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2017 (1) TMI 1254 - ITAT DELHI

2017 (1) TMI 1254 - ITAT DELHI - TMI - Allocation of proportionate expenditure - Held that:- We do not agree with the contention of the learned counsel of the assessee to accept the allowance of pro rata expenses towards the short term income(s), due to the following reasons: - i. that in the first round of proceeding, the claim of allowance of pro rata expenses towards short term income(s) was not accepted by the Tribunal and the matter was restored to the Assessing Officer to identify expe .....

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ection issued by the Tribunal and cannot act according to their wish or choice, while complying 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 requ .....

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f 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 activity of the assessee was for earning from long-term finance and, therefore, allowing proportionate expenditure was not justified. In our opinion, the estimation of ₹ 25 lakh towards the short-t .....

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el/2009 - Dated:- 20-1-2017 - SH. S.K. YADAV, JUDICIAL MEMBER AND SH. O.P. KANT, ACCOUNTANT MEMBER For The Department : Sh. H.B.S. Gill, CIT(DR) For The Respondent : Sh. Tarandeep Singh, Advocate ORDER PER O.P. KANT, A.M.: These three appeals by the Revenue are directed against separate orders of learned Commissioner of Income-tax (Appeals), New Delhi, for assessment years 1996-97, 2000-01 and 2001-02 respectively. The assessee has filed cross objection against the order of the Ld. Commissioner .....

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rned CIT(A) has erred in directing the A.O. to consider the entire common interest expense for allocation towards short term income for working out deduction u/s 36(1)(viii). 2. Learned CIT(A) has erred in not allocating the interest charge of ₹ 190.85 crores in spite of the assessee s self statement that this amount is used for both long-term as well short term loan. C.O. No. 376/Del/2009 4. Ground raised by the assessee in the Cross Objection is as under: 1. The learned CIT(A) has erred .....

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e 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 .....

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come from long-term financing for more than five years. The learned CIT(A) in first round of proceeding has listed the income other than long term finances i.e. short term income earned by the assessee as under: i. Interest in investment Rs.61.10 crores ii. Interest on inter corporate deposits Rs.24.19 crores iii. Lease income Rs.2.80 crores iv. Interest on lease financing to APSEP Rs.1.08 crores v. Misc. Income Rs.0.21 crores vi. Guarantee Fees Rs.3.83 crores vii. Income relating to the loans s .....

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al reserve, the assessee reduced the net income from short-term investments etc. rather than the gross income. For working out the net short-term income, the assessee claimed a proportionate expenditure arrived at by multiplying the income by a figure of 37.38 percent. This figure of 37.38% is the ratio of total common expenditure to the total income. The Assessing Officer did not allow this pro rata claim of expenditure against the short-term income(s) for computing the special reserve from lon .....

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essee 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 c .....

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f ₹ 24.19 Crores which comes to ₹ 9.04 Crores. This is not a correct method to arrive at the income which qualifies for the deduction u/s 36(1)(viii). The deduction shall be allowed on the income on long term finances after reducing the entire (gross amount of) other incomes such as interest on investments, interest on deposits, lease income etc. There is no expenditure which is involved in earning interest on investment on interest on deposits. These incomes have been earned on the .....

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unt of deposits of surplus money in the banks in the form of FDRs. The total interest earned is ₹ 61.10 crores from such FDRs. If the assessee s main business is to do long term financing and not to earn income as interest on FDRs, obviously the expenditure for earning the interest on FDRs shall be taken as NIL because the entire expenditure was for earning the. interest on long term financing. The assessee has, however, allocated a proportionate expenditure which is 37.38% of ₹ 61.1 .....

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ncing for industrial development. Therefore, plea taken before CBDT that the assessee qualifies for deduction u/s 36(IXviii) was not true. However, since the assessee took this plea that it qualifies for deduction u/s 36(lXviii) and therefore, it is engaged in the business of long term financing for industrial development, 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 fund .....

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e 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 different co .....

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eement with APSEB by showing purchase of plant on paper from APSEB and lease back the same to APSEB. The assessee has not taken depreciation on such purchase during this year. However, the assessee has claimed a proportionate deduction on account of expenditure to earn the lease rental. In this transaction, clearly there is no expenditure involved. Therefore, why- should the assessee be allowed an expenditure of ₹ 1.05 Crores to be allocated to earn a lease rental of ₹ 2.80 Crores? I .....

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ome : The assessee has shown Misc. income of ₹ 2,18,394/- and claimed that ₹ 81,636/- is the expenditure incurred towards earning the Misc. income. There is absolutely no expenditure which could, be said to have been incurred on earning the misc. expenditure. The Misc. income has arisen due to written back the Stale cheques and old and sticky creditors. There is no justification to say that 137.38% of such income i.e. ₹ 81,636/- has been incurred towards earning such misc. inco .....

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gure 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 ea .....

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which is on mercantile basis, is given below :- Rupees in crores Interest and other charges Rs.236.01 Brokerage and issue expenses. ₹ 6.27 Interest tax ₹ 13.83 Personnel & Administration expenses ₹ 8.32 Depreciation ₹ 0.28 Preliminary expenses written off ₹ 0.04 Rs.264.75 Interest and other charges are on the borrowed capital which has been utilized by the assessee for long term financing of power projects. Brokerage and issue expenses is mainly on discount on .....

