2023 (1) TMI 652 - AT - Income Tax

Addition u/s 68 - Unexplained share capital - unexplained cash credit - HELD THAT - though, before the departmental authorities the assessee furnished some documentary evidences to prove the genuineness of the share capital and the creditworthiness of the concerned persons contributing towards share capital, however, they were not to the satisfaction of the AO and Commissioner (Appeals). Before us, learned counsel appearing for the assessee has submitted that both the persons, namely, Mr. Sanjay Malhotra and Mr. Ajay Singh, who have invested in share capital of the assessee are again back on the Board of the assessee company and assessee is willing to produce them before AO not only to prove the identity and creditworthiness of the concerned persons but even the genuineness of the transaction. Considering the above submissions of the assessee, we are inclined to grant opportunity to the assessee to produce Mr. Sanjay Malhotra and Mr. Ajay Singh for examination before the AO to prove the creditworthiness of the concerned persons and the genuineness of the transaction. TDS u/s 195 - Payment of royalty under India Netherlands Double Taxation Avoidance Agreement - aircraft maintenance cost - payment made is in the nature of royalty, on which, assessee was required to withhold tax under section 195 Assessing Officer made disallowance under section 40(a)(i) - HELD THAT - As per the definition of royalty under the new India Netherlands DTAA, issued vide notification No. SO-6 93 E , dated 30.08.1999, the expression royalty has been amended with retrospective effect from 01.04.1998, and would mean payment of any kind received as a consideration for the use of or the right to use any copyright of literary, artistic or scientific work, including, cinematograph film, any patent, trademark, design or model, plan, secret formula or process or for information concerned, inter alia, commercial, scientific experience. Thus, as against the definition of royalty before its amendment, wherein leasing/hiring of equipment etc. was included in the expression royalty , in the amended provision, amount received from leasing/hiring of equipment been specifically excluded. Therefore, as per the meaning of royalty under the Treaty applicable to the impugned assessment year, leasing/hiring of equipment will not constitute royalty. Though Commissioner (Appeals) has given a categorical finding to the effect that as per the new provision of the Treaty it is not taxable as royalty, however, since the AO has not examined the issue in the aforesaid perspective, he has directed the Assessing Officer to examine it and allow assessee s claim of exemption. We do not find any deficiency or irregularity in the aforesaid direction of Commissioner (Appeals). Accordingly, we dismiss the ground raised. Nature of expenditure - expenditure incurred on implementation of software system for booking tickets - allowable capital expenditure - HELD THAT - Undisputedly, the expenditure incurred by the assessee is for purchasing a software for its ticket booking system. In case of Amway India Enterprises 2008 (2) TMI 454 - ITAT DELHI-C the Special Bench of the Tribunal has held that expenditure incurred in software which gives enduring benefit is of capital nature. In fact, in the depreciation schedule under the Statute, computer software is treated as an asset, on which, depreciation is allowable at the rate of 60%. In fact, the Assessing Officer has allowed depreciation at the prescribed rate. In view of the aforesaid, we do not find any reason to interfere with the decision of learned Commissioner (Appeals). Current repair and maintenance expenditure - Revenue or capital expenditure - HELD THAT - On verifying the details of expenditure, it is observed that learned Commissioner (Appeals) has allowed 5% as revenue expenditure after taking note of certain items of expenditure, such as, DG set fuel etc. The details furnished do not provide any detail, nature of major expenditure, such as, office renovation and maintenance, repairs and maintenance of office furniture, office facility and maintenance. It has to be seen, whether by incurring such expenditure any asset of enduring benefit has been created by the assessee. Since, the nature and character of each of the expenditure is not verifiable from the material on record, we direct the Assessing Officer to verify each item of expenditure and thereafter decide the character of expenditure, whether revenue or capital, and accordingly allow deduction, either under section 37(1) or 32 of the Act. This, ground is allowed for statistical purposes. Nature of expenditure claimed on leased aircrafts - HELD THAT - Reading of case of Goetz (India) Ltd. 2006 (3) TMI 75 - SUPREME COURT would make it clear that the restriction in entertaining a fresh/new claim otherwise than through a revised return of income is only applicable to the proceeding before the Assessing Officer and not appellate authority. It is fairly well settled, there are no fetters on the appellate authority in entertaining a fresh claim/additional ground raised by the assessee, if it can be decided based on the facts available on record. In the facts of the present appeal, all necessary and relevant facts relating to assessee s revised claim of revenue expenditure is available on record. Commissioner (Appeals should have adjudicated the issue by admitting the additional ground raised by the assessee - we are inclined to restore it back to the Assessing Officer for examining assessee s claim and deciding it in accordance with law, after providing due and reasonable opportunity of being heard to the assessee. This ground is allowed for statistical purposes. Addition of expenses on Foreign Currency Convertible Bonds (FCCBs) - AO Amortized the expenditure over the five year period of bonds assuming that the FCCBs cannot be redeemed, repurchased, cancelled etc., either at the option of the assessee or the company before the bond period of five years - CIT-A deleted the addition - HELD THAT - In cases where the nature of revenue expenditure is such that the same can be clearly and unambiguously identified over the specified time period akin to prepaid expenses, the same would be allowable over a period to