2005 (3) TMI 391 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of employer's contribution to Employees' Provident Fund (EPF) under Section 43B.
2. Disallowance of interest paid to IDBI on borrowed money.
3. Disallowance of commitment charges paid to IDBI.
4. Disallowance of interest on loan in lieu of share capital.
5. Treatment of brokerage and underwriting commission as revenue expenditure.
6. Maintenance of accounting system by the assessee-corporation.
7. Expenses for guarantee bond.
8. Application of Section 35D of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Employer's Contribution to Employees' Provident Fund (EPF) under Section 43B:
The primary issue was the disallowance of Rs. 12,14,854 under Section 43B of the IT Act, 1961, being the employer's contribution to the EPF. The assessee argued that the OSFC Employees' Provident Fund Scheme was duly approved by the RBI and the Government, and contributions were regularly debited to a separate management fund. The AO disallowed the contributions due to the lack of actual cash payment by the employer. The Tribunal found that the assessee-corporation is exempt from the EPF Act under Section 48(2) of the SFC Act and that the fund is managed by a Board of Administrators. The Tribunal concluded that the assessee-corporation's method of maintaining the provident fund was proper and in compliance with the relevant regulations, thus allowing the appeal in favor of the assessee.

2. Disallowance of Interest Paid to IDBI on Borrowed Money:
The assessee contested the disallowance of Rs. 4,98,54,284 being the interest paid to IDBI. The interest was debited in the year of ascertainment and reconciliation, duly approved by the CAG. The Tribunal accepted the assessee's contention that the interest was a legitimate business expense, as it was based on correspondence with IDBI and was duly audited and approved by the CAG. The appeal was allowed in favor of the assessee.

3. Disallowance of Commitment Charges Paid to IDBI:
The assessee also contested the disallowance of Rs. 79,19,654 being the commitment charges paid to IDBI. The Tribunal found that the commitment charges were debited on ascertainment and reconciliation, duly approved by the CAG, and no queries were raised by the AO. The Tribunal accepted the assessee's stand and allowed the appeal.

4. Disallowance of Interest on Loan in Lieu of Share Capital:
The assessee contested the disallowance of Rs. 1,65,35,187 being interest on loans given by IDBI in lieu of share capital. The Tribunal found that the interest was deducted by IDBI and later charged to the proper head after ascertainment of facts. The Tribunal accepted the assessee's contention and allowed the appeal.

5. Treatment of Brokerage and Underwriting Commission as Revenue Expenditure:
The assessee argued that brokerage and underwriting commission paid on the issue of bonds should be treated as revenue expenditure. The Tribunal referred to the Supreme Court decision in India Cement Ltd. vs. CIT, which held that such expenses are deductible as revenue expenditure. The Tribunal found that the expenses were incurred for raising working capital and allowed the appeal in favor of the assessee.

6. Maintenance of Accounting System by the Assessee-Corporation:
The Revenue challenged the maintenance of the accounting system by the assessee-corporation. The Tribunal found that the assessee-corporation, being a government undertaking, was subject to checks and controls by the State Government and RBI. The Tribunal dismissed the Revenue's contention and upheld the assessee's accounting system.

7. Expenses for Guarantee Bond:
The Revenue challenged the deletion of expenses for the guarantee bond. The Tribunal found that the CIT(A) had dealt with the matter in depth and that the application of Section 35D(2)(c)(iv) was not justified given the nature of the assessee-corporation's business. The Tribunal rejected the Revenue's ground and upheld the CIT(A)'s decision.

8. Application of Section 35D of the Income Tax Act:
The Tribunal found that Section 35D relates to the amortization of preliminary expenses and was not applicable to the facts of the case. The Tribunal concluded that the expenses were deductible as revenue expenditure.

Conclusion:
The Tribunal allowed the appeals of the assessee for all the assessment years and dismissed the appeals of the Department. The Tribunal found that the assessee-corporation had a sound case both factually and legally, and the disallowances made by the Revenue authorities were not justified.