TMI Blog2019 (12) TMI 375X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of section 10(33) of the Act would apply. - assessee for the previous assessment year in an appeal pending before the apex court has taken a different stand from the stand taken in the present assessment year. - Held that:- the remand to the Assessing Officer is justified and no interference is warranted in the appeal. MAT - computation of the book profit under section 115JB - disallowance of amount paid from reserve funds of GPEL (JV Partner) as guarantor of bank loans - Held that:- the assessee has established that the memorandum of association, authorised the assessee to expand its business into new areas, i.e., incorporating GPEL, etc. - GPEL on account of technical glitches in sharing know-how provided by the foreign collaborator could not take off on expected lines, resulting in cash loss etc. GPEL was referred to the BIFR as sick industry. The BIFR notified a scheme for operation or reviving GPEL. The BIFR, under the scheme had equally distributed the obligations both to Gujarat infrastructure Development company and the assessee. The assessee, as part of implementation of a scheme accepted by the BIFR had to clear the debt of GPEL as guarantor. The Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o treat the revised return dated March 17, 2004 as the return filed in pursuance of notice issued under sec tion 148 of the Act. The Assessing Officer (for short AO ) vide assessment order dated February 24, 2006 determined the total tax payable by the assessee as ₹ 13,95,78,296. The assessee aggrieved by the order of assess ment dated December 12, 2008 filed an appeal before the Commissioner of Income-tax (Appeals) in Appeal No. I. T. A. No. 80/R-1/E/CIT-II/05-06. The Commissioner of Income-tax (Appeals) allowed the appeal in part. The Revenue filed I. T. A. No. 429/Coch/2006 before the Income-tax Appellate Tribunal and the appeal was allowed in part by the Tribunal. Hence the tax appeal before this court under section 260A of the Act. The Assessing Officer made a few important additions and also disallowed a few substantial deductions claimed by the assessee. For brevity the con spectus of consideration by the statutory authorities till the disposal of I. T. A. No. 429 of 2006 is stated in the following table : Nature of disallowance or addition Amount (Rs.) Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. A company promoted by Apollo Tyres and Gujarat Industrial and Investment Corpn. amounted to ₹ 32.70 crores, written off in the account of the assessee by transfer from general reserve account 32,69,65,146 Disallowed Allowed Dismissed (3) Loss on sale of shares in Gujarat Petro Electricals Ltd. 4,66,20,000 Disallowed Allowed - (4) Payment of bonus for the year 2001-02 2,72,76,982 Disallowed Allowed Dismissed 4. The Commissioner of Income-tax (Appeals) allowed the appeal in part and set aside the addition made by the Assessing Officer to an extent of ₹ 1,20,000 being repair charges relating to buildings let out to Small Industries Development Bank of India (SIDBI). The disallowed portion of depreciation amounting to ₹ 31,66,617 restric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s court, rejected the appeal in toto except to the extent of a few additions/disallowance. 5. The Revenue challenges the orders of the Commissioner of Income-tax (Appeals) and the order of the Tribunal by raising the following substantial questions : 1. Whether, on the facts and in the circumstances of the case, the assessee-company is entitled to claim deduction of ₹ 4,38,829 as club expenses incurred towards membership fee and subscription ? 2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in interfering with the disallowance of interest of ₹ 15,59,046 on the investment made from pool of funds ? 3(a) Whether, on the facts and in the circumstances of the case is not the assessment order denying the claim of the assessee-company which had advanced a sum of ₹ 32.70 crores to Gujarat Petro Elec trical Ltd., a company promoted by the assessee and had written off the amount by transfer from general reserve account justified, valid and in accordance with law and the Income-tax Appellate Tribunal is right in law in interfering with such denial of the claim ? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses. The said sum comprises of membership fee of ₹ 2,75,014 and the amount spent towards other services at ₹ 1,63,815. The Assessing Officer disallowed the expenses of ₹ 1,63,815. On appeal, the Commissioner of Income-tax (Appeals) set aside the disallowance and the finding of the Commissioner was confirmed by the Tribunal through the order under appeal. The counsel appearing for both the parties submit that the extent to which the assessee is entitled to claim as permissible deduction is no more res integra, by the decision of this court in I. T. A. No. 1347 of 2009 dated March 13, 2019. Both the counsel state that the assessee is entitled to claim deduction to the extent of subscription or membership fee if paid by the assessee but not incidental expenses incurred by the employees/member of the assessee. The conclusion recorded by this court on club membership expenses in I. T. A. No. 1347 of 2009 reads thus : 18. Another issue involved in the appeal is in relation to the expenditure claimed by the assessee towards payment of 'club mem bership fee' of ₹ 3,02,841. It was contended by the assessee that the membership fee was incurre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Point II 9. The next substantial question deals with disallowance of interest of ₹ 15,59,046 on the investment made from pool of funds. 10. The substantial question reads thus : Whether on the facts and in the circumstances of the case, the Tribunal is right in law in interfering with the disallowance of interest of ₹ 15,59,046 on the investment made from pool of funds. 