Income Tax Appellate Tribunal - Mumbai
Mahindra Realty & Infrastructure ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI BENCH "J",MUMBAI
BEFORE SHRI T.R. SOOD (AM) & SMT. ASHA VIJAYARAGHAVAN (JM)
I.T.A.No.1256/Mum/2010 :: A.Y. 2001-02
I.T.A.No.1257/Mum/2010 :: A.Y. 2002-03
M/s. Mahindra Realty & Dy.Commr. of Income-tax-2(2),
Infrastructure Developers Ltd., (Now R.No.549, Aaykar Bhavan,
merged with Mahindra Engg. & M.K.Road,
Chemical Products Ltd.), Gateway Vs. Mumbai-400 020.
Bldg., Apollo Bunder, Worli,
Mumbai-400 001.
PAN: AAACM4116G
Appellant Respondent
I.T.A.No. 1258/Mum/2010 :: A.Y. 2001-02
I.T.A.No. 1259/Mum/2010 :: A.Y. 2002-03
I.T.A.No. 1260/Mum/2010 :: A.Y. 2003-04
I.T.A.No. 1261/Mum/2010 :: A.Y. 2004-05
M/s. Mahindra Engg. & Chemical Income-tax Officer-2(2)(2),
Products Ltd., Gateway Bldg., Aaykar Bhavan,
Apollo Bunder, Worli, Mumbai-400 M.K.Road,
001. Vs. Mumbai-400 020.
PAN: AAACM5764A
Appellant Respondent
I.T.A. No. 1183/Mum/2010 :: A.Y. 2001-02
Dy.Commr. of Income-tax-2(2), M/s. Mahindra Engg. & Chemical
R.No.545, Aaykar Bhavan, Products Ltdd., Gateway Bldg.,
M.K.Road, Apollo Bunder, Worli, Mumbai-
Mumbai-400 020. Vs. 400 001.
PAN: AAACM5764A
Appellant Respondent
Assessee by Shri H.P. Mahajani.
Department by Mrs. Kusum Ingale & Mrs.
Vandana Sagar.
O R D E R
PER BENCH :
I.T.A.No. 1256/Mum/2010:
In this appeal, the assessee has raised the following grounds of appeal :2 ITA Nos.1256 to 1261 &1183/M/10
Mahindra Realty & Infrastructure "1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in enhancing disallowance u/s.14A to the tune of Rs.531.52 lakhs applying Rule 8D.
2. Without prejudice to Ground No.1 above, the learned CIT(A) erred in considering debentures of Rs.17.60 crores as tax-free investment and wrongly included it in the computation of disallowance u/s.14A without appreciating the fact that income from debentures is taxable and hence should not form part of 'investment' in the prescribed formula under Rule 8D.
3. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming disallowance of provision for foreseeable losses on contract amounting to Rs.460.77 lakhs. The CIT(A) failed to appreciate that the loss was booked as per the method of accounting consistently followed and as mandated by Accounting Standard 7 on Construction Contract."
Ground Nos.1 & 2 :
2. After hearing both the parties, we find that during the assessment proceedings the AO noticed that the assessee had made investments amounting to Rs.93.96 crores. It was further noticed that the assessee had debited interest amounting to Rs.35.26 crores and, therefore, the assessee was requested to show cause why interest paid on borrowed funds should not be attributed to the investments in shares and disallowed u/s.14A. In response, it was submitted that the investments had been made for the purpose of business consideration and capital appreciation and not only for earning dividend. It was also submitted that if any interest was to be disallowed, then the same would work out to Rs.2,34,93,943/-. Working of the same was furnished. The AO observed as under :
"The contentions of the assessee are not acceptable as the interest bearing funds have been invested in shares from which assessee receives dividend income which is exempt as per section 10(33), therefore the provisions of Section 14A are attracted in this case. The without prejudice calculation of disallowance u/s.14A of the assessee is acceptable. Therefore Rs.2,34,93,943/- is disallowed as 3 ITA Nos.1256 to 1261 &1183/M/10 Mahindra Realty & Infrastructure per section 14A and is added back to the total income of the assessee."
3. On appeal, similar submissions were reiterated. The ld. CIT(A) issued notice for enhancement in view of the decision of the Special Bench in Tribunal in the case of ITO vs. Daga Capital Investment Ltd. (2008) 26 SOT 603 (Mum.) (SB). Before him, the figure for disallowance under Rule 8D was worked out at Rs.3.76 crores. However, after applying Rule 8D, the ld. CIT(A) worked out the disallowance at Rs.5.31 crores and accordingly disallowed a sum of Rs.5,31,52,000/-.
4. Before us, the ld. counsel of the assessee submitted that it has already been held by the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Ltd. Vs. DCIT (2010) 328 ITR 81 (Bom) that Rule 8D cannot be applied retrospectively. He further submitted that disallowance of Rs.2,34,93,943/-, which was worked out before AO and disallowed by him, may be treated as reasonable expenditure and he would have no objection if the disallowance is confirmed.
5. On the other hand, the ld. D.R. strongly supported the order of CIT(A).
6. We have considered the rival submissions carefully and find that it has already been held by the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Ltd. (supra) that Rule 8D has no retrospective application. Since the year under consideration before us is asstt. year 2001-02, Rule 8D cannot be applied. However, at the same time, the Hon'ble High Court has further held that AO has to work out the reasonable disallowance. Since before AO the disallowance was worked out at Rs.2,34,93,943/- and which has already been accepted by AO, we set aside the order of ld. CIT(A) and direct the AO to treat 4 ITA Nos.1256 to 1261 &1183/M/10 Mahindra Realty & Infrastructure the disallowance of Rs.2,34,93,943/- as reasonable disallowance. Thus, these grounds are partly allowed.
