2013 (1) TMI 135 - AT - Income Tax

Tribunal rulings on corporate debt, pollution control expenses, and capital loss disallowance

The Tribunal partly allowed the assessee's appeals in some instances and fully allowed in others, including the allowance of Corporate Debt Restructuring ... Liability in respect of wages payable - Pursuant to Order dated 13-06-2003 of the Industrial Tribunal - Liability has not crystallized during the year – Held that:- Assessee has not made any provisions in the books of account during the present year and it is also stated that the orders passed by Commissioner / Industrial Tribunal were challenged before the Hon’ ble High Court. It could not be established that the liability has crystallized during the present year. In favour of revenue Disallowance of Prior Period expense - salary, wages, bonus and welfare expenses and water expenses – Held that:- Assessee had failed to furnish any material to show that liability has crystallized during the present year. AO must have allowed the deduction to the assessee in that year to which this expenditure are pertaining to and hence, no deduction can be allowed in the present year. In favour of revenue Computation of Book Profit u/s 115JB - Provision for take or pay lease rental charges - Provision for Wage Revision – Contingent Liability - Unascertained liability – Held that: - The provisions regarding take or pay lease rental charges and the provisions for wage revision is a contingent liability. This is also submitted by assessee that this provision was written back in A.Y. 2006-07. In favour of revenue Computation of Book Profit u/s 115JB - Excess provision for doubtful advances – Held that:- It is seen that same amount was added in book profit but in view of the contradictory finding of A.O. in assessment order, we feel it proper that in the interest of natural justice, this matter should go back to the file of AO for fresh decision. Remand back to AO. Expenditure on the release of water and discharge of effluent and pollution control – Revenue or Capital expenditure – Held that:- Following the decision in case of Hooghly Mills Company Limited (2006 (11) TMI 137 - SUPREME COURT) that this expenditure did not result in the creation of any specific asset, without appreciating that the expenditure gave an advantage of enduring nature and fell in the capital field, and, for being capital expenditure, it is not always necessary that it results in creation of a new, depreciable asset for the assessee. In favour of assessee Expenditure on acquiring fire-fighting equipments – Capital or revenue expenditure – Held that:- Following the decision in case of Ballimal Naval Kishore (1997 (1) TMI 3 - SUPREME COURT) that these expenses were necessary for complying with the Government regulations and did not result in the creation of any asset, without appreciating that these are not the relevant considerations for determining the capital vis-à-vis revenue nature of an expenditure and the expenses, being in capital field and giving an advantage of enduring nature, constitute capital expenditure. In favour of assessee Disallowance u/s 14A - Expense incurred in relation to exempted income - Assessee could not establish that the investment was made out of own fund and no borrowed funds have been utilized for making such investments – Held that:- The own fund is much higher than investment and therefore, it cannot be said that interest bearing borrowed funds were used for making investments in shares and therefore, no disallowance u/s. 14A is required in respect of interest expenditure. Confirm the disallowance of Rs. 5 lakh in respect of administrative expenses. Partly allowed Disallowance of corporate debt restructuring expenses – Revenue or capital expenditure – For waiver of loans - spreading it over a period of 6 years – Held that:- Following the decision in case of Madras Industrial Investment Corporation Limited (1997 (4) TMI 5 - SUPREME COURT) that such expenditure is an revenue expenditure. In favour of assessee Remission or cessation of liability u/s 41(1) - Waive of principal loans - Loan taken and benefit has arisen because of restructuring of loan in which part amount of principle loan was waived – Held that:- Following the decision in case of Chetan Chemicals Pvt. Ltd. (2001 (10) TMI 12 - GUJARAT HIGH COURT) that if