2015 (4) TMI 725 - AT - Income Tax

Disallowance of survey charges - Held that - The assessee was acting as an advisor to the Government of Maharashtra and was required to implement port development programme in Maharashtra. For this purpose, it has to incur various expenses which was recoverable from the successful bidders. As apparent from the records, these expenses have been incurred in the assessment year 1997-98. The only reason given by the learned Commissioner (Appeals) is that, since these expenses were incurred on behalf of others which was recoverable, the assessee should not have debited the expenses to the profit and loss account. Such a view cannot be affirmed because the assessee could have either shown this amount in the balance- sheet as expenses recoverable or could have debited these expenses in the profit and loss account and claimed it as expenses and as and when these expenses are recovered, the same could have been offered for tax. The assessee has followed the second step, which in our opinion cannot be held to be incorrect. From the details of the break-up of the expenses, it is seen that most of these expenses relate to professional and technical fees for geotechnical investigations and various other expenses for advertisement, etc. It is not in dispute that these expenses have been incurred by the assessee in pursuance of the activities assigned to it. Now that these expenses have been offered for tax in the assessment year 1999-2000, when the same has been recovered from the concerned persons then there is no occasion to disallow the same in this year. - Decided in favour of assessee. Disallowance of deprecation on assets acquired under sale and leaseback transactions with Maharashtra Esters and Keytones P. Ltd. and Konkan Railway Corp. Ltd. - Held that - No reason to deviate from the findings of the learned Commissioner (Appeals) that the depreciation on the asset has to be disallowed which is claimed on normal lease transactions. Moreover, the Department has also accepted similar nature of normal lease transactions from the assessment year 1999-2000 onwards. Thus, the disallowance on normal lease transaction is set aside and is decided in favour of the assessee. Coming to the sale and leaseback transactions this issue has not been properly dealt with either by the learned Commissioner (Appeals) or by the Assessing Officer who has gone by the reasoning it is a colourable device either in the case of Konkan Railway Corp. Ltd. even in the case of Fujitsu ICIM Ltd. and Datar Switchgear Ltd. the issue has not been examined properly. In the absence of any proper material and record to come to such a finding, we are of the opinion that this matter needs to be restored back to the file of the Assessing Officer to examine it afresh. Thus the claim of depreciation on the assets pertaining to the aforesaid three sale and leaseback transactions which have been entered into this year is set aside to the file of the Assessing Officer to decide the issue afresh - Decided partly in favour of assessee for statistical purposes. Disallowance of renovation expenses - Held that - It is undisputed fact that these expenses were incurred for renovation of office on rented premises. The learned Commissioner (Appeals) has given a finding that it was very difficult to bifurcate the expenditure into revenue and capital, therefore, 50 per cent. of such expenses, as admitted by the assessee, was treated as capital expenditure and the balance as revenue. From the case law relied upon by the assessee, it is seen that the courts have held that in cases of repairs and renovation on rented premises, they have to be treated as revenue expenditure. Once 50 per cent. of the expenditure has been disallowed as capital expenditure, we do not find any reason to deviate from such findings, as allowance of 50 per cent. of revenue expenditure actually meet the ends of justice in these facts and circumstances. - Decided against revenue. Deduction under section 80M on the dividends earned - Revenue challenged deduction allowed without deducting the interest therefrom - Held that - there is no dispute that the borrowing of the assessee has been purely for the purpose of business and none of the borrowed funds were utilised for making the investment in the shares. Once this is so, the judgment of the hon'ble jurisdictional High Court in Emrald Co. Ltd. 2005 (9) TMI 50 - BOMBAY High Court is squarely applicable, wherein the High Court has held that interest on borrowing and other expenditures incurred during the course of carrying on the business are allowable as deduction while computing the business income, these expenditures cannot once again be deducted from the dividend income for the purpose of computing deduction under section 80M and the deduction has to be granted with reference to the gross dividend. - Decided against revenue. Disallowance under section 14A on account of proportionate administrative expenses - Held that - The Bombay High Court, in Godrej and Boyce Mfg. Co. Ltd. 2010 (8) TMI 77 - BOMBAY HIGH COURT has held that in case of earning of an exempt income, some reasonable basis for allocating the expenditure has to be worked out. The Assessing Officer has worked out an expenditure of ₹ 64,28,000, which, in our opinion, is too high and excessive looking to the fact that the assessee is not engaged mainly in the investment. Since the assessee is buying shares of the company by way of financing to promote such companies for industrial development in backward area, certain administrative cost has to be allocated. In our considered opinion, one percent (1 per cent.) of the administrative expenses should be disallowed and that would be a reasonable allocation of administrative expenses for the purpose of earning exempt income. Thus, the disallowance is restricted to one per cent. of administrative expenses. - Decided partly in favour of revenue. Exclusion of provision of bad debt while working out book profit under section 115J - Held that - Now this issue stands covered by the judgment of the hon'ble Supreme Court in CIT v. HCL Comnet Systems and Services Ltd. (2008 (9) TMI 18 - SUPREME COURT ) and hold that the provisions for bad debt and leave salary cannot be included in the computation of book profit and the same has to be excluded. - Decided against revenue. Entitlement to exemption under section 10(23G) on net interest income receivable - Held that - ow the notification under section 10(23G) is available, therefore, the matter is restored back to the file of the Assessing Officer who shall verify the notification and accordingly grant exemption to the assessee if it is entitled for it under the law - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Disallowance of survey charges.
2. Disallowance of depreciation on assets acquired under sale and leaseback transactions.
3. Disallowance of renovation expenses.
4. Deduction under section 80M on dividend income.
5. Disallowance under section 14A on account of proportionate administrative expenses.
6. Exemption under section 10(23G) for interest income.
7. Provision for bad debt while computing book profit under section 115J.

