(A) upheld this disallowance. However, the Tribunal found that the method of accounting adopted by the assessee had been consistent and did not affect the profit. Consequently, the Tribunal set aside the order of the CIT(A) and deleted the addition.

4. Determination of indexed cost in respect of shares of IL&FS:

The assessee claimed indexation from the assessment year 1989-90 for computing capital gains on shares sold, but the AO adopted indexation from 1994-95. The CIT(A) upheld the AO's decision, stating that the shares were purchased in 1994. The Tribunal agreed with this view, noting that the cost of acquisition should be based on the purchase year (1994) and not the year when the holding company acquired the shares.

5. Treatment of whole lease rent as income:

The assessee argued that only the interest component of lease rent should be taxed, not the entire lease rent. The Tribunal referred to its previous orders and restored the matter to the AO, directing that only the interest income should be taxed, not the rental income, recognizing the lease transaction as a financial arrangement.

6. Disallowance of interest under s. 14A of IT Act:

The AO disallowed interest on borrowed funds used to earn tax-exempt dividend income. The CIT(A) upheld this disallowance. The Tribunal noted that s. 14A was introduced with retrospective effect and that the proviso to s. 14A did not apply in this case as there was no assessment order under s. 143(3). The Tribunal directed the AO to re-adjudicate the issue, distinguishing between borrowed funds used for shares held as stock-in-trade and those held as investment.

7. Computation of book profits under s. 115JA:

The AO added Rs. 1,01,40,295 for provision for NPAs to the book profit, treating it as an unascertained liability. The CIT(A) upheld this addition. The Tribunal, however, referred to the Special Bench decision in Usha Martin Industries Ltd., concluding that the provision for NPAs is not a liability but a diminution in the value of assets. Consequently, the Tribunal directed the AO not to increase the net profit by the provision for NPAs while computing book profit under s. 115JA.

Conclusion:

The Tribunal's decision provided relief to the assessee on several grounds, including the lease equalization charge and the treatment of whole lease rent as income. However, it upheld the CIT(A)'s decisions on the setting off of loss on sale of flat and the determination of indexed cost for shares. The Tribunal's directive for fresh adjudication on the disallowance of interest under s. 14A and the computation of book profits under s. 115JA reflects a balanced approach to ensure compliance with the statutory provisions while addressing the assessee's concerns.