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2017 (5) TMI 363 - ITAT VISAKHAPATNAM

2017 (5) TMI 363 - ITAT VISAKHAPATNAM - TMI - Addition on leave encashment - addition u/s 43B - Held that:- As the assessee is not able to file any material to show that the liability is a crystallized. We find that the Assessing Officer and the ld. CIT(A) have observed that it is only a contingent liability and the assessee is not able to substantiate that the liability has been crystallized. Therefore, we are of the opinion that the claim made by the assessee cannot be allowed, hence, ground r .....

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ee has to incur expenditure, whether it may succeed or may not succeed in the bid. On the basis of assumption and presumptions, it cannot be said that the expenditure incurred by the assessee is not for the purpose of business. The assessee after participating in the bidding, if the bid is successful, it allotted the work to the subsidiaries and receives fee from the subsidiaries such as rendering services, reimbursement of expenses, payment for services rendered. We find that the matching princ .....

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s under the purview of section 37 of the Act. In view of the above, we find that the estimation made by the ld. CIT(A) scaling down the disallowance from 25% to 10%, is fair and reasonable, hence, no interference is called for. Thus, this ground of appeal raised by the assessee is dismissed. - Addition of interest - amount advanced to the trust - Held that:- CIT(A) after considering the explanation of the assessee and after perusal of the bank statement, he has observed that assessee has inv .....

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agreement with M/s. Pluto Software Pvt. Ltd. for relocation of the liaison office. As per the agreement, it has paid advance. Since the relocation was not materialized, advance amount paid as per the agreement has been written off as the party M/s. Pluto Software Pvt. Ltd. has forfeited advance because the transaction does not pass through as agreed. Therefore, the amount forfeited would take the character of business loss and is allowable under section 37 of the Act. We find that there is no i .....

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DER PER V. DURGA RAO, JUDICIAL MEMBER These are the cross appeals filed by the assessee and the Revenue against the order of Commissioner of Income Tax (Appeals), Visakhapatnam, dated 26/03/2014 for the Assessment Year 2010-11. ITA No. 292/VIZ/2014 2. Facts of the case in brief are that the assessee is a company, engaged in the business of operation and maintenance of power plants; investor in shares of various companies, manpower and consultancy services and promoting SPVs/companies of infrastr .....

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hment of ₹9,61,000/-. In the assessment order, the Assessing Officer has observed that the assessee has shown an amount of ₹ 45,41,000/- as provision for compensated absence for the financial year 2009-10, as against the amount shown of ₹ 35,80,000/- for the financial year 2008-09. During the course of assessment proceedings, the assessee has explained that the amount represent leave encashment payment to the employees, when the leaves are surrendered to the employer. The Asses .....

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ing Officer. 6. On appeal before us, the assessee is not able to file any material to show that the liability is a crystallized. We find that the Assessing Officer and the ld. CIT(A) have observed that it is only a contingent liability and the assessee is not able to substantiate that the liability has been crystallized. Therefore, we are of the opinion that the claim made by the assessee cannot be allowed, hence, ground raised by the assessee is dismissed. 7. Ground No.3 relating to disallowanc .....

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, there were studies on different subjects like traffic, technical study, final report making etc. For all these studies or making report, the legal and professional services or consultations were made from the different entities like HOK International Ltd., Zen Energy Consultants Pvt. Ltd. and Consulting Engineers Group Ltd. etc. These expenses are part and parcel of the study or project of service. The assessee is in the business of infrastructure space, and promoting SPV, where bidding or ten .....

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ssessee s business activity, the Assessing Officer considered all expenses under the legal and professional fees except the amount of ₹ 1,00,47,707/-, as capital in nature cannot be allowed as deduction under section 37(1) of the Act. 8. Being aggrieved, assessee carried the matter in appeal before the ld. CIT(A). 9. Before the ld. CIT(A), assessee has made a detailed written submissions and submitted that all expenses incurred by the assessee are in connection with the business of assesse .....

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or carrying out certain technical studies, surveys, analysis of project, site, feasibility of project, pre-bid traffic services, pre-bid engineering services, pre-tender technical advising services etc It is seen that these are essentially pre-bid expenses incurred prior to participation in the bid and allotment of projects, The assessee incurs these expenditure to enable its subsidiaries / associate companies to bid in the projects. The assessee do not bid for the projects. It was claimed that .....

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noncommon expenses, and as not relatable to its revenue streams. All these dearly indicate that these expenses cannot be said to be incurred wholly and exclusively for the purpose of its business The expenditure claimed also violates the principle of expenditure matching with the income. These expenses cannot be said to be incurred in relation to or for deriving the income admitted in its P&L account and do not partake the character of revenue expenditure In view of the above discussion, the .....

