2017 (2) TMI 637 - AT - Income Tax

Disallowance made u/s. 35D - assessee is engaged in the business of Third party logistics operations - Held that - CIT(A) has given finding that the assessee has not issued any shares for public subscription and the same appears to be a case of private placement of equity. The learned CIT(A) has also stated that the assessee has not met any of the required criteria specified in section 35D of the Act. Accordingly the learned CIT(A) held that the disallowance made by the Assessing Officer was justified. Even though learned AR argued that the claim made by the assessee is allowable u/s. 35D of the Act yet he could not convincingly explain as to how this expenditure would fall in the list of expenses specified u/s. 35D of the Act. Further in the case of Brooke Bond India Ltd. (1997 (2) TMI 11 - SUPREME Court) has held that expenditure incurred in augmenting the share capital is capital in nature. Hence we do not find any reason to interfere with the order passed by the learned CIT(A) on this issue. - Decided against assessee. Double addition of interest income - Held that - The assessing officer has already assessed the interest income (credit entry) whose corresponding debit entry is the increase in the amount of Capital work in progress . In any case since Capital workin- progress is a Balance sheet item its increase will not increase the business profit of the assessee as presumed by the Assessing Officer. Hence we are unable to agree with the view taken by the tax authorities as the same is against the accounting principles. Accordingly we set aside the order passed by the learned CIT(A) on this issue and direct the Assessing Officer to delete the addition made towards under valuation of work-inprogress as the same results in double addition of same item. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance made under section 35D of the Act for share issue expenses.
2. Double addition of interest income in the assessment.

Issue 1: Disallowance under section 35D of the Act for share issue expenses
The assessee's appeal was against the order passed by the CIT(A)-2, Mumbai related to A.Y. 2009-10. The Assessing Officer disallowed a claim made by the assessee for share issue expenses under section 35D of the Act. The CIT(A) upheld this disallowance. The assessee contended that the claim was allowable under section 35D, but failed to convincingly explain how the expenditure qualified. The tribunal noted that the expenditure incurred to increase share capital is capital in nature, as per the Supreme Court's decision in Brooke Bond India Ltd. case. Therefore, the tribunal upheld the CIT(A)'s decision on this issue.

Issue 2: Double addition of interest income in the assessment
The Assessing Officer observed that the assessee had deducted interest income earned from fixed deposits from pre-operative expenses. The AO assessed this interest income as the assessee's income from other sources. The CIT(A) confirmed this addition. However, the assessee accepted the CIT(A)'s decision. The AO also increased the work-in-progress value, leading to an increase in business profit. The tribunal found a fallacy in the AO's approach, stating that entries in the balance sheet do not determine total income. The tribunal highlighted that an increase in the asset side of the balance sheet should correspond to an increase in capital liability or income. Since the interest income was already assessed, any increase in work-in-progress value would not increase business profit. Therefore, the tribunal directed the AO to delete the addition made towards the undervaluation of work-in-progress. As a result, the appeal filed by the assessee was partly allowed.

The judgment was delivered by the Appellate Tribunal ITAT Mumbai, with detailed analysis and reasoning provided for each issue involved in the case.