2009 (2) TMI 240 - AT - Income Tax

Disallowance of 50 per cent on guest house expenses - assessee did not give details of expenditure on repairs and maintenance of own guest houses and rented guest houses - assessee has also not furnished lease agreement so as ascertain the liability to maintain the guest houses - HELD THAT - The Tribunal in AY 1999-2000 has held that expenditure incurred for maintenance of the company's own guest houses is covered u/s 30(a)(ii). Therein the Tribunal accepted the plea of the assessee that in respect of the guest houses owned by the assessee, repair expenses will have to be allowed as deduction u/s. 30(a)(ii). Once the expenditure is allowable u/s. 30(a)(ii), if the expenditure is incurred on repair and maintenance of guest house taken on lease should also be allowed. Accordingly, we decide the matter, for the assessment years in question, in favour of the assessee. Addition on account of interest accrued on loans, bonds and debentures - the recovery of which was deferred or has remained outstanding - business of general insurance - HELD THAT - Identical issue arose in assessee's own case for AY 1985-86. The Tribunal accepted the plea of the assessee and in fact the issue went up to the Hon'ble Delhi High Court in AY's 1986-87 to 1988-89, decided the issue in favour of the assessee by holding that s. 44 is a special provision dealing with the computation of profits and gains of business of insurance. It being a non obstante provision, has to prevail over other provisions in the Act. It clearly provides that income from insurance business has to be computed in accordance with the rules contained in the First Schedule. It is not the case of the Revenue that the assessee has not computed the profits and gains of its insurance business in accordance with the said rules. Reliance was placed on the scope of s. 44, as held in the case of General Insurance Corporation of India vs. CIT 1999 (9) TMI 3 - SUPREME COURT , held that the provision of s. 44 being a special provision, governs computation of taxable income earned from business of insurance. It mandates the tax authorities to compute the taxable income in respect of insurance business in accordance with the provisions of the First Schedule to the Act. Therefore, order of the Tribunal has been affirmed. Following the same reasoning, addition made by the AO is deleted. Allowing only 50 per cent of the management expenses by invoking the provisions of s. 14A - investments made by the assessee are both taxable as well as tax-free - claimed in the P L a/c is treated as expenses incurred in connection with the looking after tax-free investment - HELD THAT - It is very clear that s. 44 applies notwithstanding anything to the contrary contained within the provisions of the IT Act relating to computation of income chargeable under different heads. We agree with the ld counsel that there is no requirement of head-wise bifurcation called for while computing the income u/s. 44 in the case of an insurance company. The income of the business of insurance is essentially to be at the amount of the balance of profits disclosed by the annual accounts as furnished to the Controller of Insurance. The actual computation of profits and gains of insurance business will have to be computed in accordance with r. 5 of the First Schedule. Hence, AO is not permitted to travel beyond these provisions. Sec. 14A contemplates an exception for deductions as allowable under the Act are those contained under ss. 28 to 43B. Sec. 44 creates special application of these provisions in the cases of insurance companies. We therefore, agree with the assessee and delete the disallowance made by the AO which is based on the application of s. 14A as according to us, it is not permissible to the AO to travel beyond s. 44 and First Schedule of the IT Act.

Issues Involved:
1. Deduction of taxes deducted at source (TDS) in foreign countries.
2. Disallowance of investment written off.
3. Disallowance of 50% of guest house expenses.
4. Addition on account of interest accrued on loans, bonds, and debentures.
5. Disallowance of 50% of management expenses under Section 14A.
6. Disallowance of provision for bad and doubtful debts.
7. Disallowance of depreciation claimed by the assessee.
8. Disallowance of estimated liability for orphan claims.

Issue-wise Detailed Analysis:

1. Deduction of Taxes Deducted at Source (TDS) in Foreign Countries:
The first common dispute relates to the action of the CIT(A) in not allowing deduction for TDS in foreign countries. The assessee did not press this ground during the hearing, and thus, the CIT(A)'s order on this issue for both assessment years was upheld.

2. Disallowance of Investment Written Off:
The CIT(A) sustained the addition made by the AO, following his predecessor's orders in the assessee's own case for previous years. The Tribunal had previously decided this issue in favor of the assessee, stating that the write-off/write-down of investments is neither an 'expenditure' nor an 'allowance' but a 'loss'. This view was supported by the Supreme Court's judgment in General Insurance Corporation of India vs. CIT. Consequently, the disallowance made by the AO and sustained by the CIT(A) was deleted.

3. Disallowance of 50% of Guest House Expenses:
The AO disallowed 50% of the guest house expenses due to the lack of details provided by the assessee. The CIT(A) followed his own identical order for the previous year. The Tribunal, referencing its order for the assessment year 1999-2000, held that expenses for repair and maintenance of both owned and leased guest houses should be allowed under Section 30(a)(ii) of the Act. Thus, the matter was decided in favor of the assessee for the assessment years in question.

4. Addition on Account of Interest Accrued on Loans, Bonds, and Debentures:
The Department added the outstanding interest to the assessee's income based on the mercantile system of accounting, which the CIT(A) confirmed. However, the Tribunal, referencing the Delhi High Court's decision in the assessee's own case for previous years, held that Section 44 of the Act, being a special provision, prevails over other provisions. Therefore, the addition made by the AO was deleted.

5. Disallowance of 50% of Management Expenses Under Section 14A:
The AO disallowed 50% of the management expenses, invoking Section 14A of the Act. The Tribunal, however, held that Section 44, which applies to insurance companies, is a non obstante clause that overrides other provisions, including Section 14A. Therefore, the disallowance made by the AO was deleted.

6. Disallowance of Provision for Bad and Doubtful Debts:
The AO disallowed the provision for bad and doubtful debts, stating that Section 36(1)(vii) was not applicable. The Tribunal, referencing its order for the assessment year 1998-99, held that the provision for bad and doubtful debts is allowable under Section 36(1)(viia)(c) to the extent of 5% of income. Therefore, the AO was directed to allow the deduction to the extent of 5% if the total income is positive.

7. Disallowance of Depreciation Claimed by the Assessee:
The AO disallowed the depreciation claimed by the assessee due to the lack of details regarding additions to assets. The CIT(A) sustained this disallowance. The Tribunal agreed with the CIT(A), stating that it is obligatory for the assessee to provide details of assets added for the AO to scrutinize and allow depreciation as per the law.

8. Disallowance of Estimated Liability for Orphan Claims:
The AO disallowed the provision for unidentified motor third-party claims, considering it contingent in nature. The CIT(A) confirmed this finding. The Tribunal, following its own order for previous years, held that the claim is contingent and cannot be allowed as a deduction. Therefore, the CIT(A)'s order on this issue was confirmed.

Conclusion:
The appeals were partly allowed, with the Tribunal providing relief to the assessee on several issues while upholding the disallowances on others.

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