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Income Tax Appellate Tribunal, MUMBAI BENCHES “C”, MUMBAI
Before: Shri G. MANJUNATHA & Shri RAVISH SOOD,
per companies act, therefore, the same direction may be given for this year also.
We have heard both the parties, perused materials available on record and gone through the orders of authorities below. An identical issue has been considered by the Co- ordinate Bench of the Tribunal in asessee’s own case for AY 2004-05. The Tribunal, after considering relevant facts held that lease equalisation reserve is an allowable deduction, however, for the purpose of computation of quantum of allowances, lease equalisation reserve should be computed on the basis of tax depreciation instead of book depreciation. The relevant observations of the Tribunal are as under:-
7.2 We have appreciated the rival contentions and perused the Tribunal’s decisions cited by the representatives. Upon appreciation of Guidance note on Leases issued by ICAI and the above cited judgments, we note that the four elements have to be considered for proper treatment of lease rentals viz. Lease Rentals, Implicit Rate of Return [IRR], Depreciation and lease equalization charge. Lease rental in monetary terms is a sum total of the financing charge and the amount embedded in it in the form of a capital sum. The said financing charge constitutes the real income, which is to be offered for tax, which is determined by applying the IRR to the net investment made in the asset. The lease equalization charge is the result of the adjustment, which the assessee has to make whenever the amount put aside towards capital recovery is not equivalent to the depreciation claimed by the assessee. Lease equalization charges is a method of recalibrating the depreciation claimed by the assessee in a given accounting period. If the depreciation claimed is less than the capital recovery, the difference is debited in the profit & loss account in the form of lease equalization charge and similarly if, for any reason the depreciation claimed is more than the capital recovery, then the difference is credited, once again, in the form of lease equalization charge to the Profit & Loss Account. Therefore, the assessee in effect debits are credits its profit & loss account with a lease equalization charge depending on whether or not the depreciation claimed is less or more than the capital recovery. The method employed by the assessee, therefore, over the full term of the lease period would result in the lease equalization amount being reduced to naught, as the credits and debits in the profit & loss account would square off with each other. 7.3 Further a perusal of earlier orders of Tribunal, we find that while prima facie allowing the claim of lease equalization charges, it has been held that deprecation which is to be taken for this purpose should be the depreciation allowable as per the Income Tax Act only and not the book deprecation. Therefore, in the light of these observations and following the judicial precedence, the matter is restore back to the file of AO with the direction to 18 INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITED decide the issue afresh after giving adequate opportunity to the assessee to substantiate his claim in this regard. It is clarified that to maintain consistency, the depreciation which is to be considered for the purpose of calculating lease equalization charges would be the Income Tax Depreciation and not the book depreciation as held by the Tribunal in earlier years. The grounds stands allowed for statistical purposes.”
We further noted that the Hon’ble Supreme Court has considered an identical issue in light of accounting standard prescribed by ICAI and held that lease equalisation reserve computed as per accounting standards prescribed by ICAI is an allowable deduction because there is no express bar in the IT Act, 1961 regarding application of such accounting standards. The Hon’ble Court further held that only real income i.e. finance income should be taxed for the purpose of Income Tax which can be arrive only after applying such method which is prescribed in the guidance note. Therefore, we are of the considered view that prima-facie, the issue is settled by the decision of the Hon’ble Supreme Court, however, consistent with view taken by the Co-ordinate Bench for earlier years, we restore this issue to the file of the AO and direct him to decide computation of lease equalisation reserve in accordance with the direction of Hon’ble Supreme Court in the case of Virtual Soft Systems Ltd. (supra).
The next issue that came up for our consideration from ground no.7 to 10 of assessee’s appeal is disallowance of dividend income earned from Venture Capital Trust u/s 14A of the Act. The assessee has invested in several funds/trust and offering income from such funds/trust in same head as being considered by the Trust. The trust has earned exempt income has shown income/loss from other sources and issued Form 64 also for Venture Capital Funds covered u/s 115U and exempt u/s 10(23FB). The AO disallowed the loss from other sources on the ground that this expenses were incurred for 19 INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITED earning dividend/exempt income rejecting the income bifurcation given by Venture Capital Funder under Form 64. In other words, the assessee reflected gross dividend income from trust in the Profit & Loss Account and claimed the same as exempted, whereas, the set off of share of loss from the said funds/trust were claimed under the head ‘income from the other sources’ which led the AO to make the impugned additions.
