2018 (9) TMI 2118 - AT - Income Tax

Tribunal decision: Advances written off as business loss upheld, deductions allowed partially, lease premium issue remanded.

The Tribunal upheld the CIT(A)'s decision to allow the write-off of advances as a business loss, finding them to be made in the normal course of business ... Write off advances - Disallowance u/s 36(1)(vii) read with section 36(2) - HELD THAT:- Assessee had duly credited its profit and loss account in the earlier years either by offering the income or reducing its expenses thereby making it eligible for deduction u/s 36(1)(vii) read with section 36(2) of the Act. Certain advances were actually made in the normal course of its business which was meant wholly and exclusively for the purpose of its business. Certain amounts lying in the advances recoverable became irrecoverable for quite a long time and the assessee had consciously taken a call to write off the same during the year under consideration which would be squarely allowable as trading loss. Reliance placed by the ld AR on the decision of CIT vs Mysore Sugar Co. Ltd [1962 (5) TMI 3 - SUPREME COURT] and CIT vs Rohtas Industries Ltd [1978 (1) TMI 8 - CALCUTTA HIGH COURT] are very well founded, among others - no infirmity in the order of the ld CITA granting relief to the assessee. Deduction u/s 80IA - certain items like interest on security deposits / loans, interest on delayed payment by customers, charges towards warehousing of cargo, revenue profit on disposal of fixed assets, sale of tender documents etc. were not derived from the industrial undertaking of CFS activity and denied the deduction u/s 80IA - HELD THAT:- For net realization from auction of cargo argued that the credit balances written back and forfeiture of deposit represents advances and deposits received from customers which were treated as no longer payable and hence written back to income. When asked for the details for the same, the ld AR prayed for one opportunity before the ld AO for furnishing the same. Accordingly we direct the ld AO to verify this aspect in order to ascertain whether the same relates to CFS activity so as to fall within the expression ‘ derived from’ from the details to be filed by the assessee in this regard. Income derived from disposal of pallets / garbages - We find that the pallets are not owned by the assessee but the same are owned by the customers who stack their products in the pallets. While removing the goods from the warehouse of the assessee, the assessee stated that the pallets are left by the parties, which were unnecessarily occupying the space of the assessee and hence the same were disposed off. We find that this does not have any first degree nexus with the CFS activity of the assessee and cannot be construed as income derived from the said undertaking. Hence we hold that the ld AO had rightly denied deduction u/s 80IA of the Act for the same. Income earned on net realization from auction of cargo - The assessee at best would be entitled for claiming demurrage for storing the goods beyond the prescribed time which would be construed as first degree nexus with the CFS activity. Moreover, these are extraneous circumstances which the assessee would not undergo in the normal course of its business. Assessee did not furnish any evidence on record to prove that it has got lien over the goods stored in the CFS unit. In any case, the proceeds realized were only from auction of goods and not from storage of goods and hence the first degree nexus with the CFS activity is conspicuously absent. Hence we hold that the ld CITA erred in granting relief to the assessee in this regard. Interest on security deposits - We find that the ld AR fairly stated that this tribunal in assessee’s own case for the earlier year had held that it is not derived from CFS unit and accordingly not eligible for deduction u/s 80IA of the Act. Accordingly, we do not find any infirmity in the order of the ld CITA denying relief to the assessee in this regard. Revenue profit on sale of fixed assets - The same would take the character of sale of scrap as it is not in dispute that the fixed assets were utilized by the assessee only in its CFS unit and the sale thereon would have first degree nexus with the said unit and accordingly would be eligible for deduction u/s 80IA. Rent receipts - As we find that the same is similar to demurrage claims of the assessee and hence has got first degree nexus with the CFS unit and eligible for deduction u/s 80IA of the Act. Accordingly we direct the ld AO to grant deduction u/s 80IA of the Act for the same. Hire charges received on assets - We find that the assessee had provided refrigerators, generator sets and