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Essel Infraprojects Limited (formerly Pan India Paryatan Limited) Versus DCIT Circle 7 (1) , Mumbai and Vice-Versa

2017 (1) TMI 769 - ITAT MUMBAI

Disallowance of interest expenditure on account of capital work-in-progress - Held that:- We noticed that the assessee itself has admitted that loan funds have been used for giving share application money to its subsidiary. We also noticed that the own funds available with the assessee is in far excess of the capital work-in-progress. Hence, we are of the view that there is no requirement to make any disallowance out of interest expenditure on account of capital work-in-progress. Accordingly, we .....

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ss account and instead reduced the Repairs and maintenance account with the above said figure. The net effect is that the assessee has already offered the sum of ₹ 62.00 lakhs as its income. Thus, we notice that the AO has assessed the above said amount of ₹ 62.00 lakhs without properly appreciating the facts, whereas the Ld CIT(A) has deleted the same by correctly appreciating the facts.- Decided in favour of assessee - Disallowance made u/s 14A - Held that:- CIT(A) had restrict .....

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sue and direct the AO to restrict the disallowance to 10% of the exempt dividend income earned by the assessee during the year under consideration. - Addition on the basis of AIR information - According to Ld A.R, the assessee has reconciled the TDS amount vis-à-vis the rental income declared by the assessee and hence the error, if any, has occurred at the end of M/s Kamat Hotels (P) Ltd - Held that:- We notice that the difference noticed by the AO requires to be reconciled. According to the .....

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also disallowed the above said amount of book depreciation and allowed depreciation for income tax purposes at ₹ 2,41,65,640/-. If the above said figure of ₹ 2.41 crores does not include the depreciation amount of ₹ 97,118/-, then there is no requirement of disallowing the same again. Accordingly we set aside this to the file of the AO for the limited purpose of verifying as to whether the depreciation of ₹ 2.41 crores allowed by the AO includes the amount of ₹ 97, .....

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e expenditure incurred on bidding, even if it is unsuccessful, should be allowed as deduction - I.T.A. No. 4244/Mum/2013, I.T.A. No. 4696/Mum/2013, I.T.A. No. 4697/Mum/2013 - Dated:- 11-1-2017 - Shri B.R. Baskaran (AM)& Ramlal Negi (JM) For The Assessee : Shri Niraj Sheth For The Department : Capt. Pradeep Arya ORDER Per B.R. Baskaran (AM) :- The assessee has filed the appeal for A.Y. 2006-07 and the Revenue has filed the appeal for A.Y. 2006-07 & 2007-08. All the appeals are directed ag .....

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of interest expenses claimed by the assessee. The Assessing Officer disallowed a sum of Rs. 1,48,10,695/- out of interest expenditure and telescoped the same against another interest disallowance of Rs. 13,62,536/-. The learned CIT(A) confirmed the disallowance of Rs. 13,62,536/- and deleted the disallowance of Rs. 1.48 crores referred above. Hence both the parties are in appeal before us on this issue. 4. Facts relating to the above said issue are stated in brief. During the year under consider .....

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crores to M/s. Pan India Infrastructure Pvt. Ltd. as Share application money. The Assessing Officer took the view that the assessee has diverted the interest bearing fund by giving interest free advance in the form of share application money. Accordingly, he took the view that the entire interest claim of Rs. 1,48,10,695/- needs to be disallowed. Since the entire interest expenditure was disallowed, the Assessing Officer did not make separate addition of Rs. 13,62,536/- referred above again. 6. .....

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13,62,536/-. The Learned counsel appearing for the assessee submitted that the assessee has not borrowed any interest bearing money for executing capital work-inprogress. He submitted that the entire capital work-in-progress was met by the assessee out of internal accruals and own funds. He submitted that the loan funds have been used for the purpose of giving share application money to its subsidiary. Accordingly, he contended that there is no requirement for disallowing interest in respect of .....

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rned AR invited our attention to the balance sheet placed in one of the paper book and submitted that the assessee is having own funds of Rs. 175.93 cores, while investment made in capital work-in-progress is only Rs. 1.36 crores. Accordingly, he submitted that the ratio laid down by Hon'ble Bombay High Court in the case of Reliance Utilities (313 ITR 340) would squarely apply to the facts of the present case. He submitted that the loan funds have been used to make investments and the capita .....

