2014 (7) TMI 464 - AT - Income Tax

Nature of Bond service expenses Held that - CIT(A) was rightly of the view that the bonds servicing expenses as revenue in nature for bond like loans are liability of the company which has to be returned back to the bond holders and cannot be equated with the share capital Relying upon Brooke Bond India Limited Versus Commissioner of Income-Tax 1997 (2) TMI 11 - SUPREME Court - no disallowance was made by the assessing officer in any other year - it has no linkage with the resources for raising of the bonds - in factual terms the expenditure clearly amounts to revenue in nature thus, there was no infirmity in the order of CIT(A) Decided against Revenue. Capital recovery on leased assets Held that - The decision in DCIT (LTU) LTU New Delhi Versus Indian Railway Finance Corporation Ltd. 2014 (7) TMI 125 - ITAT DELHI followed - even after deduction of finance income, the full value of the cost of assets is fully recovered in lease period of 30 years and it is a case of Finance Lease as per the guidelines issued by ICAI - the AO should verify the charts and if the condition is satisfied, all the transactions should also be accepted as finance lease transactions thus, the matter is remitted back to the AO Decided in favour of Revenue. Bond issue expenses Held that - The decision in M/s. Indian Railway Finance Corpn. Ltd. Versus Addl. Commissioner of Income-tax, Range 11, New Delhi 2011 (1) TMI 1272 - ITAT DELHI followed - the expenditure would qualify only for amortization u/s 35D of the Act - the expenditure was a permissible deduction and accordingly deleted the addition made by the AO thus, bond issue expenses will be allowable as deduction as revenue expenditure Decided against Revenue. Prior paid expenses Held that - The decision in M/s. Indian Railway Finance Corpn. Ltd. Versus Addl. Commissioner of Income-tax, Range-11, New Delhi 2009 (8) TMI 1114 - ITAT DELHI followed - If the AO is of the view that the expenses are pertaining to the prior period, it is required to be considered for the prior and allowed in that year - If it is found that the expenses are allowable in this year on the basis of crystallization of liability, it may be considered in the year the assessee is directed to place necessary evidence in support of claim of expenses thus, the matter is remitted back to the AO Decided in favour of Assessee. Depreciation on office building Held that - The decision in Mysore Minerals Ltd. Versus Commissioner of Income-Tax 1999 (9) TMI 1 - SUPREME Court followed - depreciation is an allowance for the diminution in the value due to wear and tear of a capital asset employed by an assessee in his business - The very concept of depreciation suggests that the tax benefit on account of depreciation legitimately belongs to one who has invested in the capital asset and is utilizing the capital asset and thereby losing gradually the investment caused by wear and tear, and would need to replace the same by having lost its value fully over a period of time - there cannot be two owners of the property simultaneously and in the same sense of the term - The intention of the Legislature in enacting Section 32 of the Act would be best fulfilled by allowing deduction in respect of depreciation to the person in whom for the time-being vests the dominion over the building and who is entitled to use it in his own right and is using the same for the purpose of his business or profession - Assigning any different meaning would not sub-serve the legislative intent - the assessee is eligible to depreciation - There is no infirmity in the order of CIT(A) which is upheld Decided against Revenue.

Issues Involved:
1. Disallowance of expenses under Section 14A of the I.T. Act.
2. Nature of Bond Servicing Expenses.
3. Capital recovery on leased assets.
4. Disallowance of bond issue expenses.
5. Disallowance of prior period expenses.
6. Disallowance of depreciation on office building.

Issue-wise Detailed Analysis:

1. Disallowance of Expenses under Section 14A of the I.T. Act:
The sole ground in the assessee's appeals for A.Y. 2007-08 and 2009-10 pertained to the disallowance of expenses under Section 14A. Both parties acknowledged that Rule 8D was not applicable for A.Y. 2007-08 but was applicable for A.Y. 2009-10. The tribunal set aside the issue for both years back to the Assessing Officer to redecide, considering the Delhi High Court's decision in Maxopp Investment Ltd.

2. Nature of Bond Servicing Expenses:
The Revenue's appeals for A.Y. 2003-04 and 2006-07 contested the CIT(A)'s decision to treat Bond Servicing Expenses as revenue in nature. The CIT(A) allowed the assessee's claim, distinguishing it from the Supreme Court's decision in Brooke Bond India Ltd., and directed the Assessing Officer to allow the expenses as revenue expenditure under Section 37(1). The tribunal upheld the CIT(A)'s order, noting that the expenses were incurred yearly for servicing bonds and had no linkage with raising resources.

3. Capital Recovery on Leased Assets:
The Revenue's appeals for A.Y. 2006-07 to 2009-10 challenged the CIT(A)'s decision on capital recovery on leased assets. The tribunal noted that the issue had been restored to the Assessing Officer by the ITAT Delhi in an earlier order for A.Y. 2004-05. Following the ITAT's earlier order, the tribunal set aside the issue back to the Assessing Officer with similar directions.

4. Disallowance of Bond Issue Expenses:
The Revenue's appeals for A.Y. 2006-07 to 2009-10 contested the CIT(A)'s deletion of bond issue expenses disallowance. The tribunal noted that the issue had been decided in favor of the assessee by various ITAT orders and confirmed by the Delhi High Court. The tribunal dismissed the Revenue's ground, following the precedent that bond issue expenses are allowable as revenue expenditure.

5. Disallowance of Prior Period Expenses:
The Revenue's appeal for A.Y. 2006-07 challenged the CIT(A)'s decision on prior period expenses. The tribunal noted that the CIT(A) had restored the issue to the Assessing Officer, following an earlier ITAT order. The tribunal upheld the CIT(A)'s decision to restore the issue back to the Assessing Officer to determine the year of allowability.

6. Disallowance of Depreciation on Office Building:
The Revenue's appeals for A.Y. 2006-07 to 2009-10 challenged the CIT(A)'s decision to allow depreciation on the office building. The tribunal noted that the CIT(A) had referred to earlier ITAT orders and the Supreme Court's judgment in Mysore Minerals, which held that the assessee was entitled to depreciation. The tribunal upheld the CIT(A)'s order, following the precedent that the assessee is eligible for depreciation on the office building.

Conclusion:
The tribunal dismissed the Revenue's appeal for A.Y. 2003-04 and partly allowed the appeals for A.Y. 2006-07 to 2009-10 for statistical purposes. The assessee's appeals for A.Y. 2007-08 and 2009-10 were allowed for statistical purposes only. The tribunal's order was pronounced in open court on 18/06/2014.

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