2002 (6) TMI 162 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of initial security deposit as a deduction.
2. Disallowance under Section 40A(3) of the Income-tax Act.
3. Benefit of carry forward of loss.
4. Deduction under Section 32AB.
5. Disallowance of retention money.
6. Disallowance of investment allowance and deductions under Sections 80HH and 80-I.
7. Disallowance of professional fee payment.
8. Disallowance of interest on borrowed funds.

Detailed Analysis:

1. Disallowance of Initial Security Deposit as a Deduction:
The assessee, a Government contractor, claimed deductions for security deposits made with principals, which were refundable upon contract completion. The Assessing Officer (AO) disallowed these claims, treating the deposits as capital investments. The CIT(A) upheld this disallowance, referencing prior appellate orders. Both parties acknowledged that this issue was previously decided against the assessee by the ITAT in a similar case for the assessment year 1985-86. The Tribunal reaffirmed this stance, stating that the security deposits did not constitute an expenditure as they were refundable and did not represent an outgoing sum from the assessee's coffers. The Tribunal upheld the CIT(A)'s decision, confirming the disallowance for both assessment years.

2. Disallowance under Section 40A(3) of the Income-tax Act:
For the assessment year 1989-90, the AO disallowed Rs. 1,27,989 under Section 40A(3) due to cash payments exceeding Rs. 10,000, which the assessee claimed were made under exceptional circumstances. The CIT(A) upheld the disallowance, noting the lack of evidence supporting the necessity for cash payments. The Tribunal found that the assessee failed to provide confirmatory letters from the parties insisting on cash payments and did not raise the plea of not having a bank account in Calcutta before the lower authorities. However, considering the specific circumstances, the Tribunal concluded that the payments were covered under exceptional circumstances mentioned in rule 6DD(j) and deleted the disallowance.

3. Benefit of Carry Forward of Loss:
The assessee raised an additional ground for the assessment year 1989-90 regarding the carry forward of a loss of Rs. 12,33,768. The Tribunal admitted this ground, noting that all relevant facts were already on record, and the issue was purely legal. However, on merits, the Tribunal rejected the claim, referencing the provisions of Section 115J(2) and judgments from the Andhra Pradesh and Karnataka High Courts. These judgments clarified that the computation of income under Section 115J does not affect the determination of amounts to be carried forward under normal provisions of the Act.

4. Deduction under Section 32AB:
The assessee sought to raise an additional ground for deduction under Section 32AB for both assessment years. The Tribunal declined to admit this ground, noting that the claim required further investigation into facts that were not on record. The Tribunal emphasized that additional grounds could only be admitted if all relevant facts were already on record, which was not the case here.

5. Disallowance of Retention Money:
The AO disallowed the assessee's claim regarding retention money, treating it as accrued income. The CIT(A) deleted the disallowance, referencing prior appellate orders. Both parties acknowledged that this issue was previously decided in favor of the assessee by the ITAT for the assessment year 1985-86. The Tribunal reaffirmed this stance, stating that retention money could not be considered as income until actually received. The Tribunal upheld the CIT(A)'s decision, confirming the deletion of the disallowance for both assessment years.

6. Disallowance of Investment Allowance and Deductions under Sections 80HH and 80-I:
The AO disallowed the assessee's claims for investment allowance and deductions under Sections 80HH and 80-I, stating that the assessee was not engaged in the manufacture or production of goods. The CIT(A) allowed these claims, referencing prior appellate orders. However, the Tribunal noted that this issue was squarely covered by the Supreme Court's judgment in N.C. Budharaja & Co., which held that contractors engaged in civil construction are not engaged in the manufacture or production of goods. The Tribunal set aside the CIT(A)'s orders and restored the AO's disallowance for both assessment years.

7. Disallowance of Professional Fee Payment:
The AO disallowed a professional fee payment of Rs. 3 lakhs to an advocate, stating it related to a prior assessment year. The CIT(A) allowed the deduction, noting that the liability accrued in the assessment year under reference when the arbitration award was given. The Tribunal upheld the CIT(A)'s decision, stating that the liability related to the assessment year under reference, and any subsequent recovery would be taxable under Section 41(1).

8. Disallowance of Interest on Borrowed Funds:
The AO disallowed interest on borrowed funds diverted to a subsidiary company without charging interest. The CIT(A) restricted the disallowance to an amount of Rs. 18 lakhs, stating that the remaining amount was advanced out of receipts from clients. The Tribunal found that the assessee had substantial debit balances in the overdraft account on the dates when amounts were advanced to the subsidiary, indicating that borrowed funds were used. The Tribunal set aside the CIT(A)'s order and restored the AO's disallowance of interest.

Conclusion:
The Tribunal's consolidated order addressed multiple issues, affirming some disallowances while overturning others. The key takeaways include the Tribunal's adherence to prior decisions, the importance of factual evidence in justifying claims, and the application of legal precedents in determining the allowability of deductions and disallowances.