The Ld. AR for the assessee, at the time of hearing, submitted that this issue covered by the decision of ITAT, Mumbai Bench for AY 2004-05 in where under identical set of facts, the Tribunal has restored this issue to the file of Ld. AO to re-examine the claim of the assessee that since the assessee is earning income from two types of Trusts-one exempt u/s 10(23FB) and the other not exempt u/s 10(23FB) and therefore, the provisions of Section 115U and 161 are applicable to them. The relevant observations of the Tribunal are as under:-
“10. Ground Numbers 17 to 20 are related with income from venture capital trusts. It was noted that the assessee earned dividend and units income of Rs.43.31 crores claimed exempted u/s 10(34) & 10(35) which included dividend of Rs.48.38 Lacs received from eight pass through entities / venture capital funds / trusts as per list given on Page-16 of the assessment order. It was noted that the assessee earned capital gains (net) from sale of these units amounting to Rs.4.12 crores and also earned dividend income of Rs.48.38 Lacs from the said funds. However, the assessee’s share of losses amounting to Rs.1.61 crores in 8 pass though entities was not netted off from the dividend income but the set-off of the same was claimed under the head ‘Income from Other Sources’. In other words, the assessee reflected gross dividend income from the trusts in the Profit & Loss account and claimed the same as exempted whereas the set off of assessee’s share of loss from the said funds were claimed under the head ‘Income from other Sources’ which led the AO to make the impugned additions. 10.1 Aggrieved the assessee assailed the same before Ld. CIT(A) and explained that the assessee was beneficiary in four trust which are not registered u/s 10(23FB) and therefore, the income of the trust is taxable in the hands of the beneficiary u/s 161 of the Income Tax Act on the principal of ‘pass through’. Therefore, the beneficiaries are to be taxed on the income of the trust and the character of the income in the hands of the beneficiary is the same as the character in the hands of the trust. Further, the remaining four
20 INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITED trust were SEBI registered trust and also registered u/s 10(23FB) and therefore, the income of those trust was exempt u/s 10(23FB) and accordingly, the income of the trust was taxable in the hands of the beneficiaries in accordance of the provisions of Section 115U. As per the mandate of this section, the trust has issued a certificate under Rule 12C in Form 64 giving details of income and character of income. As per Section 115U(3) the income of the venture capital fund shall be deemed to be of the same nature and in the same proportion in the hands of the persons receiving the income. The provisions being statutory provision has to be followed strictly. Therefore, the action of Ld. AO in attributing the loss under the head income from other sources to dividend income was not justified. Further, u/s 14A, the loss under the head income from other sources could not be allocated to exempt dividend income. Moreover, the revenue has not established that the assessee has incurred any expenditure to earn the same and therefore, no disallowance thereof could be made by the Ld. AO. 10.2 The Ld. CIT(A) after examination, found the proportion of total expenses to the interest income of the fund to be lopsided and directed the assessee to justify the admissibility of expenses u/s 57(iii) against interest income. Not convinced with the explanation of the assessee, the Ld. CIT(A) came to conclusion that majority of the expenses of these funds were incurred to earn the exempt dividend income and therefore, the same could not be allowed to the assessee. Finally, the matter was restored to the file of Ld. AO for re- determination of total disallowance after segregating the indirect expenses on proportionate basis. 10.3 The assessee also pointed out mistake in calculations made by Ld. AO in arriving at disallowance of Rs.1.61 crores and explained that the correct figures of disallowance, even as per the AO’s proposition, would be worked out to Rs.79.28 Lacs which was agreed in principle by the Ld. CIT(A). Aggrieved, the assessee has raised ground nos. 17 to 20 against the same. 10.4 The Ld. AR drew our attention to the reconciliation statement of income / (loss) from pass through entities and stated that the amount in dispute has now been reduced to Rs.79.28 Lacs since the Ld. AO has accepted the calculations errors and rectified the same vide order u/s 154. 10.5 Further, our attention has been drawn to the details of share of income from beneficiary trust placed at Page No. 277 of the paper book where the assessee’s share of income / loss under various heads have been summarized. The prime contention of the Ld. AR is that the assessee is beneficiary of four trusts whose income is exempted u/s 10(23FB) and accordingly, the share of assessee’s income is to be taxed in accordance with provisions of Section 115U. Further, the balance four trusts are not entitled for the said exemption and therefore, the income of the same is to be taxed in the hands of the assessee in terms of Section 161 of the Income Tax Act. The financial statements / computations / Form No. 64 etc. of few trusts have been placed in the paper book. 10.6 Per contra, Ld. DR contended that the assessee was asked to file evidences to substantiate admissibility of expenses u/s 57(iii) but it failed to do so. Further, the provisions of Section 14A were applicable since majority of expenses were incurred on account of management fees mainly towards earning of exempt dividend income and therefore, the assessee has been rightly been saddled with impugned additions.
