Infrastructure Leasing & Financial ... vs Department Of Income Tax

Date of hearing : 24.02.2015 Date of Pronouncement : 10.04.2015 ITA No. 4600/Mum/2001 2 ITA No. 4783/Mum/2001 Assessment Year: 1998-99

ORDER

PER AMIT SHUKLA, JM:

These are the cross appeals filed by the Assessee as well as Revenue against the order dated 14.05.2001 passed by Ld. CIT(A)-8, Mumbai for the quantum of assessment u/s 143(3) for the A.Y. 1998-99.

2. We will first take up, assessee's appeal wherein various grounds of appeal have been taken challenging the impugned order on following issues:-

i) Ground no. 1 and 2 relates to disallowance of deduction u/s 35D of Rs.601353/-.

ii) Ground no. 3 is alternative to ground no. 1 and 2, wherein, the assessee has contended that the deduction should be allowed u/s 37(1).

iii) In Ground no. 4 and 5 the assessee has challenged the disallowance u/s 14A while determining the deduction u/s 10(23)G.

iv) In ground no. 6 to 8, the assessee has challenged the disallowance u/s 14A while computing the book profit u/s 115JA.

3. The assessee's company is engaged in the business of infrastructure, including setting up of infrastructure project, leasing and financial services. The facts regarding disallowance u/s 35D are that assessee had claimed deduction u/s 35D, which has been disallowed by the AO on the ground that, similar issue had come up for consideration in the A.Y. 1997-98, wherein it was held that assessee is not an industrial undertaking as it is dealing in the business of finance and leasing. The Ld. CIT(A) too has confirmed the said disallowance relying upon the earlier order of the Ld. CIT(A) for the A.Y. 1997-98.

ITA No. 4600/Mum/2001 3 ITA No. 4783/Mum/2001 Assessment Year: 1998-99

4. Before us, learned counsel submitted that right from the A.Y. 1991-1992 to A.Y. 1997-98 and also in the subsequent years for the A.Ys. 1999-2000 to A.Y. 2001-02, this matter has been set aside to the file of the AO. This issue has been mainly discussed in the order of the Tribunal for the A.Y. 1990-91 in ITA No. 127/Bom/1995. The Ld. DR also admitted that this issue is covered by order of the Tribunal and therefore, this matter should be restored back to the file of the AO.

5. After considering the relevant material placed on record we find that this is a recurring issue in the case of the assessee coming from the earlier years. In the A.Y. 1991-92, the Tribunal has set aside this issue to the file of the AO after observing and holding as under:-

"We have carefully considered the rival submissions. We see considerable force in the contention of the learned counsel of the assessee that in the absence of a specific definition. The word "industrial undertaking" should be interpreted in its popular meaning and that if should not be confined to only the activities of manufacture or production. However, we find that the issue as to whether or not the activities of the assessee amounted to the assessee being an industrial undertaking has not been examined at all either by the Assessing Officer or the learned CIT(A). The Assessing Officer simply assumed that the assessee has not an industrial undertaking or that there was no extension of an industrial undertaking. The same course has been followed by the learned CIT(A). The assessee has also not relied upon any specific material produced before the authorities below in this context. We are therefore of the view that this issue has to be examined and the facts of the assessee's case have to be brought out by the Assessing Officer in the first instance. We therefore, remit this issue to the file of the Assessing Officer with the directions to decide this issue afresh in the light of our order after allowing the assessee reasonable opportunity of being heard in the matter."

Thus consistent with the view taken in the earlier years we also set aside this issue to the file to the AO with the similar directions.

ITA No. 4600/Mum/2001 4 ITA No. 4783/Mum/2001 Assessment Year: 1998-99

6. As regards ground no. 3 is concerned, this is an alternative ground that if such a deduction is not allowed u/s 35D, then same should be allowed u/s 37(1). Since this matter has been restored back to the file of the AO, therefore, the AO will examining this claim while deciding the issue of deduction u/s 35D. In case deduction u/s 35D is not allowed then the Assessing Officer will examine the claim u/s 37(1) after hearing the assessee and decide in accordance with the law. Thus ground no. 3 is allowed for statistical purposes.

7. In ground 4 and 5, the assessee has challenged the disallowance u/s 14A, on the ground that deduction u/s 10(23)G has been computed at Rs.85,66,405/- instead of claim of the assessee at Rs.2,88,26,805/- and further reducing the deduction u/s 10(33) at Rs.89,83,946/- as against claim of the assessee at Rs.1,54,81,590/-. The assessee has claimed deduction u/s 10(23)G on gross basis, whereas the Assessing Officer held that in view of insertion of section 14A w.r.e.f. 01.04.1962 only the net income has to be included for the purpose of deduction against the gross interest and is to be reduced from the total income, hence deduction u/s 10(23)(a) was computed by him at Rs.85,66,404/- as against the claim of the assessee of Rs.2,88,26,805/-. Similarly the AO noted that assessee has claimed deduction u/s 10(33) on account of dividend income of Rs.1,54,81,589/- without deducting the interest. He required the assessee to submit the working of the expenses allocated for earning of the dividend income which was worked out by the assessee and net dividend income of Rs.89,83,946/- was arrived at and only this amount was allowed as deduction by the AO.

