2024 (4) TMI 743 - AT - Income Tax

ITAT allows deductions for relaunch expenses and foreign payments while upholding late PF ESI contribution disallowance

M/s. Express Publications (Madurai) P. Ltd. C/o. Sri T.N. Seetharaman, Advocate Versus DCIT Corporate Circle-II (1) Chennai. And (Vice-Versa)

ITAT Chennai allowed the assessee's appeal on multiple grounds. The tribunal deleted interest disallowance u/s 36(1)(iii) as the AO failed to establish ... Disallowance u/s. 36(1)(iii) - interest paid alleging diversion of interest bearing borrowals to the appellant's Group Companies - AO was of the opinion that the loan was diverted for non-business purposes and accordingly, he proceeded to make interest disallowance u/s 36(1)(iii) - HELD THAT:- Assessee uses mixed funds for the purpose of its business. The Share capital and free reserves are Rs. 217.20 Crores whereas loan funds are to the extent of Rs. 135.61 Crores. It is also seen that the secured loans are for specific purposes i.e., project loans, vehicle loans etc. only and the same could not be diverted for other purposes. In such a situation, unless the nexus of borrowed funds vis-à-vis the loans advanced by the assessee is established by Ld. AO, a presumption could be drawn in assessee’s favour that the advances were funded out of own funds and not out of borrowed funds. We find that no such exercise has been carried out by Ld. AO and therefore, it was to be presumed that funds were advanced first out of interest free funds available with the assessee. This is as per the decision of Hon’ble Supreme Court in the case of CIT Vs. Reliance Industries Ltd. [2019 (1) TMI 757 - SUPREME COURT] The decision of Savera [1997 (11) TMI 37 - MADRAS HIGH COURT] also supports this view. Therefore, we delete the impugned disallowance and allow corresponding grounds raised by the assessee. This issue arises in assessee’s appeal for AY 2011-12 also. Facts being pari-materia the same, the corresponding grounds raised in AY 2011-12 also stand allowed accordingly. Nature of expenses - Relaunch expenses - deferred revenue expenditure claimed to the extent of 1/3rd in each of the year - HELD THAT:- Assessee has undertaken publicity campaign and incurred relaunch expenses, such an activity has not enlarged the profit making apparatus of the assessee. The assessee has not ventured into any new line of business rather it is seeking growth in the existing line of business. Further, the nature of the expenditure would show that it is substantially in the nature of revenue expenditure though the benefit of the same may have accrued to the assessee over several years. Nevertheless the said expenditure could not be branded as capital expenditure merely on account of the fact that the benefit would flow in more than one year. The assessee has not enlarged its profit making apparatus and it seeks improvement in the existing line of business only. It could not be said that the assessee has acquired enduring advantage in capital field. Therefore, we direct Ld. AO to accept the claim of the assessee. In other words, the expenditure claimed by the assessee to the extent of 1/3rd would be allowable to the assessee. The depreciation as allowed to the assessee shall stand reversed. The corresponding ground stand allowed accordingly. Short Credit of TDS - HELD THAT:- We direct Ld. AO to allow correct TDS credit in accordance with law. This ground stand allowed for statistical purposes. Disallowance u/s 14A - no exempt income has been earned by the assessee - HELD THAT:- We find that this issue is covered in assessee’s favor by the decision of Chettinad Logistics P. Ltd [2017 (4) TMI 298 - MADRAS HIGH COURT] holding that Section 14A cannot be invoked where no exempt income was earned by assessee in relevant assessment year. Respectfully following the same, we direct Ld. AO to verify the same. If no exempt income has been earned by the assessee, the impugned disallowance shall stand deleted. The Explanation to Sec.14A, as referred to by Ld. CIT(A), in our considered opinion, is prospective in nature and the same is not applicable in this year. The corresponding grounds raised by the assessee stand allowed for statistical purposes. Disallowance of prior period items - HELD THAT:- From assessee’s submissions, it emerges that various expenditure, though pertaining to earlier years, have been ascertained during this year only. The same would be claimed and allowable only upon crystallization. It is also not the case that the assessee has claimed deduction of the same in earlier years. Therefore, the impugned expenditure, in our considered opinion, is allowable to the assessee in this year only. We order so. The corresponding grounds raised by the assessee stand allowed. Disallowance of late payment of Employee’s contribution to PF / ESI - HELD THAT:- Admittedly, this issue stand covered against the assessee by the decision of Checkmate