2014 (11) TMI 439 - AT - Income Tax

Entrance fees paid to club disallowed Held that - As decided in assessee s own case for the earlier assessment year, it has been held that an expenditure incurred on account of payment of membership entrance fee paid to the club is an allowable expenditure Decided against revenue. Disallowance u/s 14A Held that - As decided in assessee s own case for the earlier assessment year, it has been held that The Tribunal has set aside the issue to the file of the AO for fresh adjudication - In this year, the CIT(A) has already given direction to the AO to work out the disallowance on some reasonable basis thus, the order of the CIT(A) is upheld Decided against revenue. Expenses on software charges disallowed Held that - As decided in assessee s own case for the earlier assessment year, it has been held that the Tribunal relied upon CIT v/s Raychen RPG Ltd. 2011 (7) TMI 953 - Bombay High Court for coming to the conclusion that the expenditure incurred by the assessee on the software was in the nature of the revenue expenditure - if the expenditure incurred on software are to facilitate the assessee s business or enabling the management to conduct the business more efficiently or more profitably then it cannot be said to be in the nature of profit making and has to be treated as revenue expenditure - The expenditure incurred by the assessee on software was in the nature of revenue, hence, allowable as an expenditure Decided against revenue. Allowability of Set off and brought forward loss of amalgamating company against LTCG Whether the assessee company which is an amalgamated company should be allowed to set off and carry forward of the losses computed under the head capital gains which had arisen to the erstwhile amalgamating companies under the provisions of section 74 - Held that - The loss under the head capital gain is allowable to an assessee alone - There is no mention about the situation and the condition under which such a loss is allowed to be set-off and carried forward in the case of amalgamation, that is, to allow loss or set off loss of one assessee which has merged with another assessee - section 74 cannot be read or interpreted so as to give benefit of set-off and carried forward of losses under the head capital gains in the case of amalgamation and demerger, sans any specific provision therein Decided against assessee. Payments made to ex-managing directors disallowed Expenses to be treated as unexplained or not - Held that - The assessee in the explanation filed before CIT(A) has clearly explained the nature of expenditure and why such a payment has been made along with the approval and minutes of the AGM and the minutes of the board meeting - All the evidences have not been properly considered or appreciated by the CIT(A) thus, the matter is required to be remitted back to the AO for examination of the details, nature of payment and the evidences Decided in favour of assessee.

Issues Involved:
1. Deletion of disallowance of entrance fees paid to club.
2. Deletion of disallowance under section 14A read with rule 8D.
3. Deletion of disallowance of expenditure on software charges.
4. Non-allowance of set-off of brought forward loss of amalgamating company against long-term capital gain.
5. Disallowance of payments made to ex-managing directors.

Detailed Analysis:

1. Deletion of Disallowance of Entrance Fees Paid to Club:
The Revenue questioned whether the CIT(A) erred in deleting the disallowance of Rs. 33,30,000 on account of entrance fees paid to the Cricket Club of India, which the assessee claimed as revenue expenditure. The Assessing Officer had disallowed this claim, referencing decisions from the Gujarat and Kerala High Courts. However, the CIT(A) allowed the claim based on the jurisdictional High Court's decision in Otis Elevator Co. India Ltd. v/s CIT, which treats corporate membership fees as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, affirming that the expenditure incurred on club membership entrance fees is allowable as revenue expenditure, relying on the precedent set in the assessee's own case for the assessment year 2004-05.

2. Deletion of Disallowance under Section 14A Read with Rule 8D:
The Revenue challenged the CIT(A)'s deletion of the disallowance of Rs. 88,00,992 under section 14A read with rule 8D. The assessee had received exempt dividend income of Rs. 2,97,82,326 but made no disallowance for related expenditure. The Assessing Officer applied rule 8D to make the disallowance. The CIT(A), following the jurisdictional High Court's decision in Godrej & Boyce Mfg. Co. Ltd. v/s DCIT, held that rule 8D was not applicable for the assessment year 2006-07 and directed a reasonable disallowance. The Tribunal noted that this issue had been set aside to the Assessing Officer for fresh adjudication in earlier years and upheld the CIT(A)'s direction for a reasonable basis for disallowance, dismissing the Revenue's ground.

3. Deletion of Disallowance of Expenditure on Software Charges:
The Revenue contested the deletion of disallowance of software charges amounting to Rs. 3,74,37,137. The Assessing Officer had disallowed this expenditure, treating it as capital expenditure, while the CIT(A) deleted the addition, treating it as revenue expenditure. The Tribunal found that in earlier years, similar expenses were treated as revenue expenditure based on various High Court decisions, including CIT v/s Raychem RPG Ltd., which held that software expenditure facilitating business operations is revenue in nature. The Tribunal upheld the CIT(A)'s decision, affirming that the software expenditure is revenue expenditure, dismissing the Revenue's ground.

4. Non-Allowance of Set-Off of Brought Forward Loss of Amalgamating Company Against Long-Term Capital Gain:
The assessee appealed against the CIT(A)'s decision confirming the Assessing Officer's action of not allowing the set-off of Rs. 30,00,000 of brought forward loss of the amalgamating company against long-term capital gain. The Assessing Officer held that section 72A, which deals with the accumulation of losses, applies only to business losses and not to capital losses. The CIT(A) upheld this view, noting that section 74 does not provide for the set-off of capital losses in cases of amalgamation. The Tribunal agreed, stating that section 74 does not allow for the set-off and carry forward of capital losses in amalgamation cases, affirming the CIT(A)'s decision and dismissing the assessee's ground.

5. Disallowance of Payments Made to Ex-Managing Directors:
The assessee challenged the disallowance of payments made to ex-managing directors amounting to Rs. 1,97,12,000. The Assessing Officer disallowed these payments due to lack of proper explanation and legal validity. The CIT(A) confirmed the disallowance, stating that the assessee could not substantiate the payments with proper evidence. The Tribunal found that the assessee had provided detailed explanations and evidence before the CIT(A), which were not properly considered. Therefore, the Tribunal remanded the issue back to the Assessing Officer for fresh examination, allowing the assessee's ground for statistical purposes.

Conclusion:
The assessee's appeal is partly allowed for statistical purposes, and the Revenue's appeal is dismissed. The Tribunal affirmed the CIT(A)'s decisions on the deletion of disallowances related to club entrance fees, section 14A, and software charges, while remanding the issue of payments to ex-managing directors for further examination. The Tribunal upheld the CIT(A)'s decision on the non-allowance of set-off of brought forward capital losses in amalgamation cases.

← Previous Next →