2019 (3) TMI 137 - AT - Income Tax

Foreign exchange loss on reinstatement of closing balance of foreign currency loan amount - Capital or revenue - CIT (A) held that Exchange Loss on Restatement of Closing Balance of Foreign Currency Loan Amount which is essentially capital in nature is liable to be added back to the Total Income of the Assessee Company. - HELD THAT - assessee has opted not to press the ground. But in this appeal, assessee intend to argue the ground. We, however, carefully examined the submissions raised by the assessee recorded in the order of CIT(A) and we find that CIT(A) has properly adjudicated the issue and no interference therein is called for. Disallowance u/s 40A - Part disallowance of service charge paid to holding company - No doubt raised regarding service or payment - No allegation of excessive payment - No comparable - HELD THAT - We find that this service agreement was executed on 1.4.2009, according to which assessee was required to pay 0.5 % of the total turnover as fees for the services rendered by the holding company MEMG International India Pvt. Ltd. AO has not doubted the payment made by the assessee to MEMGIIPL on account of services rendered by them. But he has made the disallowance of its part without assigning any reason. He has not brought any comparable case to demonstrate that the payment made by the appellant is in excessive. Therefore, we are of the view that without bringing any cogent material on record to demonstrate that the payment made by the appellant is in excessive no disallowance can be made; more so in the light of the fact that both the companies are assessed to Income tax at maximum marginal rate - disallowance made by the AO is not proper and accordingly we set aside the order of the CIT(A) and delete the additions. Disallowance u/s 14A - HELD THAT - CIT(A) has re-examined the claim of the assessee and reiterated its contentions that no expenditure was incurred in earning the dividend income. The CIT(A) re-examined the claim in the light of provisions of section 14A r.w.r. 8D of the Rules and was of the view that indirect cost attributable towards exempted income has to be disallowed for which it has to be computed as per Rule 8D(2)(iii) of the Rules. Now aggrieved, assessee is before us and during the course of hearing he could not demonstrate that no indirect expenditure was incurred to earn the exempted income from the investment of ₹ 1.52 crores. Therefore, we find no infirmity in the order of the CIT(A). Allowable revenue expenditure - Expenses related to abandoned project without acquiring any new asset - HELD THAT - The expenditures incurred was an account of expansion of business and the project was finally abandoned without acquiring any new asset for enduring benefit, therefore, the entire claim is allowable as revenue expenditure. But the CIT(A) spread over the entire claim for 5 years and allowed 1/5th of the claim in the impugned assessment year and these findings are not challenged by the assessee. Therefore, we are confirming the order of the CIT(A) passed in this regard having found no merit in the contention of the Revenue that the expenditures are of capital in nature. Slump sale - transfer of business as envisaged u/s 2(42C) - HELD THAT - The capital gain cannot be computed as per provisions of section 50B of the Act. Since we have held that it is not a slump sale of a going concern, we find no justification to deal with the other issues with regard to the net worth of the assets and its cost of acquisition and computation of capital gain. So far as receipt of ₹ 10 lakh by the assessee on account of transfer of hospital business is concerned, no argument was advanced by the Revenue. The assessee however offered this amount by way of long term capital gain under section 50B in his return of income. Since we have already held that it is not a transfer of business as a going concern as it is not a slump sale and capital gain cannot be computed, the receipt of ₹ 10 lakhs be taxed in accordance with law in the hands of the assessee. We also do not wish to adjudicate other issues with regard to inclusion of land and building to the transferred undertaking while calculating net worth and whether net worth of a capital asset can be in negative figure. Accordingly, we set aside the order of the CIT(A) and delete the additions made in this regard. Disallowance invoking provisions of section 40A(2) - HELD THAT - No disallowance can be made without establishing that claim raised by the assessee is excessive against the fair market rate. Since we have taken a view on similar set of facts, we find no justification to adjudicate the issue again in this appeal. Accordingly, we set aside the order of the CIT(A) and direct the AO to allow the claim of the assessee. Dividend incomes on investment in its subsidiaries - HELD THAT - In the instant case, whatever arguments is advanced before us it was not advanced before the lower authorities. Moreover, he has not furnished the detailed explanations with regard to expenditure incurred for earning exempted income. He blatantly said that no expenditure was incurred and this stand of the assessee cannot be accepted in the light of the fact that investment was made to the tune of ₹ 1.943 crore on which assessee has earned the exempted income. Therefore, we are of the view that lower authorities have rightly adjudicated the issue in the light of given facts and circumstances of the case. Disallowance u/s 14A - HELD THAT - We find that AO has computed the disallowance invoking the provisions of section 14A r.w.r. 8D of the Rules. While doing so, the AO did not examine the nature of investment whether the investment was made with the intention to earn dividend income or to make strategic investment in subsidiaries to have control over it. With regard assessment year 2011-12, we find that average of investment is to be taken. In that year, opening investment was Nil, therefore, the investment made in that year cannot be called to be the average investment. We however find force in the contention of the assessee that average investment should be ₹ 55.33 crores but it requires a proper adjudication. We accordingly set aside the order of CIT(A) in all assessment years and restore the issue to the file of the AO to re-examine the claim of the assessee in the light of nature of investments and also the opening and closing balance of investments. Disallowance of payments made to Allegro Corporate Finance Advisors Pvt. Ltd. treating the same as capital expenditure - HELD THAT - Expansion of business has already been examined by us in foregoing appeals and we have concluded that the expenditure incurred for the expansion of the existing business, should be treated as revenue expenditure. Therefore, following the same view, we hold in this case that since the expenditure was incurred for the expansion of the existing business in terms of new beds and services and aid in raising equity funds approximately 100 crores from the interested investors to finance its expansion plan is certainly a revenue expenditure and be allowed as deduction under section 37. Disallowance of consultancy fees paid to MHSPL -commercial expediency - HELD THAT - Once the assessee has already entered into agreement with its holding company for rendering the financial and management services, there is no justification to enter into separate agreement with the other group companies for which substantial amount is to be paid. The AO has doubted the very fact of rendering of certain services. During the course of hearing, nothing has been placed before us to specify a particular type of services rendered which could not be rendered by MEMG International Pvt. Ltd. In the light of these facts, we are of the view that the expenditure incurred by the assessee under this agreement is not on account of commercial expediency and we therefore are of the view that Revenue authorities have rightly disallowed the claim. Accordingly, we confirm the order of the CIT(A) in this regard in both the years. Set off brought forward of losses claimed by the assessee - AO has denied the assessee s claim in view of the fact that in the preceding assessment year 2011-12 vide order under section 143(3) the loss was set off against the addition made therein - HELD THAT - Before the CIT(A), the assessee has clarified his position and the CIT(A) has directed the AO to give necessary consequential effect in the light of finding of the CIT(A) in assessee s appeal for assessment year 2011-12. We do not find any infirmity in the directions. Now we have already disposed off the appeal of the assessee for assessment year 2011-12 and therefore the consequential effect is to be given in this impugned assessment year keeping in view the finding of the appeal of assessee for the assessment year 2011-12