ITA No. 4600/Mum/2001 5 ITA No. 4783/Mum/2001 Assessment Year: 1998-99

8. The Ld. CIT(A) has confirmed the said disallowance on the ground that the similar issue had arisen in the earlier years, wherein the Ld. CIT(A) has decided this issue against the assessee.

9. Before us, learned counsel submitted that assessee had huge surplus funds for making the investments which is evident from the fact that the net investments stood at Rs.147.46 crores, whereas the assessee's reserve and surplus itself was 318.3 crores, besides share capital of 91.28 crores. He further submitted that the investments made by the assessee in the share capital was in subsidiary and associate concerns, which was made as business compulsion and not for earning dividend. Therefore, there was no intention for earning of exempt income from such investment. In any case, if the assessee has surplus funds, then no disallowance of interest can be made. In support of his contention, he strongly relied upon the decision of Hon'ble Bombay High Court in the case of CIT Vs. Reliance Utilities and Power Ltd. reported in [(2009) 313 ITR 340 (Bom)]. This decision has been again reiterated by the Hon'ble Bombay High Court in the case of CIT Vs. HDFC Bank Ltd. in Income Tax Appeal no. 330 of 2012, vide judgment dated 23.07.2014. He further referred to catena of decisions which has been filed before us in the compilation of case laws. Lastly, he submitted that Tribunal in the case of the assessee has set aside this issue to the file of the AO in ITA No. 6063/Mum/2002.

10. On the other hand, Ld. DR strongly relied upon the orders of the authorities below and submitted that identification of source of investment should be looked into, if the assessee has claimed that it has made investment out of its own surplus funds.

ITA No. 4600/Mum/2001 6 ITA No. 4783/Mum/2001 Assessment Year: 1998-99

11. We have heard the rival contention and also perused the relevant material placed on record. From the perusal of the accounts, it is prima facie seen that assessee's net worth including reserve and surplus is more than the average investments. In such a situation, the applicability of decision of the Hon'ble Bombay High Court in the case of HDFC Bank Ltd. (supra) and Reliance Utilities and Power Ltd. (supra) needs to be considered. Since this aspect has not been looked into either by the AO or by the Ld. CIT(A), therefore, we are of the opinion that this matter should be restored back to the file of the AO to examine this contention of the assessee and also the other contentions and decide in view of the decision of the Hon'ble jurisdictional High Court and in accordance with law, after giving effective opportunity of hearing to the assessee to present its case. Accordingly, ground no. 4 and 5 are treated as allowed for statistical purposes.

12. In ground no. 6 to 8, the disallowance u/s 14A has been challenged, while computing the book profit u/s 115JA. This issue had also come up for consideration before the Tribunal in assessee's own case. The Tribunal after taking note of the decision of Hon'ble Delhi High Court in the case of CIT Vs. GOETZ India Ltd. [(2014) 361 ITR 505], wherein it has been held that the amount disallowance u/s 14A under the normal provisions of the act is required to be added while computing the book profit u/s 115JA, has restored the matter to the file of the AO. Accordingly, we also restore this matter to the file of the AO, as the issue of disallowance u/s 14A has already been set aside to the AO. Accordingly, the AO will decide the issue in light of the decision taken by him while deciding the issue of disallowance u/s 14A, under the normal ITA No. 4600/Mum/2001 7 ITA No. 4783/Mum/2001 Assessment Year: 1998-99

provisions of the Act. In the result, the appeal of the assessee is allowed for statistical purpose.

13. Now we will take up revenue's appeal being, ITA No. 4783/Mum/2001, wherein various ground have been raised which are being discussed hereunder, in brief.

14. In ground no. 1 the revenue has challenged the deletion of disallowance of club expenses of the executives of Rs.15,30,456/-. It has been admitted by both the parties and this issue had come up for consideration in assessee's own case for the earlier years wherein it stands decided in favour of the assessee by the Tribunal in A.Ys. 1993- 94, 1994-95 and 1996-97. Learned counsel also submitted that this issue also stands covered by the decision of Hon'ble Supreme Court in the case of CIT Vs. United Glass Mgf. Co. Ltd. in Civil Appeal No. 6447 of 2012 order dated 12th September 2012.

