2004 (10) TMI 308 - AT - Income Tax

Taxpayer appeals allowed; dividend expenses, guest-house costs, and interest remitted to AO for re-examination under s.57(1)

ITAT (Madras) allowed the taxpayer's appeals for statistical purposes and remitted three issues to the AO for fresh examination. The tribunal held ... Exemption under s. 10(33) - dividend income - Expenditure incurred in relation to income not includible in total income - HELD THAT:- Admittedly, these investments in shares were made during the course of the carrying on of business and as is evident from the records, substantial investments had been made by the assessee in earlier years, and during the current year as well the assessee made an investment of Rs. 19 crores. Whether to invest or not to invest and whether to retain the investments or to liquidate the same are very strategic decisions which the management is called upon to take. These are mind-boggling decisions and top management is involved in taking these decisions. This decision making process is very complicated and requires very careful analysis. Moreover, the assessee has to keep track of various dividend incomes declared by the investee companies and also to keep track of the dividend income having been regularly received by the assessee. This activity itself calls for considerable management attention and cannot be left to a junior clerk. We restore this matter to the AO to verify the quantum of deduction claimed by the assessee in earlier years under s. 57(i) from the dividend income (when it was taxable) and make a pro rata adjustment on the basis of subsequent investments made, inflation, etc. This ground is, accordingly, allowed for statistical purposes. Disallowance towards guest-house expenses without appreciating that the expenditure was incurred in the course of the business - HELD THAT:- As is evident from the assessment order, the AO has merely disallowed the guest-house expenses without examining the nature of the expenses incurred by the assessee. After the omission of s. 37(4), as pointed out by the learned Departmental Representative in her written submissions also, the onus is on the assessee to prove that the guest-house was maintained for the purpose of its business, and that the expenditures incurred were all connected with its business. The AO has not disallowed these expenses on the basis of s. 37(4) of the Act. We, therefore, restore this issue back to the file of the AO to examine having regard to the details of expenses as to whether the expenses related to the assessee’s business or not. This ground is, accordingly, allowed for statistical purposes. Disallowance of interest on borrowed capital - investments in shares of companies in the line of business of the assessee -HELD THAT:- The assessee’s contention is two-fold. Firstly, it is contended that the assessee had not borrowed any money for being invested in the shares of investee companies and, therefore, there was no question of any disallowance at all. In this regard the assessee has filed various documents in support of its contention which were contemporaneously available at the time when the assessment was made but since the same were not called for, the same were not produced. Secondly, it is contended by the assessee that the investment was made for expansion of its business inasmuch as the basic raw material required by the assessee was to be produced by the investee company and an agreement had also been entered into with the investee company to take off the production of the investee company. We consider it in the interests of justice that since the documents were available at the time of assessment itself but were not called for by the AO, the matter be restored back to the file of the AO to find out whether any borrowed funds at all were used by the assessee for being invested in the shares of the investee company or not. Therefore, we admit the documents at pp. 5 to 64 of the paper book II, filed before us, and remit the same to the AO for examining the issue in the light of utilization of funds being invested in the investee company. In case the AO comes to the conclusion that no borrowed funds were used for the purpose of investment in the shares of the investee company, then no disallowance is called for. The assessee, in any view of the matter, succeeds on the strength of its second contention. However, in order to have the completion on the merits of the case, we restore this issue to the file of the AO for considering the first contention of the assessee that no borrowed funds were at all utilized for investment in shares. In the result, this ground is allowed for statistical purposes. Issues Involved:1. Attribution of expenditure to earning of dividends.2. Disallowance of guest-house expenses.3. Disallowance of interest on borrowed capital.4. Disallowance of club expenses.5. Thrusting depreciation not claimed by the assessee.6. Depreciation on let out buildings and technical know-how.7. Computation of book profits under Section 115JA.8. Provision for bad debts.Issue-wise Detailed Analysis:1. Attribution of Expenditure to Earning of Dividends:The first issue was whether the expenditure attributable to earning of dividends should be disallowed. The assessee claimed exemption under Section 10(33) of the IT Act for dividend income and contended that no direct expenditure was incurred. The AO, referencing Section 14A, attributed 10% of the dividend income as expenditure and disallowed Rs. 88,73,758. The CIT(A) confirmed this, emphasizing the business activity involved managerial guidance. The Tribunal restored the matter to the AO to verify the quantum of deduction claimed by the assessee in earlier years under Section 57(i) and make a pro-rata adjustment.2. Disallowance of Guest-House Expenses:The second issue concerned the disallowance of Rs. 31,19,000 towards guest-house expenses. The AO disallowed the expenditure as it was not proven to be for business purposes. The CIT(A) upheld this, noting the lack of details. The Tribunal restored the issue to the AO to examine the nature of the expenses, emphasizing the onus on the assessee to prove the expenses were business-related.3. Disallowance of Interest on Borrowed Capital:The third issue involved the disallowance of interest on borrowed capital amounting to Rs. 13,99,52,000. The AO disallowed the claim, noting that the expenses were capitalized in the books but claimed as revenue expenditure. The CIT(A) upheld this, stating the investments were for promoting group concerns with independent businesses. The Tribunal restored the issue to the AO to verify if borrowed funds were used for investment in shares. If not, no disallowance would be called for. Additionally, the Tribunal found that the investment was for business expansion, thus allowable under Section 36(1)(iii).4. Disallowance of Club Expenses:The fourth issue was the disallowance of Rs. 1,36,144 towards club expenses. The AO disallowed these as personal benefits of employees. The CIT(A) allowed only the entrance/subscription fees, disallowing other expenses. The Tribunal upheld this, distinguishing the case from the Gujarat High Court decision cited by the assessee, and found no material to show the expenses were business-related.5. Thrusting Depreciation Not Claimed by the Assessee:The fifth issue was the AO's action of thrusting depreciation not claimed by the assessee. The AO required the claim of depreciation post the amendment of the Taxation Laws (Amendment & Miscellaneous Provisions) Act, 1986. The Tribunal found this issue covered by the jurisdictional High Court decision, which held Explanation 5 to Section 32(1) as prospective. Therefore, this ground was allowed in favor of the assessee.6. Depreciation on Let Out Buildings and Technical Know-How:The sixth issue concerned depreciation on let-out buildings and technical know-how. The assessee did not press the issue regarding technical know-how. For let-out buildings, the Tribunal upheld the CIT(A)'s decision, referencing the Madras High Court's ruling that rental income is assessable under 'Income from house property,' thus no depreciation was allowable.7. Computation of Book Profits under Section 115JA:The seventh issue involved the computation of book profits under Section 115JA, specifically the deduction claimed for withdrawal from revaluation reserve. The AO disallowed the claim, citing the Tribunal's decision in DCW Ltd. The CIT(A) confirmed this. The Tribunal upheld the CIT(A)'s decision, emphasizing that the adjustment made in the P&L account was a contra adjustment, not an effective credit, and thus not deductible under the Explanation to Section 115JA.8. Provision for Bad Debts:The eighth issue was the addition of provision for bad debts in computing book profits under Section 115JA. The Tribunal referenced the Madras High Court's decision in Beardsell Ltd., which held that provision for bad debts is an unascertained liability and must be added back to book profits. This ground was thus decided against the assessee.Conclusion:The appeal was partly allowed for statistical purposes, with certain issues restored to the AO for further verification and others upheld as per the CIT(A)'s decision.