Ground No. 3:
7. After hearing both the parties, we find that during assessment proceedings the AO noticed that the assessee had claimed a provision for foreseeable losses amounting to Rs.460.77 lakhs. According to him, this was only a provision and therefore the same was disallowed.
8. On appeal before CIT(A), it was submitted that the assessee was following percentage completion method of accounting as prescribed under Accounting Standard 7 on Construction Contracts by the Institute of Chartered Accountants of India. As per this method, the income was being declared on anticipatory basis and therefore anticipatory losses were also accounted for. The ld. CIT(A) decided the issue against the assessee vide para 17, which is as under :
"17. I have carefully considered the above facts and find no merit in the contentions of the appellant. Perusal of the profit and loss account reveals that the appellant has disclosed income and also expenses from the various projects undertaken as receipts amount go Rs.5373.26 lakh while the expenses on projects has been disclosed at Rs.2906.72 lakh as per schedules 9 and 10 of the Balance Sheet. Over and above, sum of Rs.460.77 lakh has been claimed as deductible, being part of Other expenses of Rs.1604.90 lakh as per schedule-13. the appellant has claimed that such foreseeable loss pertaining to a project called Mahindra Park, Ghatkopar and the project NGE. It may be stated here that the appellant has not furnished the supporting of the exact working of such loss. It is noticed from annexure enclosed with the submission which showed working of such loss, the projects are spread over to many years and is in incipient stage staring from the year under consideration to FY 2004. There appears to be no sales realizations, no sale of flats, no actual expenditure incurred. Only as per projections, the appellant has arrived at the loss which is also not supported by any report authenticated by any technical expert. It appears that entire working made in an ad hoc manner is completely divorced from the ground realities or the actual work done. The appellant has placed undue emphasis on accounting standards AS-7 for claiming the loss but no such working has been provided in consonance with the said norms. In such a situation, the said loss cannot be considered to be ascertained in any manner. Accordingly, 5 ITA Nos.1256 to 1261 &1183/M/10 Mahindra Realty & Infrastructure the action of the AO in disallowing the same as mere provision is upheld."
9. Before us, the ld. counsel of the assessee reiterated the submissions made before the CIT(A).
10. On the other hand, the ld. D.R. strongly supported the order of CIT(A).
11. After considering the rival submissions carefully, we find that no details for future losses were furnished before AO or CIT(A). Losses cannot be claimed merely on the basis of projection. Some details are required to be filed to show how the assessee was anticipating those losses for which claim has been made. However, it seems, the assessee has not been given proper opportunity of being heard regarding this issue. Therefore, we set aside the order of ld. CIT(A) and remit the matter back to the file of AO with a direction to re-examine the issue after obtaining details on projected losses.
12. In the result, the appeal is partly allowed for statistical purposes. ITA No.1183/Mum/2010:
13. In this appeal, the Revenue has raised the following ground :
"2. On the facts and in the circumstances of the case and in law the CIT(A) erred in deleting the addition made by disallowing software expenditure amounting to Rs.11,25,785/- being expenses incurred for purchase of software relating to Auto Cad, MS Office and MS Windows, which are capital in nature."
14. After hearing both the parties, we find that during assessment proceedings the AO noticed that the assessee had made claim for software expenses amounting to Rs.11,25,785/-. It was further noticed that such an expenditure was incurred for different computer packages. After elaborate discussion, it was held to be a capital expenditure and only depreciation was allowed. The ld. CIT(A) allowed the claim on the basis of decision of Special Bench of Tribunal in the case of Amway India Enterprises vs. DCIT (2008) 21 SOT 1 (Del)(SB). 6 ITA Nos.1256 to 1261 &1183/M/10
Mahindra Realty & Infrastructure
15. Before us, the ld. D.R. submitted that though the CIT(A) has mentioned about the decision of Special Bench in the case of Amway India Enterprises v. DCIT (supra), but expenditure incurred by the assessee has not been tested on the parameters given by the Special Bench. She further submitted that the assessee had incurred major expenditure for purchasing Auto Cad and MS Office which cannot be considered as only supplements of the software.
16. On the other hand, the ld. counsel of the assessee submitted that the software purchased by the assessee was definitely covered as revenue expenditure by the decision of Special Bench in the case of Amway India Enterprises (supra).
17. We have considered the rival submissions carefully and find that though the CIT(A) has mentioned the decision of Special Bench in the case of Amway India Enterprises, but how the expenditure incurred by the assessee is covered by the decision is not discussed. Therefore, in the interest of justice, we set aside the order of ld. CIT(A) and remit the matter back to the file of AO with a direction to re-examine the issue in the light of decision of Special Bench in the case of Amway India Enterprises (supra).
18. In the result, the appeal is allowed for statistical purposes. ITA No.1257/Mum/2010:
19. In this appeal, the assessee has raised the following grounds :
"1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming disallowance of entire interest expenditure of Rs.1400.66, without appreciating the fact that interest is allowable u/s.36(1)(iii) as the funds were borrowed for the purpose of business of the Appellant. The leaned CIT9A) erred in holding that there was no nexus of monies borrowed with the business of the Appellant. The learned CIT(A) further erred in holding that the said interest was in any event disallowable u/s.14A read with Rule 8D.
