TaxTMI 
TaxTMI 
2019 (4) TMI 2064
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.... the book profits chargeable to tax u/s 115JB of the Act. 2.1 The assessee-company has claimed exemption in respect of dividend and income from units of mutual funds amounting to Rs.37,44,11,630/-. This amount was reduced while determining the book profit u/s 115JB(2) Explanation 1 clause (ii) of the Act. The AO added back an amount of Rs. 14,48,00,000/- towards expenses for earning of exempt income u/s 115JB, by resorting to the provisions of section 14A. Before us AO, the assessee submitted that : "Company has not incurred any expenses for earning dividend income. Surplus funds time to time are invested in shares, securities, units etc. of reputed companies. All the investments are out of the company's surplus taxed income. This can be verified from the huge reserves of the company." However, the AO was not convinced with the above explanation of the assessee for the reason that investments have been made out of a common pool of funds and considering the nature, quantum of transactions, it is not possible to identify the exact source of investment and it is not possible to prove that investments have been made out of the capital and reserves. The AO further observe....
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....e no question of allocation of expenses towards investment income. Thus it is stated that the entire fresh investments are financed out of the own funds of the assessee-company and not out of borrowings. The Ld. counsel further submits that on identical facts in AY 1992-93 (and followed in AY 1993-94 and AY 1994-95), the Tribunal has decided the issue in favour of the assessee and held that there is no scope for allocation of interest expenses towards investment income. It is also submitted that the department's reference to High Court on the issue and SLP to Supreme Court has been rejected. 2.4 On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A). 2.5 We have heard the rival submissions and perused the relevant materials on record. The reasons for decisions are given below. A perusal of the audited accounts of the assessee-company clearly indicates that the company has its own funds aggregating to Rs.2596.58 crores, more than the borrowed capital of Rs.1,060.71 crore, whereas the investment portfolio is just Rs.555.68 crores. We further find that on identical facts in AY 1992-93, the Tribunal has decided the issue in favour of the assessee and held....
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.... in respect of prior period expenses, submitted before the AO that though these expenses pertained to earlier years but liability to it crystallized during the year and therefore is charged in the books under a separate account head titled "prior period expenses" and this practice is followed by it for the past several years. Also it was explained to the AO that while finalizing the tax audit report, the tax auditors examined all these items and enclosed details along with tax audit report. However, the AO was not convinced with the above explanation of the assessee and disallowed such prior period items and added the same to the total income. 4.2 In appeal, the Ld. CIT(A) observed that the assessee-company is following the mercantile system of accounts, under which it is supposed to have debited the expenses on accrual basis in the year in which they have accrued. From the details filed before him, the Ld. CIT(A) noted that most of these expenses have accrued in earlier years. Therefore, he confirmed the disallowance of Rs.74,66,381/- made by the AO. 4.3 Before us, the Ld. counsel of the assessee submits that the company had a turnover of Rs.1,516 crores and expenses of R....
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....hosphates Rs.31,41,657 f SBI Capital and Bank of America Rs.16,50,000 g Interior work at Love Dale Rs.66,000 h Engg. Fees for Cement Grinding Unit Rs.66,69,101 i Plantation Irrigation drainage system Rs.41,50,756 5.1 During the course of hearing, the Ld. counsel submits that the assessee would not like to press the disallowance of expenses of Rs.8,215/- and Rs.90,000/- because of smallness of amount and as depreciation has been allowed. Therefore, we turn to the other additions/disallowances made by the AO. During the course of assessment proceedings, the assessee filed factual information in relation to the above expenses before the AO. However, the AO was not convinced with the said explanation as these expenses were capital in nature and thus not allowable u/s 37(1) of the Act. In this regard, the AO relied on the decision in Triveni Engineering Works Ltd. 232 ITR 639 (Del) and Hasmira Industries 230 ITR 927 (SC). 5.2 In appeal, the Ld. CIT(A) confirmed the above disallowances made by the AO. In respect of the disallowance of Rs.1,62,25,000/- (payment to L&T as compensation towards cancellation of construction contract), the Ld. CIT(A....
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....ions before the AO. In respect of expenses of Rs.1,62,25,000/-, the Ld. counsel submits that during year under reference, M/s L&T was awarded a contract for expansion of the assessee's existing cement facilities. However, considering the change in market scenario, the proposal of expansion was dropped and the contract was cancelled. In terms of agreement, L&T asked for compensation for cancellation of contract and a sum of Rs.1,62,25,000/- was paid to them. It is stated that the payment to L&T was made for expansion in existing line of business. However, due to change in market conditions, the contract was cancelled and the assessee-company had to pay compensation towards cancellation. It is thus argued that the cancellation of contract was purely for business reasons, hence the same should be allowed as revenue expenses u/s 37(1) of the Act. In this regard reliance is placed by him on the decision in Ideal Cellular (2014) 47 taxmann.com 341 (Mum). Regarding, the expenses of Rs.5,08,200/- the Ld. counsel submits that during the year under reference, Government of India invited various industrial houses and corporations to offer a bid for Paradeep Phosphates and National Ferti....
