2020 (11) TMI 458 - AT - Income Tax

Deduction u/s 37(1) - Non granting claim holding the expenditure on write off of investment as a capital expenditure and the write off of medical expenses for employees as not being incurred for the purpose of business - disallowing merely on the basis that corresponding income has not been offered to tax in any earlier year - HELD THAT - The assessee was awarded a project by the NHAI on DBFOT basis - The assessee decided to conduct the project through an existing non-operational company of the Group (M/s IDFC Capital Co Ltd which was renamed as JSHL) and designated the same as the SPV required for undertaking the project. The assessee owned 74% of the share capital of the SPV for which it had paid ₹ 7,40,000/-. However, the NHAI rejected the application to designate JSHL as the SPV. As a result, the SPV was wound up and since no consideration was received by the assessee on account of winding up of the SPV, the entire investment in JSHL was written off. In the instant case, the write off is nothing but write off of an expenditure on an abandoned project ; the project in question had inextricable link with the assessee s existing business and hence, the expenditure is allowable as revenue expenditure u/s 37(1) of the Act. On the basis of the above reasons, we delete the disallowance made by the AO. Payment of bonus - Assessee has claimed bonus expenses out of total eployees salary - HELD THAT - In the instant case, the assessee had set up a Special Purpose Vehicle (SPV) i.e. Dheeru Powergen Ltd. to implement 1050 MW (3x350 MW) coal based thermal power plant at District Korbar, in the State of Chhattisgarh. That in spite of all the efforts put in by the assessee, the project could not take off because of many limitations. Finally, the assessee decided in its Board Meeting held on March 7, 2012 to exit the non-coal business. In such a situation, there is merit in the contentions of the assessee before the Ld. CIT(A) that Mr. Pradeep Singh(Group head of public sector initiatives) having experience of 34 years was authorized to handle the process identifying a buyer to exit from Dheeru Powergen Limited and also to discuss, negotiate and finalize the drafts of the agreement. That in financial year 2012-13, the team was successful in negotiating the deal with a buyer for purchase of Dheeru Powergen Ltd. at an upfront consideration of ₹ 15 crore. That the payment of bonus was commensurate with the efforts rendered by the team over a period of time in order to exit the Project. Considering the above, we delete the ad-hoc disallowance made by the AO.

Summary

Issues involved:
- Disallowance of bad debt and medical expenses
- Disallowance of bonus expenses
- Dismissal of penalty proceedings under Section 271(1)(c)

Analysis:

1. Disallowance of bad debt and medical expenses:
The appellant, a public limited company engaged in infrastructure projects, filed an appeal against the order of the CIT(A) disallowing a sum of &8377; 8,21,987 as bad debt written off and medical expenses. The AO disallowed the amount as it was not offered as income in earlier years. The CIT(A) affirmed the disallowance stating that the write-off of investment and medical expenses were capital expenditures and not incurred for business purposes. However, the ITAT found that the write-off was related to an abandoned project with an inextricable link to the appellant's business, making it allowable as revenue expenditure under Section 37(1) of the Income Tax Act. Therefore, the disallowance was deleted.

2. Disallowance of bonus expenses:
The appellant claimed bonus expenses in its profit and loss account, which the AO ad-hoc disallowed as justification was not provided. The CIT(A) upheld the disallowance, stating it was not commensurate with individual qualifications and experience. However, the ITAT noted that the bonus payment was linked to efforts to exit a project and was justified based on the team's successful negotiation with a buyer. Consequently, the ad-hoc disallowance was deleted.

3. Dismissal of penalty proceedings under Section 271(1)(c):
The appellant's appeal also challenged the dismissal of penalty proceedings under Section 271(1)(c) by the CIT(A), who deemed it premature. As the disallowances were deleted, the ITAT found the penalty proceedings premature and did not uphold them.

In conclusion, the ITAT partially allowed the appeal, ruling in favor of the appellant regarding the disallowances of bad debt, medical expenses, and bonus expenses. The penalty proceedings under Section 271(1)(c) were deemed premature and not upheld.