personal computers to the customers who had stored the goods in the godown / warehouse of the assessee and had collected hire charges. These assets are given to the customers as part and parcel of the CFS activity carried on by the assessee for smooth and effective storage of the goods and income derived thereon in the form of hire charges is inextricably linked with the CFS activity carried on by the assessee. Hence we direct the ld AO to grant deduction u/s 80IA. Sale of tender documents - The tender documents were printed by the assessee and had incurred expenses for the same. These tender documents, when remaining unutilized, were sold by the assessee in order to recover its cost / expenses incurred thereon. Hence it would only tantamount to recovery of expenses incurred directly in connection with the CFS unit. We find that the reliance has been rightly placed by the ld AR on the decision of Meghalaya Steels Ltd [2016 (3) TMI 375 - SUPREME COURT] in this regard. Hence we direct the ld AO to grant deduction u/s 80IA of the Act for the same. Disallowance of Prior period expenses - HELD THAT:- We find that the entire details of prior period expenses are enclosed in paper book. It is not in dispute that these details were also filed before the lower authorities. From the perusal of the said details, we are convinced of the fact that the liability for such expenses had crystallized during the year excluding depreciation and hence we hold that the ld CITA had rightly granted relief to the assessee in this regard. Accordingly, the Ground raised by the revenue dismissed. Disallowance of lease premium - assessee had claimed the proportionate premium on lease hold land as advance rent payable by it in accordance with the terms of the lease agreement as business expenditure allowable u/s 37 - AR argued that there is a difference between the term ‘rent’ and ‘premium’ and the payment made for getting into a premises is called ‘premium’ - HELD THAT:- Admittedly, the payments made during the year contains payment towards lease rent for fresh lease and for existing leases. Obviously differential treatment need to be given for both in the light of difference between the term ‘ rent’ and ‘premium’ as the said difference has been duly noted in the case of CIT vs Panbari Tea Company Ltd [1965 (4) TMI 19 - SUPREME COURT] In the absence of proper finding in the order of the authorities below with regard to the same, we deem it fit and appropriate, in the interest of justice and fairplay, to remand this issue to the file of ld AO for denovo adjudication of the issue afresh and pass orders in accordance with law. Disallowance u/s 14A r.w.r. 8D - HELD THAT:- Since the assessee company is having sufficient own funds, by placing reliance on the decision of Reliance Utilities and Power Ltd [2009 (1) TMI 4 - BOMBAY HIGH COURT], we direct the ld AO not to make any disallowance of interest under second limb of Rule 8D(2) of the Rules. With regard to the disallowance under third limb of Rule 8D(2) of the Rules, in consonance with the decision of this tribunal in the case of REI Agro Ltd [2013 (9) TMI 156 - ITAT KOLKATA] we direct the ld AO to consider only investments (excluding foreign investments) that had yielded dividend income should be considered for working out the disallowance under third limb of Rule 8D(2) of the Rules. ISSUES PRESENTED AND CONSIDERED 1. Whether write-off of advances/security deposits debited in the relevant year is deductible as trading/business loss under sections 36(1)(vii) read with 36(2) when not previously brought to tax as income. 2. Whether specific items of 'other income' (credit balances written back, forfeiture of deposits, disposal of pallets/garbage, net realization from auction of cargo, interest on security deposits, profit on sale of fixed assets, rent, hire charges, sale of tender documents) qualify as 'profits and gains derived from' an eligible industrial undertaking (CFS) for deduction under section 80IA. 3. Whether prior-period expenses debited in the year (where liability crystallized in that year) are deductible notwithstanding mercantile accounting, and whether depreciation included in prior-period adjustments is to be disallowed. 4. Whether lease premium paid on long-term leasehold land (variously 60-99 years) can be allowed as revenue deduction under section 37, or requires fresh adjudication where facts include fresh short-term leases. 5. Whether disallowance under section 14A read with Rule 8D should be computed by reference only to dividend-bearing investments (excluding foreign investments) and whether interest disallowance under the second limb of Rule 8D(2) should be made where the assessee has adequate own funds. 