Without prejudice to the above, the learned CIT(A) ought to have held that provisions of Rule 8D was not applicable to the year under 7 ITA Nos.1256 to 1261 &1183/M/10 Mahindra Realty & Infrastructure appeal and therefore, ought to have directed the AO to at least accept the amount of disallowance computed by the Appellant u/s.14A.
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming disallowance of advance written off to the tune of RFs.678.79 lakhs either as bad debt or as a business expenditure or as a business loss under appropriate provisions of the Income-tax Act, 1961."
Ground No. 1 :
20. After hearing both the parties, we find that the AO noticed that the assessee made a claim for interest payment amounting to Rs.1400.66 lakhs. The AO noticed that the assessee has already sold its business consequent to the de- merger of assessee's business and receipts from business and profession were nil. The borrowings were made only for investment in shares which were held as investment. Therefore, interest was not allowable u/s.14A and accordingly he disallowed the interest.
21. Before the ld. CIT(A), it was submitted that investments were made as part of the business towards furtherance of business activities of the assessee company, for which reliance was placed on the decision of Hon'ble Supreme Court in the case of S.A. Builders Ltd. vs. CIT (288 ITR 1). The ld. CIT(A) did not accept the submissions and decided the issue against the assessee vide para-5 of his order, which is as under :
"5. I have carefully considered the above fact. It is noticed from the profit and loss account that during the year under consideration, the appellant has o income from business activities, rather only income credited is mainly on account of dividend. On the debit side, on the other hand, there is no expenditure on personnel, project expenses etc. which once again confirm the fact hat no business activity was carried on by the appellant. In such a situation, it can be safely concluded that the interest debited to the accounts is having no nexus with the business and it not allowable under section 36(1)(iii) of the Act. Since the interest is directly attributable to dividend which is exempt from tax, entire interest is liable to be disallowed in terms of Rule 8D r.w. section 14A of the Act which has been done by the AO. In this connection, reference could be made 8 ITA Nos.1256 to 1261 &1183/M/10 Mahindra Realty & Infrastructure to the decision in the case if Insaallah Investments Ld. vs. ITO (2008) 23 SOT 130 (Del) in which, it was observed that the phrase 'income which does not form part of the total income' used is snot limited to only cases where income cannot be included income whether received or not. The Assessing Officer in that particular, as in the present case, disallowed deduction u/s.36(1)(iii) of the interest paid on borrowed fund used in investment in shares which was claimed as business expenditure since investment could neither result into capital gains or dividend and in both the situations, no deduction of interest could be allowed. In another case of Kankhal Investments and Trading Co. P.Ltd. vs. ACIT(2008) 301 ITR (AT) 359 (Mum) where borrowed fund was used for purchase of shares which were not purchased as stock-in-trade but for long term investments and the income was being offered as long term capital gains, it was held that since the dividend income was exempt, no deduction of interest could be allowed. In the light of such facts and the emerging position of law, it is held that the AO was justified in disallowing the claim for deduction of entire interest and in ignoring the working of disallowance u/s.14A as made by he appellant.
Accordingly, the addition made is upheld."
22. Before us, the ld. counsel of the assessee referred to page 1 of the paper book and pointed out that there was loss in the business which has also been assessed as business loss. He also submitted that in the immediate preceding year the income from ICD and debentures was assessed as business income and therefore in this year there would be some business income and accordingly interest should have been allowed u/s.36(1)(iii).
23. On the other hand, the ld. D.R. submitted that all the business assets have been hived off by the assessee company and in this regard she referred to para 1 to 4 of the assessment order. Once the assessee was not doing any business activity, the interest could not be allowed u/s.36(1)(iii).
23. We have considered the rival submissions carefully and find force in the submissions of the ld. D.R. During the year, in a scheme of reconstruction and demerger under sections 391 to 394 of the Companies Act, 1956, which was sanctioned by the Hon'ble Bombay High Court, the assets of infrastructure and realty business were demerged and given to Gesco Corporation Ltd. After this, 9 ITA Nos.1256 to 1261 &1183/M/10 Mahindra Realty & Infrastructure the assessee is not left with any business. The other assets represent only investments in shares and therefore interest cannot be allowed u/s.36(1)(iii). Merely because the interest on debentures and ICD was assessed in the earlier year's business income, that will not make any difference. In fact, the ld. CIT(A) has only followed the decision of the Tribunal in the case of Kankhal Investments & Trading Co.P. Ltd. vs. ACIT 301 ITR (AT) 359. In this case, it was observed as under :
"The assessee claimed deduction of interest on borrowed capital under section 36 of the income-tax Act, 1961, for the assessment years 1998-99 and 1999-2000. In the course of the assessment proceedings, it was found by the Assessing Officer that shares were not purchased as stock-in-trade but as long term investments and the income arising from sale of shares was being offered under the head "Capital gains". Thus, the contention of the assessee that borrowed funds were utilized for business purposes was rejected. Further, no such claim was allowable under the other heads as dividend income was exempt under section 10(330 of the Act. Therefore, the claim of the assessee was disallowed. This was confirmed by the Commissioner (Appeals)."
