2025 (5) TMI 2191 - AT - Income Tax

Multiple tax issues decided: refund interest nontaxable; depreciation and s.43B deletions; s.36(1)(va) disallowance upheld; 80IA deductions affirmed

ITAT MUMBAI (AT) allowed multiple grounds for the assessee and against the Revenue: interest on income-tax refund not taxable; deletion of depreciation ... Taxability of interest earned on income tax refund - HELD THAT:- We find that while deciding identical issue in assessee’s case [2025 (6) TMI 132 - ITAT MUMBAI] while deciding the issue, following the decision in case of DIT vs. Bank of America [2014 (12) TMI 551 - BOMBAY HIGH COURT] decided the issue in favour of the assessee. We allow the ground in favour of the assessee. Disallowance of depreciation on assets forming part of the block of asset but subsequently let out - We find that while deciding identical issue in assessee’s case [2025 (6) TMI 132 - ITAT MUMBAI] held once the property forms part of the block of assets, carving out the depreciation for the said property and disallowing the same goes against the spirit of allowing depreciation on the entire block of depreciable assets. In this appeal the Revenue has not disputed the claim of deduction under section 24 of the Act in respect of the property which forms part of the block of assets. Thus, merely because the Revenue has accepted the claim of deduction under section 24 of the Act doesn’t mean that the property which forms part of the block of assets will cease to be so. Therefore, the disallowance of depreciation made by the AO is deleted. Disallowance of administrative expenses incurred in respect of retirement benefit trust - As decided in own case [2025 (5) TMI 2190 - ITAT MUMBAI] we were unable to locate any condition prescribing that the expenses incurred by the company in managing the fund/trust shall not be allowed as deduction in computing the profit and gains from business/profession. There is no dispute regarding either the incurring of the expenditure or its genuineness. Thus, when the assessee has incurred certain expenses in course of its business it has to be allowed as deduction. The provisions contained in the statute empower the approving authority to grant approval strictly in terms with the prescribed rules. The rules nowhere suggest that approval has to be granted by putting a limitation on the allowability of administrative expenses. That being the factual and legal position, in our view, the approving authority cannot impose conditions in addition to the condition prescribed under the Rules. We direct the AO to allow assessee’s claim. This ground is allowed. Disallowance of deduction u/s. 80IA on other income - rent received from housing accommodation allotted to employees - HELD THAT:- We find that while deciding identical issue in assessee’s case [2025 (6) TMI 132 - ITAT MUMBAI] to be decided in favour of assessee. Disallowance made u/s.43B - disallowance made on account of contribution to local organizations - HELD THAT:- We find that while deciding identical issue in assessee’s case [2025 (6) TMI 132 - ITAT MUMBAI] to be decided in favour of assessee. Disallowance made of rural development expenses - HELD THAT:- We find that while deciding identical issue in assessee’s case [2025 (6) TMI 132 - ITAT MUMBAI] as assessee submitted that the expenses were incurred on rural development activities, such as construction of roads in nearby villages and schools, water supply, women empowerment program, self help training, food expenses, help in mass marriage, medical camp, eye camp, tree plantation, ration distribution during flood, family planning camp, sulabh toilets at villages etc. It was submitted by the assessee, since the expenditure incurred is purely for the purpose of business of the assessee it was allowable. Cost of production of advertisement films to be allowed. Disallowance of delayed payment of employees’ contribution to provident fund and labour welfare u/s. 36(i)(va) - Following the ratio laid down in case of Checkmate Services Pvt. Ltd. [2022 (10) TMI 617 - SUPREME COURT (LB)] we uphold the disallowance made by the AO. Expenses incurred on SAP ERP to be allowed as revenue expenses. Allowance of employee’s stock option cost to be allowed. Nature of receipt - sale of Certified Emission Reduction (CER) commonly known as carbon credit - whether capital or revenue in nature? - As in case of Dodson Lindblom Hydro Power P. Ltd. [2019 (4) TMI 1034 - BOMBAY HIGH COURT] while considering the identical issue, has taken note of the view expressed in case of CIT vs. My Home Power Ltd.[2012 (11) TMI 288 - ITAT HYDERABAD], Subhash Kabini Power Corporation Ltd.[2016 (5) TMI 793 - KARNATAKA HIGH COURT] has agreed with the decision of the Tribunal that receipt from sale of carbon credit are in the nature of capital receipt. Dividend received from the Egyptian company is taxable in India. Disallowance of expenses incurred on transfer of Vikram Ispat Unit - We are of the view that the expenditure incurred, in any, case has to be allowed either as revenue expenditure or capital expenditure while computing capital gain on sale of Vikram Ispat Unit. Undisputedly, the capital gain from sale of the unit has been offered to tax in A.Y. 2010-11. In fact, learned First Appellate Authority has given clear direction to the AO to withdraw the deduction allowed for the expenditure incurred while computing capital gain. Thus, in our view, there is only a timing difference in claim of expenditure. Hence, it is revenue neutral. In view of aforesaid, we uphold the decision of learned First Appellate Authority while dismissing the ground. Allowance of deduction u/s. 80IA of the Act on head office expenses confirmed. Subsidy received under the TUF scheme is capital in nature ISSUES PRESENTED AND CONSIDERED 1. Whether interest received from income-tax refunds can be netted against interest paid to the Income-tax Department and taxed on the net amount. 