6. Whether findings on identical issues for one assessment year apply to the subsequent year with appropriate figure variations. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Write-off of advances/security deposits as deductible loss (secs. 36(1)(vii), 36(2)) Legal framework: Allowability of business losses arising from irrecoverable advances/security deposits under sections 36(1)(vii) read with 36(2); taxable treatment if previously credited in earlier years. Precedent treatment: Reliance on judicial authorities that permit deduction where advances relate wholly and exclusively to business and become irrecoverable (Apex Court and High Court precedents cited by the Tribunal). Interpretation and reasoning: Tribunal examined particulars, found advances were made in the ordinary course of business and not previously offered to tax as income in a way negating deduction; certain amounts had been credited to P&L in earlier years (thus already taxed) and others became irrecoverable after prolonged attempts to recover - write-off constituted trading loss. Ratio vs. Obiter: Ratio - irrecoverable advances/security deposits given wholly and exclusively for business and not previously giving rise to taxable income are allowable as business loss under sections 36(1)(vii) read with 36(2). Obiter - none additional. Conclusion: Disallowance by AO was set aside; deduction allowed. Revenue appeal dismissed on this issue. Issue 2 - Deduction under section 80IA: characterization of various 'other income' items Legal framework: Section 80IA allows deduction on profits 'derived from' eligible undertaking; requires first-degree nexus between receipts and the undertaking's operations. Precedent treatment: Applied distinction between income 'derived from' and 'attributable to' business; earlier tribunal decisions in appellant's own case and High Court/Supreme Court authorities on the nature of receipts were relied upon to test nexus. Interpretation and reasoning: - Credit balances written back / forfeiture of deposits: Tribunal directed verification by AO of particulars; if these represent advances/deposits from customers no longer payable and having first-degree nexus with CFS, they qualify as 'derived from' the undertaking. Direction to adjudicate on evidence - remand for fact determination. - Disposal of pallets/garbage: Pallets belonged to customers; disposal arose from customers leaving pallets and constituted sale of third-party property without first-degree nexus to core CFS operation - not 'derived from' CFS. Deduction denied. - Net realization from auction of cargo: Goods remained customer property; proceeds from auction are proceeds of disposal of customers' goods, not remuneration for storage or an income 'derived from' storage activity. Absent evidence of lien and clear nexus, auction proceeds lack first-degree nexus and are not eligible. CFS operator may claim demurrage (storage charges) which has nexus, but auction proceeds are distinct. - Interest on security deposits: Following prior tribunal findings in the taxpayer's own case, interest on security deposits does not qualify as income 'derived from' the unit - deduction denied. - Revenue profit on sale of fixed assets: Fixed assets used in CFS; sale proceeds (treated as sale of scrap) bear first-degree nexus and qualify for deduction under section 80IA. - Rent receipts (demurrage-like receipts): Treated as akin to demurrage and having first-degree nexus with CFS activity - eligible for deduction. - Hire charges on assets provided for storage operations: Inextricably linked to storage activity and form part of income 'derived from' CFS - eligible. - Sale of tender documents: Considered recovery of direct expenses incurred in connection with the CFS unit; treated as allowable on authority that recovery of direct expenditure is part of business receipts - eligible. Ratio vs. Obiter: Ratio - for section 80IA, only receipts having first-degree, direct nexus and constituting profits 'derived from' the eligible undertaking qualify; receipts that are proceeds from disposal of customer property or are one step removed do not qualify. Obiter - evidentiary burden and remand directions. Conclusion: Mixed result - certain items (sale of fixed assets scrap, rent/demurrage, hire charges, sale of tender documents) allowed for deduction; disposal of pallets and auction proceeds denied; credit balances/forfeitures remitted to AO for verification of nexus. Issue 3 - Prior-period expenses (liability crystallization and depreciation component) Legal framework: Deductibility of expense depends on accounting treatment and liability crystallization; mercantile system allows deduction when liability