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t of interest expenditure on account of capital work-in-progress. Accordingly, we set aside the order passed by the learned CIT(A) on this issue and direct the Assessing Officer to delete the disallowance of Rs. 13,62,536/-. 11. With regard to the disallowance of expenditure of Rs. 1.48 crores, we noticed that the learned CIT(A) has analysed the issue in detail and has observed that the investment made by the assessee in M/s. Pan India Infrastructure Pvt. Ltd., was in the course of carrying on i .....

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issible deduction in the computation of profits and gains of business or profession. From the language used therein, it is evident that the availability of the deduction is subject to the following three conditions, viz. (i) Money (Capital) that is money, should have been borrowed; (ii) such borrowing should be for the purposes of business or profession of the assessee; and (iii) the assessee should have paid interest on the said amount which is claimed by him as an allowance under this clause. .....

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its own business or has advanced the same as interest-free loan to its sister concern. What is relevant is whether the amount so advanced was as a measure of commercial expediency or not. It is not necessary that the amount so advanced is earning profit or not but there must be some nexus between expenses and the purpose of business. If the assessee makes a claim for deduction in terms of section 36, he has to place materials in support of his claim of entitlement to the deduction. The assessee .....

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nd cannot be allowed. The AO has also relied upon the proviso to section 36 (I) (iii) of the IT Act to state that the investment in the shares of the subsidiary would need to be disallowed as interest-bearing loans had been used for advancing ₹ 25 crores as share application money to gain control of the said subsidiary. Stating this, the AO proceeded to disallow the entire interest expenditure of ₹ 1,48,10,695/- debited in the P&L Account holding it to be capital in nature. In th .....

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ce provided to the wholly owned subsidiary by way of advance for share application money is for its business of infrastructure and is used for that purpose. In this case, the amount has been advanced to Pan India Infrastructure Pvt. Ltd. for development of MMKI toll road Project and the said concern further passed on the amount to its wholly owned subsidiary Maharashtra Hydrocarbon Products Pvt. Ltd. which is 50% share holder of MMKIPL which is in the business of construction management and oper .....

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s established, no disallowance u/s 36 (1) (iii) of the IT Act was warranted. It has been stated by the Hon'ble Courts that interest on funds borrowed by the assessee for investment in a joint venture was allowable as deduction even though the borrowings were kept as share application money in the joint venture company without charging any interest. I find that the AO has also not doubted the business nexus as he has proceeded to make the disallowance under the proviso to section 36(1) (iii) .....

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he subsidiary from interest-bearing funds would need to be allowed as a deduction. The AO is directed to calculate accordingly and allowed the benefit to the appellant. This ground of appeal raised by the appellant is, therefore, allowed. 12. On careful perusal of the order passed by the learned CIT(A) on this issue, we noticed that the learned CIT(A) has analysed the facts prevailing in the instant case in proper perspective and has taken a plausible view. Hence we do not find any reason to int .....

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ring the same. The AO noticed that the assessee had lodged insurance claim of ₹ 62 lakhs on account of fire and the claim was shown in the Balance Sheet under the head Loans and advances . The AO took the view that the assessee has not credited the insurance claim amount in the Profit and loss account and accordingly assessed the same as income of the assessee. 14. The Ld CIT(A) noticed that the assessee has credited Repairs and Maintenance A/c with the amount of ₹ 62.00 lakhs, refer .....

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62.00 lakhs as a separate item of credit in the Profit and Loss account and instead reduced the Repairs and maintenance account with the above said figure. The net effect is that the assessee has already offered the sum of ₹ 62.00 lakhs as its income. Thus, we notice that the AO has assessed the above said amount of ₹ 62.00 lakhs without properly appreciating the facts, whereas the Ld CIT(A) has deleted the same by correctly appreciating the facts. Accordingly we do not find any inf .....

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per Rule 8D. Since he had fully disallowed interest expenditure, the AO did not make any disallowance u/r 8D(2)(ii) of the Act. The AO worked out the disallowance u/r 8D(2)(iii) relating to administrative expenses at ₹ 39,58,536/- and disallowed the same. The Ld CIT(A) also upheld the same. 17. We heard the parties on this issue and perused the record. The investments held by the assessee as on 01.04.2006 and 31.3.2006 was ₹ 3.55 crores and ₹ 154.78 crores respectively. During .....