2. Whether depreciation is allowable on assets that form part of a block of assets but were let out in the relevant year (i.e., whether depreciation should be carved out for the let-out asset when income from that asset is offered under 'Income from House Property'). 3. Whether administrative expenses incurred by the assessee in respect of approved retirement benefit trusts (provident fund/gratuity fund) are allowable deductions notwithstanding conditions allegedly imposed by the approving authority. 4. Whether rental income from housing accommodation allotted to employees and various specified business receipts qualify for deduction under section 80IA. 5. Whether interest and other recurring issues previously decided in the assessee's own case (including disallowances under section 43B, contributions to local organisations, rural development expenses, cost of production of advertisement films, SAP ERP expenses, employees' stock option costs, apportionment of head-office expenses to 80IA units, TUF subsidy characterisation, and related matters) should be decided by following Coordinate-Bench precedents in the assessee's own case. 6. Whether the receipt from sale of Certified Emission Reductions (carbon credits) is capital or revenue in nature. 7. Whether dividend received from a foreign company (Egypt) is taxable in India or constitutes income taxable only in the source country. 8. Whether expenses incurred in relation to the transfer/sale (slump sale) of a business unit are deductible as revenue expenditure in the year incurred or require treatment in computation of capital gains in the year of sale (i.e., timing/character of such expenditure). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Netting of interest on income-tax refunds against interest paid to the Department Legal framework: Taxability of interest receipts; deductibility of interest paid as business expenditure; statutory provisions do not expressly prohibit netting of receipts and payments between a taxpayer and the same counterparty where facts permit. Precedent treatment: Coordinate Bench and Jurisdictional High Court decisions (Bank of America; Credit Agricole) have allowed netting in similar factual situations; contrary Supreme Court/High Court decisions cited by Revenue were found factually distinguishable. Interpretation and reasoning: The Tribunal examined that interest received and interest paid were transactions with the same party (Government) on a single account; netting does not contravene any provision of the Act and did not result in loss of revenue; precedents where the Tribunal/High Court accepted netting were followed. Revenue authorities' reliance on rulings disallowing business expenditure as not deductible was distinguished on facts because those cases did not involve netting against receipts from the same party. Ratio vs. Obiter: Ratio - where interest received and interest paid relate to the same counterparty/account, netting and taxation on net interest is permissible; Obiter - observations regarding absence of substantial question of law in High Court decisions. Conclusion: Netting allowed; interest taxed on the net amount. Ground allowed for the assessee. Issue 2 - Depreciation on assets forming part of block of assets but subsequently let out Legal framework: Sections defining 'block of assets' and depreciation (sections 2(11), 32, 43(6)(c)); CBDT Circular No.469 (simplification and block-level depreciation); principles on ownership and user for depreciation. Precedent treatment: Coordinate Bench and various High Court decisions (including Oswal Agro Mills) establish that once an asset forms part of a block, it loses individual identity for depreciation; depreciation is allowable on the block even if particular asset is not used in the business in that year. Interpretation and reasoning: The Tribunal applied statutory definition and legislative intent to simplify record-keeping by block treatment. Since the property remained owned (not sold/discarded) and formed part of the block from prior years, the Assessing Officer's carve-out of depreciation for the particular let-out property was contrary to the block concept and Circular No.469. Acceptance of section 24 deduction for 'Income from House Property' does not negate block membership. Ratio vs. Obiter: Ratio - assets forming part of a block retain block character and depreciation must be computed at block level; disallowance by carving out individual asset depreciation is untenable. Conclusion: Depreciation claim allowed; addition deleted. Ground allowed for the assessee. Issue 3 - Administrative expenses of approved retirement benefit trusts Legal framework: Sections 36(1)(iv) and 36(1)(v); Part A & B of Fourth Schedule and relevant rules prescribing conditions for approval of provident and gratuity funds. Precedent treatment: Supreme Court authority (Continental Construction) on limits to approval authorities imposing extra conditions was applied by Coordinate Bench. Interpretation and reasoning: Rules prescribing conditions for approval do not include prohibition of administrative expense deduction; the approving authority cannot add conditions beyond statutory rules; genuine business expenditure incurred in managing approved funds is deductible when it meets statutory tests. Ratio vs. Obiter: Ratio - approval cannot be qualified by additional conditions not contemplated by statute/rules; administrative expenses genuinely incurred for fund administration are allowable. Conclusion: Disallowance unsustainable; AO directed to delete disallowance. Ground allowed for the assessee. Issue 4 - Deduction under section 80IA: rent from employee housing, head-office expenses, rail system, other recurring 80IA claims Legal framework: Section 80IA conditions for deduction; requirement that deductions relate to profits of eligible undertaking/eligible business activities. Precedent treatment: Repeated Coordinate Bench decisions in the assessee's own case across assessment years have consistently allowed 80IA deductions in respect of rental income from employee housing, apportionment