On the above facts, it was held as under :
"Held, that there must be receipt either actual or on accrual basis before a deduction can be allowed therefrom. Consequently, if receipts, in respect of which expenditure is incurred, are considered under other heads, then question of determining any income under the head "Profits and gains from business or profession" does not arise. In the case of a company in the business of holding shares, if investment in shares is disposed of then income therefrom had to be computed only under the specified head "Capital gains". Further dividend income income is also to be computed under the head "Income from other sources" if such income is taxable. Since dividend income was exempt under section 10(33) of the Act, the question of computing such income did not arise. There was no other receipt arising or accruing to the assessee from the business of holding investment in shares. The assessee was not entitled to deduct the interest payment from interest income from holding of debentures as there was no nexus between the borrowed funds and investment in debentures. Admittedly, the borrowed funds were utilised for the purchase of shares and therefore interest paid could not be set off against the income by way of interest on debentures. The interest was not deductible."10 ITA Nos.1256 to 1261 &1183/M/10
Mahindra Realty & Infrastructure In the case before us, the facts are identical. Investments made by the assessee were found by the AO to be held under investment and therefore interest cannot be allowed. Accordingly, we find nothing wrong with the order of CIT(A) and confirm the same.
Ground No. 2:
24. After hearing both the parties, we find that during assessment proceedings the AO noticed that the assessee had written off advances amounting to Rs.678.79 lakhs. On a request to furnish the details, the assessee company responded as under :
"During the year under consideration, the company has written off certain Doubtful advances amounting to Rs.678.79 crores and same was debited to P/L account. The company contend that the said write off advances are allowable lu/s.37 of the I.T. Act 1961".
Since no details were submitted or the circumstances under which such advances were written off, the AO disallowed the claim.
25. Before the ld. CIT(A), it was mainly submitted that the assessee had placed certain inter-corporate deposits with various companies and subscribed to some debentures. Since interest was never received and the financial position of such companies had become bad, the amount was written off. The ld. CIT(A) decided the issue vide para-8, which is as under :
"8. On careful consideration of the above facts, I do not find any infirmity in the conclusion drawn by the AO. The appellant itself is not sure under which provision of the Act such advances could be allowed as deduction. In so far as deduction u/s.37 is concerned, it is rightly pointed out by the AO that onus lies on the assessee to prove that the expenditure was incurred wholly and exclusively for the purposes of business. The appellant has not been able to retort to the specific requirements of the AO made in this regard. Even during appeal proceedings, merely names of a few companies have been submitted with respective amounts of loans/advances and interest written off unilaterally. There is no evidence that such companies had been become financially weak which necessitated such write off. There is no confirmation in this regard from any of them nor their Annual accounts have been submitted in support of 11 ITA Nos.1256 to 1261 &1183/M/10 Mahindra Realty & Infrastructure such a contention. Moreover, the appellant has written off and claimed deduction not only of interest but also loans which are stated to be advances though the same being capital sums could not be allowed as revenue expenditure. The appellant is not engaged in money lending business and such writing off of loan could not be allowed as deduction u/s. 37(1) of the Act. It would be worthwhile to rely on the decision in the case of Salem Magnesite P. Ltd. (2009) 180 Taxman 545 (Bom) in which the assessee which was solely in the business of mining had lent certain sum to a subsidiary company which later suffered a loss and was not in a position to repay the loan which the assessee wrote off and claimed deduction.
The claim was disallowed as the loan granted did not spring directly from the business and was not incidental to it. Thus, the AO ;rightly disallowed the claim of deduction u/s.37. In so far as the alternative plea for considering deduction in terms of section 36(1)(vii), there is absolutely no merit in he claim. The appellant has not brought on record any material fact to support the claim that such advances were in the nature of debts and had been passed through the trading account in earlier years. Therefore, the provisions of section 36(2) having been not satisfied, it is held that the AO was fully justified in disallowing the claim of deduction. The addition made is, therefore, upheld."
26. Before us, the ld. counsel of the assessee reiterated the submissions made before the CIT(A). He also relied on the decision of Hon'ble Supreme Court in the case of T.R.F. Ltd. vs. CIT (323 ITR 397).
27. On the other hand, the ld. D.R. submitted that since details for such write off were not available, the claim was correctly disallowed.
28. We have considered the rival submissions carefully and find that details were not available before AO or CIT(A). It is not clear how amounts given on debentures can be written off as a bad debt. Therefore, in the interest of justice, we set aside the order of ld. CIT(A) and remit the issue back to the file of AO with a direction to re-examine the same after examining all details which may be furnished before the AO.
29. In the result, he appeal is partly allowed for statistical purposes. ITA No.1258/Mum/2010 :
30. In this appeal, the assessee has raised the following grounds : 12 ITA Nos.1256 to 1261 &1183/M/10
Mahindra Realty & Infrastructure "On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the action of the learned AO in rejecting the claim of the appellant for deduction of technical fees of Rs.22,82,663 either as a business expenditure or a business loss allowable in the year under appeal.
The learned CIT(A) failed to appreciate the fact that the claim for deduction of the amount in question was made by the appellant during the course of the assessment proceedings of the year under appeal only for the reason that the claim was rejected by the AO in assessment proceedings for AY 2000-01 when it was made in the first place and was therefore without prejudice to the contention of the appellant that it was allowable in AY 2000-01."
31. After hearing both the parties, we find that during the year the assessee has made a claim for payment of technical fees amounting to Rs.22,82,663/- which was not allowed in the assessment year 2000-01 and that is why the same claim was made again. The AO disallowed the claim by observing that the scope of assessment proceedings u/s.143(3)(i) is limited and, therefore, this claim was not allowed.