the assessee is not carrying money lending business and earlier the loan do not give a benefit arising out of business than remission of the same cannot be taxed u/s. 41(1) of the Act or u/s. 28(iv). In favour of assessee Book profit u/s. 115JB – Provision for gratuity - On the basis of actuarial valuation - Unascertained liability – Held that:- It is submitted that this issue is squarely covered in favour of assessee by the Tribunal’s decision in assessee’s own case in A.Y. 2003-04. In favour of assessee Computation of book profit u/s. 115JB – Provision for diminution in the value of assets - Provision for bad debts – Held that:- As the retrospective amendment was made by (Finance Act, 2002) with effect from 1-4-2001 as per which the amount set aside for a provision for diminution in the value of any asset is to be added back in book profit. In favour of revenue Computation of book profit u/s. 115JB – Deduction u/s 80 HHC – Held that:- Following the decision in case of Bhari Information Tech Systems (P) Ltd. (2011 (10) TMI 19 - SUPREME COURT OF INDIA) that that deduction claimed by the assessee u/s 80HHE has to be worked out on the basis of adjusted book profit u/s 115JA and not on the basis of the profits computed under regular provisions of law applicable to computation of profits and gains of business. In favour of assessee Penalty u/s 271(1)(c) - Tax payable as per MAT u/s 115JB - Taxable income was nil as per the regular provision - The tax was payable by the assessee on book profit u/s 115JB - Out of these two additions long term capital loss and depreciation on co-generation power unit for which penalty was imposed by A.O - No addition was made in computing book profit by the AO - There is no impact on tax payable by the assessee – Held that:- Following the decision in case of Vijay Mistry Construction & Rajakamal Builders Pvt. Ltd. (2013 (1) TMI 97 - GUJARAT HIGH COURT) and NALWA SONS INVESTMENTS LTD. (2010 (8) TMI 40 - DELHI HIGH COURT) that Even after making these two additions in regular assessment, income-tax payable by the assessee remained the same being on book profit. When the computation was made u/s 115JB, alleged concealment has no role to play on tax payable and therefore, the concealment did not lead to tax evasion at all and by making this observation, penalty was deleted. In favour of assessee Issues Involved:1. Disallowance of 'Take or Pay' lease rental charges.2. Allowance of Corporate Debt Restructuring expenses.3. Disallowance of Long Term Capital Loss.4. Disallowance of liability in respect of wages payable to contract laborers.5. Disallowance of Prior Period Expenses.6. Addition of lease rental charges and provision for wage revision in Book profit under Section 115JB.7. Addition of excess provision for doubtful advances to book profit under Section 115JB.8. Charge of interest under Sections 234B, 234C, and 234D.9. Allowance of expenditure on water release and pollution control as revenue expenditure.10. Allowance of expenditure on fire-fighting equipment and safety measures as revenue expenditure.11. Disallowance under Section 14A towards interest and other expenses incurred in relation to exempted income.12. Exclusion of waived amount of principal loans from total income.13. Adjustment of book profit under Section 115JB by estimated gratuity provision.14. Adjustment of book profit under Section 115JB by provision for superannuation expenditure.15. Adjustment of provision for bad debts in the computation of book profit under Section 115JB.16. Adjustment of deduction under Section 80HHC as per book profit in the computation of deemed total income under Section 115JB.17. Penalty under Section 271(1)(c) for disallowance of long-term capital loss and depreciation on co-generation power unit.Issue-wise Detailed Analysis:1. Disallowance of 'Take or Pay' Lease Rental Charges:The assessee's appeal for the disallowance of Rs. 641.53 Lacs was rejected as the liability was reversed in A.Y. 2006-07 and was not taxable. Similarly, the disallowance of Rs. 903.65 Lacs for A.Y. 2005-06 was also rejected as it was considered academic in nature.2. Allowance of Corporate Debt Restructuring Expenses:The Tribunal upheld the CIT(A)'s decision to allow the expenditure of Rs. 2.57 Crores by spreading it over six years, following the judgments of the Supreme Court in Empire Jute