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....ny capital asset as this is only for Pollution Control, therefore the same is allowable as revenue expenses u/s 37(1) of the Act. 5.4 On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A). 5.5 We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. It is found that during the year under consideration, M/s L&T was awarded a contract for expansion of the assessee's existing Cement facilities. The proposal of expansion was dropped and the contract was cancelled. In terms of agreement, L&T asked for compensation for cancellation of contract and a sum of Rs.1,62,25,000/- was paid to them. The payment to L&T was made for expansion in existing line of business. However, due to change in market conditions, the contract was cancelled and the assessee-company had to pay compensation towards cancellation. In view of the above factual scenario, the cancellation of contract was for business reasons. Therefore, we hold that the same is allowable as revenue expenses u/s 37(1) of the Act. In respect of the expenses of Rs.5,08,200/-, it is found that a sum of Rs.5,08,200/- was paid by the assess....
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....rse of assessment proceedings, the AO noticed that the assessee has claimed deduction of dividend income and income from units of mutual funds amounting to Rs.37,44,11,630/- as exempt u/s 10(33) of the Act. The AO asked the assessee to quantify and explain why the interest expenses relatable to such investments should not be disallowed u/s 14A of the Act. In response to it, the assessee vide its reply dated 10.11.2004 explained that its main business is manufacturing and sale of chemicals, cement, detergent and urea. It was explained that the surplus funds are invested in shares and other securities and at no stage, borrowed funds are diverted for investment in shares. However, the AO was not convinced with the above explanation of the assessee and calculated the interest cost allocable with the above investments at Rs.14.49 crores (3.87% interest cost to capital employed). 6.2 In appeal, the Ld. CIT(A) set aside the disallowance of interest and directed the AO to workout disallowance in respect of indirect expenses on the basis of the CIT(A)'s directions for AY 2000-01, viz. 5% of salary of CFO, Deputy CFO, Head Treasury and Salary of other employees of Treasury plus 10% overhe....
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....position of law, we set aside the order of the Ld. CIT(A) on the above issue and restore the matter to the file of the AO to re-compute the deduction u/s 80HHC by following the above decision in ACG Associated Capsules (supra). Thus the 6th ground appeal is allowed for statistical purposes. 8. The 7th ground of appeal The Ld. CIT(A) erred in upholding the disallowance Rs.2,53,92,853 in respect of Machinery Hire Charges without appreciating that the same were allowable on the matching concept for use asset used for the purpose of business. 8.1 While filing the return of income, an amount of Rs.2,58,92,853/- being the provision for lease deposit towards machinery was disallowed by the assessee and added back in the computation of income. However, during the course of assessment proceedings, the same was claimed as an allowable revenue expenditure u/s 37(1) of the Act. While finalizing the assessment order, the AO observed that this claim of write off of provision for lease deposit is not allowable as per the provisions of section 37(1) as the above referred lease deposit is capital in nature. 8.2 In appeal, the CIT(A) followed the order of his predecessor-in-office ....
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....s payable in lump sum as security deposit adjustable against license fee arrear or penalty levied for breach of conditions for license. The Government forfeited security deposit against arrears of license fee. The AO added the forfeited amount in assessable income. The Tribunal allowed security deposit adjusted as revenue expenditure in same manner as payment of license fee. The Tribunal also held that forfeiture was not by way of penalty for breach of any term of license. The Hon'ble High Court held that (i) There is no material on record to show that the forfeiture order was not merely a direction for adjustment of the security amount against the arrears of license fee. The Revenue did not suggest before the Tribunal that the failure to pay any installment of license fee entailed a criminal penalty, nor pointed out that there was any other breach of condition of license or any excise law to support its plea that the said forfeiture resulted from a violation of law disentitling the assessee's claim for deduction of the amount as a business expenditure, (ii) The finding given by the Tribunal that the security deposits was adjusted towards the arrears of license fee and the same was....
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....ms a business loss, the main question to be considered is whether the loss is incidental to the business. Having regard to the facts and findings recorded by it, the Tribunal was correct in coming to the conclusion that the deduction claimed by the assessee in writing off the forfeited amounts was in the course and incidental to the assessee's business. Accordingly, the impugned amounts were deductible from the total income of the assessee". In the instant case, in the financial year 1994-95, the assessee entered into sale and lease back agreements with L&T, Bajaj Auto and HDFC Ltd. The lease agreements provided for certain lease deposit and annual rent. During the year under reference, an amount of Rs.2,58,92,853/- was amortized and provided towards lease deposit. We find that on the basis of above facts, the present case is distinguishable from the above case laws relied on by the Ld. counsel. We are of the considered view that the amount paid as consideration for obtaining the lease is for the acquisition of a capital asset which enables the lessee to carry on its business. It is a capital expenditure. It cannot be split up into the number of years of the duration of the l....