32. Before the CIT(A), it was mainly submitted that the assessee had entered into an agreement with Farukawa Electric Company Ltd., Japan. Through this agreement, the Japanese company was to grant a licence to manufacture and sell certain components and parts manufactured on the basis of technical information and knowhow to be provided by Farukawa Electric Company Ltd. The assessee company paid a lump sum consideration for this which was payable in three installments and the first installment was payable immediately on the signing of agreement. The agreement was approved by RBI. The assessee company remitted a sum of Rs.18,16,631/- on 26-10-1998 and also effected the payment of tax. Since Farukawa Electric Company Ltd. could not meet the time schedule as per the agreement and further the proposal to manufacture contracted components was abandoned, the technical knowhow agreement with Farukawa Electric Company Ltd. was terminated. Accordingly, the amount already paid 13 ITA Nos.1256 to 1261 &1183/M/10 Mahindra Realty & Infrastructure inclusive of tax was written off in the accounts for the year ended 31-03-2000. This claim was disallowed by the AO by holding that the claim was of capital nature and, in any case, since the technical agreement was terminated in financial year 2000-01, the same could not be considered in asst. year 2000-01. It was argued that this case was a case of business loss which has been suffered during the ordinary course of business. The ld. CIT(A), after considering the submissions, decided the issue vide para 14, which is as under :
"14. I have carefully considered the above facts and find no merit in the contentions of the appellant. It is itself has admitted in no uncertain terms that the deduction is allowable in AY 2000-01 while the present appeal pertains to AY 2001-02. Thus, there is no requirement for going into the merits or otherwise of the said claim and applicability of the relevant provisions of the Act. The appellant has written off the said amount in the accounts pertaining to AY 2000-01. As such, there is absolutely no basis for claiming deduction in the year under consideration. Moreover, the said claim has been made in the course of assessment proceedings and not by way of any revised return filed u/s.139(5) of the Act. Therefore, the said deduction is otherwise also not allowable in view of the decision of Hon'ble Supreme Court in Goetze (India) Ld. vs. CIT (2006) 284 ITR 323 (SC) in which it has been held that with regard to the deduction claimed after filing of the return, the AO has no power to entertain claim made otherwise than by way of revised return. Accordingly, the action of the AO is upheld.
33. Before us, the ld. counsel of the assessee reiterated the submissions made before the CIT(A). He also submitted that the decision of Hon'ble Supreme Court in the case of Goetze (I) Ltd. vs. CIT (284 ITR 323) is not applicable because the Mumbai Bench of Tribunal has already held in the case of Nathpal Jhakri Joint Venture vs. ACIT (37 SOT 160) that a relief cannot be denied merely on technical grounds. On a query by the Bench, he fairly admitted that appeal is pending for asstt. year 2000-01 and also that no revised return was filed for making this claim.
34. On the other hand, the ld. D.R. strongly supported the order of CIT(A). 14 ITA Nos.1256 to 1261 &1183/M/10
Mahindra Realty & Infrastructure
35. We have considered the rival submissions carefully. The decision of Hon'ble Supreme Court in the case of Goetze (India) Ltd. v. CIT (supra) is as under :
"The question raised I this appeal relates to whether the appellant assessee could make a claim for deduction other than by filing a revised return. The assessment year in question was 1995-96. The return was filed on November 30, 1995, by the appellant for the assessment year in question. On January 12, 1998, the appellant sought to claim a deduction by way of a letter before the Assessing Officer. The deduction was disallowed by the Assessing Officer on the ground that there was no provision under the Income-tax Act to make amendment in the return of income by modifying an application at the assessment stage without revising the return.
This appellant's appeal before the Commissioner of Income-tax (Appeals) was allowed. However, the order of the further appeal of the Department before the Income-ax Appellate Tribunal was allowed. The appellant has approached this court and has submitted that the Tribunal was wrong in upholding the Assessing Officer's order. He has relied upon the decision of this court in National Thermal Power Company Ltd. v. CIT (1998) 229 ITR 383, to contend that it was open to the assessee to raise the points of law even before the Appellate Tribunal.
The decision in question is that the power of the Tribunal under section 254 of the Income-tax Act, 1961, is to entertain for the first time a point of law provided the fact on the basis of which the issue of law can be raised before the Tribunal. The decision does not in any way relate to the power of the Assessing Officer to entertain a claim for deduction otherwise than by filing a revised return. In the circumstances of the case, we dismiss the civil appeal. However, we make it clear that the issue in this case is limited to the power of the assessing authority and does not impinge on the power of the Income-tax Appellate Tribunal under section 254 of the Income-tax Act, 1961. There shall be no order as to costs."
The highlighted portion clearly shows that the decision would not affect the powers of Tribunal in terms of the decision of Hon'ble Supreme Court in the case of National Power Thermal Co. Ltd. v. CIT (229 ITR 383) when the issue is raked up before the Tribunal for the first time. This means that if a claim has been made before the AO and the same has been rejected because no revised return has been filed, then, since the AO has no such power, such claim has to be rejected. That is why the claim of assessee was rejected in the case of Goetze 15 ITA Nos.1256 to 1261 &1183/M/10 Mahindra Realty & Infrastructure (India) Ltd. also. In the case of Nathpal Jhakri Joint Venture, the issue was that the assessee had claimed certain expenditure on construction of temporary structure, out of which 95% of the expenditure was allowed and 5% was not allowed because the project was complete only upto 95%. The claim for balance amount was made in later years without revising the return. Before the Tribunal, the decision of Hon'ble Supreme Court in the case of Goetze (India) Ltd. was cited and the Tribunal observed that "We find that the reliance of the Revenue on this judgment is partly correct". But, however, later on, it was observed that relief could not be denied merely on technicalities. It seems, the Tribunal has not noted the portion of the order of Hon'ble Supreme Court which has been highlighted by us. It has been clearly observed by the Hon'ble Supreme Court that the powers of Tribunal will not be affected when the Tribunal is entertaining the claim for the first time a point of law. Therefore, when the claim was made before the AO without revising the return, such claim is not allowable and the decision of Hon'ble Supreme Court in the case of Goetze (India) Ltd. would clearly apply. In any case, we further find that in the case before us the claim was disallowed, not merely because the agreement was terminated in financial year 2000-01, but it was also disallowed because it was held to be of capital nature and that issue is still pending for adjudication as pointed out by the ld. counsel of the assessee before the CIT(A). Therefore, the interest of assessee is not affected. In view of this discussion, we confirm the order of ld. CIT(A).