which these relate proportionally applying the matching principle. However, in other cases where same does not result in the creation of capital asset or where the same is not allocable over defined future time periods, there can be no case for amortizing it under the Act over the expected period over which the benefit is likely to arise there from, since, in such cases the expenditure is essentially revenue in nature but is amortized in the books only on account of some other considerations. Assessee s case stands on much stronger footing as the assessee has not amortized the expenses in its books. In fact, the Assessing Officer does not dispute the nature of expenditure as revenue. Deferred revenue expenses incurred on training and acquisition/endorsement of mandatory license of pilots - CIT-A deleted the addition - HELD THAT - As far as the nature of expenditure incurred, there is no doubt that the expenditure was incurred towards training and license to fly of the pilots. The fact that the expenditure incurred is of revenue nature is not disputed. Only because, in its books of accounts the assessee had deferred it over a period of 5 years, AO has restricted the expenditure to 1/5th of the amount actually incurred. However, in case of Taparia Tools Ltd. 2015 (3) TMI 853 - SUPREME COURT has observed that the entries made in the books of account are not determinative of the nature of the expenditure. Commissioner (Appeals) has rightly observed that by incurring the expenses the assessee cannot be said to be deriving a benefit which can clearly and unambiguously be identified over specified future time period. Though, the benefit from the expenses is derived in future years also, however, the same cannot be allocable to a definite period of time. Once, it is held to be a revenue expenditure, it has to be allowed in the year wherein the expenditure is incurred. There is no doubt that the assessee has incurred the expenditure in the impugned assessment year. Therefore, the expenses have to be allowed fully. Addition u/s 40(a)(i) - Supplemental Rent/Maintenance Reserve - HELD THAT - As per the agreement, responsibility of the assessee is only to carry out minor repair works which are required to be done in the normal course of operation. All major repairs like replacement, overhauling etc. are the responsibility of the lessor. It has been factually found that the cost incurred in respect of normal repairs and replacement of routine spares etc. is not included in the supplemental rent. Thus, as rightly observed by the first appellate authority, for payments which are covered in the exceptional clause of section 10(15A) of the Act, it is not the assessee who is making the payment. On the contrary, it is the lessor who is making such payment to the lessee. Supplemental rent was determined taking into consideration a number of flying hours and had character of basic rent, said payment would be exempt from tax in the hands of lessor in India as per section 10(15A) of the Act, hence, no disallowance under section 40(a)(i) can be made - no disallowance under section 40(a)(i) can be made in respect of supplemental rent. Payments made towards engine guarantee availability fee - the amount is not deductible to tax at the hands of the payee as it is in the nature of business receipts in case of the non-resident company and in absence of PE it is not taxable in India. Insofar as the payment made towards repair of rotables not only it can be taxed at the hands of the non-resident in India in absence of PE as per India UAE DTAA it cannot be treated as FTS in absence of any FTS clause in the Treaty. In any case of the matter, it is a fact on record that the entire repair work was carried out outside India, therefore, the assessee had no liability to deduct tax as the income was not taxable in India. Insofar as the expenses on Logo printing, the revenue has failed to demonstrate that the make available condition under Article 12(4B) of the Treaty is fulfilled. Therefore, the amount is not taxable at the hands of the non-resident company in India. That being the case, the assessee has no liability to deduct tax at source. Disallowance u/s 40A(2) - assessee has taken on rent a residential apartment with parking space from Mrs. Meghla Sharma - residential apartment was acquired by Mr. Siddhanta Sharma, husband of the landlady, who was in the Board of Directors and executive chairman of the company - HELD THAT - On a reading of sections 40A(2) of the Act, it becomes clear that any payment made to a related party, if considered to be unreasonable and excessive, having regard to the market rate for such goods and services, then disallowance under section 40A(2) can be made. In the facts of the present appeal, the Assessing Officer has made the disallowance relying upon certain information obtained through a search in the internet. The source and authenticity of such information obtained by the Assessing Officer remains doubtful. Even, the Assessing Officer has not confronted the information received to the assessee to get a rebuttal. The information obtained by the Assessing Officer certainly cannot be said to be the prevailing market rate of rent as it is not from any authentic source. Disallowance u/s 14A - HELD THAT - We find no deficiency in the order of learned Commissioner (Appeals) in directing the Assessing Officer to factually verify assessee s claim in the light of the ratio laid down in the decision referred to by him. However, since the issue has now been decided by Hon ble Supreme Court in case of Maxopp Investments Ltd. 2018 (3) TMI 805 - SUPREME COURT the Assessing Officer is directed to decide the issue keeping in view the ratio laid down by the Hon ble Supreme Court. Ground raised is dismissed. Delayed remittance of TDS is allowable under section 37(1) - HELD THAT - As in case of Chennai Property Investment 1998 (4) TMI 89 - MADRAS HIGH COURT has held that the interest paid on delayed remittance of TDS is not allowable as deduction under section 37(1) of the Act. No contrary decision of any other High Court has been brought to our notice by learned counsel appearing for the assessee. Therefore, respectfully following the decision of the Hon ble Madras High Court, we uphold the disallowance.