21 INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITED 10.7 After hearing rival contentions and relevant material on record, we find that issue requires re-examination / re-adjudication at the level of Ld. AO since the assessee is earning income from two types of Trusts-one exempt u/s 10(23FB) and the other not exempt u/s 10(23FB) and therefore, the provisions of Section 115U and 161 are applicable to them. The assessee is directed to substantiate its claim in this regard including justification of management fees and indirect expenses incurred by the Trust towards earning of the income, which as per revenue are mainly incurred towards earning of dividend income. Therefore, the matter is set aside for fresh adjudication keeping all the issues alive which results into assessee’s grounds of appeal being allowed for statistical purposes.”
28. In this view of the matter and consistent with view taken by the Co-ordinate Bench of the Tribunal in assessee’s own case for earlier period, we restore this issue to the file of the AO and direct him to decide in accordance with direction given by the Tribunal for AY 2004-05.
29. The next issue that came up for our consideration from ground no.11 and additional ground no 1 and 12 is disallowance of depreciation on toll road. The brief, facts of the impugned dispute are that the assessee had constructed toll road in Rau-Pithampur in joint venture with Madhya Pradesh [MP] state government in the year 1995. The assessee was given a right to collect the tolls for a specified period to recover the cost of investment and desired yield as per agreement between the parties. The assessee has collected toll for initial year but later on government has stopped collection of toll. The assessee has capitalised expenditure incurred for construction of road under the head ‘Plant & Machinery”. The assessee has claimed depreciation @ 25% on toll roads. The AO disallowed depreciation claimed on toll road on the ground that the assessee is neither owner of the asset nor said asset is in the nature of plant and machinery, therefore, depreciation on said asset is not allowable as per provisions of act. Similarly, in respect of revenue from roads, the assessee has initially collected toll from the road but later on the 22 INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITED Government has stopped the assessee from collecting toll. The assessee left with no option invoked arbitration proceedings which is not yet reached finality.
30. Since, the matter is pending before the Arbitration; the assessee has not recognised any revenue from toll road. The AO has made ad-hoc addition of Rs.1.5 crores as income from toll collection on the basis of last income shown in AY 2001-02.
The Ld. CIT(A) has deleted this additions and directed AO to re-compute additions based on interest claim made by the assessee in arbitration proceedings. The Ld. AR for the assessee submitted that the issue of depreciation on toll road as plant & machinery was decided against the assessee by the Tribunal, but depreciation was allowed as intangible being right to collect the toll for AY 2004-05. Similarly, as regard estimation of income from toll road, the Tribunal has set-aside the issue to the file of the AO to decide estimation of income on the basis of latest decision of the arbitration Tribunal or any higher authority as the case may be.
We have heard both the parties, perused materials available on record and gone through the orders of authorities below. The issue of depreciation on toll road as well as estimation of income from such road is subject matter of consideration by the Tribunal for AY 2004-05. The Tribunal after considering rival submissions of the assessee and also relied upon certain judicial precedence held that the depreciation on toll road is not allowed as plant and machinery because the assessee is neither owner of the asset nor said asset is in the nature of plant and machinery. However, the Tribunal allowed depreciation as intangible asset being right to collect the toll. Similarly, in respect of 23 INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITED estimation of income from toll road, direct the AO to ascertain correct facts with regard to attainment of arbitration proceedings before estimation of income. The relevant findings of the Tribunal are as under:-
11.10 We have heard the rival contentions. So far as the estimation of income from the toll road is concerned, we find that the issue in hand is related with estimation of income only and not with notional income since the claim of the assessee has already been crystallized by the Appellate Tribunal and the assessee has certain right to claim the same particularly when the payment is backed by the guarantee of the state government. There is no dispute as to the fact that the assessee has unfettered right to claim the same from the government agency and only the quantification thereof is in dispute. The contention of the Ld. AR is that since the government agency has agitated the same before higher authorities, the same has not yet attained finality. However, whatever the case may be, the assessee following mercantile system of accounting is obliged to offer the same to tax in view of crystallization thereof by Appellate Tribunal. 11.11 Therefore, on the facts and circumstances, we restore the matter back to the file of Ld. AO with a direction to estimate the income on the basis of latest decision of the Appellate Tribunal or any higher authority, as the case may be. The assessee is directed to substantiate his claim in this regard forthwith failing which the Ld. AO shall be at liberty to decide the same on the basis of material available on record. 11.12 Since, we have already directed the Ld. AO to tax the estimated income from the toll road, as a logical consequence, the assessee becomes entitled to claim the depreciation on the toll road. After considering the cited decisions relied upon by respective representative, we find that since the assessee is not the owner of the toll road, depreciation thereupon could not be allowed to him in terms of decision of Hon’ble Bombay High Court in North Karnataka Expressway Ltd. Vs. CIT [supra]. However, depreciation on the same as intangible assets being ‘any other business or commercial rights of similar nature’ as per Section 32 would be available to the assessee in terms of decision of Special Bench of the Tribunal, Hyderabad rendered in Progressive Constructions Ltd. Vs. ACIT [ITA No. 1845/Hyd/2014 order dated 14/02/2017]. Respectfully following the cited decision, we direct so. The Ld. AO is directed to re-compute the same and grant depreciation thereupon as intangible assets. The assessee is also directed to substantiate his claim in this regard. The grounds of assessee’s appeal stands allowed for statistical purposes.