Services P. Ltd [2022 (10) TMI 617 - SUPREME COURT] Respectfully following the same, we dismiss the corresponding grounds raised by the assessee. TDS u/s 195 - Disallowance u/s 40(a)(i) on account of payment made to foreign agencies - PE in India or not? - impugned disallowance was deleted by CIT(A) as held that Fees for Technical Services means managerial, technical and consultancy services but do not include payments considered as salary by the recipient of such income. Journalism is the process of collection, analyzing and disseminating information in public interest - HELD THAT:- Admittedly, none of the payee has permanent establishment in India. As noted by Ld. CIT(A), Fees for Technical Services means managerial, technical and consultancy services. The process of gathering information is nothing but a profession and these kind of services are covered under specific Article-5, Article-7 and Article-15 of India-USA DTAA and India-UK DTAA which are applicable to the facts of the present case. These articles exempt such payment from taxation in the absence of any permanent establishment. The provisions of DTAA, being more beneficial to the assessee, would apply in preference to the provisions of the Act. Decided in favour of assessee. Issues Involved:1. Disallowance of interest expenditure u/s 36(1)(iii)2. Disallowance of relaunch expenses3. Short Credit of TDS4. Disallowance u/s 14A5. Disallowance of prior period items6. Disallowance of late payment of Employee's contribution to PF/ESI7. Disallowance u/s 40(a)(i) on account of payment made to foreign agencies8. Interest receipts and bad debtsSummary:1. Disallowance of interest expenditure u/s 36(1)(iii):The AO observed that the assessee had advanced interest-free loans to group concerns while having substantial interest-bearing borrowings. The AO disallowed interest expenditure of Rs. 96.49 Lacs u/s 36(1)(iii). The CIT(A) confirmed the disallowance. However, the Tribunal found that the assessee had sufficient interest-free funds and no nexus was established between the borrowed funds and the advances. Therefore, the disallowance was deleted based on the decisions in CIT Vs. Reliance Industries Ltd. and CIT vs. Hotel Savera. This issue was similarly resolved for AY 2011-12.2. Disallowance of relaunch expenses:The AO treated relaunch expenses of Rs. 464.31 Lacs as capital expenditure, allowing depreciation instead. The CIT(A) upheld this view. The Tribunal, however, concluded that the expenses were revenue in nature, incurred for relaunching the newspaper 'The New Indian Express' and did not enlarge the profit-making apparatus. The Tribunal directed the AO to allow 1/3rd of the expenditure claimed by the assessee, reversing the depreciation allowed. This issue was similarly resolved for AYs 2011-12 and 2012-13.3. Short Credit of TDS:The assessee claimed TDS credit of Rs. 36.28 Lacs as per Form 26AS, but the AO allowed only Rs. 21.25 Lacs. The Tribunal directed the AO to allow the correct TDS credit after verification. This ground was allowed for statistical purposes.4. Disallowance u/s 14A:The AO made disallowance u/s 14A for Rs. 16.33 Lacs. The CIT(A) confirmed the disallowance based on the explanation to Sec.14A introduced by Finance Act 2022. The Tribunal, referring to the decision in CIT vs. Chettinad Logistics P. Ltd., held that Sec. 14A cannot be invoked if no exempt income was earned. The Tribunal directed the AO to verify if no exempt income was earned and delete the disallowance accordingly. This issue was similarly resolved for AY 2012-13.5. Disallowance of prior period items:The AO disallowed prior period expenses of Rs. 31.10 Lacs. The CIT(A) upheld the disallowance. The Tribunal found that the expenses were ascertained during the relevant year and allowable. This issue was similarly resolved for AY 2012-13.6. Disallowance of late payment of Employee's contribution to PF/ESI:The AO disallowed Rs. 207.58 Lacs for late payment of employee's contribution to PF/ESI. The CIT(A) confirmed the disallowance. The Tribunal dismissed the assessee's appeal, following the decision in Checkmate Services P. Ltd. Vs CIT. This issue was similarly resolved for AY 2012-13.7. Disallowance u/s 40(a)(i) on account of payment made to foreign agencies:The AO disallowed Rs. 54.98 Lacs u/s 40(a)(i) for payments made to foreign agencies without TDS. The CIT(A) deleted the disallowance, noting that the payments were not taxable in India as the payees had no permanent establishment in India, and the DTAA provisions applied. The Tribunal upheld the CIT(A)'s order.8. Interest receipts and bad debts:The AO added Rs. 7.01 Lacs to the income for unaccounted interest receipts and disallowed bad debts of Rs. 97.66 Lacs. The CIT(A) directed the AO to verify the claims. The Tribunal found no reason to interfere with these directions.Conclusion:The assessee's appeals were partly allowed, and the revenue's appeal was dismissed.