Summary

Issues Involved:
1. Addition under Section 68 of the Income-tax Act.
2. Nature of payment to KLM Engineering and Maintenance.
3. Capitalization of software expenditure.
4. Capitalization of repair and maintenance expenditure.
5. Depreciation on leased aircrafts.
6. Expenses on issue of Foreign Currency Convertible Bonds (FCCBs).
7. Deferred revenue expenses on training and license of pilots.
8. Disallowance under Section 40(a)(i) for various payments.
9. Premium payable on redemption of FCCBs.
10. Disallowance under Section 40A(2) for excessive rent.
11. Disallowance under Section 14A for exempt income.
12. Deductibility of interest paid under Section 201(1A).

Detailed Analysis:

1. Addition under Section 68 of the Income-tax Act:
The assessee challenged the addition of Rs.13.50 crores under Section 68. The Assessing Officer (AO) added this amount as unexplained cash credit due to lack of confirmation from the concerned persons. The Tribunal restored the issue back to the AO, allowing the assessee to produce the concerned persons and any other evidence to substantiate the claim.

2. Nature of Payment to KLM Engineering and Maintenance:
The AO disallowed Rs.1,32,00,000/- paid to KLM Engineering and Maintenance, treating it as royalty under the India-Netherlands DTAA. The Commissioner (Appeals) found that the payment was not royalty under the amended DTAA definition and directed the AO to verify the claim. The Tribunal upheld this direction, noting that leasing/hiring of equipment is excluded from the definition of royalty under the DTAA.

3. Capitalization of Software Expenditure:
The AO treated Rs.13,98,512/- spent on software for ticket booking as capital expenditure and allowed depreciation. The Tribunal upheld this decision, referencing the ITAT Special Bench decision in Amway India Enterprises, which treated software expenditure as capital in nature.

4. Capitalization of Repair and Maintenance Expenditure:
The AO disallowed Rs.3,96,14,684/- out of Rs.4,16,99,667/- claimed as repair and maintenance, treating it as capital expenditure. The Tribunal directed the AO to verify each item of expenditure to determine its nature and allow it accordingly under Section 37(1) or 32 of the Act.

5. Depreciation on Leased Aircrafts:
The AO restricted depreciation on leased aircrafts to 15% instead of 40%. The Tribunal restored the issue to the AO for examining the assessee's claim that the expenditure should be treated as revenue expenditure, as the aircrafts were leased, not owned.

6. Expenses on Issue of FCCBs:
The AO amortized FCCB issue expenses over five years. The Tribunal upheld the Commissioner (Appeals) decision allowing the entire expenditure in the year incurred, referencing the Supreme Court decision in Taparia Tools Ltd. vs. JCIT.

7. Deferred Revenue Expenses on Training and License of Pilots:
The AO allowed only 1/5th of the deferred revenue expenses claimed by the assessee. The Tribunal upheld the Commissioner (Appeals) decision allowing the full expenditure in the year incurred, citing the Supreme Court decision in Taparia Tools Ltd.

8. Disallowance under Section 40(a)(i) for Various Payments:
The AO disallowed various expenses under Section 40(a)(i) for non-deduction of TDS. The Tribunal upheld the Commissioner (Appeals) decision, noting that supplemental rent and other payments were not taxable in India under the relevant DTAA provisions, and therefore, no TDS was required.

9. Premium Payable on Redemption of FCCBs:
The AO disallowed the premium payable on redemption of FCCBs as capital expenditure. The Tribunal upheld the Commissioner (Appeals) decision allowing the premium as revenue expenditure, consistent with the treatment in earlier years.

10. Disallowance under Section 40A(2) for Excessive Rent:
The AO disallowed Rs.7,00,000/- as excessive rent paid to a related party. The Tribunal upheld the Commissioner (Appeals) decision deleting the disallowance, noting that the AO relied on unauthenticated information from the internet.

11. Disallowance under Section 14A for Exempt Income:
The AO disallowed Rs.59,97,880/- under Section 14A read with Rule 8D. The Tribunal upheld the Commissioner (Appeals) direction to verify the assessee's claim that no expenditure was incurred for earning exempt income in light of the Supreme Court decision in Maxopp Investments Ltd. vs. CIT.

12. Deductibility of Interest Paid under Section 201(1A):
The Tribunal upheld the disallowance of interest paid on delayed remittance of TDS, following the Madras High Court decision in Chennai Property & Investment.

Conclusion:
The appeals were partly allowed for statistical purposes or dismissed based on the detailed analysis of each issue, with directions for fresh examination or verification where necessary. The Tribunal's decisions were consistent with established legal principles and precedents.