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consult various experts and has to come to a conclusion that whether particular project is feasible or not and, therefore submitted that the expenditure incurred by the assessee is exclusively for the purpose of running of business and, therefore, it is allowable under section 37 of the Act. (b) The assessee also pointed out from the paper book at page No. 26 and submitted that the assessee receives income from subsidiaries in following kinds, fee for rendering services, reimbursement of expense .....

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2 (Ker.)] b) CIT Vs. Tamilnadu Industrial Development Corporation Ltd., [215 CTR 90 (Mad.)] c) CIT Vs. Tata Robins Fraser Ltd., [253 CTR 227 (Jharkand)] d) Indo Rama Synthetics India Ltd. Vs. CIT [(333 ITR 18 (Del)] 12. On the other hand, Learned Departmental Representative strongly supported the orders passed by the authorities below and also submitted that the expenses incurred by the assessee on behalf of subsidiary companies and not for the business of the assessee. The Departmental Represen .....

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he business of operation and maintenance of power plants. From the objects of the Memorandum of Association, we find that the assessee is carrying on various activities such as promoter, sponsor, developer, advisor, operator or otherwise, alone or in consortium with others, within or outside the group companies and to do all such acts as are required to participate float, or acquire through bidding or negotiate process for promoting, developing implementing and operations all kinds of projects s .....

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articipate in the bid. Further for this purpose, assessee has incurred legal and professional fees. The Assessing Officer and ld. CIT(A) were of the opinion that it is capital in nature. The ld. CIT(A) has observed that the expenditure incurred by the assessee prior to participation in the bid and allotment of project to enable its subsidiaries/associate companies to bid in the projects. The assessee do not bid for the project, therefore, the ld. CIT(A) was of the opinion that it had not incurre .....

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h has been received from its subsidiaries for all kinds of services rendered. Therefore, the ld.CIT(A) is not correct in saying that the expenditure incurred by the assessee is not for the business of the assessee and it is for the subsidiaries. The ld.CIT(A) raised one more objection to disallow these expenditure that the subsidiaries or its associate companies may or may not get the project, but the assessee undertakes technical studies for the business purpose, therefore, it cannot be allowed .....

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bid is successful or not, the assessee has to incur the expenditure in respect of legal and professional fee. The assessee undertakes project studies through various technical experts and has to decide whether project is feasible or not? The assessee has come to a conclusion that the project is feasible, it participates in bid/tender. Therefore, the expenditure incurred by the assessee is very much necessary for the purpose of carrying out the business, therefore, it has to be allowed. The ld.CI .....

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ssessee. After careful consideration of the business activities carried out by the assessee and the expenses incurred by the assessee, we are of the opinion that the expenditure incurred by the assessee is wholly and exclusively for the purpose of business and it has to be allowed under section 37 of the Act. 16. So far as case-laws relied upon by the learned counsel for the assessee is concerned, in the case of Tamilnadu Industrial Development Corporation Ltd., (supra), the Hon'ble Madras H .....

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y studies are only revenue expenditure and not capital expenditure. In the case of Tata Robins Fraser Ltd. (supra), the Hon'ble Jharkhand High Court has held that if the expenditure has been incurred for setting up a new unit which was subsequently abandoned, then the aforesaid expenditure will be treated as revenue in nature as no new industrial asset came in existence and the matching principles referred by the ld.CIT(A) have no application. 18. Keeping in view of the above and by consider .....

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ts were purchased and tender/bid fee were paid for obtaining the tender. These are RFP purchase for JNPT 4th terminal, purchase of FRQ documents - 4 laning of Devihalli-Hassan Section of NH-48, payment to NHAI, Delhi, PPP-India Infrastructure Publishing Pvt. Ltd., and so on. All these are the bidding process, however, Assessing Officer observed that these are early procurement stage or preliminary stage of tender, or submission of documents in the study stage of any service or feasibility of any .....

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apital expenditure and becomes the part of the project. These expenses and payments are the preliminary expenses of the service/project/tender and by nature of such expenses; these expenses are capital in nature. Till the commencement of services/project, all expenses are disallowed as revenue expenses and capitalized. These expenses are not related to income directly. However, these expenses produce the service/ commodity/project of enduring nature. This gives the assessee the requisite experie .....

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ld. CIT(A), it was submitted that bid and tender document charges are necessary to be incurred by the assessee, unless assessee participates in the bid/tender, he may not get the project, therefore, the expenditure incurred by the assessee is very much connected to the business of the assessee. The ld. CIT(A) after considering the submissions of the assessee, confirmed the order of the Assessing Officer and held that the expenditure cannot be allowed under section 37(1) of the Act. The relevant .....

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f its business activity as per its memorandum of objectives. The subsidiary/associate companies may or may not get the projects but the assessee incurs these expenditure for the purpose. It is also noted that the assessee s revenue stream is only operating/maintenance fee from the subsidiaries to whom the Infrastructure projects are allotted, It is also seen that in the computation of disallowance u/s. 14A, the assessee has considered these expenditure as non-common expenses, and as not relatabl .....