36. In the result, the assessee's appeal is dismissed. ITA No.1259/Mum/2010:
37. In this appeal, the assessee has raised various grounds but basically 4 disputes are involved, which are as under :
(1) Confirmation of addition on account of notional interest amounting58,72,500/-.16 ITA Nos.1256 to 1261 &1183/M/10
Mahindra Realty & Infrastructure (2) Confirmation of addition on account of capital expenditure incurred on repairs & maintenance.
(3) Confirmation of addition on account of addition amounting to Rs.10,00,000/- on account of proportionate premium on redemption of debentures.
(4) Confirmation of addition on account of exclusion from profits 90% of service charges, premium on debentures and misc. income. Issue No. (1):
37. After hearing both the parties, we find that during assessment proceedings the AO noticed that the assessee company had placed a deposit of Rs.4.35 crores in financial year 2000-01 with Mahindra Construction Co. Ltd. (for short "MCCL").
It was claimed that the financial position of this company was not good and, therefore, interest amounting to Rs.58,72,500/- was waived. The AO noted that though the assessee had made a provision for doubtful debts in respect of this advance, but the same was added to the computation of income, which means provision for doubtful debts had been nullified. He further noted that deposit was given in financial year 2000-01 and was treated doubtful in the same year without any basis. He wondered how a deposit given to a sister concern could be treated as doubtful in the year of advance only without ascertaining the true financial position and accordingly this amount of Rs.58,72,500/- was added back to the income of the assessee.
38. On appeal before the CIT(A), it was again emphasized that interest was waived on the basis of interim assessment of financial condition of MCCL. The ld. CIT(A) confirmed the addition by observing that there was no evidence to show that the financial condition of MCCL was poor.
39. Before us, the ld. counsel of the assessee reiterated the submissions made before the lower authorities and emphasized that interest was waived mainly on the interim assessment of financial position of MCCL. 17 ITA Nos.1256 to 1261 &1183/M/10
Mahindra Realty & Infrastructure
40. On the other hand, the ld. D.R. supported the orders of AO and CIT(A).
41. After considering the rival submissions, we find that no evidence was produced before lower authorities to prove that the financial position of MCCL has really become bad. It is very strange that advance given in the same year has been treated as doubtful. However, in the interest of justice, we set aside the order of ld. CIT(A) and remit the matter back to the file of AO for re-examination as the ld. counsel of the assessee has submitted that opportunity to produce evidence regarding poor financial health of MCCL was not given. The assessee is directed to produce evidence and the AO is directed to provide adequate opportunity to the assessee and then decide the issue in accordance with law. Issue No. (2):
42. After hearing both the parties, we find that during assessment proceedings the AO noticed that assessee had claimed expenditure on repairs & maintenance amounting to Rs.8,93,406/- as per details below :
Sl.No. Particulars Amount (Rs.)
1 Network installation and color monitor 5,700/-
2 Tullu make water pump/tank 4,200/-
3 Water Tank 2,050/-
4 Clamping Cylinder 2,23,677/-
5 Custom Duty on Clamping Cylinder 1,29,357/-
6 Bed extension for winding m/c 60,823/-
7 Upgradation of PC 13,000/-
8 Heating Catridge 1,00,710/-
9 MS Office 2000 Standard/professional 32,589/-
10 MS Office 2000 small business 3,21,300/-
TOTAL 8,93,406
18 ITA Nos.1256 to 1261 &1183/M/10
Mahindra Realty & Infrastructure
The AO observed that the assets purchased and claimed as repairs were part of the bigger asset and, therefore, they were of capital nature and accordingly he allowed only depreciation @ 25%.
43. On appeal, the ld. CIT(A) confirmed the addition vide para 13, which is as under :
"13. I have carefully considered the above facts. It is evident from the facts stated above that all the plat and machineries are capital assets acquired for the first time. There is nothing on record to show that the same were replacement of the existing assets or were meant for upgradation, more specifically in the case of computer software in the form of MS Office. Accordingly, no interference is called for in the matter and the addition made is upheld.
44. Before us, the ld. counsel of the assessee submitted that the nature of expenditure was clearly of revenue nature and, therefore, these expenses should be allowed.
45. On the other hand, the ld. D.R. pointed out that the nature of expenditure was clearly of capital nature e.g. purchase of color monitor or water tank or clamping cylinder cannot be treated as items of revenue nature.
46. We have considered the rival submissions carefully and find that some of the items seem to be revenue nature but some items are clearly of capital nature. Then, there is a case of installation of software of MS Office. However, as requested by the ld. counsel of the assessee to decide the matter one way or the other, we estimate that a sum of Rs.5,00,000/- out of these items may be treated as revenue expenditure and the balance as capital expenditure. As far as the balance capital expenditure is concerned, depreciation @ 25% as admitted by the ld. counsel of the assessee should be given in the year under consideration as well as in future yeas.