11. The assessee received dividend from the UTI Mutual Fund and the Bank of India aggregating to ₹ 10,59,119 and reduced from the net profit under Explanation (ii) below the second proviso to sub-section (2) of section 115JB by treating the said income to which the provisions of section 10(33) of the Act would apply. The Assessing Officer disallowed the said deduction by holding that the assessee for the previous assessment year in an appeal pending before the apex court has taken a different stand from the stand taken in the present assessment year. Separate accounts are not maintained for the investment in mutual fund independent of the business carried out for the year under consideration. The assessee claims th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e shares/investment is in trading account, then by following the decision of the Kerala High Court in the case of Leena Ramachandran, no expenditure can be disallowed under section 36(1)(iii). However, if they are on account of investment, then reasonable expenditure which is directly attributable to earning such dividend, income may be disallowed. In other words, the Tribunal directed the Assessing Officer to reconsider the particular entries, keeping in view the ratio laid down by this court in Leena Ramachandran's case and redetermine the tax liability. After perusing the reasons recorded by the Tribunal and the decision in Leena Ramachandran's case, we are of the view that no substantial question is made out for interfering with the order of remand on this issue by the Tribunal. In our considered view the remand to the Assessing Officer is justified and no interference is warranted in the appeal. The findings of the Tribunal in this behalf are tenable, does not warrant interfering and the point is answered accordingly. Point No. III 13. The assessee claimed deduction of ₹ 33,56,74,286 in computing the book profit under section 115 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated as business expenditure and hence has disallowed the deduction and added ₹ 32.70 crores to the income of the assessee. 14. Mr. Christopher Abraham places reliance on the reasons recorded by the Assessing Officer and argues the following two substantial questions : 1 (a) Whether, on the facts and in the circumstances of the case is not the assessment order denying the claim of the assessee-company which had advanced a sum of ₹ 32.70 crores to Gujarat Petro Elec trical Ltd., a company promoted by the assessee and had written off the amount by transfer from general reserve account justified, valid and in accordance with law and the Income-tax Appellate Tribunal is right in law in interfering with such denial of the claim ? (b) The Tribunal is right in law in interfering with the denial of ₹ 32,69,65,146 by the Assessing Officer ? 2 (a) Whether, on the facts and in the circumstances of the case and sections 115JA and 115JB being similar should not the Income-tax Appellate Tribunal have, in the light of the decision of the Supreme Court reported in Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich 11 per cent. was to be given to GIIC and balance 40 per cent. to the assessee. The assessee was designated as an associated partner and the day-to-day management as well as operations of this project were entrusted to the assessee. The assessee-company was allowed to depute four directors in the board of GPEL, whereas GIIC was to have only two members on the GPEL. The chairman and managing director of GPEL were also to be the nominee of the assessee-com pany. Further, the assessee-company was entrusted the role of arranging finances for this project which was for manufacture of cop per clad laminates as per the letter of intent by the Government of India. Accordingly, the assessee subscribed to the share capital of GPEL for a sum of ₹ 5.18 crores. An advance of ₹ 5 crores in two transcripts amounting to ₹ 2.43 crores in the financial year 1997-98 and ₹ 2.57 crores in the financial year 1998-99 was also given. The assessee also stood guarantor to the loans granted to GPEL by banks and financial institutions. The operations of GPEL were unsatisfactory right from its inception and ultimately GPEL was referred to the BIFR on August 11, 1997 and later on a R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer because, according to him, there was no direct business connection between the assessee and GPEL. The products of GPEL were not being used by the assessee in its manufacturing process. The activities of GPEL had no connection with that of the assessee and, therefore loss suffered by the assessee has no direct and proximate nexus between the business operations carried on by it or incidental to its business. It was further observed that in any case it was a loan repayment and, therefore, it cannot be termed as revenue loss. It was also noted that GPEL was a separate entity and assessed as such and, therefore liabilities created by it did not automatically become the business expenditure of the assessee. The alternate claim under sec tion 36(1)(vii) was also rejected by observing that the assessee was not in the business of banking or money lending and even the deci sion of the hon'ble Calcutta High Court in the case of Turner Moris son and Co. Ltd. v. CIT [2000] 245 ITR 724 (Cal) was distinguished by observing that in that case money was advanced to a subsidiary com pany on the winding up and in the present case GPEL was not the subsidiary and it has also not been w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness plant at Limda near Baroda in the State of Gujarat. Therefore, it is clear that whatever was being tried to be achieved through GIIC was a larger business interest or what in other words is known as commercial expediency. The hon'ble Supreme Court in the case of S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC) has given the following definition of commercial expediency at placitum-26 (page 8 of 288 ITR) : 'The expression commercial expediency is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency.' 44. The assessee having though achieved its major object of estab lishing its tyre business at Limda but in the meantime the operations of GPEL were not running satisfactorily. Ultimately, GPEL went to the BIFR and a scheme of rehabilitation was framed which has been confirmed by the hon'ble Gujarat High Court. As contended by the learned counsel of the assessee every stake holder ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on by paying to the financial insti tutions and bankers towards discharge of its guaranteed liabilities and other liabilities as proposed by the BIFR. Failure to pay these liabilities would have exposed the assessee-company of getting black listed and losing the face from financial institutions and banks for its future pro jects. In fact, when the whole situation is looked from this angle, it seems that the assessee-company had no choice but to pay the amount. Even the delay for making these payments would have led the assessee-company into further trouble in the sense that liabilities of financial institutions and banks would have gone up further. 