of head-office expenses, and Rail System claims; revenue accepted some issues in earlier years or failed to appeal. Interpretation and reasoning: Factual parity with earlier assessment years and absence of material change in law/facts led the Tribunal to follow its consistent prior holdings. Where the Assessing Officer had given effect to Tribunal orders in subsequent years, consistency and recurring adjudication supported allowing the claims. Ratio vs. Obiter: Ratio - recurring issues already adjudicated in assessee's own case are to be followed where factual matrix is identical; specific holdings that rental receipts and apportionments qualify under 80IA in the assessee's circumstances constitute binding ratio for the appeals. Conclusion: Deductions under section 80IA allowed for the items in question. Grounds allowed for the assessee where applicable; revenue grounds dismissed where Tribunal followed precedent. Issue 5 - Recurring issues decided in assessee's own case (section 43B, contributions to local organisations, rural development expenses, advertisement film costs, SAP ERP expenses, ESOP costs, apportionment of head-office expenses, TUF subsidy) Legal framework: Section 43B (timing of deductions), section 37(1) (business expenditure), capital vs revenue distinction; relevant statutory provisions on subsidies and specific scheme rules. Precedent treatment: Coordinate Bench and applicable High Court/Supreme Court authorities were relied upon; where the Tribunal in the assessee's case and higher courts had consistently taken a view, that view was followed. Interpretation and reasoning: The Tribunal repeatedly emphasized that identical facts and no change in law justify following prior decisions in the assessee's own case. For SAP ERP, ESOP, local contributions, rural development and advertisement film costs, the Tribunal found consistent past treatment favouring the assessee. For TUF subsidy, prior Coordinate Bench/High Court precedents treated the subsidy as capital in nature and the Tribunal followed that view. Ratio vs. Obiter: Ratio - consistent prior findings in the assessee's own case bind subsequent assessment years with identical facts; TUF subsidy held capital in nature (ratio for that issue). Conclusion: Revenue grounds on these recurring items were dismissed; respective claims of the assessee allowed or sustained as per Coordinate Bench precedents, except where different holdings applied (see Issue 6 and 7 below). Issue 6 - Nature of receipt from sale of Certified Emission Reductions (CER)/carbon credits (capital v. revenue) Legal framework: Distinction between capital and revenue receipts; treatment depends on nature of asset, business activity and factual matrix determining whether sale arises out of business operations or is a disposal of an asset. Precedent treatment: Multiple Tribunal decisions and several High Court rulings (including jurisdictional High Court) have treated receipts from sale of carbon credits as capital receipts in comparable circumstances. Interpretation and reasoning: The Tribunal considered the body of precedents and concluded that the issue is 'more or less settled' in favour of the assessee; factual findings supported that the receipts were not revenue derived from business activity but capital in nature. Ratio vs. Obiter: Ratio - sale proceeds of CERs, in the factual context examined, are capital receipts and not taxable as revenue receipts. Conclusion: Deletion of addition sustained; receipt treated as capital (ground dismissed for Revenue, favourable to assessee). Issue 7 - Taxability of dividend received from foreign company (Egypt) Legal framework: Domestic taxability of foreign dividends; interpretation of taxing rights and statutory changes (e.g., changes to section 90 by Finance Act); applicability of prior Tribunal decisions in the assessee's case. Precedent treatment: The Tribunal had in earlier assessment years taken conflicting views in the assessee's own case; later Coordinate Bench decisions held such foreign dividend taxable in India. Interpretation and reasoning: Having regard to the Tribunal's later consistent decisions in the assessee's own case (post amendment and subsequent orders), and absent any binding contrary higher court ruling in the present record, the Tribunal followed the Coordinate Bench's consistent later view that the dividend is taxable in India. Ratio vs. Obiter: Ratio - where Coordinate Bench consistently holds foreign dividend taxable in India in the assessee's own case and facts are identical, the Tribunal follows that view. Conclusion: Addition for foreign dividend upheld; ground allowed for the revenue. Issue 8 - Expenses relating to transfer/sale (slump sale) of business unit - timing and character Legal framework: Capital gains computation on sale of business or block of assets; treatment of expenses incurred in connection with sale - whether revenue or capital and timing of allowable deduction. Precedent treatment: Tribunal and CIT(A) practice requires matching of expenditure to the year in which capital gain is computed when expenditure relates to sale of capital asset/unit. Interpretation and reasoning: The Tribunal found the disputed expenses were incurred in connection with sale of the unit and would be allowable either as revenue or capital expenditure while computing capital gain in the year of sale. The First Appellate Authority had allowed deduction in the earlier year but directed recomputation of capital gain in sale year after withdrawing the deduction; the Tribunal treated the issue as a timing difference and revenue-neutral. Ratio vs. Obiter: Ratio - expenditures integrally connected with sale of a capital asset/unit should be considered in computing capital gain in the year of sale; earlier allowance in a different year is a timing issue and does not prejudice revenue if recomputation occurs. Conclusion: First Appellate Authority's approach upheld; ground dismissed for the revenue (no net prejudice; timing difference only).