2018 (4) TMI 88 - HC - Income Tax

High Court Upholds Exclusion of Interest, Revises Expenditure & Depreciation Rulings

The High Court partially allowed the appeal, upholding the Tribunal's decision to exclude interest under Section 244(1A) but overturning the Tribunal's ... Revision u/s 263 - addition towards interest granted under section 244(1A) to the assessee - whether interest granted under Section 244 (1A) escaped inclusion in the income chargeable to tax? - Held that:- We answer the first question framed, being one on facts, in favour of the assessee and against the department. The assessee was perfectly right in having included the interest received in 1992-93 in the A.Y. 1993-94, as income. The deletion made by the Tribunal of the addition of a sum of ₹ 88,007/- towards interest granted under Section 244(1A), was perfectly justified. - Decided against revenue Expenses incurred towards the construction of the houses to the weaker sections of the society come under business expenditure under section 37 - Held that:- Commissioner was exercising powers under Section 263 to undo the erroneous assessment carried out by the A.O; which were prejudicial to the interest of the Revenue. The Tribunal egregiously erred in qualifying the amounts expended by the assessee in charity, as one “wholly and exclusively” laid out or expended for the purpose of business; for reason of the incidental goodwill and popularity garnered by such charitable act. The question has to be answered against the assessee and in favour of the Revenue. Entitled to depreciation u/s 32 for the expenses incurred towards installation of plant and machinery at their Palghat Unit - Held that:- Third question too has to be answered in favour of the Revenue and against the assessee since the assessee had not commenced production in the relevant assessment year and the depreciation claim on the basis of the installation of plant and machinery and readying the unit for use for business purposes, cannot be sustained in the wake of the overwhelming precedents noticed against such a claim Issues Involved:1. Exclusion of interest under Section 244(1A).2. Classification of expenditure on housing for the poor under Section 37.3. Entitlement to depreciation under Section 32 for plant and machinery.4. Validity of the Tribunal's interference with the Commissioner's order under Section 263.Issue-wise Detailed Analysis:1. Exclusion of Interest under Section 244(1A):The Tribunal justified excluding the addition of Rs. 88,007 towards interest granted under Section 244(1A) for the assessment year 1992-93. The assessee included the interest as income in the return for the assessment year 1993-94, as the interest was granted only by order dated 09-10-1992. The Tribunal found no failure on the part of the assessee to disclose the interest in the relevant year. The High Court agreed with the Tribunal's findings, stating that the interest was rightly included in the assessment year 1993-94, and no question of law arose from the Tribunal's decision on this matter.2. Classification of Expenditure on Housing for the Poor under Section 37:The Tribunal held that the expenditure of Rs. 8,21,916 incurred towards constructing houses for the weaker sections was a business expenditure under Section 37, as it created tremendous goodwill and increased the circulation of the assessee's newspaper. However, the High Court disagreed, stating that the expenditure was charitable and philanthropic, not incurred wholly and exclusively for business purposes. The Court referenced the case of Malayala Manorama Co. Ltd. v. CIT, where similar charitable expenditures were not allowed as business expenses. The High Court concluded that the expenditure was not for business promotion and thus could not be allowed under Section 37, setting aside the Tribunal's findings and restoring the Commissioner's order under Section 263 on this count.3. Entitlement to Depreciation under Section 32 for Plant and Machinery:The Tribunal allowed depreciation for the expenses incurred towards the installation of plant and machinery at the Palghat Unit, despite the commercial production commencing only in April 1992. The High Court, however, held that depreciation under Section 32 is permissible only if the machinery was actually used during the relevant assessment year. The Court cited several precedents, including Liquidators of Pursa Ltd. v. CIT and CIT v. Jiwaji Rao Sugar Co. Ltd., emphasizing that the machinery must be actively used for business purposes within the accounting year. Consequently, the High Court set aside the Tribunal's decision and restored the Commissioner's order under Section 263, denying the depreciation claim.4. Validity of the Tribunal's Interference with the Commissioner's Order under Section 263:The High Court examined the Tribunal's interference with the Commissioner's order under Section 263. The Tribunal had set aside the Commissioner's order, holding it as erroneous. However, the High Court found that the Commissioner rightly exercised suo motu revisional powers under Section 263, as the original assessment was prejudicial to the interest of the Revenue. The High Court noted that the Tribunal's justification of mere change of opinion did not apply to orders under Section 263. The Court referenced the decision in Appolo Tyres Ltd. v. Deputy Commissioner of Income Tax, supporting the Commissioner's revision. Therefore, the High Court upheld the Commissioner's order on the two counts of disallowance under Section 37 and denial of depreciation under Section 32, while affirming the Tribunal's decision regarding the exclusion of interest under Section 244(1A).Conclusion:The High Court allowed the appeal in part, sustaining the Tribunal's decision on the exclusion of interest under Section 244(1A) but setting aside the Tribunal's decisions on the disallowance of expenditure under Section 37 and the depreciation claim under Section 32. The Court directed the Assessing Officer to pass consequential orders based on the upheld revisions.