Issue-wise Analysis:

1. Disallowance of Survey Charges:
The assessee challenged the disallowance of survey charges of Rs. 19,75,520 incurred for the port development program of the Government of Maharashtra. The Assessing Officer disallowed the claim on the grounds that the expenses were not crystallized in the assessment year 1997-98 and were to be recovered from successful bidders. The Commissioner (Appeals) upheld the disallowance, stating these were not the assessee's business expenses. The Tribunal found that since the expenses were incurred as per the Government's direction and were offered for tax in the assessment year 1999-2000, the disallowance was not justified. Consequently, the Tribunal allowed the ground raised by the assessee.

2. Disallowance of Depreciation on Sale and Leaseback Transactions:
The assessee claimed depreciation on leased assets, which the Assessing Officer disallowed, treating them as financial leases. The Commissioner (Appeals) categorized the leases into normal leases and sale and leaseback transactions, allowing depreciation on normal leases but disallowing it for sale and leaseback transactions with Maharashtra Esters and Keytones P. Ltd. and Konkan Railway Corp. Ltd. The Tribunal upheld the allowance of depreciation on normal leases but restored the issue of sale and leaseback transactions to the Assessing Officer for fresh examination, emphasizing the need to verify the genuineness of these transactions.

3. Disallowance of Renovation Expenses:
The assessee incurred Rs. 77,66,359 for renovating rented office premises, out of which Rs. 73,19,509 was claimed as revenue expenditure. The Assessing Officer disallowed the entire amount as capital expenditure. The Commissioner (Appeals) treated 50% as capital and 50% as revenue expenditure. The Tribunal upheld this bifurcation, treating the allowance of 50% as revenue expenditure as meeting the ends of justice.

4. Deduction Under Section 80M on Dividend Income:
The assessee claimed deduction under section 80M on gross dividend income. The Assessing Officer deducted proportionate finance and interest charges, resulting in a negative amount, thus denying the deduction. The Commissioner (Appeals) allowed the deduction without deducting interest, following the Tribunal's decision in the assessee's own case. The Tribunal confirmed this decision, citing the jurisdictional High Court's judgment in CIT v. Emrald Co. Ltd., which supports granting deduction on gross dividend income.

5. Disallowance Under Section 14A on Account of Proportionate Administrative Expenses:
The Assessing Officer disallowed proportionate administrative expenses for earning dividend income. The Commissioner (Appeals) held that no administrative expenditure was attributable to earning dividend income. The Tribunal, following the jurisdictional High Court's decision in Godrej and Boyce Mfg. Co. Ltd., directed a reasonable allocation of 1% of administrative expenses for disallowance under section 14A.

6. Exemption Under Section 10(23G) for Interest Income:
The assessee's claim for exemption under section 10(23G) was disallowed due to the absence of necessary approval/notification. The Tribunal restored the matter to the Assessing Officer for verification of the notification and directed to grant exemption if the assessee is entitled under the law.

7. Provision for Bad Debt While Computing Book Profit Under Section 115J:
The Assessing Officer included provisions for bad debt and leave salary in the computation of book profit. The Commissioner (Appeals) excluded these provisions, relying on the jurisdictional High Court's decision. The Tribunal affirmed this exclusion, following the Supreme Court's judgment in CIT v. HCL Comnet Systems and Services Ltd., which supports excluding such provisions from book profit computation.

Conclusion:
All the assessee's appeals and the Revenue's appeals were treated as partly allowed for statistical purposes, with specific directions for fresh examination or verification by the Assessing Officer where necessary. The Tribunal's decisions were guided by relevant case laws and principles of consistency and proper examination of facts.