2023 (11) TMI 336 - AT - Income Tax

Nature of expenses - project expenses - revenue or capital expenditure - HELD THAT - Identical issue was dealt with by the ITAT in the said year 2005-06 2022 (12) TMI 333 - ITAT AHMEDABAD wherein the ITAT had allowed the claim of the assessee treating the project expenses as incurred for the continuation of the existing business of the assessee only, and therefore, revenue in nature. Disallowance of interest paid to Sales Tax Authorities treating it as penalty - Interest on Completion of Assessment U/s.47(4) of the G.S.T. Act - HELD THAT - We have noted that the Hon ble Apex Court in the case of Lachmandas Mathuradas 1997 (12) TMI 16 - SUPREME COURT has categorically held that interest on outstanding balance of sales tax was compensatory in nature and hence allowable under Section 37(1) of the Act. In view of the proposition of law as above, we find merit in the contention of the ld. Counsel for the assessee that the amount paid to the Sales Tax Authorities for late payment of sales tax is to be allowed under Section 37(1) of the Act. The ground of appeal so raised by the assessee is, therefore, allowed. Disallowance of prior period expenses as reported in the Tax Audit Report - Since the assessee was unable to substantiate its claim to the said expenses in the said year on the reasoning that the expenses crystallized in the impugned year, the AO disallowed these expenses - HELD THAT - ITAT in the Assessment Year 2005-06 2022 (12) TMI 333 - ITAT AHMEDABAD wherein the order of the Ld.CIT(A) restoring the issue back to the file of the AO for verifying which prior period expenses crystalized during the year and directing him to allow all such prior period expenses, was upheld by the ITAT.In view of the same, we restore this issue back to the Assessing Officer to adjudicate the same afresh. Disallowance made of expenses relating to the earning of exempt income, as per the provisions of Section 14A - HELD THAT - The issue, therefore, admittedly stands covered in favour of the assessee by the order of the ITAT in the immediately preceding year i.e. AY 2005-06 2022 (12) TMI 333 - ITAT AHMEDABAD following which we direct the Assessing Officer to delete the disallowance made under Section 14A as held that it is a settled law that where sufficient interest free funds are available the presumption is that the investments have been made out of such funds calling for no disallowance of interest under section 14A of the Act. Hon ble Supreme Court in the case of Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT has laid down the above law. In the present case, therefore, invocation of Rule 8D by the ld.CIT(A), we hold is not in accordance with law. Further, noting that the assessee had sufficient owned interest free funds for the purpose of making the impugned investment, as demonstrated both to the Ld.CIT(A) and also before us and which fact has remained uncontroverted by the Revenue, we hold no disallowance of interest under section 14A of the Act is warranted. Disallowance of contribution made to Index-B Govt. of Gujarat for celebrating Gaurav Day Shardotsav - HELD THAT - We are in complete agreement with the Ld.CIT(A) that these expenses are nothing but donations made by the assessee. These expenses have not been incurred for the purpose of business of the assessee. They are merely contributions made to these entities. That some benefit would accrue to the assessee is only incidental. The purpose of incurring the expenditure is definitely not for the business of the assessee. The same have therefore, we hold, rightly been disallowed by the Ld.CIT(A). the facts being found to be different from A.Y 2005-06, the contention of the assessee that the issue is covered by the order of the ITAT in A.Y 2005-06 2022 (12) TMI 333 - ITAT AHMEDABAD is rejected. Disallowance of expenses for non deduction of tax at source u/s 40(a)(ia) - assessee had paid an amount to ATIRA, an approved Scientific Research Association - HELD THAT - The fact that ATIRA to whom payment was made by the assessee without deduction of tax at source is exempt from tax by virtue of CBDT Notification No.1325/DG/IT/E/CAL/G-33-35(1)(ii) dated 25.01.1995 has not been controverted by the Revenue. We have also noted that in the case of Essar Steel Ltd. 2013 (6) TMI 186 - ITAT MUMBAI has held that where the recipient is exempt from tax, there is no TDS liability on the payer and, therefore, no disallowance is warranted in such circumstances for non-deduction of tax at source. In view of the same, we find merit in the contention of the ld. Counsel for the assessee that there being no TDS liability on the assessee vis- -vis ATIRA, non-deduction to tax at source on the payment made to the assessee would not attract the provisions of Section 40(a)(ia) - disallowance made by the AO under the said section is, therefore, directed to be deleted. This ground of appeal of the assessee is accordingly allowed. Income from other sources - treating the income earned by the assessee from projects which was still under construction - HELD THAT - e issue, therefore, admittedly stands covered in favour of the assessee by the order of the ITAT in the immediately preceding year i.e. AY 2005-06 2022 (12) TMI 333 - ITAT AHMEDABAD following which we direct the Assessing