2019 (12) TMI 672 - AT - Income Tax

ITAT Ruling: Disallowance upheld under various sections, but provision written back deemed non-taxable.

The ITAT upheld the disallowance of the claim under section 36(1)(viii) for the amount transferred to a special reserve, disallowance of grant given to ... Disallowance of claim u/s. 36(1)(viii) - amount transferred to special reserves - AO had disallowed the same holding that activity of the assessee of extending long term finance to the dairy cooperative could not be termed as long term financé for agricultural and industrial development - HELD THAT:- Issue decided in favour of the revenue as in its own case [2017 (6) TMI 1146 - ITAT AHMEDABAD] as held that other conditions of section 36(1)(viii) are not complied with by the assessee. The milk produced by the assessee is not amounting to manufacture and therefore the assessee was not engaged in providing long term finance for industrial and agricultural development or development of industrial facility and again it had no capital which is necessary to compute the aggregate of the amount to be carried to special reserve account as twice the amount of the paid up share capital and of the General reserve. The assessee failed to comply with these other conditions and therefore it would not be entitled the deduction. Disallowance being grant given to Cooperative Union Federation and other Organization u/s. 36(1)(xii) alternatively allowable u/s. 28/37 - HELD THAT:- As in assessee's own case [2017 (6) TMI 1146 - ITAT AHMEDABAD] Tribunal had recalled the earlier order, and it was held that the grant is allowable as an expenditure under section 36(l)(xii) of the Act, and the matter was sent back to the AO for verification (j) whether the alleged non-refundable grants are given from grants received or not, and (ii) non-refundable grants sanctioned, are claimed as only when fund are already utilised/ fund utilisation report are received. He also submitted that under similar facts, in A.Y.2004-05, 2005-2006 and 2006-2007, the Tribunal has restored back the matter to the file of the AO for readjudication. Disallowance u/s. 14A - HELD THAT:- We restrict the adhoc disallowance to ₹ 10 lacs being administrative expenditure incurred towards earning exempt income. Accordingly, the appeal of the assessee is partly allowed on this issue. Interest income of NKPDF project - HELD THAT:- In the preceding assessment years the same issue was travelled upto ITAT and the ITAT in assessment year 2003-04 and subsequent years till assessment year 2008-09 has adjudicated the issue against the assessee. We have gone through the decision of ITAT for assessment year 2008-09 [2017 (6) TMI 1146 - ITAT AHMEDABAD] and noticed that ITAT has held that consistently following the decision of Co-ordinate Bench for assessment year 2004-05 and subsequent years the interest income of North Kerala Dairy Project is to be considered as taxable income. Respectfully following the decision of ITAT for assessment year 2008- 09 and other preceding assessment years as cited above, we are of the view that interest income of North Kerala Dairy Project is to be considered as taxable income. Therefore, this ground of appeal of the assessee is dismissed. Disallowance being contribution made to Employees Recreation Trust by invoking provisions of section 40A(9) - HELD THAT:- It is noticed that in assessment year 2007-08 [2013 (8) TMI 360 - ITAT AHMEDABAD] the ITAT has adjudicated this issue against the assessee after following the decision of ITAT in the case of the assessee itself for assessment year 2003-04. Addition being provision written back - HELD THAT:- Addition made by the AO is not sustainahle for two reasons. The first reason is that when provision was made, the assessee was not liable to tax, hence, if the provision is reversed in the year of making the provision, it is not resulting into any tax liability, because the assessee was not taxable in that year, and therefore, reversal of such a liability cannot give rise to tax in the year of reversal, when it is not giving any benefit to the assessee, in the year of making the provision. The second reason is that even, if it is held that income has to be assessed in the year of making the provision, then this deduction on account of provision under section 36(l)(vii) is not allowable deduction in that year, because under this section, actual write allowable and not the provision. This is a pre-requirement of section 41(1) that where the allowance or deduction has been made in the assessment for any year, in respect of loss, expenditure or trade liability incurred by the assessee, and the same is subsequently ceased or has been remitted, then there is income under section 41(1) of the Act. Since in the present case, no deduction has been allowed to the assessee, in the year of making the provision, and it cannot be allowed because provision is not allowable under section 36(1)(vii), write back of such provision cannot give rise to an income under section 41(1) Issues Involved:1. Disallowance of claim u/s 36(1)(viii)2. Disallowance of grant given to Cooperative Union Federation u/s 36(1)(xii)3. Disallowance u/s 14A4. Taxability of interest income of North Kerala Dairy Project5. Disallowance of contribution to Employees Recreation Trust u/s 40A(9)6. Deletion of addition of provision written backDetailed Analysis:Ground No. 1: General Nature- This ground does not require adjudication and is dismissed.Ground No. 2: Disallowance of claim u/s 36(1)(viii)- The assessee claimed a deduction of Rs. 5,36,79,690/- u/s 36(1)(viii) for the amount transferred to a special reserve. The assessing officer and CIT(A) disallowed this claim, referencing ITAT's decision for AY 2003-04, which held that the assessee's activities did not qualify as long-term finance for agricultural and industrial development. The ITAT upheld this disallowance, following its previous decisions for AY 2003-04 and AY 2008-09, and dismissed the assessee's appeal.Ground No. 3: Disallowance of Rs. 13,69,559/- being grant given to Cooperative Union Federation u/s 36(1)(xii)- The assessing officer disallowed Rs. 13,69,559/- given to Bangalore Urban and Rural District Co-operative Milk Producers Society Union Ltd., treating it as a grant rather than deductible expenditure. CIT(A) upheld this disallowance, noting the assessee failed to prove the genuineness of the transactions. ITAT restored the matter to the assessing officer for re-adjudication, following its decision for AY 2008-09.Ground No. 4: Disallowance u/s 14A- The assessing officer disallowed Rs. 2,32,10,571/- u/s 14A, stating the assessee incurred expenses to earn exempt income. The CIT(A) upheld this disallowance. ITAT, referencing its decision for AY 2008-09, restricted the disallowance to Rs. 10 lacs as administrative expenditure, acknowledging that the assessee had sufficient interest-free funds and minimal reshuffling of investments.Ground No. 5: Taxability of interest income of North Kerala Dairy Project- The assessee argued that the interest income of Rs. 2,30,90,542/- from the North Kerala Dairy Project was not taxable, claiming it acted as a nodal agency and the income was diverted at source. The CIT(A) and ITAT, referencing previous decisions up to AY 2008-09, held that the interest income was taxable. The assessee's appeal was dismissed.Ground No. 6: Disallowance of Rs. 3,20,775/- being contribution to Employees Recreation Trust u/s 40A(9)- The assessing officer disallowed Rs. 3,20,775/- contributed to the Employees Recreation Trust, and CIT(A) upheld this disallowance, referencing ITAT's decision for AY 2003-04. ITAT, following its decision for AY 2007-08, dismissed the assessee's appeal.Revenue's Appeal: Deletion of addition of Rs. 45,00,00,000/- being provision written back- The assessing officer disallowed the provision written back, stating the assessee did not prove the provision was taxed in earlier years. CIT(A) allowed the assessee's claim, referencing similar deletions in AY 2007-08 and 2008-09. ITAT upheld CIT(A)’s decision, referencing its decision for AY 2007-08, stating the provision was not taxable when made, and its reversal does not result in taxable income.Conclusion:- The assessee's appeal is partly allowed for statistical purposes, and the revenue's appeal is dismissed.