2016 (4) TMI 215 - AT - Income Tax

Tribunal allows appeal on interest & book profits, partially allows disallowance under Section 14A.

M/s. Kamat Hotels (I) Ltd. Versus Addl. CIT-Range-8 (2), Mumbai

M/s. Kamat Hotels (I) Ltd. Versus Addl. CIT-Range-8 (2), Mumbai - TMI Issues Involved:1. Disallowance of interest on timeshare deposits.2. Disallowance under Section 14A of the Income Tax Act.3. Determination of income as per the provisions of Section 115JB of the Income Tax Act.Issue-wise Detailed Analysis:1. Disallowance of Interest on Timeshare Deposits:The primary issue was the disallowance of Rs. 1.07 crores claimed as interest on timeshare deposits. The Assessing Officer (AO) disallowed the amount, stating that the liability was contingent and not an actual business expenditure. The Assessee argued that the liability was taken over from Himco under a scheme of amalgamation approved by the Bombay High Court, and the interest liability was an existing obligation. The First Appellate Authority (FAA) upheld the AO's decision, noting that the provision was notional and no actual payment had been made.Upon appeal, it was argued that the liability was quantified and provided for as per Accounting Standard 14 and approved by the High Court. The Tribunal found that the liability was ascertainable on a scientific basis and thus could not be termed contingent. Referring to the Supreme Court's principles in Rotork Controls India P. Ltd., the Tribunal concluded that the obligation arose from a past event and required an outflow of resources. The Tribunal reversed the FAA's order, allowing the interest claim as a business expenditure.2. Disallowance under Section 14A of the Income Tax Act:The AO disallowed Rs. 6.53 lakhs under Section 14A, related to the exempt dividend income of Rs. 21,509/-. The Assessee argued that the investments were made from interest-free funds and no expenditure was incurred to earn the dividend. The FAA, referencing the Godrej and Boyce Mfg. Co. Ltd. case, restricted the disallowance to Rs. 1 lakh, stating that Rule 8D was not applicable for the relevant year.The Tribunal, considering the Godrej Agrovet Ltd. case, directed the AO to restrict the disallowance to 2% of the exempt income, thus partially allowing the Assessee's appeal.3. Determination of Income as per Section 115JB:The AO made certain additions while calculating book profits under Section 115JB, which the Assessee contested, arguing that the AO overlooked the scheme of amalgamation and relevant published accounts. The FAA upheld the AO's additions, stating they fell within the provisions of Section 115JB.The Tribunal noted that the AO did not provide reasons for the additions and that the FAA did not adjudicate the issue of accrued interest on deposits for calculating book profits. The Tribunal restored the matter to the FAA for adjudication on merits, emphasizing that appellate authorities are not restricted by the requirement of a revised return for new claims. The Tribunal also referred to CBDT Circular No. 8/2005, which clarified that FBT is an allowable deduction in the computation of book profits under Section 115JB. Consequently, the Tribunal reversed the FAA's order in part, directing a fresh adjudication.Conclusion:The appeal was partly allowed, with the Tribunal reversing the FAA's decisions on the disallowance of interest on timeshare deposits and the computation of book profits under Section 115JB, while partially allowing the disallowance under Section 14A. The matter regarding book profits was remanded back to the FAA for a fresh decision.