Officer to treat the income from projects as Business income. Gross expenditure incurred on projects is to be allowed to the assessee and the income earned from these projects is to be treated as income from business and profession. Claim of depreciation in respect of leased buses to GSRTC - transaction was held to be ingenuine and colorable device intended to avoid taxation by claiming depreciation - HELD THAT - The issue, therefore, admittedly stands covered in favour of the assessee by the order of the ITAT in assessee s own case in the immediately preceding year i.e. AY 2005-06 2022 (12) TMI 333 - ITAT AHMEDABAD following which we direct the Assessing Officer to delete the disallowance made on account of depreciation of leased assets as in the present case the assessees lease and buy back arrangement has been held to be a colorable device on the basis of the special bench decision of the ITAT in IndusInd Bank 2012 (3) TMI 212 - ITAT MUMBAI which blanket proposition vis a vis lease and buy back arrangements has since been reversed by the Hon ble apex court 2013 (1) TMI 344 - SUPREME COURT and the Ld.DR has not distinguished the said case before us - Decided in favour of assessee. Nature of expenses - expenditure incurred for excavation of river diversion - treating it to be capital in nature, which in turn was upheld to the extent of 80% by the ld.CIT(A) - HELD THAT - Admittedly stands covered in favour of the assessee by the order of the ITAT in assessee s own case in the immediately preceding year i.e. AY 2005-06 2022 (12) TMI 333 - ITAT AHMEDABAD to hold, the assessee s claim of expenses incurred for excavation of river diversion as allowable revenue expense. Disallowance of depreciation and additional depreciation of Akrimota project - Claim denied denied on the ground that the project commenced operations in October 2005, though assessee claimed commencement in March 2005 when trial runs were done which contention was rejected by the authorities below HELD THAT - Admittedly stands covered in favour of the assessee by the order of the ITAT in assessee s own case in the immediately preceding year i.e. AY 2005-06 2022 (12) TMI 333 - ITAT AHMEDABAD held assessee had substantiated carrying on trial run, by pointing out that the power generated during the trial run had been sold to GEB which was evidenced by copy of invoices issued by the GEB, meter reading confirmed by the GEB and fact that power generation from the plant being reported in the newspaper. Considering the fact that the assessee had demonstrated carrying on trial runs with valid evidences, which have not been controverted by the Revenue despite being placed before both the authorities below, we cannot agree with the finding of the Revenue authorities that no trial run was conducted by the assessee. In view of the same, we hold that the assessee had rightly claimed deprecation - direct the Assessing Officer to delete the disallowance of depreciation - Decided in favour of assessee. Addition pertaining to accrued interest on doubtful advance made to GIIC - HELD THAT - As in the immediately preceding year 2022 (12) TMI 333 - ITAT AHMEDABAD , held no addition on account of interest on advances made to GIIC is tenable in the present year on mercantile basis. The addition therefore made is directed to be deleted. Addition made of lease rental charges and accrued interest on lease rental charges to be recovered from GSRTC - HELD THAT - We uphold the grievance of the assessee and direct the Assessing Officer to delete the addition made of lease rent and accrued interest on lease rent as what derives from the same is that GSRTC was not paying up the amounts due from it to the assessee. And for this reason the assessee had resorted to accounting for lease rental income from GSRTC on cash basis which aspect we have dealt with above. Besides, the assessee had filed resolution of Board of directors approving the write off of debts. The facts on record themselves establish the fact of debts from GSRTC becoming bad. The assessee therefore, we hold, is entitled to claim bad debts. MAT - addition to the book profits of the assessee for the purposes of paying tax thereon in terms of Section 115JB relating to disallowance of expenses made under Section 14A of the Act and FBT paid by the assessee - HELD THAT - We hold that the disallowance made under Section 14A is not required to be added back to the Book Profits of the assessee, nor the FBT paid to be added back to the Book Profits of the assessee under Section 115JB of the Act. The additions so made by the Assessing Officer is, therefore, directed to be deleted. This ground of appeal raised by the assessee is thus allowed. Payment made to commissioner, geology and Mining allowed and disallow that made to Index B Fund - As for payments made to advertisement agencies, we see no justification in the orders of the authorities below denying it for the reason that assessee not dealing it branded products it was not required to advertise its products. As long as the incurrence of the expenditure is not in dispute and there is also no dispute that it is for the purpose of business of the assessee, the claim cannot be denied by the Revenue gauging its necessity. The claim to expenses for advertisement in dailies is therefore allowed.

