2004 (10) TMI 308 - AT - Income Tax

Expenditure incurred in relation to income not includible in total income, Interest on borrowed capital, Guest house expenses, Depreciation, Business expenditure, income from house property,Minimum alternate tax

Issues Involved:
1. Attribution of expenditure to earning of dividends.
2. Disallowance of guest-house expenses.
3. Disallowance of interest on borrowed capital.
4. Disallowance of club expenses.
5. Thrusting depreciation not claimed by the assessee.
6. Depreciation on let out buildings and technical know-how.
7. Computation of book profits under Section 115JA.
8. Provision for bad debts.

Issue-wise Detailed Analysis:

1. Attribution of Expenditure to Earning of Dividends:

The first issue was whether the expenditure attributable to earning of dividends should be disallowed. The assessee claimed exemption under Section 10(33) of the IT Act for dividend income and contended that no direct expenditure was incurred. The AO, referencing Section 14A, attributed 10% of the dividend income as expenditure and disallowed Rs. 88,73,758. The CIT(A) confirmed this, emphasizing the business activity involved managerial guidance. The Tribunal restored the matter to the AO to verify the quantum of deduction claimed by the assessee in earlier years under Section 57(i) and make a pro-rata adjustment.

2. Disallowance of Guest-House Expenses:

The second issue concerned the disallowance of Rs. 31,19,000 towards guest-house expenses. The AO disallowed the expenditure as it was not proven to be for business purposes. The CIT(A) upheld this, noting the lack of details. The Tribunal restored the issue to the AO to examine the nature of the expenses, emphasizing the onus on the assessee to prove the expenses were business-related.

3. Disallowance of Interest on Borrowed Capital:

The third issue involved the disallowance of interest on borrowed capital amounting to Rs. 13,99,52,000. The AO disallowed the claim, noting that the expenses were capitalized in the books but claimed as revenue expenditure. The CIT(A) upheld this, stating the investments were for promoting group concerns with independent businesses. The Tribunal restored the issue to the AO to verify if borrowed funds were used for investment in shares. If not, no disallowance would be called for. Additionally, the Tribunal found that the investment was for business expansion, thus allowable under Section 36(1)(iii).

4. Disallowance of Club Expenses:

The fourth issue was the disallowance of Rs. 1,36,144 towards club expenses. The AO disallowed these as personal benefits of employees. The CIT(A) allowed only the entrance/subscription fees, disallowing other expenses. The Tribunal upheld this, distinguishing the case from the Gujarat High Court decision cited by the assessee, and found no material to show the expenses were business-related.

5. Thrusting Depreciation Not Claimed by the Assessee:

The fifth issue was the AO's action of thrusting depreciation not claimed by the assessee. The AO required the claim of depreciation post the amendment of the Taxation Laws (Amendment & Miscellaneous Provisions) Act, 1986. The Tribunal found this issue covered by the jurisdictional High Court decision, which held Explanation 5 to Section 32(1) as prospective. Therefore, this ground was allowed in favor of the assessee.

6. Depreciation on Let Out Buildings and Technical Know-How:

The sixth issue concerned depreciation on let-out buildings and technical know-how. The assessee did not press the issue regarding technical know-how. For let-out buildings, the Tribunal upheld the CIT(A)'s decision, referencing the Madras High Court's ruling that rental income is assessable under 'Income from house property,' thus no depreciation was allowable.

7. Computation of Book Profits under Section 115JA:

The seventh issue involved the computation of book profits under Section 115JA, specifically the deduction claimed for withdrawal from revaluation reserve. The AO disallowed the claim, citing the Tribunal's decision in DCW Ltd. The CIT(A) confirmed this. The Tribunal upheld the CIT(A)'s decision, emphasizing that the adjustment made in the P&L account was a contra adjustment, not an effective credit, and thus not deductible under the Explanation to Section 115JA.

8. Provision for Bad Debts:

The eighth issue was the addition of provision for bad debts in computing book profits under Section 115JA. The Tribunal referenced the Madras High Court's decision in Beardsell Ltd., which held that provision for bad debts is an unascertained liability and must be added back to book profits. This ground was thus decided against the assessee.

Conclusion:

The appeal was partly allowed for statistical purposes, with certain issues restored to the AO for further verification and others upheld as per the CIT(A)'s decision.

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