2024 (7) TMI 832 - AT - Income Tax

Deduction claimed u/s. 36(1)(viii) - interest income from housing finance for non-residential purposes - excluding the amounts in computing the profits eligible for deduction u/s 36(1) (viii) - HELD THAT - As following the appellate order for AY 1998-99 in assessee s own case 2024 (1) TMI 1300 - ITAT MUMBAI it is held that for Assessment Year 1999-2000, there being no material change in facts and applicable law, the disallowance made by the AO is to be allowed after recomputing the income eligible for deduction u/s. 36(1)(viii) afresh in accordance with the directions noted in the aforesaid appellate order for Assessment Year 1998-99 and allow the deduction accordingly. Thus, ground no.2 is partly allowed. Allocation of provisions for contingencies and interest on foreign currency borrowings - As we direct AO to apportion part of the cost towards the income which has been held to be not eligible for claiming deduction u/s. 36(1)(viii), since interest income from housing finance for non-residential purpose has been held to be not eligible for deduction u/s. 36(1)(viii). Also, in respect of other expenses we set aside the allocation done by the ld. AO on ad-hoc basis in the ratio of 80 20 towards income from housing finance and income other than from housing finance and adopt the recomputed ratio in terms of our directon. Considering our observations and findings, certain income has been recharacterized as income from eligible business and those from ineligible business activities. Accordingly, ld. Assessing Officer is directed to reallocate such cost in the ratio as finally determined consequent to the findings given herein on re-characterisation of income into eligible and ineligible business. Ground No.2.4 is partly allowed. Disallowance of expenses towards earning of exempt income u/s. 10(33) - allocation of other expenses, as expenditure incurred in relation to earning the dividend income - HELD THAT - As per assessee own case 2024 (1) TMI 1300 - ITAT MUMBAI AY 1998-99 we also hold that no interest cost need to be adjusted against the dividend income for the purpose of exemption u/s. 10(33). Also, with regard to allocation of other expenses, we direct the AY to reallocate the same based on actual ratio of the investments yielding exempt income to the total average assets for the relevant financial year and consider the same for the purpose of exemption u/s. 10(33). Accordingly, ground no.3 is partly allowed. Disallowance u/s. 14(A) in respect to income-tax free bonds and section 10(23) bonds - HELD THAT - It is an admitted position that the assessee is having own funds more than the amount invested in the tax free bonds. Further the impugned investments as per the submissions of the assessee are resulting in both exempt as well as taxable income. We place reliance on the decision of the coordinate bench in the case of Prakash K. Shah Shares Securities Pvt. Ltd 2016 (12) TMI 47 - ITAT MUMBAI to hold that no disallowance is warranted u/s. 14A. The disallowance made in this regard is deleted. Accordingly, ground no.4 is allowed. Nature of receipt - addition made on account of receipt of non-compete fees treated as revenue receipt - HELD THAT - As in the present case, the amount received by the assessee as non-compete fee under a negative covalent is a capital receipt. We are in agreement with the ld. Counsel for the submissions made by him before us which are narrated in the above paragraphs. Further, in this respect, we have perused the relevant clause of the non-compete agreement which is extracted above. We also note that it is only w.e.f. 01.04.2003 vide Finance Act, 2002 that the said capital receipt is brought to tax through section 28(va). The said section is held to be prospective since it is mandatory and not clarificatory in nature. We have also taken note of the exception 1 to section 27 of the Indian Contract Act, 1872, in respect of agreement in restraint of trade which otherwise is to be treated as void. In the present case, the agreement is in respect of transfer of business requiring certain pre-conditions to be fulfilled subject to which a restrain is put on the assessee in the form of negative covenant. The restriction in the agreement is with regard to restricted business which also has been defined in the said agreement. Assessee has received the amount for undertaking the restraining obligation and therefore it cannot be treated as business income in the year under consideration which is much prior to the amendment brought in by the Finance Act, 2002. Thus, we hold that noncompete fee received by the assessee under the negative covenant is in the nature of capital receipt not exigible to tax since it relates to Assessment Year 1999-2000. Accordingly, ground no.5 taken by the assessee is allowed. Disallowance made towards discount amortised in the accounts towards stock options granted to its employees by holding the same as capital in nature - HELD THAT - Considering the facts on record and the judicial precedents discussed above, we find that the issue is covered by the aforesaid judicial precedents in the case of Biocon ltd. 2020 (11) TMI 779 - KARNATAKA HIGH COURT and PVR ltd. 2022 (8) TMI 1234 - DELHI HIGH COURT in favour of the assessee. Respectfully following the same, the ground taken by the assessee in this respect is allowed.

