2021 (2) TMI 127 - AT - Income Tax

Appeal partly allowed, service tax adjustment and IPO expenditure deductions granted, TDS credit remanded for verification.

The Tribunal partly allowed the appeal, directing the Assessing Officer to verify and allow certain claims. The disallowance of the service tax adjustment ... Prior Period Expenditure - Deduction claimed on account of CENVAT credit pertaining to PSF / UDF and advertisement expenses - departmental authorities have rejected them on the ground that they are prior period expenditure - HELD THAT:- On the basis of legal opinion, the assessee has reversed the entries in the prior period income account by debiting the prior period expenditure account in the impugned assessment year. Thus, as could be seen from the facts on record, the CENVAT credit on PSF / UDF and advertisement fee was not actually received by the assessee but anticipating that it is entitled to such credit, assessee had offered them as income in assessment years 2010-11 and 2011-12. The amount representing CENVAT credit on PSF / UDF and advertisement expenses were wrongly offered as income in assessment years 2010-11 and 2011-12. When an item of income is not received by the assessee and was wrongly offered in the preceding assessment years, the assessee is entitled to claim deduction of such amount in the subsequent assessment year by way of reversal of entries. This is simply on the basis of real income theory and on the principle that if there is no income, there cannot be any tax. When the assessee has not earned the income, liability in respect of such nonexistent income cannot be fastened with the assessee. We direct the Assessing Officer to delete the addition subject to verification that the assessee has actually forgone its claim of CENVAT credit before the concerned authority. Disallowance of service tax paid on chartered flight and service tax computed on discount received on PSF / UDF - it is the contention of the assessee that while offering income on accrual basis in the preceding assessment years, the assessee had also included the service tax paid on chartered flight and discount received on PSF / UDF and submitted, since the assessee had voluntarily offered such income in the preceding assessment years and since the amount has been actually paid in the impugned assessment year, they have to be allowed as deduction in view of section 43B - HELD THAT:- We find substantial merit in the aforesaid submission of the assessee. Accordingly, we direct the Assessing Officer to verify whether the service tax on chartered flight amounting to ₹ 18,72,540 and discount received on PSF / UDF of ₹ 36,28,401 was paid to the government account in the impugned assessment year and if on verification assessee’s claim is found to be correct, the same has to be allowed. Interest on delayed payment of service tax - HELD THAT:- Commissioner (Appeals) has accepted assessee’s claim that such interest is not penal, but compensatory in nature. The doubt raised by him is only with regard to the fact whether the liability relating to such interest payment has arisen during the year. In view of the aforesaid, we direct the Assessing Officer to verify the date of actual payment of interest on delayed payment of service tax. If on verification it is found that the assessee has actually paid the interest in the impugned assessment year, the same should be allowed as deduction to the assessee. This ground is allowed subject to verification. Disallowance being the expenditure incurred for increase in share capital - HELD THAT:- On a perusal of the balance-sheet of the assessee as at 31-03-2012, we do not find any asset of enduring nature created on account of issuance of IPO. Thus, in our view, this expenditure is akin to expenditure incurred towards aborted project, hence, qualify as revenue expenditure. In the case of CIT vs General Insurance Corporation [2006 (9) TMI 116 - SUPREME COURT] the Hon’ble Apex Court has allowed assessee’s claim of expenditure in connection with issuance of bonus shares as revenue expenditure. Similar view has been expressed in the other decisions cited before us. Short grant of TDS credit - HELD THAT:- Having heard the parties, we direct the Assessing Officer to verify assessee’s claim and allow due credit of TDS in accordance with law after proper verification of facts and materials on record. This ground is allowed, for statistical purpose. Issues Involved:1. Disallowance of service tax adjustment and interest on service tax.2. Disallowance of expenditure incurred for increase in share capital.3. Short grant of TDS credit.Issue-wise Detailed Analysis:1. Disallowance of Service Tax Adjustment and Interest on Service Tax:The assessee, a company engaged in operating and chartering aircraft, claimed CENVAT credit on service tax paid on Passenger Service Fee (PSF) / User Development Fee (UDF) and advertisement expenses, which was initially offered as income in the assessment years 2010-11 and 2011-12. Upon legal advice, the assessee reversed this income in the assessment year 2012-13, claiming it as a deduction under section 37(1) of the Income Tax Act. The Assessing Officer disallowed this claim, viewing it as prior period expenditure. The Commissioner (Appeals) upheld this disallowance, stating that the deduction claimed was not against any existing liability and thus not allowable under section 37(1). The Tribunal, however, directed the Assessing Officer to delete the addition of Rs. 11,62,28,262/- subject to verification that the assessee had actually forgone its claim of CENVAT credit before the concerned authority.Regarding service tax paid on chartered flights and discounts received on PSF/UDF, the Tribunal found merit in the assessee's claim that these amounts, included in the income of preceding assessment years, should be allowed as deductions under section 43B of the Act if paid in the impugned assessment year. The Assessing Officer was directed to verify the actual payment and allow the deduction accordingly.For the interest on delayed payment of service tax, the Tribunal agreed with the Commissioner (Appeals) that such interest is compensatory and thus allowable, provided the liability arose during the year. The Assessing Officer was instructed to verify the date of actual payment and allow the deduction if the interest was paid in the impugned assessment year.2. Disallowance of Expenditure Incurred for Increase in Share Capital:The assessee claimed an expenditure of Rs. 40,92,638/- towards an initial public offer (IPO), which was subsequently aborted. The Assessing Officer treated this as capital expenditure, allowing amortization of 1/5th of the amount under section 35D of the Act. The Commissioner (Appeals) upheld this disallowance. The Tribunal, however, accepted the assessee's contention that since the IPO was aborted, no enduring benefit accrued, and hence the expenditure should be treated as revenue expenditure. The Tribunal relied on various judicial precedents, including the decisions in CIT vs Nimbus Communications Ltd and CIT vs General Insurance Corporation, to allow the assessee's claim by deleting the disallowance.3. Short Grant of TDS Credit:The assessee challenged the short grant of TDS credit. The Tribunal directed the Assessing Officer to verify the assessee's claim and allow due credit of TDS in accordance with law after proper verification of facts and materials on record.Conclusion:The appeal was partly allowed, with the Tribunal providing directions for verification and allowing certain claims subject to such verification. The order was pronounced in the Open Court on 25/01/2021.