TMI Blog2017 (1) TMI 1254X X X X Extracts X X X X X X X X Extracts X X X X ..... ying the direction of the Tribunal. v. that the direct expenses like interest etc. are prima facie not allowable against the lease income etc. on prorata basis. The interest expenses incurred for borrowing funds was required to be examined by the Assessing Officer from terms and conditions of money borrowed. If same were incurred exclusively for long term borrowing, then no interest expenses was required to be allocated against short term income from fixed deposit in banks or inter corporate deposits etc. The Assessing Officer was required to examine all these issues, which he has not done. In view of above, we feel it appropriate to restore the matter back to the file of the learned Commissioner of Income Tax (Appeals), who is directed to follow the direction of the Tribunal given in the first round of proceedings and decide the issue accordingly after giving sufficient opportunity of hearing to the assessee. The grounds of appeal raised by the Revenue are allowed for statistical purposes. Allocation for expenses other than direct expenses towards short-term income - Held that:- We agree with the finding of the learned Commissioner of Incometax (Appeals) that the main act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommon expense of ₹ 9.53 crores (comprising of personal expense of ₹ 8.32 crores depreciation of ₹ 0.28 crores, preliminary expenses ₹ 0.04 crores and prior period expenses ₹ 0.89 crores) only ₹ 25 lacs have been held to be allocable to earning of short-term income as against PFC s claim of ₹ 1.55 crores, resulting in reduction of long-term income eligible for relief u/s 36(1)(viii). 5. The brief facts of the case are that the parties are in appeal before the Tribunal in second round of proceeding. The assessee is engaged in financing the power project on long term finance basis. In the original return of income filed, the assessee claimed deduction under section 36(1)(viii) of the Income-tax Act, 1961 (for short the Act ) towards income from long term finances. During relevant period, the assessee was eligible for deduction in respect of any special reserve credited and maintained by the assessee, for an amount not exceeding 40% of the profit derived from such business of providing long term finance (computed under the head profit and gains of business or profession before making any deduction under this clause) carried to su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from other sources and thus the income shall not be qualified for deduction u/s 36(1)(viii) and no expenditure shall be treated for incurring such expenditure. The findings of the learned CIT(A) are reproduced as under: However, in the revised return the assessee decided-to reduce net incomes from these, other sources instead of reducing the gross value of such other incomes. The logic of the assessee is that the assessee, after all, spends certain amount to earn such other incomes (like interest on sh6rt-term deposits etc.). Accordingly, the assessee has claimed a proportionate expenditure and the proportionate expenditure has been arrived at by - multiplying the income by 37.38%. The figure of 37.38% has been arrived at as per Annexure-E to the computation of revised income (May please see Annexure-UI of this order. The figure of 37.38% is nothing but ratio of total common expenditure to the total income. In other words, the gross expenditure rate, which comes to 37.38% has been taken as the ratio to arrive at the proportionate expenditure for earning a particular type of income. For example, the total interest on ICDs is ₹ 24.19 crores. The proportionate expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... velopment, the expenditure on earning interest on FDR etc. shall be taken at NIL. Without prejudice to above, it may also be argued that the interest on the FDRs made out of surplus funds is not the income from the main business which the assessee has been carrying out. Therefore, the interest on such investments shall be taken as income from Other Sources and therefore, the same will not qualify for deduction u/s 36(1)(viii) of the I.T. Act. At the same time, expenditure shown in the business shall be treated as business expenditure and nothing out of that shall be treated as expenditure for earning such income from. Other Sources. For this reliance is placed on Hon ble Supreme Court s decision in the case of M/s Tuticorin Alkalies Chemicals Fertilizers Ltd. reported in 227 ITR 172(SC). b) Interest on deposits : The interest earned on Inter-corporate deposits (ICDs) have been shown at 7rs.24.19 Crores and the expenditure to earn such interest has been proportionately taken at 9.05 Crores. The expenditure to earn the interest on ICDs is to be taken at NlL as discussed in the preceeding paragraph. Alternatively, the interest on deposits with the differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any expenditure which could be said to have incurred to earn the guarantee fee. Therefore, the entire guarantee fee shall be reduced from the total income to arrive at the figure on which deduction u/s 36(1)(viii) could be allowed. g) Income relating to loans sanctioned for a period less than five years. Income relating to loans sanctioned for a period less than five years. The assessee has shown ₹ 27.39 lacs as income under the above head and claimed that 37.38% of such income which comes to ₹ 10.24 lacs has been incurred to earn the said income. For the reasons as discussed above in item No.