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sessee has used its own funds only for making investments in the earlier years also. Accordingly it was submitted that the interest disallowance is not called for and the same has been accepted by Ld CIT(A) also. 18. We have noticed that the AO has disallowed a portion of administrative expenses by applying the provisions of Rule 8D(2)(iii) of I.T Rules. The year under consideration being AY 2006-07, the provisions of Rule 8D shall not apply to the year under consideration as per the decision re .....

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Telefilms Ltd and other five companies. Besides the above, the assessee has received dividend income and earned Long term capital gains on sale of shares of two companies. Thus, we notice that the transactions carried on by the assessee company were limited during the year under consideration. We notice that the Ld CIT(A) had restricted the disallowance to 10% of the dividend income in the succeeding year and the same has been accepted by the assessee. Accordingly, considering the factual matri .....

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sue contested by the assessee relates to the addition of ₹ 1,45,749/- made on the basis of AIR information. The assessee had shown income from M/s Kamat Hotels (P) Ltd. However the income shown by the assessee from the above said hotel was lesser than the amount shown in AIR information by ₹ 1,45,749/-. Since the assessee did not reconcile the same, the AO added the difference and the Ld CIT(A) also confirmed the same. 20. We heard the parties on this issue. According to Ld A.R, the .....

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ordingly it was contended that the mistake, if any, should have occurred at the end of M/s Kamat Hotels P Ltd. Since it is a matter requiring reconciliation, we are of the view that this issue needs to be examined afresh at the end of the AO. Accordingly we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to call for the details from M/s Kamat Hotels P Ltd. After seeking explanations from the assessee on the details collected by .....

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ted at ₹ 97,118/-. Since the Income tax Act does not provide for writing off of 100% in respect of machineries costing less than ₹ 5000/- each, the AO disallowed the above said claim. The Ld CIT(A) also confirmed the same, since the Tax auditor has reported the same. 22. The contention of the assessee is that it had claimed 100% depreciation on machineries costing less than ₹ 5000/- each, only under the Companies Act for book purposes and it has disallowed the entire amount of .....

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submitted that the book depreciation of ₹ 3,63,34,199/- claimed in the profit and loss account has been disallowed fully and the depreciation for income tax purposes has been claimed at applicable rates only. We notice that the above said explanation of the assessee has not been examined by the tax authorities. In the computation of total income made in the assessment order, we notice that the AO has also disallowed the above said amount of book depreciation and allowed depreciation for in .....

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18/-, otherwise the addition shall be sustained. The order of Ld CIT(A) passed on this issue stands set aside accordingly. 24. The next issue relates to the disallowance of bidding expenses of ₹ 2,76,76,530/-. The assessee had incurred the above said expenses in connection with filing bids for modernization of Mumbai and Delhi Airports. The AO treated the same as capital expenditure, being pre-commencement expenses and accordingly disallowed the same. The Ld CIT(A) also confirmed the view .....

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be either a capital loss or capital expenditure being pre-commencement expenses and project considered as new line of business and expenses being shown in the Profit & Loss Account as exceptional item. Submissions The assessee is engaged in the business of infrastructure development management and finance in addition to its amusement parks and water parks as per the Memorandum of Association of the company. The name of the company is also changed from Pan India Paryatan Limited to Essel Infr .....

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requires highly technical knowledge financial and commercial understanding and sometimes require help of outside consultants, JV Partners, etc. for technical and financial support all these require huge expenses to be incurred. The question arises in whether such expenses on the tenders, bids for getting business in the line of business of the assessee are in the nature of revenue or capital? Main Objects as per the Memorandum of Association are as under. To purchase, erect or otherwise acquire .....

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theatres, concert halls, circus properties picture places, studios, dramas or other entertainment. To construct, improve, maintain, develop, work, manage, carry out or control any building, factories, works, roads, ways, railways, sidings, bridges, wells, reservoirs, water courses, wharfs warehouses, electric works, shops, stores, chawls and other building for housing work people and other otherwise assist to take part in the construction, improvement maintenance, development, working management .....