Summary

Issues Involved:
1. Disallowance of Provision for Exchange Loss on Foreign Currency Loans
2. Deduction under Section 36(1)(viii) of the Income-tax Act, 1961
3. Computation of Income from Dividends Exempt under Section 10(33) of the Act
4. Computation of Income in Respect of Tax-Free Bonds and Section 10(23G) Bonds
5. Addition on Account of Receipt of Non-Compete Fees
6. Disallowance of Entertainment Expenses
7. Disallowance of Guest House Expenses

Detailed Analysis:

1. Disallowance of Provision for Exchange Loss on Foreign Currency Loans
The assessee did not press ground No.1 (1.1 to 1.3) regarding the provision for exchange loss on foreign currency borrowings arising out of the reinstatement of loan balances for all three appeals. Accordingly, the same was dismissed as not pressed in all three appeals.

2. Deduction under Section 36(1)(viii) of the Income-tax Act, 1961
The assessee claimed a deduction of Rs. 99,25,79,867/- under section 36(1)(viii). The AO noted that the assessee included various incomes that did not fulfill the test of being derived directly from the business of providing long-term finance for residential purposes. The AO reallocated expenses and recomputed the income from housing finance business, disallowing a significant portion of the claimed deduction.

The Tribunal referred to its earlier decision in the assessee's case for AY 1998-99, which allowed certain categories of income to be included in the computation of profits eligible for deduction under section 36(1)(viii). The Tribunal directed the AO to re-compute the income eligible for deduction afresh, following the directions and findings from the earlier case.

3. Computation of Income from Dividends Exempt under Section 10(33) of the Act
The AO had disallowed interest and other expenses related to earning dividend income exempt under section 10(33). The Tribunal, following its earlier decision in the assessee's case for AY 1998-99, held that no interest cost should be adjusted against the dividend income for the purpose of exemption under section 10(33). The AO was directed to reallocate administrative expenses based on the actual ratio of the investments yielding exempt income to the total average assets for the year.

4. Computation of Income in Respect of Tax-Free Bonds and Section 10(23G) Bonds
The AO had disallowed interest and other administrative expenses related to tax-free bonds and Section 10(23G) bonds. The Tribunal, following its earlier decision, deleted the disallowance, holding that the assessee had sufficient own funds to cover the investments and that the investments resulted in both exempt and taxable income.

5. Addition on Account of Receipt of Non-Compete Fees
The AO treated the non-compete fee of Rs. 5 crores received by the assessee as revenue receipt. The Tribunal, following the decisions of the Hon'ble Supreme Court in Guffic Chem (P) Ltd. and Shivraj Gupta, held that the non-compete fee received under a negative covenant is a capital receipt and not taxable for the year under consideration. The Tribunal allowed the ground in favor of the assessee.

6. Disallowance of Entertainment Expenses
The AO disallowed entertainment expenses claimed by the assessee. The Tribunal, following its earlier decision in the assessee's case for AY 1998-99, held that the AO had not provided specific reasons for the disallowance and confirmed the CIT(A)'s decision to allow the expenses.

7. Disallowance of Guest House Expenses
The AO disallowed guest house expenses claimed by the assessee. The Tribunal, following its earlier decision in the assessee's case for AY 1998-99, held that the AO had not provided specific reasons for the disallowance and confirmed the CIT(A)'s decision to allow the expenses.

Conclusion:
The Tribunal allowed the appeals of the assessee in part, directing the AO to re-compute the deductions and disallowances in accordance with the Tribunal's directions and findings. The appeals by the Revenue were partly allowed, with the Tribunal dismissing the grounds related to entertainment and guest house expenses, and directing the AO to follow the Tribunal's earlier decisions regarding the disallowance of interest and other expenses related to dividend income and tax-free bonds.