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TMI Blog2017 (1) TMI 769X X X X Extracts X X X X X X X X Extracts X X X X ..... maintenance account with the above said figure. The net effect is that the assessee has already offered the sum of ₹ 62.00 lakhs as its income. Thus, we notice that the AO has assessed the above said amount of ₹ 62.00 lakhs without properly appreciating the facts, whereas the Ld CIT(A) has deleted the same by correctly appreciating the facts.- Decided in favour of assessee Disallowance made u/s 14A - Held that:- CIT(A) had restricted the disallowance to 10% of the dividend income in the succeeding year and the same has been accepted by the assessee. Accordingly, considering the factual matrix available during the year under consideration, we are of the view that the disallowance u/s 14A of the Act may be restricted to the same level of 10% of dividend income and the same, in our considered view, would work out to a reasonable figure for making disallowance. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to restrict the disallowance to 10% of the exempt dividend income earned by the assessee during the year under consideration. Addition on the basis of AIR information - According to Ld A.R, the assessee has reconciled the TD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y this common order, for the sake of convenience. 2. The assessee-company is engaged in the business of operating amusement park, infrastructure development management and finance activities. 3. We shall first take the appeal filed by both the parties for A.Y. 2006- 07. First issue contested by both of them relates to disallowance made by the Assessing Officer out of interest expenses claimed by the assessee. The Assessing Officer disallowed a sum of Rs. 1,48,10,695/- out of interest expenditure and telescoped the same against another interest disallowance of Rs. 13,62,536/-. The learned CIT(A) confirmed the disallowance of Rs. 13,62,536/- and deleted the disallowance of Rs. 1.48 crores referred above. Hence both the parties are in appeal before us on this issue. 4. Facts relating to the above said issue are stated in brief. During the year under consideration, the assessee has shown capital work-in-progress of Rs. 1.36 crores. The Assessing Officer took the view that interest expenditure relatable to the investment made in capital work-in-progress is required to be disallowed as per the proviso to section 36(1)(iii) of the Act. Accordingly, he worked out the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... progress is only Rs. 1.36 crores. Accordingly, he submitted that the ratio laid down by Hon'ble Bombay High Court in the case of Reliance Utilities (313 ITR 340) would squarely apply to the facts of the present case. He submitted that the loan funds have been used to make investments and the capital work-in-progress was met out of internal accruals and own funds. 10. Having heard the rival submissions on this issue, we find merit in the contentions of the assessee. We noticed that the assessee itself has admitted that loan funds have been used for giving share application money to its subsidiary. We also noticed that the own funds available with the assessee is in far excess of the capital work-in-progress. Hence, we are of the view that there is no requirement to make any disallowance out of interest expenditure on account of capital work-in-progress. Accordingly, we set aside the order passed by the learned CIT(A) on this issue and direct the Assessing Officer to delete the disallowance of Rs. 13,62,536/-. 11. With regard to the disallowance of expenditure of Rs. 1.48 crores, we noticed that the learned CIT(A) has analysed the issue in detail and has observed that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... what the sister-concern did with the money advanced the AO has relied upon the order of CIT v/s United Breweries (1973) 89 ITR 17 (Mys) to state that the said interest income was capital in nature and cannot be allowed. The AO has also relied upon the proviso to section 36 (I) (iii) of the IT Act to state that the investment in the shares of the subsidiary would need to be disallowed as interest-bearing loans had been used for advancing ₹ 25 crores as share application money to gain control of the said subsidiary. Stating this, the AO proceeded to disallow the entire interest expenditure of ₹ 1,48,10,695/- debited in the P L Account holding it to be capital in nature. In the submission made, it has been argued by the appellant that the AO has misunderstood the entire transactions. The submission of the appellant has been reproduced above in this order wherein it has been stated by the appellant that it is engaged in the business of infrastructure development management and finance in addition to its amusement park and water park. The wholly owned subsidiary to which these funds are provided to, take up the infrastructure project on behalf of the company. The finance p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... instant case in proper perspective and has taken a plausible view. Hence we do not find any reason to interfere with the order passed by him on this issue. 