2020 (2) TMI 1690 - AT - Income Tax

Tribunal Partially Allows Appeal, Issues Remanded for Verification

The tribunal partially allowed the appeal, deleting disallowances for club entrance fees, section 35D deduction, section 14A, and section 36(1)(viii). The ... Nature of expenses - club entrance fees - Revenue or capital expenditure - HELD THAT:- As decided in CIT vs. Samtel Colour Limited [2009 (1) TMI 26 - DELHI HIGH COURT] holds that such an admission fee expenditure incurred for corporate membership is very much allowable as revenue expenditure. Thus both the learned lower authorities have erred in law and on facts in disallowing the impugned payments as capital expenditure. The same stands deleted. Deduction u/s 35D regarding share issue expenditure - whether amortization is allowable only for “pre-operative expenses”? - HELD THAT:- No merit in Revenue’s instant stand since section 35D(1)(ii) makes it clear that such an expenditure is allowable not only that pertaining to “before the commencement his business” but also “after the commencement of his business, in connection with extension of his undertaking or in connection with its setting up of a new unit”. This tribunal’s recent decision in M/s MBL Infrastructure Ltd [2020 (1) TMI 457 - ITAT KOLKATA] has held similar share issue expenses as eligible for section 35D amortization - We adopt the above detailed reasoning mutatis mutandis and accept the assessee’s contention seeking impugned amortization. CIT-DR said that the assessee did not identify the share issue expenses - He fails to dispute that the assessee’s impugned expense have already been recorded in the books of accounts forming part of records. We thus allow the assessee’s instant second substantive ground as well. Disallowance u/s 40(a)(ia) - Assessee not filing the necessary details of its payees - effect of section 40(a)(ia) 2nd proviso inserted in the Act vide Finance Act 2012 w.e.f. 01.04.2013 - HELD THAT:- We wish to clarify here that hon’ble Kerala high court in Thomas George Muthoot [2015 (7) TMI 810 - KERALA HIGH COURT] had held the very proviso as having prospective operation only. We note in this backdrop that the assessee’s omission, if any, in not filing the necessary details of its payees is not fatal to its cause in view of the legal developments qua interpretation of the above-stated amended proviso involving divergent views from various high courts. We thus accept the assessee’s instant third substantive grievance for statistical purposes and leave it open for the Assessing Officer to carry out the necessary factual verification as per law. This substantive ground is taken as accepted for statistical purposes. Disallowance u/s 14A - administrative expenses disallowance - HELD THAT:- Both the lower authorities have erred in law invoking the impugned disallowance in case of an assessee’s shares held as stock-in-trade. The assessee’s instant fourth substantive grievance is accepted. Disallowance of interest claim u/s 36(1)(viii) after changing allocation of operative expenses from asset to turnover basis - HELD THAT:- We notice qua the instant issue as well that this tribunal’s coordinate bench’s decision in Allahabad Bank [2019 (6) TMI 993 - ITAT KOLKATA] as held assessee-Bank was required to manage both performing as well as nonperforming assets and the operating expenses incurred by it thus were attributable to non-performing assets also. This vital aspect was not appreciated by the authorities below in proper perspective and as rightly contended by assessee, the basis adopted by them for apportioning the operating expenses without proper appreciation of the vital position resulted in a distorted picture - basis adopted by the assessee for the apportionment of operating expenses was more fair and reasonable and the same followed consistently by the assessee in the earlier years was accepted by the revenue. Thus we conclude that both the lower authorities have erred in changing assessee’s allocation from asset to turnover basis thereby including even the non-performing assets as well. The impugned section 36(1)(viii) disallowance is directed to be deleted therefore. Provision for fraud and dacoity disallowed - assessee argued since the impugned provision has followed reasonable prudence after taking into account all fraud and dacoity cases and therefore allowable as per the hon’ble apex court’s landmark decision in Chainrup Sampatram [1953 (10) TMI 2 - SUPREME