crystallizes; depreciation excluded from such deduction if already part of allowed computation. Precedent treatment: Tribunal adhered to its prior approach allowing prior-period expenses where liabilities crystallize during the relevant year and details are furnished; depreciation as per books must be restored where not allowable as prior period deduction. Interpretation and reasoning: Detailed schedule of prior-period items showed liabilities crystallized during the year under consideration. Depreciation component included in prior-period adjustments represents book depreciation and is not allowable again; AO properly disallowed the depreciation amount, while rest of the prior-period expenses were deductible. Ratio vs. Obiter: Ratio - prior-period expenses are deductible if liability crystallized in the year and not previously claimed; book depreciation included in prior-period adjustments must be disallowed to avoid double benefit. Obiter - none. Conclusion: Tribunal sustained CITA's allowance except for confirmed disallowance of depreciation; revenue's ground dismissed except for depreciation disallowance. Issue 4 - Lease premium (section 37) - remand for fresh factual adjudication Legal framework: Distinction between premium (consideration for acquisition/entry) and rent (payment for use); long-term lease premium often confers enduring benefit and is capital in nature, not deductible under section 37; short-term or payments characterized as advance rent may be revenue. Precedent treatment: Tribunal's prior decision against the assessee on similar facts; Supreme Court authority recognizing difference between 'rent' and 'premium.' Interpretation and reasoning: Majority of lease premium related to long-term leases of 60-99 years indicates capital nature (enduring benefit) and not deductible. However, fresh facts for the year under appeal included new 15-year lease agreements and payments that may properly be termed rent/advance rent rather than premium. Because the authorities below did not make specific findings distinguishing premium from rent on new facts, the Tribunal remanded the matter to AO for de novo adjudication and allowed the assessee liberty to adduce fresh evidence and arguments. Ratio vs. Obiter: Ratio - characterization of payments as premium or advance rent is fact-sensitive; fresh short-term lease payments may be revenue in nature and require separate consideration. Obiter - need for remand where fresh facts exist. Conclusion: Issue remitted to AO for fresh adjudication; assessee's ground allowed for statistical purposes pending fresh inquiry. Issue 5 - Section 14A and Rule 8D disallowance computation Legal framework: Section 14A disallows expenditure incurred to earn exempt income; Rule 8D prescribes mechanical computation including three limbs - apportioned interest (second limb) and expenses relating to exempt income (third limb). Precedent treatment: Tribunal and High Court authorities restrict Rule 8D computations to dividend-bearing investments for third limb; where assessee has sufficient own funds, interest disallowance under second limb may not be warranted (relying on relevant High Court and tribunal precedents). Interpretation and reasoning: Tribunal admitted additional ground (NTPC principle) as it concerned law. It held that foreign investments yielding dividends taxable under the Act should be excluded from Rule 8D computation for exempt dividends. Given the assessee had adequate own funds relative to investments, disallowance of interest under the second limb was not warranted. For the third limb, only investments that actually yielded dividend income (excluding foreign investments) should be considered in computing disallowance under Rule 8D(2)(iii). Tribunal directed AO to rework disallowance accordingly. Ratio vs. Obiter: Ratio - second limb interest disallowance under Rule 8D(2) should not be applied where sufficient own funds exist; third limb should consider only dividend-yielding investments (excluding foreign investments whose dividends are taxable). Obiter - application specifics left to AO's computation. Conclusion: Additional ground admitted; disallowance under second limb directed to be deleted; third limb to be recomputed limited to dividend-yielding domestic investments; matter partly allowed for statistical purposes. Issue 6 - Application to subsequent assessment year(s) Legal framework & reasoning: Identical issues and legal principles apply across assessment years unless facts or figures differ materially. Conclusion: Tribunal applied same conclusions to the subsequent assessment year with appropriate figure variations; grounds that were general in nature required no specific adjudication.