2019 (5) TMI 1380 - AT - Income Tax

Nature of expenses - expenditure incurred on shelved project and expenses incurred on preliminary studies, feasibility reports etc. on the projects which have not taken off - revenue or capital expenditure - HELD THAT - As decided in assessee's own case 2012 (4) TMI 731 - ITAT MUMBAI we allow the said expenses as business expenses of the assessee and uphold the decision of learned CIT(A). This issue is decided in favour of the assessee Accrual of income - Addition of foreign exchange gain on repatriation of certificates of deposits (Euro Notes) - assessee has received an income being surplus on buy back of Euro notes - HELD THAT - The assessee had raised Euro Notes in 1997 towards incurring capital expenditure. The said Euro Notes were partly redeemable in 2007 and remaining in 2017. On being asked, it is admitted by the assessee that the projects for which Euro Notes were raised were completed and interest expenditure has been claimed as an Revenue expenses. The assessee has prematurity redeemed the said Euro Notes at discount in the year under consideration and surplus has arisen on said premature buy back of Euro Notes. As observed that the assessee has filed a decision of Hon‟ble Bombay High Court, 2 2014 (7) TMI 12 - BOMBAY HIGH COURT for AY 2001-02 concerning profit on foreign exchange fluctuation on repatriation of proceeds of certificate of deposit to India, while presently we are concerned with gains arising on discount on buy back of Euro Notes due to premature redemption of aforesaid Euro Notes. Thus, issue in both the years were different. Surplus on buy back of Euro Notes - As observed in the case of Mahindra Mahindra Ltd. . 2018 (5) TMI 358 - SUPREME COURT has held in favour of the tax payer that waiver of loan for acquiring capital asset cannot be brought to tax either by invoking provisions of Section 28(iv) or Section 41(1) of the 1961 Act as noted that the tax-payer did not claimed deduction by way of interest expenditure u/s 36(1)(iii). However, in the instant case it is admitted by the assessee that the projects for which Euro Notes were raised were completed and the assessee had claimed deduction towards interest expenses u/s 36(1)(iii) as business/revenue expenses. Thus in our view this matter needs to be restored back to the file of the AO for re-adjudication of this matter denovo Ground of Revenue is allowed for statistical purposes Disallowance of provision for wages - accrued/crystallized liability and not an contingent liability - HELD THAT - It is not the case of the Revenue that the assessee has fraudulently inflated its claim by way of higher wages to defraud Revenue than what will be reasonably expected to emerge under the new revised wage settlement agreement which has to become effective from 01.01.2002. The assessee on its part has given a detailed computation of expected higher wages/salaries under revised wage settlement agreement to be entered into with employees effective from 01.01.2002, based on past experience and demand of workers/employees during negotiations. No fault was found by authorities below in the said computational working submitted by the assessee towards provision for wages made by it. The case of the revenue is that this provision for wages is only a contingent liability and not liability in praesenti, which we respectfully do not concur as in our considered view this is an liability in praesneti and is an accrued/crystallized liability which the assessee will be required to pay as only quantification is postponed to the signing of new revised wage settlement agreement. Under these circumstances we are in agreement with the decision of Ld. CIT(A) in granting relief to the assessee by following the decision of tribunal in assessee‟s own case for AY 1999-00 as this liability towards provision for wages is not a contingent liability but a liability in praesenti which is an crystallized /accrued liability of the assessee based on mercantile system of accounting by following matching principle of costs with income. Grant of deduction u/s. 80IA - Assessee has earned other income‟ in the case of Jojobera 67.5 MW unit and Belgaum 81.5MW unit respectively which was disallowed by learned CIT(A) on the grounds that the details have not been furnished by the assessee and certain income arose from the advances given to the employees and staff which could not be considered as income derived from undertaking for allowing deduction u/s 80IA - HELD THAT - Now the assessee has come forward and has submitted details to the tune of ₹ 23,43,201/- which is claimed to have been earned from sale of sludge arising from Belgaun unit and ledger account of sale of sludge account in books of account of Belgaun unit is produced for the first time before the tribunal. The said document albeit was part of books of accounts was not been verified by authorities below as contention of said other income‟ being derived from sale of sludge was not furnished/claimed before authorities below. CIT(A) has granted relief with respect to income from sale of scrap arising from the Jojobera Unit for granting deduction u/s. 80IA of the Act. Thus in our considered view this issue need to be set aside and restored to the file of AO for verification of the claim of the assessee that said income was earned from sale of sludge which was derived from Belgaun unit eligible for deduction u/s 80IA Allowability of deduction u/s 80IA on the taxable income after setting off brought forward unabsorbed depreciation of the units eligible for deduction u/s 80IA albeit assessee is claiming that said depreciation is already been set off against the income of the company as a whole in earlier assessment years - HELD THAT - As decided in own case 2016 (5) TMI 1476 - ITAT MUMBAI held that the notionally brought forward losses/ depreciation of the Jojobera 67.5 MW power generating unit for the period from the assessment year 1997-98 to 2001-02 which are already set off against the other business income in earlier years and set-off being allowed by the Revenue shall not be adjusted from the profit so computed by the assessee company with respect to Jojobera 67.5MW power generating unit for the assessment year 2002-03 for the purposes of computing deduction u/s.80IA of the Act. Thus issue decided in favour of the assessee. Treatment to income earned from broadband project during trial runs and income on scrap sale before capital projects were installed - revenue income or setting off such income against capital work-in-progress - HELD THAT - Both these income were inextricably linked with broadband project which was under installation and these income were earned during trial run phase/pre-installation phase and the assessee rightly reduced both the aforesaid income‟s from the capital work in progress and the same cannot be brought to tax as revenue income as were sought to be done by lower authorities. The assessee has rightly relied upon the decision of Hon‟ble Supreme Court in the case of Bokaro Steel Limited 1998 (12) TMI 4 - SUPREME COURT No hesitation in holding that income from broadband project during trial run phase as well income from sale of scrap during pre-installation of the project was rightly reduced by the assessee from capital work in progress and cannot be brought to tax as revenue receipts chargeable to tax. - Decided in favour of assessee Addition u/s. 40A(9) for payments made by assessee to local schools - assessee has suo motu voluntarily disallowed these expenses while filing return of income - Admission of additional evidence - HELD THAT - We are inclined to hereby admit this additional claim of the assessee towards deductions for making payment to local schools and then to restore this issue to the file of the AO for fresh adjudication on merits in accordance with law. AO shall admit all additional evidences/explanations submitted by the assessee during denovo proceedings in connection therewith the aforesaid claim of deduction and adjudicate the same on merits in accordance with law. The assessee is also directed to file all relevant details before the AO during denovo proceedings as to the payments made to local schools as well details of children of the employees who were studying in the said local school during the year under consideration to prove that these expenses were inextricably linked with the business of assessee and is wholly and exclusively incurred for the purposes of the business of the assessee and comply with the mandate of provision of Sec. 40A(9) and/or Section 37(1)