Summary

Issues Involved:
1. Disallowance of foreign exchange loss.
2. Disallowance under section 40A(2) of the Income Tax Act.
3. Disallowance under section 14A of the Income Tax Act.
4. Treatment of expenditure incurred for developing a capital asset.
5. Computation of capital gains on slump sale under section 50B.
6. Disallowance of consultancy fees paid to Allegro Corporate Finance Advisors Pvt. Ltd.
7. Disallowance of payments made to holding company MEMG International Pvt. Ltd.
8. Disallowance of consultancy fees paid to MHSPL.
9. Set off of brought forward losses.

Detailed Analysis:

1. Disallowance of Foreign Exchange Loss:
The assessee claimed a foreign exchange loss of ?70 lakhs as revenue expenditure. The Assessing Officer (AO) disallowed this amount, treating it as capital in nature. The CIT(A) confirmed the AO's decision, stating that the loss on foreign exchange fluctuation was capital in nature and not allowable as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, noting that the loss was related to a capital item and could not be treated as a revenue expenditure.

2. Disallowance under Section 40A(2):
The AO disallowed 1/3rd of the service charges paid to the holding company MEMG International Pvt. Ltd., amounting to ?66,54,726 in one year and ?71,30,121 in another year, under section 40A(2), considering it excessive. The CIT(A) upheld this disallowance. However, the Tribunal noted that the AO did not provide any comparable cases to demonstrate that the payment was excessive and allowed the assessee's claim, stating that the disallowance was not justified without concrete evidence.

3. Disallowance under Section 14A:
The AO disallowed ?68,000 under section 14A read with Rule 8D, considering it as expenditure related to earning exempt dividend income. The CIT(A) confirmed this disallowance. The Tribunal upheld the CIT(A)'s decision, noting that the assessee could not demonstrate that no indirect expenditure was incurred to earn the exempt income.

4. Treatment of Expenditure Incurred for Developing a Capital Asset:
The AO treated an expenditure of ?3,95,19,428 incurred for developing a hospital project as capital expenditure. The CIT(A) partially allowed the claim, treating it as deferred revenue expenditure to be spread over five years. The Tribunal upheld the CIT(A)'s decision, noting that the expenditure was revenue in nature but should be spread over five years.

5. Computation of Capital Gains on Slump Sale under Section 50B:
The AO computed capital gains on the slump sale of the hospital business, including negative net worth in the calculation. The CIT(A) confirmed this computation. The Tribunal held that since the land and building were not transferred, it could not be treated as a slump sale under section 50B. The Tribunal set aside the CIT(A)'s order and deleted the additions made by the AO.

6. Disallowance of Consultancy Fees Paid to Allegro Corporate Finance Advisors Pvt. Ltd.:
The AO disallowed ?3,31,00,000 paid to Allegro Corporate Finance Advisors Pvt. Ltd. as capital expenditure. The CIT(A) confirmed this disallowance. The Tribunal, however, allowed the claim, treating it as revenue expenditure incurred for the expansion of the existing business.

7. Disallowance of Payments Made to Holding Company MEMG International Pvt. Ltd.:
The AO disallowed 50% of the service charges paid to MEMG International Pvt. Ltd. under section 40A(2). The CIT(A) confirmed this disallowance. The Tribunal, following its earlier decision, allowed the entire claim, noting that the disallowance was not justified without concrete evidence.

8. Disallowance of Consultancy Fees Paid to MHSPL:
The AO disallowed ?5 crore paid to MHSPL for management consultancy, citing lack of tangible proof of services rendered. The CIT(A) upheld this disallowance. The Tribunal confirmed the CIT(A)'s decision, noting that the expenditure was not justified by commercial expediency.

9. Set Off of Brought Forward Losses:
The AO disallowed the set off of brought forward losses, stating that they were nullified by the assessment order for the preceding year. The CIT(A) directed the AO to pass a consequential order based on the outcome of the appeal for the preceding year. The Tribunal upheld the CIT(A)'s decision, directing the AO to pass a consequential order in light of the Tribunal's findings.

Conclusion:
The Tribunal's detailed analysis addressed each issue comprehensively, providing clarity on the treatment of various disallowances and the computation of capital gains. The decisions were made based on the specific facts and circumstances of each case, ensuring that the legal principles were applied correctly.