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2016 (11) TMI 357 - ITAT MUMBAI

2016 (11) TMI 357 - ITAT MUMBAI - TMI - Depreciation claim - capital expenditure being technical fee and other expenses, incurred towards setting up of the Hotel project - Held that:- Tribunal decided this issue in A.Ys. 2007-08 in favour of the assessee and held that assessee was entitled to capitalise the amount and claim depreciation thereon. But for the purpose of verification of facts, this issue was sent back to the file of the AO with the direction to verify the amount of expenditure and .....

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satisfaction before proceeding to make disallowance u/s 14A for more than the voluntary disallowance made by the assessee. The AO in the case before us failed to record any reasoning whatsoever or satisfaction and thus he did not assume jurisdiction to make disallowance u/s 14A read with rule 8D(2) (iii) as per law. Thus the disallowance deleted - Decided in favour of assessee - Addition of notional interest on the loan given by the assessee to its wholly owned subsidiary - Held that:- Asses .....

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idered as income as per principles of ‘real income theory’. The AO has wrongly added it as part of income on notional basis and the same is directed to be deleted. This ground is allowed. - I.T.A. No.100/Mum/2015 - Dated:- 21-9-2016 - SHRI C.N. PRASAD (JUDICIAL MEMBER) AND SHRI ASHWANI TANEJA (ACCOUNTANT MEMBER) For The Appellant : Shri Sunil Bhandari For The Respondent : Ms. Arju Garodia, DR ORDER Per ASHWANI TANEJA, AM This is an appeal filed by the assessee against the order of Ld. CIT(A) dt .....

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technical fee and other expenses, incurred towards setting up of the Hotel project. 2. Ld. CIT(A) erred in confirming disallowance of Other Expenses u/s 14A as per Rule 8D at 0.50% of average Investments without appreciating the fact that assessee had made investments in Mutual Funds wherein NAV is calculated after deducting expenses and as such, based on 106 transactions of purchase and sale, assessee had correctly estimated administrative expenses at ₹ 50,000/-. Consequentially AO made .....

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IT(A) in confirming the action of AO in not allowing the claim of depreciation of ₹ 16,49,070/- in respect of capital expenditure incurred on account of technical fee and other related expenses towards setting up of the hotel project. 3. During the course of hearing, it was submitted at the very outset by the Ld. Counsel that this issue had come up before the Tribunal in earlier years also wherein the Tribunal had decided this issue in favour of the assessee. 4. Per contra, the Ld. DR did .....

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oved by the projectee, therefore, same were neither paid nor booked in accounts in the year of incurring. However, in the previous year relevant to A.Y.2007-08 under consideration, a settlement was reached with the projectee, assessee company approved the same and amount was remitted after deducting required tax at source u/s.195. As the expenses were crystallized during the year itself, the assessee has capitalized the same and claimed depreciation thereon which was disallowed by the AO on the .....

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ny merit in the action of the lower authorities for denial of claim of depreciation in respect of expenditure which was crystallized and paid during the year under consideration. It is also not the case of the AO that tax was not deducted at source in respect of such payments. Keeping in view the totality of the facts and circumstances of the case, we restore the matter back to the file of the AO in both the years with a direction to verify the bills of expenditure so incurred and crystallized d .....

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verification of facts, this issue was sent back to the file of the AO with the direction to verify the amount of expenditure and allowing depreciation accordingly. Thus, this year also we send this issue back to the file of the AO with direction to follow the order of the Tribunal for the A.Ys 2007-08 & 2008- 09 and accordingly allow depreciation after verification of requisite facts. With these directions, this issue is sent back to the file of the AO and may be treated as allowed, for sta .....

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AO did not record any reasons or any kind of satisfaction in arriving at a conclusion that expenses to be disallowed u/s 14A are more than what was offered by the assessee and he simply proceeded to invoke rule 8D(2)(iii) and made disallowance @0.50% without giving any reasoning, whatsoever. 9. Per contra, the Ld. DR submitted that admittedly, no reasoning has been given by the AO for making disallowance @0.50%, but since the rule has prescribed disallowance @0.50%, the AO has followed the law .....

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ngle line in the assessment order as to why he did not accept the disallowance offered by the assessee. He has not recorded any finding that having regard to the books of account and other material, more disallowance was required to be made. Reliance has been placed in this regard by the Ld. Counsel on the judgement of the Hon ble Delhi High Court in the case of CIT vs I.P. Support Services India Pvt Ltd 378 ITR 240 (Del). We find the following observations of the Hon ble High Court are worth re .....

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tion to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the said Act. In other words, the requirement .....

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d that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Subsection (3) is nothing but an offshoot of sub-section (2) of section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to inco .....

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ion (2) of section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in rule 8D of the said Rules. While rejecting the claim of the as .....

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made by the assessee was unreasonable and unsatisfactory" is a mandatory requirement of the law. No substantial question of law arises. The appeal is dismissed. 11. Thus, from the above observations it is clear that invocation of section 14A is not automatic. The AO is bound to record his satisfaction before proceeding to make disallowance u/s 14A for more than the voluntary disallowance made by the assessee. The AO in the case before us failed to record any reasoning whatsoever or satisfa .....