13. The next issue contested by the revenue relates to the disallowance of ₹ 62.00 crores relating to Repairs and Maintenance. The AO noticed that the repairs and maintenance expenses claimed by the assessee has increased during the year. When called for explanations, the assessee submitted that a fire has broken out in INS Prabal Ship (kept for public viewing in the park) and the assessee had incurred a sum of ₹ 78.97 lakhs in repairing the same. The AO noticed that the assessee had lodged insurance claim of ₹ 62 lakhs on account of fire and the claim was shown in the Balance Sheet under the head Loans and advances . The AO took the view that the assessee has not credited the insurance claim amount in the Profit and loss account and accordingly assessed the same as income of the assessee. 14. The Ld CIT(A) noticed that the assessee has credited Repairs and Maintenance A/c with the amount of ₹ 62.00 lakhs, referred above, and the net figure has been debited to Profit and Loss account. Accordingly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that the assessee has used its own funds only for making investments in the earlier years also. Accordingly it was submitted that the interest disallowance is not called for and the same has been accepted by Ld CIT(A) also. 18. We have noticed that the AO has disallowed a portion of administrative expenses by applying the provisions of Rule 8D(2)(iii) of I.T Rules. The year under consideration being AY 2006-07, the provisions of Rule 8D shall not apply to the year under consideration as per the decision rendered by Hon ble jurisdictional Bombay High Court in the case of Godrej Boyce Manufacturing Co Ltd (328 ITR 81). The Ld A.R submitted that the investment in M/s Zee Telefilms Ltd was made only on 28-03-2006, i.e., 3 days prior to the close of the year. We also notice that the assessee has held shares in two quoted companies, four unquoted companies, two subsidiaries and units in one mutual fund. The assessee has sold shares in two companies as discussed earlier and purchased shares in Zee Telefilms Ltd and other five companies. Besides the above, the assessee has received dividend income and earned Long term capital gains on sale of shares of two companies. Thus, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rect the assessee to assist the AO in collecting details from M/s Kamat Hotels P Ltd. 21. The next issue contested by the assessee relates to the disallowance of depreciation claim of ₹ 97,118/-. The AO noticed that the Tax auditor has reported in the tax audit report that the assessee has claimed 100% depreciation on machineries costing less than ₹ 5000/- each. The total amount of said claim was reported at ₹ 97,118/-. Since the Income tax Act does not provide for writing off of 100% in respect of machineries costing less than ₹ 5000/- each, the AO disallowed the above said claim. The Ld CIT(A) also confirmed the same, since the Tax auditor has reported the same. 22. The contention of the assessee is that it had claimed 100% depreciation on machineries costing less than ₹ 5000/- each, only under the Companies Act for book purposes and it has disallowed the entire amount of book depreciation while computing total income. It was submitted that the depreciation has been claimed for income tax purposes as per applicable rates only. 23. We have heard Ld D.R on this issue and perused the record. The question of disallowing depreciation claimed at h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it Loss Account as exceptional item. Submissions The assessee is engaged in the business of infrastructure development management and finance in addition to its amusement parks and water parks as per the Memorandum of Association of the company. The name of the company is also changed from Pan India Paryatan Limited to Essel Infraprojects Limited to reflect the addition to the infrastructure business activities carried on by the company. The business of infrastructure requires filing bids, tenders for getting work i. e. Roads, bridges, Airports, Ports etc to prove capabilities to execute such contract and price to be charged for the contract etc. These bids many times fail for any reason including technical or financial reasons and the lowest with technical capabilities wins the bid. For making bid or tender submission requires highly technical knowledge financial and commercial understanding and sometimes require help of outside consultants, JV Partners, etc. for technical and financial support all these require huge expenses to be incurred. The question arises in whether such expenses on the tenders, bids for getting business in the line of business of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technical