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....on with the sale of detergent division of Rs.8,68,923/- as allowable to be reduced from the sale consideration of Rs.3.75 crores and accordingly worked out the claim u/s 50B of the Act. Further, holding that once the sale of detergent division is treated as a slump sale, the AO withdrew the capital loss on sale of lease hold land (forming part of sale of assets of detergent division) of Rs.59,24,561/-. Finally, the AO held that the reduction in depreciation of Rs.69,18,105/-, which the assessee himself has made in its return of income, (by reducing the sale proceeds of assets of detergent division treating them as itemized sale) would be restored and the assessee would be entitled to additional depreciation of Rs.69,18,105/-. 9.2 In appeal, the Ld. CIT(A) observed that in the sale agreement dated 19.11.2001 between the assessee and Jyothi Laboratories, the assessee has sold its detergent manufacturing facility at Pitampura Industrial Estate in Madhya Pradesh for a lump sum consideration of Rs.3.75 crore, however, in the said agreement there is no bifurcation of the sale consideration amongst the individual assets. Therefore, the Ld. CIT(A) confirmed the order of the AO and held ....
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.... land, forming part of sale of assets of detergent divisions. 9.5 We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. During the year under consideration, various assets of the detergent division of the appellant-company were sold to M/s Jyothi Laboratories for a lump sum consideration of Rs.3.75 crores. It is further found that while filing the return of income, the total sale consideration of Rs.3632077/- (net of expenses - Rs.11,73,923/-) received on sale of various assets of detergent division of was allocated to various assets in the ratio of their original cost and reduced from the WDV of the respective block of assets in the Income tax depreciation schedule. In Mahindra Sintered Products Ltd. (supra), it is held that where price had been fixed before hand in respect of identifiable assets of undertaking and no liability was transferred to buyer, transfer of undertaking would not constitute a slump sale. In Kampli Co-op. Sugar Factory Ltd. (supra), it is held that "sale of assets of factory excluding investment and deposits while retaining the liabilities was not a slump sale and long ter....
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.... the assessee, the AO following the stand of the revenue made a disallowance of Rs.78,68,088/-. In appeal, the Ld. CIT(A), by following the order of the Tribunal and CIT(A), deleted the following additions : Particulars Amount Rs. Tata Sports Club 3,00,000/- Nutan Bal Shikshan Sangh, Mithapur 19,00,000/- Kindergarten Primary School, Mithapur 10,75,000 Mithapur/Kamdar/Indica Sports Club Mithapur 85,944 Tata Chem Sports and Cultural Club 67,255 Flag Day Collection 1,103 Fort Medical Society 12,04,750 Thatachem Co-operative Credit Society 53,500 11.2 The Ld. DR supports the order passed by the AO. On the other hand, the Ld. counsel of the assessee submits that on similar facts, similar additions made by the AO in earlier assessment years have been deleted either by the CIT(A) or by the Tribunal. 11.3 We have heard the rival submissions and perused the relevant materials on record. As per the decisions filed by the Ld. counsel, we find that the above issues have been decided by the ITAT in favour of the assessee in assessee's own case for earlier assessment year. In the case of Tata Sports Club, similar issue has been de....
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.... shown under separate head of balance sheet. When the project commenced production on December 1994, deduction @ 1/10^th was claimed. The cost of Fertilizer project was more than Rs.1,400/- crore and this amount of Rs.65,00,000/- is less than 0.10%. This claim was allowed in the very first year i.e. AY 1995-96. Similar issue has been decided in favour of the assessee by the Tribunal in assessee's own case in AY 1997-98 (ITA No. 7035/M/04, dated 17.05.2017), AY 1998-99 (ITA No. 7036/M/04, dated 21.06.2017), AY 1999-00 (ITA No. 5153/M/11, dated 21.06.2017), AY 2000-01 (ITA No. 5446/M/14, dated 21.06.2017) and AY 2001-02 (ITA No. 6366/M/14, dated 15.09.2017). In view of the above facts and the decision in earlier years, we uphold the order of the Ld. CIT(A) and dismiss the 2nd ground of appeal. 13. The 3rd ground of appeal On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the additions of Rs.3,39,29,363/- for subscription of brand equity treating it as business expenditure ignoring the fact that it is a capital expenditure and the ratio of ITAT's decision in the case of M/s Rallies India Ltd. for AY 2004-05 does not apply to the ....