In this view of the matter and consistent with view taken by the Co-ordinate Bench of the Tribunal in assessee’s own case for earlier period, we restore this issue to the file of 24 INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITED the AO and direct him to decide in accordance with direction given by the Tribunal for AY 2004-05.
The next issue that came up for our consideration from Ground no.14 is disallowance of expenses incurred for increase in authorized share capital u/s 35D of the Act. The AO has disallowed expenditure on the ground that conditions as prescribed in section 35D(1)(ii) was not fulfilled, the same was confirmed by the Ld. CIT(A).
The Ld. AR for the assessee submitted that this issue is covered against the assessee by the decision of ITAT, Mumbai Bench for AY 2004-05 by earlier orders, where the Tribunal has restored the issue back to the file of AO to re-examine whether the assessee is an industrial undertaking within the meaning of section 35D of the Act, which makes it eligible to claim expenditure.
The Ld. DR, on the other hand, fairly accepted that this issue is covered against the assessee by the decision of ITAT, Mumbai.
We have heard both the parties, perused materials available on record and gone through the orders of authorities below. This issue is covered by the decision of ITAT, Mumbai ‘I’ Bench in assessee’s own case for AY -2004-05 in where the issue has been restored back to the file of the AO. For the year under consideration, facts being identical, by following the decision of ITAT for earlier year, we restore this issue back to the file of AO with a direction to examine whether the assessee is an industrial undertaking within the meaning of section 35D of the Act, which makes it
25 INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITED eligible to claim expenditure. The AO is also directed to consider the issue in light of findings recorded by the Tribunal for AY 2004-05.
The next issue that came up for our consideration from ground No.15 is levy of interest u/s 234B of the Act. This issue is consequential and mandatory in nature. The AO shall compute interest as applicable for the relevant period as per provisions of section 234B of the Act after determining total income of the assessee. Accordingly, the ground taken by the assessee is dismissed.
The next issue that came up for our consideration from ground no.16 is addition made on account of provision for non-performing assets while computing book profit u/s 115JB of the Act. The assessee has claimed deduction on account of provisions for non- performing asset while computing book profit. The AO has denied the deduction and added back the same while computing book profit on the ground that it is mere provision, therefore, the same should be added back to book profit.
The Ld. AR for the assessee, submitted that this issue is covered against the assessee by the decision of ITAT, Mumbai, “I” Bench for AY 2004-05, where under identical set of facts, the Tribunal has upheld the additions made towards disallowance of provision made for non-performing assets while computing book profit u/s 115JB of the Act.
Having heard both the sides and considering the material available on record, we find that this is a recurring issue which is subject matter of discussions by the Tribunal right from AY 2002-03. The Tribunal had considered an identical issue in the light of 26 INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITED provisions of section 115JB of the Act, and held that provisions made for non-performing assets needs to be added back while computing book profit u/s 115JB of the Act.
Therefore, consistent with view taken by the Tribunal for earlier years, we dismissed ground taken by the assessee.
The next issue that came up for our consideration from ground no.17 is disallowance of provision for diminution in the value of securities while computing book profit u/s 115JB of the Act. The assessee has claimed deduction of provision for diminution in value of securities held as stock-in-trade. Further, it is offering income from such securities as business income. The provisions was made year on year as consistent policy of stock valuation. The AO has disallowed said deduction while computing book profit. On appeal, before the First Appellate Authority, the Ld. CIT(A) has confirmed the additions based on retrospective amendment by the Finance Act, 2009.