COURT]- HELD THAT:- the assessee’s income realized from the corresponding customers as well as insurance sums to this effect have also been declared in the year(s) of actual receipt. Learned CIT-DR is fair enough in submitting that all these aspects requires AO’s factual verification. We therefore restore the instant issue back to AO for carrying out necessary factual verification. Assessee appeal partly allowed. Issues Involved:1. Disallowance of club entrance fees.2. Disallowance of section 35D deduction regarding share issue expenditure.3. Section 40(a)(ia) disallowance for non-deduction of TDS.4. Disallowance of administrative expenses under section 14A r.w.r 8D(2)(iii).5. Disallowance of interest claim under section 36(1)(viii).6. Disallowance of provision for fraud and dacoity.Detailed Analysis:1. Disallowance of Club Entrance Fees:The assessee challenged the disallowance of club entrance fees of Rs.97,794/- treated as capital expenditure by the lower authorities. The tribunal referenced the Delhi High Court’s judgment in CIT vs. Samtel Colour Limited, which held that such expenditure for corporate membership is allowable as revenue expenditure. Consequently, the tribunal held that the lower authorities erred in disallowing the payment as capital expenditure, and the disallowance was deleted.2. Disallowance of Section 35D Deduction Regarding Share Issue Expenditure:The assessee contested the disallowance of Rs.34,29,200/- under section 35D for share issue expenses. The CIT(A) had affirmed the disallowance, citing the Supreme Court decision in Brooke Bond India Ltd., which categorized such expenses as capital in nature. However, the tribunal noted that section 35D(1)(ii) allows amortization of expenses incurred after business commencement in connection with extension or setting up a new unit. The tribunal referenced its decision in DCIT vs. M/s MBL Infrastructure Ltd., which allowed similar expenses for section 35D amortization. The tribunal concluded that the assessee’s share issue expenses qualified for section 35D amortization and allowed the deduction.3. Section 40(a)(ia) Disallowance for Non-Deduction of TDS:The assessee argued against the disallowance of Rs.1,58,21,235/- under section 40(a)(ia) for non-deduction of TDS, citing the second proviso inserted by the Finance Act 2012, which exempts disallowance if the payees are assessed. The tribunal referenced the Supreme Court decision in CIT vs. Calcutta Export Company, which held that the proviso has retrospective effect. The tribunal accepted the assessee’s contention but remanded the issue to the Assessing Officer for factual verification of the payees’ assessments.4. Disallowance of Administrative Expenses Under Section 14A r.w.r 8D(2)(iii):The tribunal addressed the disallowance of Rs.1.64 crores under section 14A r.w.r 8D(2)(iii) related to exempt income. The tribunal referenced its earlier decision in the assessee’s case for AY 2010-11, which held that disallowance under section 14A does not apply to shares held as stock-in-trade. The tribunal reiterated that shares held as stock-in-trade are not subject to section 14A disallowance and deleted the disallowance.5. Disallowance of Interest Claim Under Section 36(1)(viii):The assessee contested the disallowance of Rs.14,55,65,230/- under section 36(1)(viii) after changing the allocation of operative expenses from asset to turnover basis. The tribunal referenced its decision in Allahabad Bank vs. DCIT, which held that operating expenses should be apportioned considering both performing and non-performing assets. The tribunal concluded that the lower authorities erred in changing the allocation basis and deleted the disallowance.6. Disallowance of Provision for Fraud and Dacoity:The assessee challenged the disallowance of Rs.137,92,000/- for provision for fraud and dacoity. The assessee argued that the provision followed reasonable prudence and should be allowed as per the Supreme Court decision in Chainrup Sampatram vs. CIT. The tribunal noted that the issue required factual verification and remanded it to the Assessing Officer for necessary verification.Conclusion:The tribunal allowed the appeal partly, deleting the disallowances related to club entrance fees, section 35D deduction, section 14A disallowance, and section 36(1)(viii) disallowance. The issues of section 40(a)(ia) disallowance and provision for fraud and dacoity were remanded to the Assessing Officer for factual verification.