2019 (12) TMI 982 - AT - Income Tax

Addition of interest income - assessee had earned interest on the deposits in its bank account out of funds received by the assessee to be used as its own and the claim of transfer of the interest income to the payer was in contravention to provisions of section 60 - HELD THAT - We find that identical issue in the case of the assessee for the assessment year 2009-10 has been decided by the Tribunal in favour of the assessee CIT (A) has also made finding of fact that out of total interest earned by assessee interest related to this account. CIT(A) has also made a finding of fact that the conditions stipulated for grants of funds to the appellant clearly provides that interest earned on the deposits shall be utilized for cost of the projects by way of adjustment in the last instalment and therefore there was no difference between funds granted by the Government and the interest credited by the bank in the account of the appellant. We find that learned CIT (A) has correctly allowed relief to the assessee and we do not find any infirmity in his order. Expenditure was incurred on social responsibility activities - HELD THAT - In comparison to the business turnover of the assessee, the amount incurred on community development and welfare is very miniscule amount and has been incurred to encourage a conducive atmosphere in the area of working of the assessee. In view of the fact, the finding of the ld. CIT(A) that expenditure has not been incurred wholly and exclusively for the purpose of business can not be said to be correct. The Tribunal in the case of National Seeds Corporation Ltd. 2018 (4) TMI 335 - ITAT DELHI has held the above Explanation 2 to be prospective and not to be operated retrospectively. Since the assessment year involved in the instant case is A.Y. 2012-13, the above Explanation cannot be invoked in the case of assessee. Accordingly, the expenditure incurred of ₹ 5,99,893/- on community Development and welfare is allowed. Ground of appeal of the assessee is allowed. In the result, the appeal of the assessee is allowed.

Summary

Issues involved:
1. Disallowance of interest income earned on deposit of advances received from Rural Electrification Company (REC).
2. Disallowance of community development & welfare expenses.

Detailed Analysis:

1. Disallowance of interest income earned on deposit of advances received from Rural Electrification Company (REC):
The case involved cross-appeals by the assessee and the Revenue against the order of the Commissioner of Income-tax (Appeals) for the assessment year 2012-13. The Revenue challenged the deletion of addition of interest income of ?64,16,15,379, arguing that the interest earned on deposits in the bank account was in contravention of Section 60 of the Income Tax Act. The assessee's appeal raised concerns about the disallowance of interest income. The Tribunal noted that in previous assessment years, similar issues had been decided in favor of the assessee by the Tribunal, the Delhi High Court, and the Supreme Court. The Tribunal referred to findings that the interest earned was to be utilized towards the cost of the projects and not treated as income of the assessee. The High Court upheld the decision, emphasizing that the interest income would depend on the subsequent use as agreed upon in the MOU. The Supreme Court also upheld the High Court's decision. Consequently, the Tribunal upheld the deletion of the disallowance, dismissing the Revenue's appeals.

2. Disallowance of community development & welfare expenses:
The assessee's appeal challenged the disallowance of ?5,99,893 on the account of community development & welfare expenses. The assessee argued that the expenses were incurred for social responsibility activities in the area where project activities were conducted, thus being wholly and exclusively for the purpose of business. The Tribunal considered the nature of the expenses and the proportion to the business turnover, finding the amount to be minimal and aimed at fostering a conducive atmosphere in the operational area. The Tribunal noted that Explanation-2 to section 37(1) prohibiting expenditure on corporate social responsibility was inserted prospectively from 01.04.2015. Since the assessment year in question was 2012-13, this provision did not apply. Relying on a previous case law, the Tribunal allowed the expenditure on community development and welfare. Consequently, the Tribunal allowed the appeal of the assessee, dismissing the Revenue's appeal.