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loan given by the assessee to its wholly owned subsidiary, viz. M/s Mahima Holdings Pvt Ltd. The brief facts of the case are that the assessee had given loan to its 100% subsidiary company, M/s Mahima Holdings Pvt Ltd in the earlier years. The assessee had booked interest income from the said company in the preceding two years. But, in the year under consideration, the assessee did not book any interest income on the ground that during the year, loan was converted into equity and the said compan .....

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e interest from the said company and, therefore, assessee should have booked interest income in its P&L Account. Under these circumstances, the AO made addition on account of notional interest for an amount of ₹ 53,43,800/-. 13. Being aggrieved, assessee filed appeal before the Ld. CIT(A) and made exhaustive submissions, a part of which is reproduced hereunder:- Appellant is in the business of construction and running of hotels and has set up a Five Star Hotel at Vakola in Santacruz(Ea .....

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l. Appellant company formed a separate company as its 100% subsidiary and acquired the plot in the said subsidiary for which funding was done by the holding company by way of loan. Loan given to Subsidiary was substantially utilized for meeting its administrative expenses and working capital. A perusal of the Financial Statements of Mahima would show that loan received from JHPL has been fully utilized in the business of Mahima and not diverted therefrom for any other business. However, the proc .....

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erest on the loans given by Holding company. This continued till the FY 2007-08 It was then realized that for setting up Training Institute, substantial funds would be required through banks/financial institution. The pre condition from the banks and financial institutions was that the borrowing money should have sizeable equity. Appellant company, therefore, decided to convert its loan into equity and as of 31st march 2009, loan was converted into share application money and equity shares were .....

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otel business. It was further submitted that funds provided to Mahima have remained utilized in business assets of the company and in fact no loan is given there from to any individual or entity. Business of the subsidiary being business of the holding company, interest paid on borrowals made for the funding of subsidiary deserves to be fully allowed u/s.36(1)(iii) of the Act. For this proposition appellant also relied on the decision of the Hon'ble Apex Court in the case of S. A. builders L .....

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income arising to any person by virtue of a revocable transfer of assets." Obviously what can be brought to tax is restricted to income actually arising to the and not any notional or fictitious income. Income must be real making the transferee richer immediately and not presumed income which may arise in future. From the Audited Financial Statements, it can be see that in the hands of Mahima no revenue, whatsoever, accrued during FY 2008-09 and on the debit side of the P&L A/c. it incu .....

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In the case of your appellant, loan was never given to transfer income to subsidiary. It also needs to be appreciated that during the succeeding Financial Year i.e. FY 2009-10 said loan as converted into equity and hence is no more revocable even for FY 2008-09. We would also like to draw your attention to the decision of the Hon'ble Supreme Court in the case of S. P. Jaiswal vs. CIT 224 ITR 619 (SC). Though facts of the decision are quite different (loan given by father to children was rou .....

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bmissions of the assessee and upheld the addition made by the AO with following observations:- 5.3 I have considered appellant's submission. The appel lant had extended loan of ₹ 5,04,70,700/- to a 100% subsidiary company M/s. Mahima Holding Pvt. Ltd. The appel lant was charging interest of ₹ 53,43,800/- till the last assessment year and this interest was offered for income-tax purposes. However, at the end of this year appellant had converted this loan into equity and not offere .....

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diary company. However, the loan which was converted into equity this year, at the end of the year appellant had not offered any income. Here it clearly shows that appellant's loan was with the subsidiary company throughout the year, following the rule of consistency as held in the case of CIT vs. Paul Brothers 216 ITR 548 (Born) and CIT vs. Western Outdoor Interactive 80 DTR 246 (Born). Following the above Rule as appellant had failed to offer the interest income which was offered earlier h .....

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interest income. An amount can be taxed in the hands of the assessee only if it is in the nature of income. The AO made notional addition on account of interest which was neither recoverable nor has ever been recovered. The AO disregarded the well accepted concept of real income theory. He also placed reliance on Accounting Standarde-9 on revenue recognition issued by the Institute of Chartered Accountants of India. 16. Per contra, the Ld. DR submitted that since in the earlier two years assesse .....

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part of Balance-sheet under Schedule A:- The Holding Company M/s Juniper Hotels Private Ltd has approached Mahima Holding Private Ltd to convert outstanding unsecured loan and interest accrued thereon into equity to the extent of ₹ 5,16,00,000 ; due to Mahirna Holding Private Ltd's inability to repay the said loan and interest accrued thereon. The relevant documentation and other statutory formalities are underway and same shall be completed during 2009-10.Pending completion of these f .....

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said company had made any provision of interest nor it had capacity to make payment of interest or repayment of loan to the assessee company. Under these circumstances, the assessee took a decision to not to book any interest income by way of just creating an accounting entry. It is further noted that during the year under consideration, the loan was converted into share application money. Under these circumstances, we find that merely because the assessee was following mercantile system of acc .....