15. After considering the rival submissions, we find that this issue too has been decided in favour of the assessee by the Tribunal after relying upon the decision of Hon'ble Bombay High Court in the case of OTIS Elevator, reported in 195 ITR 682. In the A.Y. 2002-03, the Tribunal following the decision of Hon'ble Supreme Court in the United Glass Mgf. has held that, club membership fee for employees incurred by the assessee is allowable u/s 37(1). Accordingly, we hold that such expenses are allowable as business expenditure, which has rightly been deleted by the Ld. CIT(A). However, the order by the Revenue authorities do not indicate if any part of the impugned expenditure includes expenditure by way of entrance fees, which, where so, would assume the character of a capital expenditure, inadmissible u/s 37(1). We decide accordingly, so ITA No. 4600/Mum/2001 8 ITA No. 4783/Mum/2001 Assessment Year: 1998-99

that AO shall allow the expenditure subject to his verification as to club entrance fees, if any.

16. In ground no. 2, revenue has challenged deduction of interest u/s 36(1)(iii) of Rs.19,76,12,033/-. It has been admitted by both the parties that this issue is also covered by the decision of the Tribunal for the earlier years and also in the subsequent years from the A.Ys. 1999-2000 to 2001-02.

17. As in the earlier years, the assessee has claimed a sum of Rs.19,76,12,033/- as interest capitalized in the books, but was claimed as deduction u/s 36(1)(iii) in the computation of income. The Assessing Officer disallowed the said claim after detailed discussion mainly on the ground that, after capitalization, the amount of interest has merged with the cost of the assets and after insertion of Explanation 8 to section 43, the various case laws as relied upon by the assessee will not be applicable. The Ld. CIT(A) allowed the assessee's claim following the earlier order of the Ld. CIT(A) holding that the capital was borrowed for the expansion of similar line of business and therefore, such interest has to be allowed as business expenditure. The Tribunal in the A.Ys. 1993- 94 and 1994-95 has considered this issue in detail and has upheld the order of the Ld. CIT(A) after referring to catena of decisions. The same view has been reiterated by the Tribunal in the appeal for the A.Y. 1999- 2000 to 2001-02, wherein the Tribunal observed and held as under:-

"The next issue relates to the disallowance of interest claimed u/s 36(1)(iii) of the Act on the reasoning that part of interest has to be capitalized. The AO disallowed part of interest claim by holding that they relate to the amounts borrowed for acquisition of Capital assets. However, this issue has been decided in favour of the assessee by the Tribunal in the assessee's own case in earlier years viz., ITA No.2773/Mum/98 and 2283/Mum/98 relating to AY ITA No. 4600/Mum/2001 9 ITA No. 4783/Mum/2001 Assessment Year: 1998-99

1994-95 and 1993-94. We also notice that the following proviso was inserted in sec.36(1)(iii) only with effect from 1.4.2004 by Finance Act 2003:-

"provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset-tor- extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date .on which tile capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction."

Hence, consistent with the view taken by the co-ordinate bench of Tribunal in the earlier years, we hold that the assessee is entitled to claim interest expenditure u/s 36(1)(iii) in respect of capital borrowed for acquiring capital assets in these years and accordingly uphold the order of the Ld. CIT(A) on this issue."

Thus, consistent with the precedence in assessee's own case and also the fact that similar interest claim on the same borrowed funds have been held to be allowable u/s 36(1)(iii), we uphold the order of the Ld. CIT(A).

18. In ground no. 3 to 3.7, revenue has challenged the disallowance of deletion of disallowance of depreciation on leased assets. This issue has been discussed in detail by the Assessing Officer from pages 2 to 18 of the assessment order. The Ld. CIT(A) has allowed the depreciation following the earlier year order of the Ld. CIT(A), wherein it was held that assessee company had entered into genuine lease transaction and assessee being the owner of the leased assets and has been used for the business purpose, therefore, depreciation is to be allowed.

19. Before us, Ld. DR relied upon the decision of ITAT Special Bench in the case of Indus-in Bank Ltd. Vs. ACIT, whereas the learned counsel relied upon the order of the Tribunal in assessee's own case and also the decision of Hon'ble Supreme Court in the case of ICDS Ltd Vs. CIT.

ITA No. 4600/Mum/2001 10 ITA No. 4783/Mum/2001 Assessment Year: 1998-99

20. After considering the rival submissions and the decisions of the Tribunal in assessee's own case for the earlier years, it is an undisputed finding of fact that, the assets has been leased under operating lease and such lease transaction have been found to be genuine transaction. In such a case, the claim of depreciation on these assets is to be allowed in view of the decision of Hon'ble Supreme Court in the case of ICDS Ltd. This view has been reiterated by the Tribunal in all the earlier years and also in the subsequent years. If depreciation has been allowed on the lease assets in the earlier years, then in this year same depreciation cannot be disallowed on the WDV of the leased assets. Accordingly, the revenue's ground on this score is dismissed.

21. In the result, the Assessee's appeal is allowed for statistical purpose, whereas revenue's appeal is dismissed.

Order pronounced in the open court on this 10th day of April, 2015.

Sd/- Sd/- (SANJAY ARORA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated: 10.04.2015 *Srivastava

Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT(A) Concerned, Mumbai The DR "A" Bench

//True Copy// By Order

Dy/Asstt. Registrar, ITAT, Mumbai.