2019 (12) TMI 375 - HC - Income Tax

High Court Allows Income Tax Appeal: Club Expenses Reassessed, Interest Disallowed

Commissioner Of Income-Tax Versus Apollo Tyres Ltd.

The High Court partially allowed the income tax appeal, remanding the case for reassessment on the admissibility of club expenses and confirming the ... Allowance of club membership fees - Both the counsel state that the assessee is entitled to claim deduction to the extent of subscription or membership fee if paid by the assessee but not incidental expenses incurred by the employees/member of the assessee. - Held that:- the decision of CIT(A) and ITAT to the extent of granting complete deduction to the amount spent towards club membership fee and incidental expenses is untenable. - Matter restored before AO for passing orders after examining the accounts on the actual extent of expenses incurred by the assessee in this behalf and grant deduction to the actual expenses incurred by the assessee by keeping in view the ratio laid down by this court in [2019 (4) TMI 82 - KERALA HIGH COURT] Deduction of interest on the investment made from pool of funds - nexus between borrowed funds and interest in units of mutual funds - assessee received dividend and reduced from the net profit under Explanation (ii) below the second proviso to sub-section (2) of section 115JB by treating the said income to which the provisions of section 10(33) of the Act would apply. - assessee for the previous assessment year in an appeal pending before the apex court has taken a different stand from the stand taken in the present assessment year. - Held that:- the remand to the Assessing Officer is justified and no interference is warranted in the appeal. MAT - computation of the book profit under section 115JB - disallowance of amount paid from reserve funds of GPEL (JV Partner) as guarantor of bank loans - Held that:- the assessee has established that the memorandum of association, authorised the assessee to expand its business into new areas, i.e., incorporating GPEL, etc. - GPEL on account of technical glitches in sharing know-how provided by the foreign collaborator could not take off on expected lines, resulting in cash loss etc. GPEL was referred to the BIFR as sick industry. The BIFR notified a scheme for operation or reviving GPEL. The BIFR, under the scheme had equally distributed the obligations both to Gujarat infrastructure Development company and the assessee. The assessee, as part of implementation of a scheme accepted by the BIFR had to clear the debt of GPEL as guarantor. The Tribunal held that the contention of the Assessing Officer if accepted literally amounts to deciding the priorities of the business exigencies of the assessee, as long as the truthfulness of the entries is not doubted and it is not a case of siphoning off of money through cheap fictitious entries, the Tribunal held that there was no need to interfere with the findings recorded by the Commissioner of Income-tax (Appeals). - Order of CIT(A) and ITAT sustained. Payment of bonus - deduction on actual payment basis u/s 43B - Held that:- The Tribunal further refers to consistent practice followed by the assessee, namely, that the assessee makes payment on account of 'bonus' on the occasion of Onam, which is an important festival in the State of Kerala. It is finally held that a combined reading of section 36(2), sub-section (1) of section 36 read with section 43B allows accepting the expenditure on actual payment basis made by the assessee. - No interference required. Issues Involved:1. Admissibility of club expenses.2. Disallowance of interest on investment from pool of funds.3. Deduction claim for business loss on writing off bad debt of Gujarat Petro Electrical Ltd. (GPEL).4. Deduction for payment of bonus in the assessment year 2002-03.5. Computation of book profit under section 115JB.Detailed Analysis:Point I: Admissibility of Club ExpensesThe assessee claimed Rs. 4,38,829 as club expenses, including membership fees and incidental expenses. The Assessing Officer disallowed Rs. 1,63,815 for incidental expenses. The Commissioner of Income-tax (Appeals) and the Tribunal allowed the claim, but the High Court referred to a prior decision (I.T.A. No. 1347 of 2009) stating that only the membership fee, not incidental expenses, is deductible. The case was remitted to the Assessing Officer to verify actual expenses and allow only the membership fee.Point II: Disallowance of Interest on Investment from Pool of FundsThe assessee claimed deduction for interest on investments in UTI Mutual Fund and Bank of India, which was disallowed by the Assessing Officer. The Tribunal remanded the issue to the Assessing Officer to verify if the investments were for trading or investment purposes, following the decision in CIT v. Smt. Leena Ramachandran. The High Court upheld the Tribunal's decision for remand, finding no substantial question of law.Point III: Deduction Claim for Business Loss on Writing Off Bad Debt of GPELThe assessee wrote off Rs. 32.70 crores paid to GPEL as a guarantor for loans, claiming it as a business loss. The Assessing Officer disallowed the claim, but the Commissioner of Income-tax (Appeals) and the Tribunal allowed it, citing commercial expediency and the BIFR scheme. The High Court upheld these findings, noting that the assessee's actions were within the scope of its business expansion and commercial expediency. The court confirmed the findings of the lower authorities, emphasizing that the decision was specific to the current assessment year.Point IV: Deduction for Payment of Bonus in the Assessment Year 2002-03The assessee paid a bonus for the assessment year 2001-02 during the assessment year 2002-03 and claimed it under section 43B. The Assessing Officer disallowed the claim, but the Commissioner of Income-tax (Appeals) and the Tribunal allowed it, stating that section 43B permits deduction in the year of actual payment. The High Court upheld this interpretation, confirming the Tribunal's finding that the deduction was allowable in the year of payment.Point V: Computation of Book Profit under Section 115JBThe Tribunal held that amounts withdrawn from reserves, which were added to book profits in earlier years, should be reduced when computing book profits under section 115JB. The High Court agreed, noting that this prevents double taxation and aligns with the purpose of minimum alternate tax provisions.Conclusion:The High Court allowed the income tax appeal in part, remanding the case to the Assessing Officer for reassessment on the admissibility of club expenses and confirming the Tribunal's remand on the issue of interest disallowance. The rest of the findings, including those on business loss, bonus payment, and book profit computation, were confirmed in favor of the assessee.