The Ld. AR for the assessee, submitted that this issue is covered in favour of the assessee by the decision of ITAT, Mumbai, for AY 2004-05, where under identical set of facts, the Tribunal has restored the issue back to the file of the AO to appreciate the scrip wise details provided by the assessee to arrive at provisions for diminution in value of securities and provide the benefit of the same with respect to those scrips which are held as stock in trade and also the income of which has been offered under the head ‘business income’.
Having heard both the sides and considering the material available on record, we find that the Tribunal has considered similar issue for AY 2004-05 in ITA
27 INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITED No.3203/Mum/2008, where under identical set of facts has restored issue back to the file of the AO with following observations:-
5.2 We have heard the rival contentions. We note that the assessee has made provision of Rs.1,70,58,371/- in the Profit & Loss Account towards investment valuation and cumulative figures of these provisions in Balance Sheet Schedule ‘F’ stood at Rs.2,53,91,613/-. Further As per Note no. 34 in Schedule N-Notes forming part of the accounts, it has been stated that income from investments included in income from operations under Schedule I includes net profit on sale of securities Rs.86,82,62,292/-. Further, the assessee in computation of income made suo-moto disallowance of Rs.31,77,056/- towards provision for diminution in value of investments and shown certain profit on sale of strategic / long term investments. All these facts and figures lend strength to the argument of Ld. AR. It is well settled that closing stock has to be valued at cost or market price whichever is less and prima facie, it appears that the assessee is following consistent policy of stock valuation. Therefore, on the facts and circumstances, we deem it fit to restore the matter back to the file of AO to appreciate the scrip wise details provided by assessee to arrive at the provisions for diminution in value made by the assessee and provide the benefit of the same with respect to those scrips which are held as stock in trade and the income of which has been offered under the head ‘business income’. The grounds of assessee’s appeal stand allowed for statistical purposes.
In this view of the matter and consistent with view taken by the co-ordinate Bench of the Tribunal, we restored this issue back to the file of the Ld. AO and direct him to consider the issue in light of findings recorded by the Tribunal for AY 2004-05.
The next issue that came up for our consideration from ground no.18 is with regard to disallowance of provision for diminution in the value strategic investment while computing book profit u/s 115JB of the Act.
The Ld. AR for the assessee, at the time of hearing, submitted that he does not want to press this ground, therefore, this ground of the assessee is dismissed as not pressed.
28 INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITED 47. The next issue that came up for our consideration from ground no. 19 is addition of the amount disallowed u/s 14A while computing book profit u/s 115JB of the Act. The AO has made addition u/s 14A of the Act towards expenditure incurred in relation to exempt income. Further, a similar adjustment has been made towards amount disallowed u/s 14A of the Act, while computing book profit u/s115JB of the Act.
The Ld. AR for the assessee, submitted that this issue is covered in favour of the assessee by the decision of ITAT, Delhi, Special Bench in the case of ACIT vs Vireet Investment Pvt Ltd. (2017) 82 taxmann.com 415 (Del. ITAT), wherein, the Tribunal held that disallowance contemplated u/s 14A shall not be added back while computing book profit u/s 115JB of the Act.
We have heard both the parties, perused materials available on record. We find that both issue is covered in favour of the assessee by the decision of ITAT Delhi Special Bench in the case of ACIT vs Vireet Investment Pvt Ltd.(supra). But, fact remains that the issue of disallowance contemplated u/s 14A of the Ac read with Rule-8D has already been discussed by us in preceding paras in ground no. 4, 5, 7 and 10 of assessee’s appeal, where the matter has been restored back to the file of the AO to recompute disallowance of expenditure by excluding investment which do not yield exempt income. The issue of computation of book profit with reference to 14A disallowance is bearing on the outcome of computation of disallowance u/s 14A of the Act in light of our discussions given in the grounds of appeal taken for the assessee’s in its appeal. Therefore, we restore this issue back to the file of the AO and direct him to first re-compute disallowance contemplated u/s 29 INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITED 14A and then decide this issue in accordance with findings of the Special Bench of ITAT, Delhi in the case of ACIT vs Vireet Infest Pvt. Ltd. (supra) and also the Hon’ble Bombay High Court in the case of CIT vs Ms/ Bengal Finance Investment Pvt. Ltd. in Income Tax Appeal No.337 of 2013.
