2016 (7) TMI 963 - HC - Income Tax

High Court dismisses Department's appeal on preoperative expenses, remits other deductions for fresh consideration.

The High Court dismissed the Department's appeal challenging the ITAT order on disallowance of preoperative expenses under section 36(1)(iii) for the ... Disallowance made u/s 36(1)(iii) out of preoperative expenses - Held that:- As decided in Commissioner of Incometax, Baroda v. Ishwar Bhuvan Hotels Ltd. [2008 (2) TMI 4 - SUPREME COURT OF INDIA] Interest paid in respect of borrowings on capital assets not put to use in the concerned financial year can be permitted as allowable deduction u/s 36(1)(iii) of the I.T. Act, 1961 - Decided in favour of assessee Issues:Challenge to ITAT order on disallowance of preoperative expenses under section 36(1)(iii) for assessment year 1995-96. High Court's dismissal of Civil Application Nos.53 and 54 of 2001 regarding advertisement expenses, deduction under Section 35D, and deduction under Section 80HH and 80I.Analysis:1. The appellant, the Department, challenged the ITAT order on disallowance of preoperative expenses under section 36(1)(iii) for the assessment year 1995-96. The key question raised was whether the Appellate Tribunal was correct in confirming the order passed by the CIT (A) deleting the disallowance of a specific amount made under section 36(1)(iii). The counsel for the assessee relied on the decision in the case of Deputy Commissioner of Income-tax v. Core Health Care Ltd. to support their argument. The High Court examined the provisions of section 36(1)(iii) and held that the AO was not justified in making the disallowance. The judgment favored the assessee, and the appeal was dismissed.2. The High Court also addressed the dismissal of Civil Application Nos.53 and 54 of 2001 by the High Court, which raised substantial questions of law. These questions related to the allowability of advertisement expenses for creating a brand image, deduction under Section 35D for short-term loans, and deductions under Sections 80HH and 80I for miscellaneous income. The High Court found that the questions raised were substantial and should have been decided. Therefore, the High Court remitted these questions for fresh consideration. The Civil Appeals filed by the Department were partly allowed, and the matter was sent back to the High Court for further examination.3. The counsel for the assessee referred to the decision in the case of Commissioner of Income-tax, Baroda v. Ishwar Bhuvan Hotels Ltd., where a similar view was adopted by the Hon'ble Apex Court. The High Court, without elaborate reasoning, adopted the same view and answered the question in favor of the assessee and against the Department, leading to the dismissal of the appeal.In conclusion, the judgment addressed the issues of disallowance of preoperative expenses under section 36(1)(iii) and the dismissal of Civil Application Nos.53 and 54 of 2001 regarding various deductions. The High Court's decision favored the assessee in both instances, highlighting the importance of legal interpretations and precedents in tax matters.