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iture towards, earning income as mentioned from (a) to (g) above. The Accounting Principle followed by the assessee to arrive at the Special Reserve amount on which the assessee could claim deduction u/s 36(l)(viii), is not correct and certainly not as per the law. In this regard reliance is placed on the decision of Hon ble Supreme Court in the case of M/s. Tuticorin Alkalies Chemical & Fertilizers Ltd. reported in 227 ITR 172 (SC). As per the decisions, principles of accountancy cannot ove .....

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8377; 3,85,66,000/- collected from 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 t .....

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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 further agree with the order of the Commissioner of Income-tax (A) that the assessee has neither any justification nor there can be any system of allocating pro rata expenses at the rate of 37.38 per cent keeping in view the nature of the income which has been held by us, hereinabove in t .....

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er, to be treated as business income by passing a clear and speaking order. 47. We further find that though the Commissioner of Income-tax(A) had made such observations which have been upheld by us hereinabove treating the same to be very logical and reasonable but we find that no such directions were issue by the Commissioner of Income-tax (A) in his order, so, now, while upholding the order of the Commissioner of Income-tax (A) to the extent as observed hereinabove by us, we restore the issue .....

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ounting to ₹ 265.64 crores, which is reproduced as under: Expense Total Amout (Rs. In cores) Amount directly allocable (Rs. In crores) Amount not directly allocable (Rs. In cores) 1. Interest and other charges: 236.01. a) Interest on foreign currency loans (FCL) 21.07 a) Interest on government of India Loans 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 1 .....

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rores = 37.38% 5.5 The assessee also submitted detail of income other than interest income from long-term financing as under: interest on investment 61.01 crores Interest on deposits (ICD) 24.19 crores Guarantee fees 3.83 crores Total 89.03 crores 5.6 The Assessing Officer was of the view: (i) that no expenses could be directly attributable to the guarantee fees (ii) the expenses on brokerage and issue expenses, personal and administration expenses, depreciation, preliminary expenses written off .....

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could be be allocated towards other interest income of ₹ 85.29 crores, i.e, interest on investment of ₹ 61.10 crores and interest on deposits (ICDs) ₹ 24.19 crores. The Assessing Officer computed the proportionate common interest expenditure as under: = ₹ 95.22 crores X short-term income/total income = ₹ 95.22 crores X 85.29 Crores/ 551.76 crores = ₹ 14.72 crores. 5.8 In view of the above allocation of proportionate expenditure, the Assessing Officer revised .....

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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 t .....

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the learned CIT(DR) submitted that the formulae of allocating common expenses followed with assessee was already rejected by the Tribunal in first round of proceeding and matter was restored to the Assessing Officer, and thus the learned Commissioner of Income-tax (Appeals) was not justified in accepting the allocation suggested by the assessee. He further submitted that the Assessing Officer has fairly allocated 50% of the common interest expenses in terms of the percentage of the short-term i .....

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the decision of the Hon ble Delhi High Court in the case of COMMISSIONER OF INCOME TAX vs. SHRI RAM HONDA POWER EQUIP & ORS. reported in 289 ITR 475. He further submitted that allocation of entire common interest expenses has been allowed by the Assessing Officer in assessment year 2007-08 and assessment year 2008-09. He also filed copy of the assessment orders for those years. 8. We have heard the rival submission of the parties and perused the relevant material on record including the orde .....

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l. We find that the pro rata expenses at the rate of 37.38% allocated towards gross income from short-term investments for netting of the income from short-term investments, was not accepted by the Tribunal in first round proceedings. The Tribunal held that there was no justification for such allocation on 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 allo .....

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han 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 provi .....

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ommon direct expenses towards short-term incomes. 9. We do not agree with the contention of the learned counsel of the assessee to accept the allowance of pro rata expenses towards the short term income(s), due to the following reasons: i. that in the first round of proceeding, the claim of allowance of pro rata expenses towards short term income(s) was not accepted by the Tribunal and the matter was restored to the Assessing Officer to identify expenses towards each of the short term income. ii .....

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wish or choice, while complying 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 b .....

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re 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. .....

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xpenses ₹ 0.04 crores and prior period expenses 0.89 crores the observation of the AO that these expenses have nothing to do with earning of short term income does not appear a correct approach. At the same time I am also not convinced with the plea of the appellant that such expenditure should also be apportioned proportionately for both for long term as well as short term income. It is a fact that the main establishment of the appellant is primarily and mainly working for earning of the .....

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ion somewhere between the appellant s claim of proportionate amount of Approximately ₹ 1.5 crore and Nil figure as per the finding of the AO. Accordingly, considering the volume of work involved in earning of short term interest income. It would be fair and reasonable to allow a net deduction of ₹ 25 lacs out of the expenses under the misc. sub-heads. 14. We agree with the finding of the learned Commissioner of Incometax (Appeals) that the main activity of the assessee was for earnin .....

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