50. The next issue that came up for our consideration from Ground no.13 of assessee’s appeal is addition towards income earned from loan given to Tamilnadu Road Development Co. Ltd. and Mahendra Industrial Park u/s 10(23G) of the Act. The assessee have given Long Term Loan to Tamilnadu Road Development Co. Ltd. and Mahendra Industrial Park. The assessee has claimed exemption towards interest earned from loan to above two companies u/s 10(23G) of the Act. The AO has disallowed exemption towards interest income u/s 10(23G) on the ground that required recognition for exemption has not been issued by the CBDT in respect of above two companies which is mandatorily required for claiming exemption u/s 10(23G) of the Act.
The Ld. AR for the assessee, submitted that although this issue has been contested for the AY 2004-05, but considering the smallness of amount, the ground has not been pressed, therefore, the Tribunal do not adjudicate the issue on merit for AY 2004-05. Therefore, this new issue has to be decided on the basis of material available on record in light of provision of section 10(23G) of the Act. The Ld. AR for the assessee referring to provisions of section 10(23G) of the Act, submitted that as per said provisions, any income by way of dividends, other than dividends referred to in section 115(O) of the Act, interest or long term capital gains of infrastructure capital fund or infrastructure capital
30 INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITED company or cooperative bank from investments made on or after 1st day of June 1998 by way of shares or long term finance in any enterprises or undertaking wholly engaged in the business referred to in sub-section of (4) of 80IA and which has been approved by the Central Government on an application made by it in accordance with Rules made in this behalf, which satisfy prescribed conditions is exempted from tax. Therefore, the assessee being infrastructure capital company advanced long term loans to two companies involved in developing infrastructure project, therefore, any income including interest income earned from such company is exempt from tax, even though, the approval for such company is obtained at later date. The AR further submitted that what is required to be seen is whether the assessee has granted long term loans for a company, which is developing infrastructure or not and further, such company has been approved u/s 10(23G) of the Act. The AR further submitted that even Explanation-2 inserted by the Finance Act, 1998 has also considered to be retrospective in nature because the said explanation is declaratory statute inserted to supply an obvious omission and to cut and clear doubts, therefore, any company which is fulfilled the condition u/s 10(23G) and the investments are made before 01/06/1998, then any income received from such investment is exempted u/s 10(23G) of the Act. In this regard, he relied upon the decision of ITAT, Hyderabad in the case of VBC Ferro Alloys Ltd. vs ACIT (2007) 107 TTJ 925. The assessee also relied upon the decision of ITAT Ahmedabad Bench in the case of Gujarat Power Corporation Ltd. vs ACIT in ITA No.1663/Ahd/2008.
The Ld. DR on the other hand, submitted that unless the assessee to whom loans have been given is approved u/s 10(23G) by the CBDT as per prescribed procedure, the 31 INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITED assessee would not get the benefit of exemption u/s 10(23G) of the Act, towards any income received from such investments/loans, therefore, the AO was right in making addition towards interest income earned from long term finance given to Tamilnadu Road Development Co. Ltd. and Mahendra Industrial Park because the required approval u/s 10(23G) has not been obtained by those companies for the relevant financial year.
We have heard both the parties, perused the material available on record and gone through the orders of authorities below. It is an admitted fact that the assessee is a infrastructure capital company, which is eligible for exemption in respect of any income by way of dividends, interest or long term capital gains of an infrastructure capital fund from investment made, by way of shares or long term finance in any enterprise undertaking wholly engaged in the business of infrastructure development. It is also an admitted fact that Tamilnadu Road Development Co. Ltd. has been approved by the CBDT, u/s 10(23G) of the Act, read with Rule 2(e) of Income Tax Rules, 1962, but such provision has been granted from AY 2006-07 onwards. The dispute is with regard to deduction claimed towards interest income earned from Tamilnadu Road Development Co. Ltd. on long term loans. The claim of the assessee is that exemption is granted u/s 10(23G) of the Act, to a company which is engaged in the business of providing long term finance to companies or undertakings developing infrastructure facilities. Therefore, the approval if any required u/s 10(23G) in respect of those companies is only a formality. The assessee has further claimed that once an approval has been granted u/s 10(23G), to company, then any income received from such company is eligible for exemption u/s 10(23G), because the section clearly states that exemption is allowable in respect of investment made before the 32 INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITED 1st day of June 1998. We find that there is no dispute with regard to the fact that the assessee is an infrastructure capital company. It is also not in dispute that the assessee has given long term finance to a company which is engaged in the business of development of infrastructure facilities. The dispute is with regard to the cut of date for making investment. According to the AO, exemption is available only in respect of investment made between 01/04/1998 and 01/06/1998. Further, the AO opined that exemption is available only if the company which is developing