2016 (7) TMI 1011 - AT - Income Tax

Tribunal grants partial relief in appeal, limits disallowance under Section 14A, allows deductions under Section 10A

TATA Industries Ltd. Versus The Income Tax Officer, Ward- 2 (3) (3), Mumbai

The appeal was partly allowed by the Tribunal, granting relief on certain grounds while upholding disallowances on others. The significant relief included ... Processing fees for acquiring the term loans from the Banks - nature of expenditure - revenue or capital - Held that:- The assessee being an investment & finance company and a promoter of new companies and having interest in the business of these companies has made the investments for business purposes for having control over these subsidiary and associated companies, hence, in the light of the proposition of law laid down by the Hon’ble Bombay High court in the case of “CIT, Panaji, Goa vs. Phil Corpn. Ltd.”(2011 (6) TMI 187 - BOMBAY HIGH COURT ), Hon’ble Delhi High Court in the case of “Eicher Goodearth Ltd. vs. CIT” (2015 (5) TMI 685 - DELHI HIGH COURT) and the Hon’ble Supreme Court in “S.A. Builders vs. CIT” (2006 (12) TMI 82 - SUPREME COURT), no interest disallowance is attracted u/s 36(iii) of the Act. On the same analogy, the processing fees paid by the assessee for obtaining such loans is also allowable as business expenditure. More over the issue is covered with the decision of the Hon’ble Supreme Court’ in the case of India Cements Ltd. v. CIT [1965 (12) TMI 22 - SUPREME Court] wherein the Supreme Court held that the expenditure in raising loans or issuing debentures would be revenue in nature, irrespective of whether the borrowing is a long term or short term one. This issue is accordingly decided in favour of the assessee. Disallowance of expenditure in the shape of upfront fees and brokerage etc. paid for issuing the non-convertible debentures - Held that:- This issue is also covered with the decision of the Hon’ble Supreme Court’ in the case of India Cements Ltd. v. CIT [1965 (12) TMI 22 - SUPREME Court] wherein the Supreme Court held that the expenditure in raising loans or issuing debentures would be revenue in nature, irrespective of whether the borrowal is a long term or short term one. It was held that the act of borrowing money was incidental to the carrying on of business, the loan obtained was not an asset or an advantage of enduring nature, the expenditure was made for securing the use of money for a certain period and it was irrelevant to consider the object with which the loan was obtained. This issue is accordingly decided in favour of the assessee. Alowability of deduction under section 10A - Held that:- This issue is squarely covered with the decision of Hon’ble Bombay High Court in the case of “CIT vs. Black & Veatch Consulting Pvt. Ltd.” (2012 (4) TMI 450 - BOMBAY HIGH COURT ) wherein held that the deduction under section 10A has to be given at the stage when the profits and gains of business are computed in the first instance and thus the brought forward unabsorbed losses cannot be set off against current profit of the section 10A eligible unit for computing the income of the assessee. That the unabsorbed losses have to be deducted only from the profit available after allowing deduction u/s 10A. The Ld. D.R. has not brought any decision contrary to the above decision of the Hon’ble Bombay High Court. - Decided in favour of assessee Issues Involved:1. Disallowance of gross interest expenditure under Section 14A.2. Disallowance of establishment expenditure under Section 14A.3. Alternative contention regarding reduction of gross establishment expenditure.4. Capitalization of disallowed expenses.5. Disallowance of professional fees for valuation reports.6. Disallowance of processing fees paid to banks.7. Disallowance of debenture issue expenses.8. Allowance of debenture issue expenses in the following assessment year.9. Disallowance of professional fees for project-related activities.10. Non-deduction of write-back provision for contingency.11. Deduction under section 10A for computing income from Business or Profession.12. Deduction under section 10A after adjusting Gross Total Income by brought forward Business Loss.Detailed Analysis:1. Disallowance of Gross Interest Expenditure under Section 14A:The assessee's claim of deduction for interest paid on borrowed funds used for purchasing shares in group companies was disallowed by the AO under Section 14A. The AO noted that