Issue No. (3):
19 ITA Nos.1256 to 1261 &1183/M/10
Mahindra Realty & Infrastructure
47. After hearing both the parties, we find that the assessee had claimed towards reduction of premium on redemption of debentures amounting to Rs.10,00,000/-. In the year 2000, the assessee had subscribed to 10,00,000 unsecured optional convertible debentures of Mahindra Holidays & Resorts India Ltd.. These debentures were redeemable at the end of 5 years and there was an option for early redemption. On 03-04-2002, these debentures were prematurely redeemed at a premium of Rs.50,00,000/-. The resultant premium of Rs.50,00,000/- was offered and brought to tax in asstt. year 2003-04. However, in the accounts, proportionate amount of Rs.10,00,000/- was shown in the assessment year under consideration and that is why the same was sought as a deduction. The AO as well as the CIT(A) rejected the claim.
48. Both the parties were heard. After considering the rival submissions, we set aside the order of CIT(A) and remit the matter to the file of AO with a direction to verify if the whole amount has been subjected to tax in asstt. year 2003-04, then the amount of Rs.10,00,000/- has to be reduced in the current year. Otherwise, the AO may decide the issue as per law. Issue No. (4) :
49. As far as the items pertaining to premium on debentures amounting to Rs.10,00,000/- and misc. income amounting to Rs.19,23,637/- excluded from the business profits for the purpose of deduction u/s.80HHC was not pressed before us. However, as far as exclusion of service charge from business profits amounting to Rs.7,44,270/- is concerned, the same was excluded from business profits by the AO under clause (baa) of sub-sec. 4(c) of sec. 80HHC. The decision of AO was confirmed by the ld. CIT(A).
50. Before us, the ld. counsel of the assessee submitted that recently the Hon'ble Bombay High Court in the case of CIT v. Pfizer Ltd. has observed that it 20 ITA Nos.1256 to 1261 &1183/M/10 Mahindra Realty & Infrastructure is not always necessary that other receipts should have nexus with export activity and therefore the same cannot be reduced under clause (baa). In this regard, he relied on the decision of Hon'ble Bombay High Court in the case of CIT vs. Pfizer Ltd. (233 CTR 521).
51. On the other hand, the ld. D.R. submitted that the Hon'ble Bombay High Court in the case of CIT v. Dresser Rand India P. Ltd. (323 ITR 429) has clearly explained why certain receipts have to be excluded from the business profits for the purpose of deduction u/s.80HHC. In this case, the decision of CIT v. Bangalore Clothing Co. (260 ITR 371) has been overruled and the decision of Hon'ble Supreme Court in the case of CIV v. Ravindranathan Nair (295 ITR 228) has been followed. She also relied on the decision of Hon'ble Bombay High Court in the case of CIT v. K.K. Doshi & Co. (245 ITR 849) wherein it was specifically held that amount of service charge collected had no direct nexus with exports and therefore the same could not be taken into account for calculating the deduction u/s.80HHC.
52. We have considered the rival submissions carefully and find that the assessee had collected service charge from Electricity Board in India which has no nexus with export activity. Further, in the case of CIT v. Pfizer Ltd. the issues raised were in respect of insurance claim, writing off of sundry receipts and income from house property and it is only with reference to insurance claim that relief was allowed by the Hon'ble Court by observing that if stock of the assessee gets destroyed, then, instead of receiving sale consideration, if the assessee has received insurance claim, that would also amount to sale proceeds only and therefore this case cannot be taken as precedent for service charge. In the case of CIT v. K.K. Doshi (supra), it was clearly observed that amount collected as service charges, which had no nexus with export activity, could not be taken into 21 ITA Nos.1256 to 1261 &1183/M/10 Mahindra Realty & Infrastructure account for calculating deduction u/s.80HHC. In any case, the Hon'ble Bombay High Court recently considered various decisions for exclusion of various items under clause (baa) in the case of CIT v. Dresser Rand India P. Ltd. and it was observed as under :
"Sub-section (1) of section 80HHC of the Income-tax Act, 1961, contemplates a deduction to an assessee being an Indian company or a person resident in India and engaged in the business of export out of India of any goods or merchandise to which the section applies. The deduction is to be allowed in computing the total income of the assessee to the extent of profits referred to in sub- section (1B) derived by the assessee from the export of such goods or merchandise. Clause (a) of sub-section (3) of section 80HHC provides a formula for determining the profits derived from such export. The proportion between the export turnover and the total turnover of the business is applied to the profits of the business, in order to determine the extent to which the profits are to be regarded as being derived from export. Explanation (baa) which was inserted by the Finance Act of 1991 defines the expression "profits of the business". Profits of the business, as Explanation (baa) would postulate, have to be first computed under the head "Profits and gains of business or profession" under the provisions of sections 28 and 44D of the Act. They have to be reduced by (i) ninety per cent. Of the incentive income referred to in clauses (iiia), (iiib) and (iiic) of section 28 or any receipts by way of brokerage, commission, interest, rent, charges of "any other receipt of a similar nature included in such profits"; and (ii) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India. In CIT v. K. Ravindranathan Nair [2007] 295 ITR 228 the Supreme Court held that independent income like rent, commission, brokerage, etc., though it formed part of the gross total income had to be reduced by 90 per cent. as contemplated in Explanation (baa) in order to arrive at business profits. The rationale for this which is indicated in the judgment of the Supreme Court is that profit incentives and items which constitute independent incomes have no element of export turnover and are consequently liable to be excluded to the extent that is stipulated in Explanation (baa). The decision in CI v. Bangalore Clothing Co. [2003] 260 ITR 371 to the extent to which it lays down a principle of law at variance with the subsequent judgment of the Supreme Court in Ravindranathan Nair's case 295 ITR 228 would ;not therefore hold the field under the judgment of the Supreme Court. In CIT v. Baby Marine Exports [2007] 290 ITR 323 there is nothing in the judgment of the Supreme Court to suggest that the judgment in CIT v.