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ssee also proposes to develop Multi product Special Economic Zone (SEZ) project in the Gorai - Manori - Uttan region. The assessee has obtained in-principle approval from the State as well as the Central Government for development of the SEZ. This activity has started during the year. 3) The Company has incorporated a wholly owned subsidiary Essel Airport Infrastructure Private Limited. 4) The assessee had in response to the "invitation to register an expression of interests" issued by .....

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for the purpose of the bid. The details of expenses are enclosed. The expenses mainly consists of Consultants Fees of ₹ 14,058,745/- and Bank Guarantee and other related bank charges of ₹ 8,411,034/, As the ultimate bid was awarded to some other bidder, the expenses have been debited to Profit and Loss account for the year and grouped under Exceptional Items, as required by Accounting Standard. The Ld A.0. has altogether gone on wrong notion and misunderstanding of facts and hence h .....

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all expenses relating to it from procurement of project, execution and managing are revenue in nature. There are always expenses incurred for getting project that pre- commencement but it is relating to its business hence revenue in nature, it is not the assessee setting up capital assets like factory etc. for running and earning income. He understood projects means capital account. Hence these are biding and tender related expenses pre-commencement and pre- awarding of contract but still reven .....

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g bids, sometimes technical first and the financial bids or together. Hence in principle proposal does not make it capital project. To qualify for in principle and proposal (RFP) is first step to enter the ring without this you cannot bid even and bidding is also proposal till you are selected it is proposal it is accepted or not it depends upon so many factors and other competitors. The in principle or bidding or proposal are like giving CV for employment you go on giving C Vs till you are sele .....

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the asset for which bid is made, whether the bid is allotted or not. The assessee has incurred these expenses on the making of proposal/bid/tender for Airport renovation being for its infrastructure business are expenses of revenue in nature, neither capital nor nonbusiness or personal expenses hence allowable u/s 37 of the Act. The Ld A.0. has observed that these expenses are reflected as exceptional item and shown below the line in Profit & Loss Account as also netted off against profit o .....

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#39;s operational results hence grouped and shown separately. While grouping the revenue and capital in one group does not change in nature of each other. Finally the way in which the accounting entries are made by an assessee does not decide the nature or allowability of expense. Hon 'ble Supreme Court in Badridas Daga (34 ITR 10) after referring to the decision in Chimavis case, Gresham Life Assurance Society vs Styles and Pondicherry Railways Cos case, their Lorships proceeded to observe: .....

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also upheld by Apex Court in Sutlej Cotton Mills Ltd. (116 ITR 1) and jurisdictional High Court in Dempo & Co. (P) Ltd. (206 1TR 291) wherein it was held that "whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter". Section 37 of the IT Act, 1961 An .....

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evident from the copy of balance sheet and profit & loss account for the later years. The airport expenses are incurred wholly and exclusively for the infrastructure business and are neither capital nor personal in nature hence allowable u/s 37(1) of the Act." As noticed earlier, the Ld CIT(A) upheld the view taken by the AO by holding that the assessee has commenced a new line of business and the same is not linked to the existing business of the assessee. He also observed that the pr .....

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infrastructure development. The object clause of the assessee makes it clear the objective of formation of the assessee company. Even though the assessee might not have carried the infrastructure development business earlier, the very fact that the assessee changed its name would show that the assessee has commenced the infrastructure development business in this year. This fact is further fortified by the fact that it has submitted its bid to acquire infrastructure projects. The impugned biddin .....

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e this issue on wrong appreciation of facts. 28. In our view, these expenses have been incurred by the assessee in the course of carrying on its business and hence the same has to be allowed as deduction, since it has been incurred in furtherance of the business activities of the assessee. Ld A.R relied upon the decision rendered by Hon ble Bombay High Court in the case of CIT Vs. Essar Oil Ltd (ITA (Lodg.) No.921 of 2006 dated 16.10.2008 to support the contentions of the assessee. We have gone .....

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ble Bombay High Court held that the finding recorded by the Tribunal is finding of fact and hence no question of law arises. 29. We have earlier noticed that the assessee has incurred bidding expenses in the course of carrying of its business activities in furtherance of its business objects. Hence the expenses incurred on bidding, even if the bid was unsuccessful, should be considered to be revenue expenses and should be allowed. Accordingly we set aside the order passed by Ld CIT(A) on this is .....

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