2021 (1) TMI 958 - AT - Income Tax

Tribunal partially allows appeal, remands interest disallowance & MAT credit, allows deduction for compensation.

The Tribunal partly allowed the appeal, remanding issues related to interest disallowance and MAT credit back to the AO for fresh consideration, while ... Addition u/s 40A(2)(a) - interest expenditure crystallized as an liability to the assessee during the previous - admission of additional evidence is a loan availed by the assessee from Kotak Mahindra Bank @ 13.5% without security which will have a bearing on a decision on grounds 4 to 8 and the invocation of provisions to section 40A(2)(b) - HELD THAT:- We are of the view that the issue sought to be raised in grounds 4 to 8 which is a disallowance under section 40A(2)(b) of the Actand the issue sought to be raised in grounds 9 to 12 with regard to the question whether interest expenditure of ₹ 1,90,06,180/- crystallized as an liability to the assessee during the previous year relevant to Assessment Year 2011-12 requires fresh consideration by the AO in the light of the additional evidence filed before us by the assessee - we remand the aforesaid two issues to the AO for fresh consideration, after affording opportunity of being heard to the assessee. Nature of expenditure - compensation paid on termination of the licence agreement - capital expenditure or revenue expenditure - HELD THAT:- We are of the view that the payment in question was owing to commercial expediency and enabled the assessee to avoid payment of future licence fee and thereby reduced the operating cost of the assessee. Such payment cannot be regarded as a capital expenditure. We, therefore, hold that the expenditure in question is revenue in nature and should be allowed as a deduction Eligibility for MAT credit u/s 115JAA arrived at after considering surcharge and cess - AO has not considered surcharge and cess applicable on such MAT credit and allowed MAT credit which has been set off against the tax liability arrived under normal provisions inclusive of surcharge and cess, which has resulted in an increased tax liability - HELD THAT:- In the case of Consolidated Securities Ltd. v. Asstt. CIT [2018 (7) TMI 1722 - ITAT DELHI]wherein, it was held that the amount of the MAT tax credit, inclusive of surcharge and education cess etc., if any, should be reduced from the amount of tax determined on the total income after adding surcharge and education cess, etc., and only the resultant amount payable will suffer interest under the relevant provisions of the Act.The aforesaid decision is applicable to the facts of the present case on all fours and by respectfully following the same, we set aside the impugned order and remit the matter to the file of the Ld. AO for ascertaining the correct amount of MAT tax credit available to the assessee including of surcharge/cess and then allow tax credit. Issues Involved:1. General grounds of appeal.2. Disallowance of interest expenditure under Section 40A(2)(a) of the Income Tax Act.3. Disallowance of interest expenditure treating it as prior period expenses.4. Disallowance of compensation paid towards early termination of a license agreement as capital expenditure.5. Claim of MAT credit under Section 115JAA of the Income Tax Act.Issue-wise Detailed Analysis:1. General Grounds of Appeal:The grounds 1 to 3 raised by the assessee are general in nature and do not require any specific adjudication.2. Disallowance of Interest Expenditure under Section 40A(2)(a) of the Act:The assessee, engaged in health care services, paid interest on loans to related parties at 15% p.a., which the AO deemed excessive compared to the fair market rate of 10.5% p.a. Consequently, the AO disallowed the excess interest paid, amounting to INR 8,85,303. The CIT(A) upheld this disallowance. The Tribunal admitted additional evidence, including affidavits and loan agreements, to reassess the reasonableness of the interest rate. The Tribunal remanded the issue back to the AO for fresh consideration in light of the new evidence.3. Disallowance of Interest Expenditure as Prior Period Expenses:The assessee claimed interest expenses totaling INR 1,90,06,180 for loans taken in earlier years but argued that the liability crystallized in the financial year 2010-11. The AO disallowed this claim, treating it as prior period expenses, and the CIT(A) upheld this disallowance. The Tribunal admitted additional evidence, including affidavits and board meeting minutes, to reassess whether the interest liability crystallized in the relevant financial year. The Tribunal remanded the issue back to the AO for fresh consideration in light of the new evidence.4. Disallowance of Compensation Paid Towards Early Termination of License Agreement:The assessee paid INR 1,50,00,000 as compensation for early termination of a license agreement with Apollo Health and Lifestyle Limited, which the AO and CIT(A) treated as capital expenditure. The Tribunal, referencing judicial precedents, held that the compensation was a revenue expenditure incurred for business considerations, not for acquiring a capital asset or enduring benefit. The Tribunal allowed the deduction of this expenditure, deciding in favor of the assessee.5. Claim of MAT Credit under Section 115JAA of the Act:The assessee claimed MAT credit inclusive of surcharge and cess, which the AO did not fully allow, resulting in an additional tax liability of INR 82,820. The CIT(A) upheld the AO's decision. The Tribunal referenced the decision in Consolidated Securities Ltd. v. Asstt. CIT, which held that MAT credit should be inclusive of surcharge and cess. The Tribunal remanded the issue back to the AO to ascertain the correct amount of MAT credit available to the assessee, including surcharge and cess, and to allow the tax credit accordingly.Conclusion:The Tribunal partly allowed the appeal, remanding issues related to interest disallowance and MAT credit back to the AO for fresh consideration, while allowing the deduction for compensation paid towards the early termination of the license agreement.