infrastructure facilities is approved u/s 10(23G) of the Act. We, find that a similar issue has been considered by the Co-ordinate Bench of ITAT, Hyderabad, in the case of VBC Ferro Alloys Ltd. vs ACIT (2007) 107 TTJ 925, where under identical set of facts, the Tribunal held that as per section 10(23G) as it existed immediately before amendment by Finance Act, 1998 clearly states that any income by way of long term capital gain of an infrastructure capital fund is exempted u/s 10(23G) of the Act, because as per provisions of statute existing in 1997 read with explanation 2 introduced by the Finance Act 1997 mandates that income by way of long term capital gain of an infrastructure capital company from investment made before 01/04/1998 by way of any shares, any enterprise which is infrastructure facilities shall not be included in the total income. Similarly, the Co-ordinate Bench of ITAT, Ahmedabad in the case of Gujarat Power Corporation Ltd. (supra) has considered an identical issue and by following the decision of ITAT, Hyderabad in the case of VBC Ferro Alloys Ltd. vs ACIT (supra) held that assessee is entitled to exemption u/s 10(23G) of the Act, even though, investments in those companies are made prior to 01/04/1998. In this case, on perusal of facts available on record, there is no dispute with regard to the fact that the assessee is an 33 INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITED infrastructure capital company, It is also not dispute that the assessee had given long term finance given to a company which is engaged in the business of development of infrastructure facilities as defined u/s 80IA of the Act. The said company has been approved by the CBDT u/s 10(23G) of the Act, but such approval has been granted for AY 2006-07. Therefore, we are of the considered view that once, it was an admitted fact that the assessee is an infrastructure capital company and the long term finance given to a company which is also engaged in the business of infrastructure development , then whatever income earned from such company including interest income is exempt u/s 10(23G) of the Act, because the approval if any required u/s 10(23G) is for the company which is developing infrastructure facilities, but not to a company which is providing long term loan or investment to an infrastructure development company. Since, Tamilnadu Road Development Co. Ltd. has been approved u/s 10(23G) of the Act, the assessee is eligible for exemption in respect of interest income from that company u/s 10(23G) of the Act even though such approval was granted subsequently. Therefore, we direct the AO to delete the addition made towards disallowance of interest income from Tamilnadu Road Development Co. Ltd. u/s 10(23G) of the Act.
In so far as, deduction towards interest income earned from Mahendra Industrial Park, at the time of hearing, the Ld. AR for the assessee submitted that he do not want to press this issue in respect of interest income received from Mahendra Industrial Park, therefore, we are of the considered view that the AO was right in making addition towards interest income from long term finance given to Mahendra Industrial Park. Accordingly, we uphold the additions made by the AO.
34 INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITED Revenue’s Appeal (ITA No.3165/Mum/2007)
The first issue came up for consideration from ground number 1 of revenue’s appeal is disallowance of expenditure incurred in relation to exempt income u/s 14A under normal provisions of the Act. The Revenue has challenged partial relief allowed by the Ld. CIT(A). The Revenue has challenged relief allowed to the assessee in light of recent decision of Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs CIT, where the issue of strategic investment and stock-in-trade has been considered by the Hon’ble Supreme Court. Further, the Hon’ble Court has not touched the concept of commercial expediency and consideration of disallowance on actual dividend yielding investment.
The Ld. AR for the assessee submitted that this ground taken by the Revenue is already covered in ground taken by the assessee in respect of disallowance of expenditure u/s 14A of the Act, where applicability of the decision of the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs CIT has been considered, therefore, this ground may also be sent back to the file of the AO with similar directions to re-compute disallowances contemplated u/s 14A of the Act.
Having heard both the sides and perused the material available on record. We find that we have already discussed this issue in assessee’s appeal where the applicability of Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs CIT (supra) has been thoroughly discussed. Further, in assessee’s appeal ground relating disallowance of expenditure u/s 14A has been restored back to the file of the AO. Therefore, we are of the considered view that this ground taken by the Revenue also needs to go back to the file of 35 INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITED the AO to decide the issue in accordance with our findings given in assessee’s appeal and also the decision of Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs CIT (Supra) hence, we set-aside the issue to the file of the AO.
The next issue that came up for our consideration from ground no.2 of Revenue’s appeal is disallowance of Software Development Expenses. The AO has disallowed Software Development Expenses of Rs.84,47,787/- on the ground that no details has been furnished to justify deduction claimed towards Software Development Expenses. The Ld. CIT(A) has allowed the deduction on the basis of information furnished by the assessee as per which expenditure debited under the head miscellaneous (Software Development Expenses) are in the nature of AMC Charges, internet access charges, lease line expenses, anti-virus expenses and other software expenses for accounting package.