the borrowed funds resulted in exempt dividend income and therefore, disallowed the interest expenditure. The CIT(A) upheld this disallowance, emphasizing the direct nexus between the borrowed funds and the exempt income. The Tribunal, however, referred to the decision of the Hon'ble Bombay High Court in 'CIT, Panaji, Goa vs. Phil Corpn. Ltd.' and 'Eicher Goodearth Ltd. vs. CIT' by the Hon'ble Delhi High Court, which allowed such interest expenditure under Section 36(1)(iii) if the investment was made for business purposes to have control over subsidiary companies.2. Disallowance of Establishment Expenditure under Section 14A:The AO also disallowed establishment expenditure in proportion to the dividend income. The CIT(A) upheld this disallowance, referring to the principle that all forms of expenditure, whether direct or indirect, related to earning exempt income should be disallowed under Section 14A. The Tribunal agreed with the CIT(A) but limited the disallowance to the extent of the exempt income earned, following the principles laid down in 'Joint Investment Private Limited vs. CIT' and 'PCIT vs. Empire Package Pvt. Ltd.'3. Alternative Contention Regarding Reduction of Gross Establishment Expenditure:The assessee contended that the gross establishment expenditure should first be reduced by the amounts already disallowed in the Return of Income and during the assessment proceedings. The Tribunal did not find merit in this contention as the lower authorities had already considered the relevant facts and figures.4. Capitalization of Disallowed Expenses:The assessee's alternate claim that disallowed expenses should be capitalized and added to the cost of acquisition of shares was rejected by the CIT(A). The Tribunal did not find any basis to interfere with this finding.5. Disallowance of Professional Fees for Valuation Reports:The professional fees paid for obtaining valuation reports of certain investments were disallowed by the AO and upheld by the CIT(A). The Tribunal found no reason to differ from the findings of the lower authorities.6. Disallowance of Processing Fees Paid to Banks:The processing fees paid for acquiring term loans were disallowed by the AO as capital expenditure. The Tribunal, however, allowed this expenditure as business expenditure, referring to the decision of the Hon'ble Supreme Court in 'India Cements Ltd. v. CIT,' which held that the expenditure in raising loans is revenue in nature.7. Disallowance of Debenture Issue Expenses:The AO disallowed debenture issue expenses, considering them as capital expenditure. The Tribunal allowed these expenses as revenue expenditure, following the decision of the Hon'ble Supreme Court in 'India Cements Ltd. v. CIT.'8. Allowance of Debenture Issue Expenses in the Following Assessment Year:The assessee's claim to allow the debenture issue expenses in the following assessment year was not pressed and hence dismissed.9. Disallowance of Professional Fees for Project-Related Activities:This ground was also not pressed by the assessee and thus dismissed.10. Non-Deduction of Write-Back Provision for Contingency:The issue regarding the non-deduction of write-back provision for contingency was not pressed by the assessee due to relief granted in rectification proceedings under Section 154.11. Deduction under Section 10A for Computing Income from Business or Profession:The AO had set off the deduction available under Section 10A against brought forward losses. The Tribunal, following the decision of the Hon'ble Bombay High Court in 'CIT vs. Black & Veatch Consulting Pvt. Ltd.,' held that the deduction under Section 10A should be given at the stage of computing the profits and gains of business, and not after setting off brought forward losses.12. Deduction under Section 10A after Adjusting Gross Total Income by Brought Forward Business Loss:The Tribunal reiterated that the deduction under Section 10A should be allowed before adjusting the Gross Total Income by brought forward business loss, as per the decision of the Hon'ble Bombay High Court in 'CIT vs. Black & Veatch Consulting Pvt. Ltd.'Conclusion:The appeal was partly allowed, with the Tribunal providing relief on certain grounds while upholding the disallowances on others. The significant relief was granted by limiting the disallowance under Section 14A to the extent of the exempt income and allowing the deduction under Section 10A before setting off brought forward losses.