2018 (8) TMI 2114 - AT - Income Tax

Government IT Company's Loss Write-off Upheld; Book Profits Provision Added; Rental Income Expenses Remanded

DCIT, Circle-1, Kolkata Versus M/s West Bengal Electronics Industry Development Corp. Ltd. And Vice-Versa

The Tribunal allowed the write-off of investments as a business loss for the government company promoting IT and ITES sectors. However, it upheld the ... Write off of investments - assessee company was engaged in promoting the growth of electronics, IT and ITES sectors in the State of West Bengal - DR argued that the assessee had made certain investments in subsidiaries which were merely pure and simple investments and had written off the same in its books and write off is only a capital loss in the hands of the assessee company and hence cannot be allowed as deduction - assessee before us is not engaged in the business of financing - as argued assessee before us is a manufacturing company and hence every investment made in subsidiaries cannot be stretched further to have been made for the purpose of business and the investments made by the assessee company in the aforesaid subsidiaries were not meant for survival needs of the subsidiary companies - HELD THAT:- Assessee despite knowing the fact that the subsidiaries had incurred huge losses, had bothered to acquire the shares from outsiders during the year so as to enter into joint venture with renowned industrial houses for promoting the growth of IT and ITES sectors in the State of West Bengal. It is also not in dispute that the assessee company’s proposal to enter into joint venture with renowned industrial houses had been abandoned and hence the assessee had no other choice after making investments in shares but to write off the same. This conscious business decision of the assessee cannot be questioned by the revenue and if the shares held by the assessee results in any gain in future on sale of the same, the same would any way get taxed as income in the hands of the assessee company. We find that the objects of the assessee company includes financing also and that the financing could be by way of lending to parties by way of loans or by way of investing in shares of those companies. In effect the assessee had only brought down the value of investments on the ground of non-realisability of the value thereon. Hence we hold that the assessee is entitled for deduction in respect of write off of investments by respectfully following the decision of Tamil Nadu Industrial Investment Corporation Ltd [2017 (7) TMI 1048 - MADRAS HIGH COURT] Decided in favour of assessee. MAT computation - provision for investments and loans and advances in its profit and loss account and claimed the same as deduction while computing the book profits u/s 115JB - HELD THAT:- As in the instant case, it is not in dispute that the assessee had made only provision for doubtful investments and doubtful loans and advances in the sum which was not written off in the books by the assessee. Assessee had voluntarily added back the said provision under the normal computational provisions of the Act and had not disputed the same before the revenue. Hence it could be safely concluded that the amounts provided towards doubtful investments and advances were only in the nature of mere provisions and not write off. In the instant case, the provisions of section 115JB of the Act, being a complete code in itself having a deeming fiction , need to be strictly construed and and amendment has been brought by way of inserting clause (i) in Explanation 1 to section 115JB of the Act with retrospective effect from 1.4.2001 by the Finance (No. 2) Act, 2009. Accordingly, we hold that the addition while computing the book profits u/s 115JB of the Act by the ld AO is in order. The Ground No. 2 raised by the assessee for the Asst Year 2008-09 is dismissed. Disallowance u/s 14A - Necessity of recording satisfaction - Assessee claimed that no expenditure was incurred by it for earning dividend income - AO applied the provisions of second and third limb of Rule 8D(2) of the IT Rules and made disallowance - HELD THAT:- It could be safely concluded that even when the assessee claims that no expenditure was incurred by it for the purpose of earning exempt income, still it is incumbent on the part of the ld AO to record satisfaction having regard to the accounts of the assessee in terms of section 14A(2) / 14A(3) of the Act as to why the claim so made by the assessee is incorrect. Only after recording such satisfaction, he could resort to computation mechanism provided in Rule 8D(2) of the Rules. In the absence of any such recording of satisfaction, we hold that no disallowance u/s 14A of the Act read with Rule 8D of the Rules could be made by the ld AO. Thus no hesitation in directing the ld AO to delete the disallowance made u/s 14A - Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether the write-off of diminution in value of investments in certain subsidiaries is an allowable business loss (u/s 28 principles) where such investments were made in furtherance of the company's objects and shown at nominal value in the balance-sheet. 2. Whether provisions for diminution in value of investments and for doubtful loans & advances are to be added back while computing book profits under the deemed income regime of section 115JB (Explanation 1, clause (i)). 3. Whether the Assessing Officer's apportionment of general building-related expenditures to rental income (for disallowance) was justified where the assessee had itself disallowed certain amounts and contended separate usage/security/maintenance for business and rented portions. 4. Whether disallowance under section 14A read with Rule 8D can be made where the AO has not recorded the mandatory satisfaction (per s.14A(2)/(3) and Rule 8D(1)) on the accounts and linkages between expenses and exempt income. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Allowability of write-off of investments as business loss Legal framework: Deductibility of losses connected with business activities governed by general principles (business expediency, nexus with assessee's trade/object). Treatment of investments as stock-in-trade depends on the company's objects and the purpose of acquisition; valuation loss due to permanent diminution may be allowable if investments are integral to business. Precedent treatment: The Tribunal relied on the reasoning of a High Court decision (Madras High Court) which held that a State industrial/investment corporation's investments and write-offs could be treated as stock-in-trade and allowed; contrasted with a jurisdictional High Court decision where investments not treated as stock-in-trade were disallowed (distinguished on facts). Interpretation and reasoning: The Tribunal examined the memorandum of association and concluded that the principal object included promotion of electronics/related industries and formation/ acquisition of subsidiaries to advance that object. Investments were made to acquire control and further joint-venture projects; in the books investments were retained at Re 1 (not fully written off), evidencing business purpose rather than mere passive investment. Given erosion of investee net worth and abandonment of joint-venture plans, diminution was treated as permanent and not recoverable. The Tribunal considered the Madras High Court decision analogous on facts and followed its reasoning. Ratio vs. Obiter: Ratio - Where an entity's objects and business purpose include promoting industry and financing or formation of subsidiaries, investments made in furtherance of those objects may constitute stock-in-trade; diminution in value that is permanent and related to business purpose is an allowable trading loss. Distinguishing observations regarding different facts in contrary precedent are obiter inasmuch as they turn on factual matrix. Conclusion: The write-off of investments (partial diminution) was held to be an allowable business loss; the Tribunal allowed the grounds on this issue for both assessment years by following the Madras High Court approach and distinguishing adverse authority on facts. Issue 2 - Add-back of provisions while computing book profits under section 115JB Legal framework: Section 115JB (MAT) constitutes a self-contained code; Explanation 1 clause (i) (as amended retrospectively) mandates add-back of 'amount or amounts set aside as provision for diminution in the value of any asset' while computing book profits. Precedent treatment: The assessee relied on Supreme Court decisions (e.g., on allowability of provisions under ordinary income computation) and a High Court decision (Gujarat) which treated certain provisions as effective write-offs; Revenue relied on the statutory amendment. The Tribunal distinguished general tax-computation precedents as not governing section 115JB which must be strictly construed. Interpretation and reasoning: The Tribunal observed that the assessee had only made provisions (not actual write-offs) and had accepted add-back under normal provisions earlier; the amended Explanation expressly covers provisions for diminution and requires add-back in MAT computation. Given the statutory deeming and retrospective amendment, the provision must be added back; decisions on ordinary computation do not alter the clear mandate of section 115JB's Explanation. Ratio vs. Obiter: Ratio - Provisions for diminution in value of any asset are to be added back when computing book profits under section 115JB pursuant to Explanation 1(i); general precedents on ordinary computation do not override the specific deeming provision. Obiter - Comments comparing factual differences with other High Court decisions. Conclusion: The Tribunal upheld the AO's add-back of Rs.4,98,23,842 to book profits under section 115JB and dismissed the assessee's ground on this point. Issue 3 - Apportionment of building-related expenses to rental income (revenue appeal) Legal framework: Expenditure directly attributable to earning of exempt or separate category income must be apportioned; AO must base apportionment on material and allocation relevant to the year under consideration. Previous orders in earlier assessment years and remand practice were considered. Precedent treatment: The Tribunal noted its own prior remand in the assessee's earlier years and followed that approach to require de novo factual adjudication by the AO rather than applying a fixed benchmark percentage mechanically. Interpretation and reasoning: AO applied a 75% apportionment benchmark from an earlier year without detailed evidence segregating usage or showing allocation of specific expenses (e.g., watch & ward, gardening, repairs, depreciation). Assessee produced contentions (separate security, garden used only by company, voluntary disallowances taken) accepted by the CIT(A). Given earlier Tribunal practice and the need for specific factual enquiry, the matter was remanded to the AO for fresh adjudication in accordance with law. Ratio vs. Obiter: Ratio - Apportionment of common building-related expenditures to rental income requires specific factual examination; mechanical adoption of prior-year percentage without enquiry is inappropriate and merits remand. Obiter - Observations about tenants not using garden and separate security arrangements were factual and not binding precedent. Conclusion: The Tribunal remanded the issue to the AO for de novo adjudication and allowed the revenue's appeal for statistical purposes. Issue 4 - Disallowance under section 14A read with Rule 8D without recording AO's satisfaction Legal framework: Section 14A(2)/(3) and Rule 8D(1)-(2) require the AO to record satisfaction on examination of the assessee's accounts before invoking Rule 8D apportionment; Maxopp (SC) clarifies that AO must record such satisfaction and consider nature/source of funds. Precedent treatment: The Tribunal relied on the Supreme Court (Maxopp) and other coordinate decisions holding recording of satisfaction as condition precedent. It also relied on decisions holding that only expenses related to investments yielding exempt income and borrowing usage must be examined. Interpretation and reasoning: The AO's order merely stated Rule 8D was applied without recording the requisite satisfaction or linking specific account heads/expenditure to the exempt dividend income; there was no finding that borrowed funds financed the exempt investments or that relevant expenditures existed. Given the absence of the mandatory satisfaction and the presence of sufficient own funds and higher interest income than interest outgo, the AO's computation under Rule 8D could not be sustained. Ratio vs. Obiter: Ratio - Disallowance under section 14A read with Rule 8D cannot be sustained unless the AO records a clear satisfaction (after examining accounts and fund usage) as mandated by law; in its absence, Rule 8D computation is impermissible. Obiter - Reliance on particular coordinate decisions for linked propositions. Conclusion: The Tribunal deleted the Rule 8D disallowance of Rs.6,93,046 and allowed the assessee's grounds on this issue for AY 2009-10.