Co. Ltd. v. CIT and India Cement Ltd. v. CIT.3. Disallowance of Long Term Capital Loss:The Tribunal rejected the assessee's claim for a long-term capital loss of Rs. 7,49,49,713/- as the issue was covered against the assessee by the Tribunal's decision in Schrader Duncan Ltd. v. ACIT.4. Disallowance of Liability in Respect of Wages Payable to Contract Laborers:The Tribunal upheld the CIT(A)'s decision that the liability of Rs. 7 Crores had not crystallized during the year and rejected the alternative claim for deduction in A.Y. 2010-11.5. Disallowance of Prior Period Expenses:The Tribunal upheld the CIT(A)'s decision to disallow Rs. 263.20 Lacs as the liability had not crystallized during the year and directed the AO to allow the expenditure in the year to which it pertains.6. Addition of Lease Rental Charges and Provision for Wage Revision in Book Profit under Section 115JB:The Tribunal upheld the CIT(A)'s decision that the provisions for lease rental charges and wage revision were contingent and unascertained liabilities, respectively, and should be added to the book profit.7. Addition of Excess Provision for Doubtful Advances to Book Profit under Section 115JB:The Tribunal remanded the issue back to the AO to verify if the provision was added back in the book profit of A.Y. 2003-04 and to pass a necessary order as per law.8. Charge of Interest under Sections 234B, 234C, and 234D:The Tribunal held that the issue is consequential and should be decided accordingly.9. Allowance of Expenditure on Water Release and Pollution Control as Revenue Expenditure:The Tribunal upheld the CIT(A)'s decision to allow the expenditure of Rs. 86.69 Lacs as revenue expenditure, following the Tribunal's decisions in the assessee's own case for earlier years.10. Allowance of Expenditure on Fire-Fighting Equipment and Safety Measures as Revenue Expenditure:The Tribunal upheld the CIT(A)'s decision to allow the expenditure of Rs. 65.14 Lacs as revenue expenditure, following the Tribunal's decisions in the assessee's own case for earlier years.11. Disallowance under Section 14A towards Interest and Other Expenses Incurred in Relation to Exempted Income:The Tribunal upheld the CIT(A)'s decision to disallow Rs. 5 Lacs for administrative expenses and deleted the disallowance of interest expenditure, as the assessee's own funds were higher than the investment in shares.12. Exclusion of Waived Amount of Principal Loans from Total Income:The Tribunal upheld the CIT(A)'s decision to exclude the waived amount of Rs. 60.13 Crores from total income, following the judgment of the Hon'ble Gujarat High Court in CIT v. Chetan Chemicals Pvt. Ltd.13. Adjustment of Book Profit under Section 115JB by Estimated Gratuity Provision:The Tribunal upheld the CIT(A)'s decision to delete the adjustment of Rs. 5,35,80,234/- as the provision for gratuity was based on actuarial valuation and was not an unascertained liability.14. Adjustment of Book Profit under Section 115JB by Provision for Superannuation Expenditure:The Tribunal upheld the CIT(A)'s decision to delete the adjustment of Rs. 2,32,83,738/- as the provision for superannuation expenditure was not an unascertained liability.15. Adjustment of Provision for Bad Debts in the Computation of Book Profit under Section 115JB:The Tribunal reversed the CIT(A)'s decision and restored the AO's order to add back the provision for bad debts to the book profit, following the retrospective amendment in Section 115JB.16. Adjustment of Deduction under Section 80HHC as per Book Profit in the Computation of Deemed Total Income under Section 115JB:The Tribunal upheld the CIT(A)'s decision to allow the deduction under Section 80HHC as per book profit, following the judgments of the Hon'ble Supreme Court in CIT v. M/s. Bhari Information Tech. Sys. P. Ltd. and Ajanta Pharma v. CIT.17. Penalty under Section 271(1)(c) for Disallowance of Long-Term Capital Loss and Depreciation on Co-Generation Power Unit:The Tribunal upheld the CIT(A)'s decision to cancel the penalty of Rs. 2,82,50,000/- as the assessed income under regular provisions was nil, and tax was payable only on book profit under Section 115JB.Conclusion:- Assessee's appeals were partly allowed for statistical purposes in some instances and fully allowed in others.- Revenue's appeals were partly allowed in some instances and dismissed in others.