and financial bid for the said project by the AAI. The ultimate bid was however given in favour of other competitive bidder. During the year the assessee has incurred expenses of ₹ 27,675,530/-for the purpose of making designing, layouts and other documents required for the purpose of the bid. The details of expenses are enclosed. The expenses mainly consists of Consultants Fees of ₹ 14,058,745/- and Bank Guarantee and other related bank charges of ₹ 8,411,034/, As the ultimate bid was awarded to some other bidder, the expenses have been debited to Profit and Loss account for the year and grouped under Exceptional Items, as required by Accounting Standard. The Ld A.0. has altogether gone on wrong notion and misunderstanding of facts and hence he termed these expenses being pre-operative or precommencement hence capital in nature. He considered the project as new line of business hence capital in nature. It is proposal and in principle approval of Govt. etc makes it capital in nature as per the observations of the Ld A.0. and Company's proposal to take up the project through its WOS-Essel Airports Infrastructure Pvt. Ltd. Contrary t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsonal expenses hence allowable u/s 37 of the Act. The Ld A.0. has observed that these expenses are reflected as exceptional item and shown below the line in Profit Loss Account as also netted off against profit on sale of Jaipur Park hence he concluded that these are capital in nature. The nature of expenses is not decided by its disclosure in the accounts. The revenue and capital or any other item can be grouped under exceptional items below the line as per accounting standard or accounting practice and it is mainly done so that results of operations can be clearly visible to the stakeholders. The exceptional item are exceptional including non-recurring, huge in volume amount which can distort company's operational results hence grouped and shown separately. While grouping the revenue and capital in one group does not change in nature of each other. Finally the way in which the accounting entries are made by an assessee does not decide the nature or allowability of expense. Hon 'ble Supreme Court in Badridas Daga (34 ITR 10) after referring to the decision in Chimavis case, Gresham Life Assurance Society vs Styles and Pondicherry Railways Cos case, their Lor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would arise only if the assessee is creating its own capital asset. In this case, the assessee is, inter alia, engaged in infrastructure development. The object clause of the assessee makes it clear the objective of formation of the assessee company. Even though the assessee might not have carried the infrastructure development business earlier, the very fact that the assessee changed its name would show that the assessee has commenced the infrastructure development business in this year. This fact is further fortified by the fact that it has submitted its bid to acquire infrastructure projects. The impugned bidding expenses have been incurred by the assessee in connection to filing bids for infrastructure development and it could not succeed in the bidding. 27. The Ld CIT(A) has observed that the assessee has capitalized the expenses, which appears to be against the facts available on record. The AO himself has observed that the assessee has claimed the impugned expenses as deduction under the head Exceptional items in the Profit and Loss account. Thus, we notice that the Ld CIT(A) has proceeded to decide this issue on wrong appreciation of facts. 28. In our view, these ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Consistent with the view taken therein, we uphold the view taken by Ld CIT(A) on this issue. 32. The next issue contested by the revenue relates to the disallowance made u/s 14A of the Act. The AO computed the disallowance u/s 14A of the Act as per Rule 8D of IT rules. The Ld CIT(A) restricted the disallowance to 10% of the dividend income. Revenue is aggrieved by the said decision of Ld CIT(A). 33. We have heard the parties on this issue. The Hon ble jurisdictional Bombay High Court has held in the case of Godrej Boyce Manufacturing co ltd (328 ITR 81) that the provisions of Rule 8D shall be applicable from AY 2008-09 onwards. It has further held that the disallowance u/s 14A should be computed on a reasonable basis for earlier years. We have considered an identical issue in AY 2006-07 and taken the view, by considering the disallowance upheld by Ld CIT(A) in AY 2007-08, that disallowance of 10% of the dividend income would be a reasonable disallowance in view of limited activities in the investment portfolio. The Ld A.R submitted that the facts are identical in AY 2007-08 also. We notice that the Ld CIT(A) has restricted the disallowance to 10% of the dividend income and th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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