TaxTMI 
TaxTMI 
2017 (1) TMI 1254
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....ssessee for assessment year 1996-97. 3. Grounds of appeal raised by the Revenue in ITA No. 4059/Del/2009 are as under: "1. Learned CIT(A) has erred in directing the A.O. to consider the entire common interest expense for allocation towards short term income for working out deduction u/s 36(1)(viii). 2. Learned CIT(A) has erred in not allocating the interest charge of Rs. 190.85 crores in spite of the assessee's self statement that this amount is used for both long-term as well short term loan." C.O. No. 376/Del/2009 4. Ground raised by the assessee in the Cross Objection is as under: "1. The learned CIT(A) has erred in law and on facts by restricting assessee respondent's claim for allocation of common expense. Out of total common expense of Rs. 9.53 crores (comprising of personal expense of Rs. 8.32 crores depreciation of Rs. 0.28 crores, preliminary expenses Rs. 0.04 crores and prior period expenses Rs. 0.89 crores) only Rs. 25 lacs have been held to be allocable to earning of short-term income as against PFC's claim of Rs. 1.55 crores, resulting in reduction of long-term income eligible for relief u/s 36(1)(viii)." 5. The brief facts of the case are that ....
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....ata claim of expenditure against the short-term income(s) for computing the special reserve from long-term financing. The learned CIT(A) also didn't allow the pro rata claim of expenditure but he alternatively also held the short term income from interest on investment and interest on deposit was income to be assessed under the head 'income from other sources and thus the income shall not be qualified for deduction u/s 36(1)(viii) and no expenditure shall be treated for incurring such expenditure. The findings of the learned CIT(A) are reproduced as under: "However, in the revised return the assessee decided-to reduce net incomes from these, other sources instead of reducing the gross value of such other incomes. The logic of the assessee is that the assessee, after all, spends certain amount to earn such other incomes (like interest on sh6rt-term deposits etc.). Accordingly, the assessee has claimed a proportionate expenditure and the proportionate expenditure has been arrived at by - multiplying the income by 37.38%. The figure of 37.38% has been arrived at as per Annexure-E to the computation of revised income (May please see Annexure-UI of this order. The figure of 37.38% is....
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....trial development. Therefore, plea taken before CBDT that the assessee qualifies for deduction u/s 36(IXviii) was not true. However, since the assessee took this plea that it qualifies for deduction u/s 36(lXviii) and therefore, it is engaged in the business of long term financing for industrial development, the expenditure on earning interest on FDR etc. shall be taken at NIL. Without prejudice to above, it may also be argued that the interest on the FDRs made out of surplus funds is not the income from the main business which the assessee has been carrying out. Therefore, the interest on such investments shall be taken as income from Other Sources and therefore, the same will not qualify for deduction u/s 36(1)(viii) of the I.T. Act. At the same time, expenditure shown in the business shall be treated as business expenditure and nothing out of that shall be treated as expenditure for earning such income from. Other Sources. For this reliance is placed on Hon'ble Supreme Court's decision in the case of M/s Tuticorin Alkalies Chemicals & Fertilizers Ltd. reported in 227 ITR 172(SC). b) Interest on deposits: The interest earned on Inter-corporate deposits (ICDs) have been s....
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....ated that Rs. 1.43 crores (i.e.-37.38% of Rs. 3.83 Crores ) has been spent to earn the income of Rs. 3.83 crores. The very nature of this income clearly shows that there cannot be any expenditure which could be said to have incurred to earn the guarantee fee. Therefore, the entire guarantee fee shall be reduced from the total income to arrive at the figure on which deduction u/s 36(1)(viii) could be allowed. g) Income relating to loans sanctioned for a period less than five years. Income relating to loans sanctioned for a period less than five years. The assessee has shown Rs. 27.39 lacs as income under the above head and claimed that 37.38% of such income which comes to Rs. 10.24 lacs has been incurred to earn the said income. For the reasons as discussed above in item No.(a), the expenditure cannot be proportionately allocated to earn such income. Accordingly, from the total interest income of Rs. 27.39 lacs, Rs. 10.24 lacs is not to be reduced to arrive at the figure on which deduction u/s 36(1 )(viii) could be allowed. Further, if we analyse the-total expenditure debited to the P& L Account, we find that that there is no expenditure which could be called as expenditure....
