2022 (4) TMI 169 - AT - Income Tax

Addition made on account of club membership fees - Allowable deduction u/s 37(1) - HELD THAT - Hon ble Supreme Court in the case of United Glass Manufacturing Company Ltd. 2012 (9) TMI 914 - SUPREME COURT as held that the club membership paid in the normal course of business is purely business expenditure allowable as deduction u/s.37(1) We find that the ld. CIT(A) had granted relief by placing reliance on case of CIT vs. Sundaram Industries Ltd. 1999 (4) TMI 50 - MADRAS HIGH COURT Since the issue is covered in favour of the assessee by various High Courts including the Hon ble Jurisdictional High Court and the decision of the Hon ble Supreme Court referred to supra the reliance placed by the ld. AO on various Tribunal decisions would be of no relevance and accordingly we hold that the order of the ld. CIT(A) granting relief in this regard does not warrant any interference. Accordingly the ground No.1 raised by the Revenue is dismissed. Disallowance made u/s.14A r.w.r. 8D - HELD THAT - AO directly applied the computation mechanism provided in second and third limb of Rule 8D(2) of the Income Tax Rules and made disallowance - CIT(A) placed reliance on the decisions of various High Courts including decision of Oil Industry Development Board 2019 (3) TMI 1571 - SC ORDER wherein it was held that the disallowance u/s.14A of the Act could not be made in the absence of exempt income. The law is very much settled in view of the decision of the Hon ble Supreme Court in the case of Maxopp Investments 2018 (3) TMI 805 - SUPREME COURT wherein it had been held that disallowance u/s 14A of he Act cannot be invoked in the absence of exempt income and there cannot be any quarrel on this issue. Hence we do not find any infirmity in the order of the ld. CIT(A). Accordingly the ground Nos.2 3 raised by the Revenue are dismissed. MAT computation u/s 115JB - Disallowance of loan processing fees debited in the profit and loss account as an exceptional item while computing the book profit u/s.115JB - whether the action of the ld. CIT(A) in confirming the action of the ld. AO for disallowing the loan processing fees while computing book profits u/s.115JB of the Act would result in travelling beyond the scope of limited scrutiny ? - HELD THAT - We find that the case of the assessee is selected for limited scrutiny under CASS wherein one of the items that required to be verified is verification of large other expenses debited in the profit and loss account . Admittedly the fees paid to IFC for a capital project was indeed an exceptional item debited by the assessee in accordance with Accounting Standard-5(AS-5) issued by the Institute of Chartered Accountants of India (ICAI) as a separate line item. The purpose of selection of a case for scrutiny be it complete scrutiny or limited scrutiny is only determination of total income of the assessee. In our considered opinion this would certainly include determination of total income both under normal provisions of the Act as well as in the computation of book profits u/s.115JB of the Act. The ld. AO is bound to compute the total income under both the mechanisms provided under the Act and ultimately determine the higher of the two tax liabilities in the manner provided therein and raise a demand on the assessee. Hence we are in complete concurrence with the view taken by the ld. CIT(A) in this regard. Hence we hold that the ld. AO had not travelled beyond the jurisdiction provided under the limited scrutiny by disturbing the computation of book profit u/s.115JB of the Act and which is also relevant for the purpose of determination of total income. Accordingly the ground Nos.1.1 to 1.2 raised by the assessee are dismissed. Admittedly fee paid to IFC was for the purpose of expansion of business of the assessee. Hence there is no doubt that such expenditure is clearly a capital expenditure. When this capital expenditure is debited in the profit and loss account as an exceptional item then the ld. AO would be entitled to tinker with the audited financial statements in view of the fact that Part-II and Part-III of Schedule-6 of the Companies Act 1956 does not permit any capital expenditure to get debited in the profit and loss account. So once it is undisputedly proved that a capital expenditure is debited to profit and loss account and claimed as deduction while computing book profits u/s.115JB of the Act the ld. AO would be entitled to tinker with the said approved audited accounts even though it does not fall within the item of adjustments provided in Explanation-1 to Section 115JB(2). Thus wherein a particular expenditure which is not allowable as deduction from its inception will not be allowed as deduction while computing book profits u/s.115JB of the Act and the same would have to be added back while computing book profits u/s.115JB of the Act. Hence we confirm the action of the ld. CIT(A) in this regard. Accordingly the ground Nos. 2.1 and 2.2 raised by the assessee are dismissed.

Summary

Issues Involved:
1. Deletion of addition made on account of club membership fees.
2. Deletion of disallowance made under Section 14A of the Income Tax Act.
3. Disallowance of loan processing fees while computing book profit under Section 115JB of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made on Account of Club Membership Fees:
The Revenue challenged the deletion of the addition made on account of club membership fees by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee, a listed company engaged in port services, had debited Rs. 5,52,847/- for club membership fees, which the Assessing Officer (AO) disallowed, considering it a personal privilege not related to business promotion. The assessee argued that the club membership was for business purposes, such as meetings and networking, and cited the Supreme Court's decision in United Glass Manufacturing Company Ltd., which held that club membership fees paid in the normal course of business are allowable as business expenditure under Section 37(1) of the Income Tax Act. The CIT(A) granted relief based on this precedent and the decision of the Bombay High Court in Otis Elevator Company (India) Ltd. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's ground.

2. Deletion of Disallowance Made Under Section 14A of the Income Tax Act:
The Revenue contested the deletion of disallowance under Section 14A, where the AO had applied Rule 8D(2) of the Income Tax Rules and disallowed Rs. 14,03,84,683/-. The assessee had not earned any exempt income during the year, a fact not disputed by the AO. The CIT(A) relied on the Supreme Court's decision in PCIT vs. Oil Industry Development Board, which held that disallowance under Section 14A cannot be made in the absence of exempt income. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's grounds, citing the settled law in Maxopp Investments.

3. Disallowance of Loan Processing Fees While Computing Book Profit Under Section 115JB of the Income Tax Act:
The issue was whether the CIT(A) was justified in confirming the disallowance of loan processing fees debited as an exceptional item while computing book profit under Section 115JB. The assessee, engaged in port development, had debited Rs. 34.58 Crores as fees paid to IFC for a cancelled loan agreement, which was added back while computing income under normal provisions but not under Section 115JB. The AO argued that this capital expenditure should be added back while computing book profits, as it was not allowable under normal provisions. The CIT(A) upheld the AO's action, stating that the determination of total income includes both normal provisions and book profits under Section 115JB. The Tribunal concurred, noting that capital expenditure debited in the profit and loss account can be adjusted while computing book profits, aligning with the Mumbai Tribunal's decision in JSW Steel. The Tribunal dismissed the assessee's grounds, confirming the CIT(A)'s decision.

Conclusion:
The Tribunal dismissed the appeals of both the Revenue and the assessee, upholding the CIT(A)'s decisions on all issues. The order was pronounced on 31/03/2022.