2012 (8) TMI 633 - AT - Income Tax

Tribunal grants partial relief under Section 80IA(4) Income-tax Act; highlights need for commercial expediency

The Tribunal granted partial relief to the assessee by allowing the deduction under Section 80IA(4) of the Income-tax Act, 1961, for engaging in ... Deduction under Sec 80IA(4) - AO denied the claim of the assessee on the ground that assessee was not developer rather a work contractor – Held that:- there is no requirement that the assessee should have been the owner of the infrastructure facility. - the contractor and the developer cannot be viewed differently. Every contractor may not be a developer but every developer developing infrastructure facility on behalf of the Government is a contractor. The term ‘contractor’ is not necessarily contradictory to the term ‘developer’. On the other hand, rather section 80IA(4) itself provides that assessee should develop the infrastructure facility as per the agreement with the Central Government, State Government or a Local Authority. So, entering into a lawful agreement and thereby becoming a contractor should in no way be a bar to the one being a ‘developer’. The assessee has developed infrastructure facility as per the agreement with Maharashtra Government/APSEB, therefore, merely because in the agreement for development of infrastructure facility the assessee is referred to as a contractor or because some basic specifications are laid down, it does not detract the assessee from the position of being a ‘developer’; nor will it debar the assessee from claiming deduction u/s 80IA(4). Disallowance of interest - assessee has made an investment in subsidiaries – Held that:- Assessee is not able to explain what were the business advantages assessee derived from these interest free advances to sister concerns and also not able to explain whether the amount advanced to sister concern was actually used for the business purposes or not - assessee has not shown the commercial expediency – In favor of revenue Applicability of provisions of section 40A(3) of the IT Act - assessee made a cash payment in excess of Rs. 20,000 – Held that:- Assessee could not show any reasonable cause for making the cash payment exceeding Rs. 20,000. The assessee also not brought on record any exceptions to make cash payments as provided in Rule 6DD of IT Rules, 1962 – In favor of revenue Disallowance of property tax - property tax paid on the property which was provided as a collateral security to the State Bank of India for obtaining the loan and it was necessary for the assessee to incur such expenditure so as to retain the security provided – Held that:- Property on which the property tax was paid was not owned by the assessee. The liability of payment of property tax on the property is on the owner of the property and not on any other person – Disallowance justified Disallowance of expenditure incurred on increasing the share capital - assessee claimed to allow this expenditure as a deduction u/s. 35D of the IT Act – Held that:- Expenditure incurred by a company in connection with the issue of shares with a view to increase its share capital, is directly related to the expansion of the capital base of the company, and is capital expenditure, even though it may incidentally help in the business of the company and in the profit making – in favor of revenue Issues Involved:1. Allowability of deduction under Section 80IA(4) of the Income-tax Act, 1961.2. Disallowance of interest on loans advanced to subsidiaries.3. Application of provisions of Section 40A(3) regarding cash payments.4. Disallowance of property tax paid on collateral security.5. Disallowance of expenditure incurred on increasing share capital.Issue-wise Detailed Analysis:1. Allowability of Deduction under Section 80IA(4):The primary issue was whether the assessee, engaged in developing irrigation canals and railway tracks, was entitled to deduction under Section 80IA(4) of the Income-tax Act, 1961. The assessee argued that its activities constituted the development of infrastructure facilities, making it eligible for the deduction. The Tribunal examined the legislative history of Section 80IA(4), noting that the provision was intended to encourage the development of infrastructure by allowing deductions to enterprises engaged in such activities. The Tribunal found that the assessee undertook substantial development work, including surveys, engineering designs, and construction, and bore the risks associated with these projects. It concluded that the assessee was indeed a developer and not merely a contractor, thus eligible for the deduction under Section 80IA(4). The Tribunal directed the Assessing Officer to grant the deduction on eligible turnover and compute the profit on a pro-rata basis.2. Disallowance of Interest on Loans Advanced to Subsidiaries:The Assessing Officer disallowed interest expenses attributable to loans advanced to subsidiaries without charging interest, citing a lack of commercial expediency. The Tribunal upheld this disallowance, noting that the assessee failed to demonstrate any business advantage or commercial expediency for these interest-free advances. The Tribunal relied on the principle that interest on borrowings used for non-business purposes is not allowable as a business expenditure.3. Application of Provisions of Section 40A(3) Regarding Cash Payments:The Assessing Officer disallowed 20% of cash payments exceeding Rs. 20,000, invoking Section 40A(3). The Tribunal upheld this disallowance, as the assessee did not provide any reasonable cause for making such cash payments and failed to bring any exceptions under Rule 6DD of the Income-tax Rules, 1962.4. Disallowance of Property Tax Paid on Collateral Security:The assessee claimed a deduction for property tax paid on a property used as collateral security. The Tribunal disallowed this deduction, stating that the liability to pay property tax lies with the property owner, not the assessee. The Tribunal found no basis to allow this expenditure as a business expense.5. Disallowance of Expenditure Incurred on Increasing Share Capital:The assessee incurred expenditure to increase its share capital and claimed it as a deduction or alternatively under Section 35D. The Tribunal disallowed this expenditure, referencing the Supreme Court's judgment in Brooke Bond India Ltd. v. CIT, which held that such expenditure is capital in nature and not allowable as a revenue expense.Conclusion:The Tribunal's judgment provided a detailed analysis of each issue, ultimately granting partial relief to the assessee by allowing the deduction under Section 80IA(4) while upholding disallowances on other grounds. The judgment emphasized the importance of demonstrating commercial expediency and adhering to statutory provisions for claiming deductions.