Summary

Issues Involved:
1. Disallowance of project expenses as capital expenditure.
2. Disallowance of interest paid to Sales Tax Authorities.
3. Disallowance of prior period expenses.
4. Disallowance of expenses related to earning exempt income under Section 14A.
5. Disallowance of contributions made to Index-B and Government of Gujarat.
6. Disallowance of expenses for non-deduction of tax at source under Section 40(a)(ia).
7. Treatment of income from projects under construction as income from other sources.
8. Rejection of claim of depreciation on leased buses to GSRTC.
9. Disallowance of expenditure for excavation of river diversion as capital expenditure.
10. Disallowance of depreciation and additional depreciation on Akrimota project.
11. Addition of accrued interest on doubtful advance made to GIIC.
12. Addition of lease rental charges and accrued interest on lease rental charges from GSRTC.
13. Additions to book profits under Section 115JB.

Summary:

1. Disallowance of Project Expenses as Capital Expenditure:
The Tribunal found that the disallowance of project expenses on the grounds that the projects were new and had not commenced was incorrect. It was held that the projects were a continuation of existing business and the expenses were revenue in nature. Therefore, the Tribunal directed the Assessing Officer (AO) to allow the project expenses incurred by the assessee.

2. Disallowance of Interest Paid to Sales Tax Authorities:
The Tribunal allowed the assessee's claim, holding that the interest paid for late payment of sales tax was compensatory in nature and allowable under Section 37(1) of the Act, following the Supreme Court's decision in Lachmandas Mathuradas Vs. CIT.

3. Disallowance of Prior Period Expenses:
The issue was restored to the AO to verify which prior period expenses crystallized during the year and to allow those expenses accordingly, following the Tribunal's order in the assessee's case for AY 2005-06.

4. Disallowance of Expenses Related to Earning Exempt Income Under Section 14A:
The Tribunal deleted the disallowance made under Section 14A, noting that Rule 8D was not applicable for AY 2005-06 and that the assessee had sufficient interest-free funds for making investments.

5. Disallowance of Contributions Made to Index-B and Government of Gujarat:
The Tribunal upheld the disallowance of contributions to Index-B and Government of Gujarat for Gujarat Gaurav Day and Sharad Utsav, finding them to be in the nature of donations and not incurred for business purposes.

6. Disallowance of Expenses for Non-Deduction of Tax at Source Under Section 40(a)(ia):
The Tribunal deleted the disallowance, holding that there was no TDS liability on the payment made to ATIRA, which was exempt from tax by CBDT notification.

7. Treatment of Income from Projects Under Construction as Income from Other Sources:
The Tribunal directed the AO to treat the income from projects under construction as business income, following its decision in the assessee's case for AY 2005-06.

8. Rejection of Claim of Depreciation on Leased Buses to GSRTC:
The Tribunal allowed the claim of depreciation on leased buses to GSRTC, following the Supreme Court's decision in ICDS Ltd., which recognized the genuineness of lease and buy-back arrangements.

9. Disallowance of Expenditure for Excavation of River Diversion as Capital Expenditure:
The Tribunal held that the expenditure incurred for diverting the course of the river was revenue in nature and allowable as it facilitated the assessee's mining operations.

10. Disallowance of Depreciation and Additional Depreciation on Akrimota Project:
The Tribunal allowed the claim of depreciation and additional depreciation on the Akrimota project, holding that the project had commenced operations during the year and the assessee was engaged in manufacturing activities.

11. Addition of Accrued Interest on Doubtful Advance Made to GIIC:
The Tribunal deleted the addition, holding that the interest on advances to GIIC was not certain of recovery and should not be accounted for on an accrual basis.

12. Addition of Lease Rental Charges and Accrued Interest on Lease Rental Charges from GSRTC:
The Tribunal directed the deletion of additions made on account of lease rental income and accrued interest on delayed lease rentals from GSRTC, as the recovery was uncertain and the assessee had adopted the cash basis of accounting for such income.

13. Additions to Book Profits Under Section 115JB:
The Tribunal held that disallowances made under Section 14A and Fringe Benefit Tax (FBT) should not be added back to the book profits for computing tax under Section 115JB, following judicial precedents.

Conclusion:
The appeals were partly allowed, with directions to the AO to follow the Tribunal's findings and allow or delete the disallowances and additions as per the detailed reasoning provided for each issue.