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based merely on theoretical ideas or notions. The assessee can be made bound to pay tax only on the amount of income that has been earned by the assessee and not upon any artificial or hypothetical income. In the peculiar facts of this case, the department cannot assess the income of the assessee by ignoring the sound principles of real income theory . The taxable income of the assessee must be computed in accordance with sound judicial principles. It would be too harsh to ask the assessee to p .....

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appeal, the Tribunal by the impugned order takes into account the fact that even in mercantile system of accounting an item would be regarded as accrued income only if there is certainty of receiving it and not when it has been waived. The Tribunal has in the impugned order very succinctly set out the principles to be applied while recovering income in following the mercantile system of accounting :- "(A) that merely because assessee was following mercantile system of accounting, it could .....

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collection with reasonable certainty is lacking, the revenue recognition is to be postponed to the extent of uncertainty involved. in terms of the guidance note, it is appropriate to recognize revenue in such cases only when it becomes reasonably certain that ultimate collection will be made. (D) Non-recognition of income on the ground that the income had not really accrued as the realisability of the principal outstanding itself was doubtful, is legally correct under the mercantile system of ac .....

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of Section 145(1) are subject to, inter alia, mandate of AS-1 which also prescribes that Accounting policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies. 'In the name of compliance with Section 145(1), it cannot be open to anyone to force adoption of accounting policies which result in a distorted view of .....

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interest has been waived. Further on facts it holds that there is no reason to disbelieve the resolution passed by the Respondent-Assessee waiving interest. The Tribunal further adverted to the fact that subsequently, M/s, Marketing & Brand Solutions (I) Pvt. Ltd. had amalgamated with the Respondent-Assessee which would also establish that the debentures issuing company was in serious financial difficulties which was incidentally a group company of the Respondent. The decision rendered by th .....

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e excluded from its total income since it could not be said to have accrued unless imports were made and raw materials consumed. But the Assessing Officer did not accept the assessee s claim on the ground that such benefits were covered u/s 28(iv) and, therefore, along with the fulfillment of obligation of export commitment, the assessee gets the benefit of importing raw material duty free. Thus, when exports were made, the obligation of the assessee was fulfilled and the right to receive the be .....

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s by learned counsel for the Revenue that in view of the provisions of Section 28(iv) of the Act, the value of the benefit obtained by the assessee is its income and is liable to tax under the head "Profits and gains of business or profession". We are unable to accept the contention of learned counsel for the Revenue for several reasons. 16. Section 28(iv) of the Act reads as follows: "Profits and gains of business or profession 28. The following income shall be chargeable to inco .....

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t was held as follows:- Income-tax is a levy on income. No doubt, the Income-tax takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income , which does not materialise. Where income has, in fact, been received and is subsequently given up in such cir .....

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nsidered the dictionary meaning of the word "accrue" and held that income can be said to accrue when it becomes due. It was then observed that: ..........the date of payment .......does not affect the accrual of income. The moment the income accrues, the assessee gets vested with the right to claim that amount even though it may not be immediately." 19. This Court further held, and in our opinion more importantly, that income accrues when there "arises a corresponding liabili .....

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the benefits under the advance licences as well as under the duty entitlement pass book, there was no corresponding liability on the customs authorities to pass on the benefit of duty free imports to the assessee until the goods are actually imported and made available for clearance. The benefits represent, at best, a hypothetical income which may or may not materialise and its money value is therefore not the income of the assessee. 22. In Godhra Electricity Co. Ltd. v. Commissioner of Income T .....

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s of the case that the assessee had a legal right to recover the consumption charge in dispute at the enhanced rate from the consumers. 24. This Court did not accept the view taken by the High Court on facts. Reference was made in this context to Commissioner of Income Tax v. Birla Gwalior (P.) Ltd., [1973] 89 ITR 266 (SC) wherein it was held, after referring to Morvi Industries that real accrual of income and not a hypothetical accrual of income ought to be taken into consideration. For a simil .....

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n the principles of real income theory. The majority opinion went on to say "What has really accrued to the assessee has to be found out and what has accrued must be( considered from the point of view of real income taking the probability or improbability of realisation in a realistic manner and dovetailing of these factors together but once the accrual takes place, on the conduct of the parties subsequent to the year of closing an income which has accrued cannot be made "no income&quo .....

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gh the letter had no legal binding effect but "one has to look at things from a practical point of view." (R.B. Jodha Mal Kuthiala v. Commissioner of Income Tax, [1971] 82 ITR 570 (SC)). This Court took the view that the probability or improbability of realisation has to be considered in a realistic manner and it was held that there was no real accrual of income to the assessee in respect of the disputed enhanced charges for supply of electricity. The decision of the High Court was, ac .....

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have made imports), it is quite clear that in fact no real income but only hypothetical income had accrued to the assessee and Section 28(iv) of the Act would be inapplicable to the facts and circumstance of the case. Essentially, the Assessing Officer is required to be pragmatic and not pedantic. 20. Thus, from the above observations of Hon ble Supreme Court, it is noted that well accepted principles under the Income-tax law have been again reiterated laying down that income-tax cannot be levie .....

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