45. Thus, it is clear that payments were made out of the commer cial expediency and as observed by the hon'ble Supreme Court in the case of S.A. Builders that even if there is no necessity to make the payments and such payments are made voluntarily on the grounds of commercial expediency, then such claim has to be allowed. We would like to reproduce the relevant observations which are given at placi tum 24 of the judgment as under (page 7 of 288 ITR) : 'Thus in Atherton (H. M. Inspector of Taxes) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trying to establish the new business through GPEL and was also try ing to achieve the larger business interest by establishing further factory in the State of Gujarat and it has been done also by estab lishment of tyre manufacturing unit at Limda near Baroda. 17. While dealing with sections 115JA and 115JB held as follows : The above clearly shows that any amount withdrawn from any reserve is to be allowed to be reduced. However, the proviso to above clause puts a restriction that such reduction is permitted only if such amounts were added back to the book profits in the earlier year. Before the Assessing Officer the details of reserve created in earlier years were also filed. These general reserves were stated to be reserves which were created after debiting the profit and loss account. However, the Assessing Officer has rejected the same on the premise that strictly speaking the same has not been added to the book profits because in those years the assessee suffered tax under the normal provisions. This is not the correct way of interpreting the concept of minimum alternate tax. The minimum alternate tax provisions sec tions 115JA and 115JB were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble in law, but the argument proceeds that the assessee could not have claimed the writing off of bad debt as a business loss in the peculiar circumstances of the case while computing total income. The instant argument or question does not satisfy the requirements of section 260A of the Act, viz., that a substantial question of law arises for consideration of this court. 20. In the singular facts and circumstances of this case, and particularly for the subject assessment year, we are of the view that the assessee has established that the memorandum of association, authorised the assessee to expand its business into new areas, i.e., incorporating GPEL, etc. The Tribunal has recorded a finding of fact that the assessee has, in fact, established one of the biggest tyre manufacturing companies in the State of Gujarat and with a view to expand its business activities incorporated GPEL. GPEL on account of technical glitches in sharing know-how provided by the foreign collaborator could not take off on expected lines, resulting in cash loss etc. GPEL was referred to the BIFR as sick industry. The BIFR notified a scheme for operation or reviving GPEL. The BIFR, under the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id not claim deduction under section 43B of the Act since the assessee suffered loss in the assessment year 2001-02. 24. The reasoning of the Assessing Officer is that without making provision, claiming deduction in the assessment year 2002-03, when the assessee earns profit, is incorrect and the intention of the assessee is quite clear that the assessee wants to take deduction under section 43B to reduce the net taxable amount for the assessment year 2002-03. The understanding of the assessee of the proviso to section 43B is incorrect and the assessee has adopted a colourable device in tax planning with an intention to avoid the incidence of tax in the assessment year 2002-03. Thereby the Assessing Officer added ₹ 2,72,79,645 to the net income of the assessee. 25. The Commissioner of Income-tax (Appeals) from the admitted dates and entries and upon construing the scope of section 43B held that the appellant claimed benefit under section 43B in the assessment year during which the actual payment was made. According to the Commissioner of Income-tax (Appeals) section 43B does not impose restriction on the assessee either to claim in the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me is allowable in the year in which payment has been made irrespective of the assessment year in which liability for the same has been incurred and recognized by the assessee by the method of accounting adopted by him. Therefore, it is clear that items referred to in section 43B can be allowed only if payment has been made and the same are allowable in which payment has been made. Since the assessee has been making payment on account of bonus on the occasion of Onam which is a most important festival in the State of Kerala and has been consistently claiming deduction of payment of bonus only in the year of payment. This fact becomes clear from the assessment order because no claim has been made in the assessment year 2003-04 on the basis of the proviso to section 43B. 57. The proviso to section 43B gives further concession that if pay ment in respect of any of the items referred to in section 43B is made in a particular year before the due date of filing of the Income-tax return, then such claim can be made in the earlier year also for which return is due to be filed. This seems to be only a further concession and cannot be read as a restriction that necessarily d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year in which a liability for the same has been incurred and recognised by the assessee by the method of accounting adopted by the assessee. 29. The Tribunal further refers to consistent practice followed by the assessee, namely, that the assessee makes payment on account of bonus on the occasion of Onam, which is an important festival in the State of Kerala. It is finally held that a combined reading of section 36(2), sub-section (1) of section 36 read with section 43B allows accepting the expenditure on actual payment basis made by the assessee. The Revenue could not show an infirmity or raise a substantial question on the concurrent finding of facts and law recorded by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal. 30. We are not convinced that a substantial question of law arises on the findings recorded by the orders of the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal. Hence confirm the findings of the Tribunal and accordingly hold this point against the Revenue and in favour of the assessee. 31. For the above reasons, the income tax appeal is allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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