2011 (4) TMI 792 - AT - Income Tax

Appeal partly allowed on disallowances due to merit in assessee's arguments. Bonus payment, interest disallowance overturned.

The appeal was partly allowed as the tribunal found merit in the assessee's arguments regarding various disallowances. The disallowance of bonus payment ... Deduction of bonus disallowed - Amendment to section 43B - Bonus paid prior to the due date of filing of return of income u/s 139(1) - Held that:- In view of judgment of CIT v. Alom Extrusions Ltd. [2009 (11) TMI 27 - SUPREME COURT] deletion of second proviso to section 43B by Finance Act, 2003 is retrospective and it would operate with effect from 1-4-1988 - Accordingly, the amount paid before the date of filing of the return u/s 139(1) is not hit by disallowance u/s 43B - No doubt, the assessee is required to furnish evidence of such payment along with the Income-tax return but then in the present case, the return was filed on 24-10-2005 and the bonus payment is made after the date of filing of the return i.e., 30-10-2005 - substantive requirement is payment within the time permissible for filing of Income-tax return u/s 139(1) and furnishing the evidence is a procedural requirement. The evidence of payment was duly furnished before the CIT(A)- Decided in favour of assessee. Payment of donation - exemption u/s 80G - Held that:- It is noted that the assessee has paid ₹ 5,000 towards donation for temple construction but no proof of exemption, under section 80G, was filed at any stage of proceedings - Against assessee. Deduction of interest on borrowed fund - Held that:- Since, the assessee is quite justified in contending that no part of the interest paid on borrowings could be treated as having been used for the purposes of investments, and, accordingly, no disallowance u/s 14A can be made in respect of the same. The disallowance in respect of interest is deleted - Having held so, however, a reasonable portion of management expenses can indeed be disallowed under section 14A, and for that limited purpose and for fresh adjudication in the light of principles laid down in the case of Godrej & Boyce Mfg. Co. Ltd. v Dy. CIT [2010 (8) TMI 77 - BOMBAY HIGH COURT], the matter is restored to the file of the Assessing Officer. Indexation benefit denied - loss on sale of preference shares - Held that:- Second proviso to section 48 provides that, 'where long-term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the words 'cost of acquisition' and 'cost of any improvement', the words 'indexed cost of acquisition' and 'indexed cost of any improvement' had respectively been substituted' - Once shares are specifically covered by indexation of costs, and unless there is a specific exclusion clause for ‘preference shares’, it cannot be open to the Assessing Officer to decline indexation benefits to preference shares. Net profit as per clause (iii) to Explanation 1 to section 115JB - Held that:- The Authority for Advance Ruling, not being a part of the judicial hierarchy, cannot lay down a binding precedence for anyone - the revenue, the assessees or the appellate authorities - It was not open to the CIT(A) to simply brush them aside on the ground that the issue is covered against the assessee by an AAR ruling - The CIT(A) was, therefore, clearly misguided in treating the matter as covered against the assessee by the AAR ruling - He ought to have decided the matter on merits and by way of a speaking order dealing with all the contentions of the assessee by way of a speaking order. Issues Involved:1. Disallowance of bonus payment under Section 43B.2. Disallowance of donation payment.3. Disallowance of interest under Section 14A.4. Lump sum disallowance of Rs. 1,00,000.5. Denial of indexation benefit on the sale of preference shares.6. Adjustment under clause (f) to Explanation 1 to Section 115JB.7. Non-reduction of Rs. 25,34,023 from net profit as per clause (iii) to Explanation 1 to Section 115JB.Issue-wise Detailed Analysis:1. Disallowance of Bonus Payment under Section 43B:The assessee contested the CIT(A)'s decision to disallow the deduction of Rs. 1,05,008 for bonus payments under Section 43B, despite making the payment before the due date for filing the return under Section 139(1). The Assessing Officer (AO) disallowed the claim due to a lack of evidence attached to the return. The CIT(A) upheld this disallowance, emphasizing the need to furnish evidence with the return. However, the tribunal found merit in the assessee's grievance, citing the Supreme Court's judgment in CIT v. Alom Extrusions Ltd., which clarified that the deletion of the second proviso to Section 43B is retrospective. The tribunal concluded that the substantive requirement was the payment within the permissible time, and furnishing evidence was procedural. Since the evidence was provided before the CIT(A) and the tribunal, the disallowance was deemed incorrectly sustained, and the appeal was allowed.2. Disallowance of Donation Payment:The assessee's claim for a Rs. 5,000 donation for temple construction was disallowed due to the absence of proof of exemption under Section 80G. The tribunal upheld the CIT(A)'s decision, finding no infirmity in the order, and dismissed this ground of appeal.3. Disallowance of Interest under Section 14A:The AO disallowed Rs. 2,92,593 under Section 14A, attributing it to investments made from borrowed funds. The CIT(A) upheld this disallowance, relying on the judgment in CIT v. Abhishek Industries Ltd. The tribunal, however, disagreed, noting that the investments were made from own funds and subsequent borrowings for business use did not imply the use of borrowed funds for investments. The tribunal referenced the Supreme Court's disapproval of the Abhishek Industries principle in Munjal Sales Corpn. v. CIT. Consequently, the disallowance of interest was deleted, but the tribunal remitted the matter back to the AO to determine a reasonable portion of management expenses attributable to investments, in line with the principles laid down in Godrej & Boyce Mfg. Co. Ltd. v Dy. CIT.4. Lump Sum Disallowance of Rs. 1,00,000:This issue was addressed along with the interest disallowance under Section 14A. The tribunal remitted the matter to the AO for fresh adjudication, considering the principles from the Godrej & Boyce case.5. Denial of Indexation Benefit on Sale of Preference Shares:The AO denied indexation benefits on the sale of preference shares, arguing that their prices do not fluctuate like equity shares. The CIT(A) upheld this decision. The tribunal found this stance without merit, stating that the law clearly allows indexation for shares unless specifically excluded. Since preference shares were not excluded, the tribunal directed the AO to grant indexation benefits, allowing the appeal.6. Adjustment under Clause (f) to Explanation 1 to Section 115JB:The CIT(A) confirmed the adjustment due to the disallowance under Section 14A. Since the tribunal deleted the disallowance under Section 14A, the foundation for this adjustment was invalidated, and the tribunal allowed the appeal.7. Non-reduction of Rs. 25,34,023 from Net Profit as per Clause (iii) to Explanation 1 to Section 115JB:The CIT(A) rejected the assessee's contention, treating the issue as covered by the ruling in Rashtriya Ispat Nigam In re. The tribunal noted that AAR rulings are not binding precedents and that the CIT(A) should have addressed the assessee's contentions on merits. The tribunal remitted the matter back to the CIT(A) for a de novo adjudication, directing a speaking order addressing all contentions.Conclusion:The appeal was partly allowed, with several disallowances deleted or remitted for fresh adjudication, and specific reliefs granted to the assessee.