2013 (9) TMI 688 - AT - Income Tax

Interest income to be adjusted towards the cost of the project - Assessee has utilised the borrowed funds for earning the income to that extent, the interest has to be given set off to the interest paid on the borrowed funds - It was the contentions of the assessee that there is a direct nexus and these funds are not surplus funds so as to consider as income from other sources Held that - Direct nexus aspect requires examination by the AO and in case there is direct nexus with the earning of interest income with that of the borrowals, then only net interest can be brought to tax or adjusted in the construction account Restored the issue to the file of the AO to examine the nexus aspect of the earning of interest income on borrowed funds, specifically borrowed for the purpose of project which is under construction and decide accordingly. Disallowance of leave encashment Amount involved is ₹ 1,03,25,488/- - Assessee made a provision of leave encashment on actuarial basis which was disallowed by the AO as a provision Held that - Restored the matter to the file of the AO for fresh adjudication as and when the decision of the Hon ble Supreme Court is rendered on this issue in the case of Exide Industries Ltd., which has been decided by Kolkata High court referred in 2007 (6) TMI 175 - CALCUTTA High Court and which is still pending before the Hon ble Apex court. Disallowance of Bad Debts A.O. disallowed the amount on the reason that no details were furnished Held that - The claim of amount satisfy the conditions of section 36(2) as these are taken into the books of account - These advances/ receivables are part of the business activity of the assessee and there is no dispute with reference to the amounts being receivable - Except the amount of TDS, which is claimed as bad debt, other amounts, in our view, are allowable as bad debt and in the alternative also as business loss - For the purpose of verification including the claim written off as TDS, the issues are restored to the file of the AO to examine the facts first and then decide according to law Matter restored to the file of A.O. Decided in favor of Assessee for statistical purpose.

Issues Involved:
1. Taxation of interest income earned during the construction period.
2. Disallowance of leave encashment.
3. Disallowance of expenses under section 14A.
4. Disallowance of bad debts.
5. Denial of deduction under section 80IB on TUF subsidy received.
6. Additional grounds regarding TUF subsidy as capital in nature.
7. Disallowance under section 40(a)(ia) for short deduction of tax.
8. Disallowance of prior period expenses.

Issue-wise Detailed Analysis:

1. Taxation of Interest Income Earned During the Construction Period:
The assessee capitalized interest on borrowings towards the cost of the project under the EDCP account. Interest income from fixed deposits was adjusted against these interest expenses. The AO taxed this interest income as "income from other sources" based on the Supreme Court decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. The CIT(A) upheld this view, rejecting the nexus between interest earned and interest expended. The Tribunal restored the issue to the AO to examine the direct nexus and decide accordingly. If a nexus is established, only the net interest should be taxed or adjusted in the construction account.

2. Disallowance of Leave Encashment:
The assessee's provision for leave encashment was disallowed by the AO under Section 43B(f) and upheld by the CIT(A). The Tribunal noted the pending decision of the Supreme Court in the case of Exide Industries Ltd. and restored the matter to the AO for fresh adjudication based on the Supreme Court's decision.

3. Disallowance of Expenses Under Section 14A:
The AO disallowed Rs. 78,90,394 under Section 14A by applying Rule 8D, which was confirmed by the CIT(A). The Tribunal held that Rule 8D was not applicable for the assessment year in question, following the Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd. The Tribunal considered a reasonable disallowance of 5% of the dividend earned, amounting to Rs. 7,83,850.

4. Disallowance of Bad Debts:
The assessee wrote off Rs. 1,36,74,180 as bad debts, which the AO disallowed for not meeting Section 36(2) conditions. The CIT(A) confirmed this. The Tribunal found that the amounts written off were part of the business activity and could be allowed as bad debts or business loss. The Tribunal restored the issue to the AO for verification and decision according to law.

5. Denial of Deduction Under Section 80IB on TUF Subsidy Received:
The AO excluded the TUF subsidy received by the assessee from the deduction under Section 80IB, treating it as incentive profit. The CIT(A) upheld this. The Tribunal restored the issue to the AO to examine whether the subsidy reduced the interest expenditure and if the nexus was established, to allow the deduction under Section 80IB.

6. Additional Grounds Regarding TUF Subsidy as Capital in Nature:
The assessee claimed the TUF subsidy of Rs. 4.93 crores as capital in nature. The Tribunal admitted the additional ground and restored the matter to the AO to examine the claim afresh, considering the principles laid down by the Supreme Court and other case laws.

7. Disallowance Under Section 40(a)(ia) for Short Deduction of Tax:
The AO disallowed Rs. 6,82,852 for short deduction under Section 40(a)(ia). The Tribunal restored the issue to the AO for fresh consideration, following the ITAT's decision in DICT vs. Chandabhoy & Jassobhoy, which held that Section 40(a)(ia) does not apply to lesser deduction of tax.

8. Disallowance of Prior Period Expenses:
The AO disallowed Rs. 11,39,761 as prior period expenses, which the CIT(A) allowed. The Tribunal upheld the CIT(A)'s decision, noting that the expenses crystallized during the year. The alternate ground raised by the assessee to allow these expenses in the previous year was dismissed as academic.

Conclusion:
The Tribunal dismissed the Revenue's appeal and treated the Assessee's appeal as allowed for statistical purposes. The AO was directed to re-examine several issues based on the Tribunal's observations and legal precedents.

← Previous Next →