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....2,61,54,000/- which is not allowed. The deduction u/s 36(l)(viii) is allowed only on the income earned on long term financing for Industrial Development or other activities as given in the provision. Therefore, these amounts would not qualify for deduction. This issue has been taken up at the time of processing u/s 143(l)(a). The deduction u/s 36(l)(viii) has been computed separately in this order as Annexure -IV to this assessment order." 5.2 The matter travelled to the Tribunal. The Tribunal in ITA No. 994 and 1062/Delhi/2006 held the short term income as business income but concurred with the finding of the learned Commissioner of Income-tax (Appeals) that claim of the assessee of pro rata expenses at the rate of 37.38% was not justified and remitted the matter back to the Assessing Officer to examine the expenditure incurred by the assessee relating to each of such short term income and allow accordingly. The relevant finding of the Tribunal is reproduced as under: "46. We further agree with the order of the Commissioner of Income-tax (A) that the assessee has neither any justification nor there can be any system of allocating pro rata expenses at the rate of 37.38 per....
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....on .28 0 .28 6. Preliminary expenses written off .04 0 .04 7. Prior period expenses .89 0 .89 Total 265.64 59.39 206.25 5.4 Thus, the assessee allocated Rs. 59.39 crores as directly relatable to the business of long-term financing. The ratio of the balance expenses of 206.25 crores as compared to the total income of Rs. 551.76 crore was computed as under: common expenditure/total income = 206.25 crores/ 551.76 crores = 37.38% 5.5 The assessee also submitted detail of income other than interest income from long-term financing as under: interest on investment 61.01 crores Interest on deposits (ICD) 24.19 crores Guarantee fees 3.83 crores Total 89.03 crores 5.6 The Assessing Officer was of the view: (i) that no expenses could be directly attributable to the guarantee fees (ii) the expenses on brokerage and issue expenses, personal and administration expenses, depreciation, preliminary expenses written off and prior period expenses related to the long-term financing and therefore same cannot be attributed towards short term income. ....
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....mmon expenses followed with assessee was already rejected by the Tribunal in first round of proceeding and matter was restored to the Assessing Officer, and thus the learned Commissioner of Income-tax (Appeals) was not justified in accepting the allocation suggested by the assessee. He further submitted that the Assessing Officer has fairly allocated 50% of the common interest expenses in terms of the percentage of the short-term income compared to the total income. 7. On the other hand, the learned counsel of the assessee submitted that only considering 50% of the direct expenses for allocation towards the short-term income was without any basis and not in compliance to the direction of the Tribunal in first round proceedings. He further submitted that for computing income from long-term finance, the net short-term income was to be reduced from the total income. In support of the contention the learned counsel relied on the decision of the Hon'ble Delhi High Court in the case of COMMISSIONER OF INCOME TAX vs. SHRI RAM HONDA POWER EQUIP & ORS. reported in 289 ITR 475. He further submitted that allocation of entire common interest expenses has been allowed by the Assessing Office....
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....n our opinion not having any scientific basis for allocation of the expenses and therefore we are not inclined to accept such allocation of expenses. We have also perused the assessment order in the case of the assessee for assessment year 2007-08 and 2008-09 wherein the Assessing Officer himself as accepted the allocation of the common direct expenses towards short-term incomes. 9. We do not agree with the contention of the learned counsel of the assessee to accept the allowance of pro rata expenses towards the short term income(s), due to the following reasons: i. that in the first round of proceeding, the claim of allowance of pro rata expenses towards short term income(s) was not accepted by the Tribunal and the matter was restored to the Assessing Officer to identify expenses towards each of the short term income. ii. that the Assessing Officer has not followed the finding of the Tribunal while passing the order in compliance to direction of the Tribunal. iii. that the learned Commissioner of Income Tax (Appeals) has also not taken into consideration the direction of the Tribunal and allowed the relief to the assessee, which was not approved by the Tribunal in firs....
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....ea of the appellant that such expenditure should also be apportioned proportionately for both for long term as well as short term income. It is a fact that the main establishment of the appellant is primarily and mainly working for earning of the long term income, however, it can also not be denied that in earning of short term income to the tune of Rs. 89.03 crores the appellant has not incurred any expenditure at all. Considering the fact that a small fraction of managerial and clerical men power must have been utilized for taking the decisions regarding placement of funds in short term deposits and accounting of such income etc., in the given facts and circumstances it would be more appropriate to make a fan and reasonable estimation somewhere between the appellant s claim of proportionate amount of Approximately Rs. 1.5 crore and Nil figure as per the finding of the AO. Accordingly, considering the volume of work involved in earning of short term interest income. It would be fair and reasonable to allow a net deduction of Rs. 25 lacs out of the expenses under the misc. sub-heads." 14. We agree with the finding of the learned Commissioner of Incometax (Appeals) that the main ....