Summary

Issues Involved:
1. Allowability of expenses on shelved projects and feasibility studies.
2. Taxation of foreign exchange gain on repatriation of Euro Notes.
3. Disallowance of provision for wages.
4. Deduction under Section 80IA for "other income" and setting off brought forward unabsorbed depreciation.
5. Income from broadband project trial runs and sale of scrap as revenue income.
6. Disallowance under Section 40A(9) for payments to local schools.

Detailed Analysis:

1. Allowability of Expenses on Shelved Projects and Feasibility Studies:
The assessee claimed expenses on shelved projects (?1,68,94,456) and feasibility studies (?9,16,589) as revenue expenses. The AO treated these as capital expenses and disallowed them. The CIT(A) allowed the expenses as revenue in nature, following earlier decisions in the assessee's favor. The Tribunal upheld the CIT(A)'s decision, noting that the expenses were connected with the existing business and were incurred for commercial expediency. The Tribunal referenced its previous ruling for AY 2002-03, affirming that such expenses are business expenses.

2. Taxation of Foreign Exchange Gain on Repatriation of Euro Notes:
The AO added ?2,31,67,715 as income from the surplus on buyback of Euro Notes, treating it as taxable. The CIT(A) deleted the addition, following earlier decisions in favor of the assessee. The Tribunal initially upheld the CIT(A)'s decision based on past rulings but later restored the issue to the AO for re-adjudication, considering the Supreme Court's decision in Mahindra & Mahindra Ltd., which held that waiver of loan for acquiring capital assets cannot be taxed. The Tribunal directed the AO to re-examine the issue considering the Supreme Court's judgment and other relevant decisions.

3. Disallowance of Provision for Wages:
The AO disallowed the provision for wages (?19,81,60,000) as contingent liability. The CIT(A) allowed the claim, noting that similar provisions were allowed in earlier years (AY 1999-2000). The Tribunal upheld the CIT(A)'s decision, agreeing that the provision was an accrued liability based on past experience and demands during negotiations, not a contingent liability. The Tribunal referenced the Supreme Court's decision in Bharat Earth Movers, affirming that such provisions are allowable business expenses.

4. Deduction Under Section 80IA for "Other Income" and Setting Off Brought Forward Unabsorbed Depreciation:
The AO reduced the deduction u/s 80IA by excluding "other income" from Jojobera and Belgaum units. The CIT(A) partially allowed the deduction but excluded certain incomes. The Tribunal restored the issue to the AO for verification of the assessee's claim that the income was from the sale of sludge and should be considered for deduction u/s 80IA. Regarding the setting off of brought forward unabsorbed depreciation, the Tribunal followed its earlier decision for AY 2002-03, allowing the deduction without adjusting the notional brought forward losses/depreciation, in line with the CBDT's Circular No. 1/2016 and relevant High Court rulings.

5. Income from Broadband Project Trial Runs and Sale of Scrap as Revenue Income:
The AO treated the income from broadband project trial runs (?9,81,38,257) and sale of scrap (?1,27,67,139) as revenue income. The CIT(A) upheld the AO's decision. The Tribunal reversed this, holding that the income was inextricably linked with the project under installation and should be reduced from capital work in progress, referencing the Supreme Court's decision in Bokaro Steel Limited.

6. Disallowance Under Section 40A(9) for Payments to Local Schools:
The AO disallowed the claim for payments to local schools (?29,36,361) as it was not claimed in the return of income. The CIT(A) upheld the disallowance. The Tribunal admitted the additional claim and restored the issue to the AO for fresh adjudication, directing the AO to verify the claim and consider it on merits, referencing the Bombay High Court's decision in Pruthvi Brokers & Shareholders and the Supreme Court's decision in Jute Corporation of India Limited.

Conclusion:
The Tribunal provided detailed rulings on each issue, upholding some of the CIT(A)'s decisions, restoring certain issues to the AO for re-examination, and allowing new claims for fresh adjudication. The decisions were based on past rulings, relevant case laws, and CBDT circulars, ensuring a comprehensive review of each matter.