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lowed u/s.37(1). I find that the disal lowance made by the AD is justified. The impugned addition made is confirmed. This ground of appeal is dismissed. 21. On being aggrieved, assessee carried the matter in appeal before the Tribunal. 22. Learned counsel for the assessee submitted that the business of the assessee is to identify the project and study the feasibility of the project and participate in the bid/tender. Unless and until, assessee participates in bidding/tender, he cannot carry on it .....

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rticipation of the bid and allotment of projects. This expenditure was incurred by the assessee is to enable its subsidiaries/ associate companies to bid in the projects. We find that the ld. CIT(A) is not correct in observing that the expenses incurred are not for the assessee s business. The assessee s business is to identify the project and study the feasibility of the project and participate in the bidding/tender. After successful in bidding for project, it will be allotted to the subsidiari .....

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expenses, payment for services rendered. We find that the matching principles referred by the ld.CIT(A) have no application. Therefore, we are of the opinion that the assessee has incurred these expenditure towards bid/tender documentation wholly and exclusively for the purpose of assessee s business, therefore it has to be allowed under section 37 of the Act. In view of the above, this ground of appeal raised by the assessee is allowed. 26. The fourth ground of appeal raised by the assessee rel .....

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and accordingly disallowed 25% of the same. 27. On appeal, it was submitted that the disallowance made by the Assessing Officer to the extent of 25% is highly excessive and claimed that the expenses incurred by the assessee squarely comes within the purview of section 37 of the Act. The ld. CIT(A) after considering the explanation of the assessee, he gave a finding that the assessee has not filed any details in respect of expenses incurred and also not able to substantiate its claim, therefore, .....

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interference is called for. Thus, this ground of appeal raised by the assessee is dismissed. 29. In the result, appeal filed by the assessee is partly allowed. ITA No. 323/VIZ/2014 30. The Revenue has raised the following grounds of appeal:- 1. The CIT(A) erred both on facts and in law 2. The CIT(A) ought not to have admitted 'h additional evidence furnished by the assessee during the appellate proceedings in violation of rule 46-A of the I.T. Rules. 3. The CIT(A) ought to have remanded the .....

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The CIT(A) erred in deleting the addition made on account of advances written off of ₹ 11,75,000/- as business loss. 7. The CIT(A) ought to have appreciated that the reasons for not materializing the agreement with regard to advance given to M/s.Pluto Software Pvt. Ltd. for relocation of the liaison office were not furnished by the assessee 8 Any other ground that may be urged at the time of appeal hearing before the 1-lonble ITAT. 31. Ground Nos. 1 to 3 are relating to violation of secti .....

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oan and also to explain why the relatable interest should not be disallowed. In response to the query raised by the Assessing Officer, the assessee has submitted that the company has given interest free loans to the GVK Employees Welfare Trust for the benefit of the employees. Since in current assessment year, company on its own has already disallowed an amount of ₹ 67,72,260/- under section 14-A towards interest payment on the interest bearing loan, there is no need to add the interest ag .....

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essee of ₹ 2,64,13,699/- is an amount to be disallowed under section 36(1)(iii) and not under section 14-A. The Assessing Officer also noted that considering the cash flow statement, it is evident that an interest bearing fund has been utilized for non-business purpose. The Assessing Officer also noted that there is no business nexus in regard to the amount advanced to the trust. Since the total interest paid was ₹ 86,42,000/-, the balance interest of ₹ 18,69,740/- was disallow .....

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appellant submits that it had given interest free loan of ₹ 10 crores to GVIK Employees Welfare Trust on 06-08-2009 out of redemption of certain mutual funds which were earlier made out of funds raised through QIP (Qualified Institutional Placement) on 09-07-2009. The appellant made investment in various mutual funds out of funds raised through QIP. The appellant is enclosing herewith bank statements showing receipt of QIP funds, investment in mutual funds, redemption of mutual funds and L .....

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tablishing that borrowed funds were utilised for giving such loan. In this regard, the appellant places reliance on the following decisions wherein it is held that unless nexus between the borrowed funds and interest free advance are established by the Assessing Officer, no disallowance of interest could be made. a) CIT vs. Bharti Televentures Ltd (331 ITR 502- Del) b) ACIT vs. Mohan Exports Pvt Ltd (138 lTD 108-Del ITAT) c) ITO vs. Davinder Hide Co. Ltd. (log TTJ 580-Mr ITAT) d) Voltas Ltd vs. .....

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nds are utilized for the said advance, it was argued no disallowance can be made. 34. The ld. CIT(A) after considering the explanation of the assessee and after perusal of the bank statement, he has observed that assessee has invested in the QIP proceeds in mutual funds after few months, some of the mutual funds have been redeemed and the proceeds of which was utilized to make the advance to the Trust and gave a finding that interest bearing funds are not utilized to make the impugned advance to .....

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