Bangalore Clothing Co. [2008] 260 ITR 371 was neither expressly or impliedly approved. The ambit of Explanation (baa) has been considered by the judgment of the Supreme Court in Ravindranathan Nair's case 295 ITR 228. The legislative policy underlying the provision is that items which are unrelatable to the 22 ITA Nos.1256 to 1261 &1183/M/10 Mahindra Realty & Infrastructure export activity must be excluded in the computation of business profits in order to prevent a distortion in the computation of the deduction under section 80HHC. What provision should be made consistent with the legislative policy underlying section 80HHC is a matter for Parliament to determine. The duty of the court is to interpret the language of the provision. The interpretation of the provision by the Supreme Court is binding and has to be followed". and then held as under :
"Held accordingly, that 90 per cent. of recovery of freight, insurance and packing receipts amounting to Rs.49,14,076, sales tax set off/refund amounting to Rs.38,33,148 and service income ofRs.2,89,17,545 had to be excluded for the purpose of computation of special deduction under section 80HHC".
Therefore, following the above decision, we hold that CIT(A) has correctly held that the amount received on account of service charges has to be excluded from business profits for the purpose of computing deduction u/s.80HHC.
53. In the result, the assessee's appeal is partly allowed for statistical purposes.
ITA No.1260/Mum/2010:
53. In this appeal, the assessee has raised the following two disputes :
(1) Confirmation of action of AO in confirming notional interest amounting to Rs.38,31,286/-.
(2) Failure of the CIT(A) to give direction to allow depreciation on the items treated as capital expenditure in the earlier year.
Dispute No.(1):
54. After hearing both the parties, we find that the issue is identically same as adjudicated in ITA No.1259/Mum/2010 in assessee's own case wherein the issue regarding notional interest has been set aside by us vide para 41 of this order to the file of AO for re-examination after considering the evidence regarding financial health of MCCL. Therefore, in this year also, we remit the issue back to the file of AO with similar direction.
23 ITA Nos.1256 to 1261 &1183/M/10
Mahindra Realty & Infrastructure Dispute No.(2):
55. After hearing both the parties, we find that we have already held while adjudicating ITA No.1259/Mum/2010 in respect of claim of repairs that a sum of Rs.5,00,000/- is to be treated as repairs and balance amount as capital expenditure. Therefore, depreciation has to be allowed on the balance amount and we direct the AO to allow depreciation @ 25% on the balance amount which has been treated by us as capital expenditure.
56. In the result, the assessee's appeal is allowed for statistical purposes. ITA No.1261/Mum/2010:
57. In this appeal, the assessee has raised the following dispute:
(1) Confirmation of action of AO in confirming notional interest amounting to Rs.38,31,286/-.
58. After hearing both the parties, we find that the issue is identically same as adjudicated in ITA No.1260/Mum/2010 in assessee's own case wherein the issue regarding notional interest has been set aside by is vide para 41 of this order to the file of AO for re-examination after considering the evidence regarding financial health of MCCL. Therefore, in this year also, we remit the issue back to the file of AO with similar direction.
59. In the result, the assessee's appeal is allowed for statistical purposes.
60. To sum up, ITA No.1256 & 1257/Mum/2010 by the assessee are partly allowed for statistical purposes, ITA No.1258/Mum/2010 by the assessee is dismissed, ITA No.1259/Mum/2010 by the assessee is partly allowed for statistical purposes, ITA Nos. 1260 & 1261/Mum/2010 by the assessee are allowed for statistical purposes, while ITA No.1183/Mum/2010 by the Revenue is allowed for statistical purposes.
24 ITA Nos.1256 to 1261 &1183/M/10 Mahindra Realty & Infrastructure Order pronounced on the 27th day of April, 2011. Sd/- Sd/- (SMT.ASHA VIJAYARAGHAVAN) (T.R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai: 27th April , 2011. NG: Copy to : 1.Assessee. 2.Department. 3 CIT(A)-5,Mumbai. 4 CIT-2,Mumbai. 5.DR,"J" Bench,Mumbai. 6.Master file. (TRUE COPY) BY ORDER, Asst.Registrar, ITAT, Mumbai. 25 ITA Nos.1256 to 1261 &1183/M/10 Mahindra Realty & Infrastructure Details Date Initials Designa tion 1. Draft dictated on 18-04-2011 Sr.PS/ 2. Draft Placed before author 21-04-2011 Sr.PS/ 3. Draft proposed & placed before the Second JM/AM Member 4. Draft discussed/approved by Second Member JM/AM 5. Approved Draft comes to the Sr.PS/PS Sr.PS/ 6. Kept for pronouncement on Sr.PS/ 7. File sent to the Bench Clerk Sr.PS/ 8. Date on which the file goes to the Head clerk 9. Date on which file goes to the AR 10. Date of dispatch of order