(a), the expenditure cannot be proportionately allocated to earn such income. Accordingly, from the total interest income of ₹ 27.39 lacs, ₹ 10.24 lacs is not to be reduced to arrive at the figure on which deduction u/s 36(1 )(viii) could be allowed. Further, if we analyse the-total expenditure debited to the P L Account, we find that that there is no expenditure which could be called as expenditure debited or incurred towards earning of the incomes as discussed above from Item No.(a) to (g). The total expenses charged to P .L Account which is o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the different parties from the total special reserve on which deduction under section 36(l)(viii) is to be allowed. On this account, the assessee has claimed excess deduction of ₹ 2,61,54,000/- which is not allowed. The deduction u/s 36(l)(viii) is allowed only on the income earned on long term financing for Industrial Development or other activities as given in the provision. Therefore, these amounts would not qualify for deduction. This issue has been taken up at the time of processing u/s 143(l)(a). The deduction u/s 36(l)(viii) has been computed separately in this order as Annexure -IV to this assessment order. 5.2 The matter travelled to the Tribunal. The Tribunal in ITA No. 994 and 1062/Delhi/2006 held the short term income as business income but concurred with the finding of the learned Commissioner of Income-tax (Appeals) that claim of the assessee of pro rata expenses at the rate of 37.38% was not justified and remitted the matter back to the Assessing Officer to examine the expenditure incurred by the assessee relating to each of such short term income and allow accordingly. The relevant finding of the Tribunal is reproduced as under: 46. We f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 23.90 c) Management, Commitment and agency fee 0.30 d) Guarantee fee relating to FCL 0.29 Unallocated Balance 190.45 2. Brokerage and issue expenses 6.27 0 6.27 3. Interest-tax 13.83 13.83 Nil 4. Personnel Administration expenses 8.32 0 8.32 5. Deprecaition .28 0 .28 6. Preliminary expenses written off .04 0 .04 7. Prior period expenses .89 0 .89 Total 265.64 59.39 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer. The assessee submitted that alternatively if the common expenses are allocated in the percentage share of short-term income of ₹ 89.13 crores (16.15%) and long-term income of ₹ 462.63 crores (83.75%), the expenses relating to short-term income will work out to ₹ 33.28 crores, which has been claimed by the assessee. The learned Commissioner of Income-tax (Appeals) after considering the submission of the assessee, held the allocation of expenses towards short-term income as under: (i) rejected the allocation of 50 % out of common interest expenses of ₹ 190.45 crores made by the Assessing Officer and directed for allocation of the entire common interest expenses of ₹ 190.45 crores. (ii) agreed with the Assessing Officer on the issue of no allocation of expenditure towards guarantee fee (iii) allowed deduction of ₹ 25 Lacs out of the expenses of ₹ 15.80 crores i.e. the expenses other than common interest expenses. 5.10 Aggrieved with the direction in point No. (i) above, the Revenue is in appeal before us, whereas the assessee in cross objection against the deduction restricted to ₹ 25 lacs against the expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of the ratio of common expenses to the total income. The learned CIT(A), in the first round of proceedings, analysed each and every short term income and expenses which could be allowed against such income for netting of incomes. He didn t allow any expenses. The Tribunal didn t agree with finding that no expense were incurred towards short term incomes, and accordingly, the matter was restored to the Assessing Officer to examine the expenditure incurred by the assessee relating to short-term incomes. But we find that neither the Assessing Officer nor the Ld. Commissioner of Income-tax( Appeals) has attempted for examining in detail of the expenses for income earned other than the income from long-term finance i.e. short term income. The Assessing Officer has simply estimated 50% of the common interest expenses as not related to short term income and balance 50% was allocated in terms of share of short-term income as compared to total income. The Commissioner of Income Tax (Appeals) has rejected the finding of the Assessing Officer on the ground that it was not based on any material and thus could not be held as fair and reasonable. The Assessing Officer was provided oppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordingly after giving sufficient opportunity of hearing to the assessee. The grounds of appeal raised by the Revenue are allowed for statistical purposes. 11. In the cross objection, the assessee has challenged allocation of ₹ 25 lakh for expenses other than direct expenses towards short-term income. 12. The learned counsel of the assessee submitted that the expenses of ₹ 15.80 crore towards brokerage and issue expenses (Rs. 6.27 crores), personal and administrative expenses (8.32 crores), depreciation (Rs. 0.28 crores), preliminary expenses written off (Rs. 0.04 crores), prior period expenses (Rs. 0.89 crores) should also be allocated proportionately for short-term income. The learned CIT (DR), on the other hand, relied on the finding of the learned Commissioner of Incometax (Appeals). 13. We have heard the rival submissions and perused the relevant material on record. We find that the learned Commissioner of Income-tax (Appeals) has decided the issue as under: 5.4 For remaining heads of expenses i.e. personal expenses of ₹ 820 crores, depreciation ₹ 0.28 crores, Preliminary Expenses ₹ 0.04 crores and prior period expenses 0.89 cror ..... X X X X Extracts X X X X X X X X Extracts X X X X
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