The Ld. AR for the assessee, submitted that this issue is covered in favour of the assessee by the decision of the ITAT, Mumbai, “I” Bench in assessee’s own case for AY 2004-05 in ITA No.3203/Mum/2008., where under identical set of facts, the Tribunal has upheld the findings of the Ld. CIT(A) in deleting the additions made towards Software Development Expenses.
We have heard both the parties and perused the material available on record. The Tribunal has considered an identical issue for AY 2004-05 where it was held that Software Development Expenses is debited under the head miscellaneous expenses are in the nature of AMC Charges, internet access charges, lease line expenses, anti-virus
36 INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITED expenses and other software expenses for accounting package, therefore, being revenue in nature and allowable as deduction. The relevant findings of the Tribunal are as under:-
“20. Facts qua Ground No. 1 are that the assessee claimed certain software development expenses of Rs.1.16 crores, the details of which were not filed before the AO which led the AO to believe that the same expenditure, being capital in nature, was not allowable to the Assessee. The assessee provided the details thereof before Ld. CIT(A) who noted that the impugned expenses were in the nature of AMC Charges, internet access charges, lease line expenses, anti-virus expenses, charges for link facility, software charges for accounting package and therefore, being revenue in nature and hence allowable to the assessee. 20.1 The Ld. DR has contended that no details were filed by the assessee before Ld. AO and therefore, the assessee has rightly been saddled with impugned additions and Ld. CIT(A) erred in providing relief to the assessee. The Ld. AR placed reliance on the findings of Ld. CIT(A) and drew our attention to details of expenses as placed in Page No. 543 of the paper-book to support the contention that impugned expense, being revenue in nature, were allowable to the assessee and the Ld. CIT(A) provided relief to the assessee after due appreciation of the material facts. 20.2 We have considered the rival contentions and inclined to agree with the findings of Ld. CIT(A) who after appreciating the relevant material came to the right conclusion that the impugned expenditure being revenue in nature, were allowable to the assessee. A bare perusal of the said expenses reveals that the said expenditure are primarily revenue in nature and the Ld. AO disallowed the same on mere presumption. However, Ld. CIT(A) examined the same and provided relief to the assessee after appreciating the material and therefore, we find no reason to interfere with the same. The revenue’s ground of appeal stands dismissed.”
61. In view of the matter and consistent with view taken by the Co-ordinate Bench, we do not find any infirmity in the findings of the Ld. CIT(A) and hence, we are inclined to upheld the findings of the ld. CIT(A) and reject the ground taken by the Revenue.
62. The next issue that came up for consideration from ground no.3 is disallowance of dividend income earned from Venture Capital trust u/s 14A of the Act. This issue has been already discussed in assessee’s appeal in ground no. 7 to 10, where the issue has been 37 INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITED set-aside to the file of the AO for fresh adjudication in light of observations of the Tribunal in assessee’s own case for AY 2004-05. The Revenue challenged the findings of the Ld. CIT(A) in respect of allocation of proportionate expenses on the basis of taxable as well as exempt income earned by such fund/trust. Since, we have already restored back this issue to the file of the AO in assessee’s appeal in ground no. 7 to 10, we are of the considered view that this ground taken by the Revenue is also needs to go back to the file of the AO to decide the issue afresh in accordance with our findings given in ground nos. 7 to 10 of assessee’s appeal, where we have followed the findings of the Tribunal for AY 2004-05.
Therefore, we direct the AO to reconsider the issue in light of our findings given in the order of the Tribunal for AY 2004-05.
The next issue that came up for our consideration from ground no.4 of Revenue’s appeal is addition of notional unrealised hypothetical income from toll road. The AO has estimated income from toll road on ad-hoc basis. The Ld. CIT(A) has deleted the addition made by the AO of ad-hoc estimation however, direct the AO to assess the accrued income due from MPSIDC.
We have heard both the parties and perused the material available on record. We find that the Tribunal has considered identical issue for AY 2004-05, wherein, it was held that estimation of income on toll road is not notional or hypothetical, but it is based on fact that the dispute between the parties has been reached finality before appropriate arbitration authority and considering this fact, the income from toll road need to be estimated. We find that we have already considered similar issue while considering the 38 INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITED issue of disallowance of depreciation on toll road in assessee’s appeal vide ground no.11 and additional ground no. 1 and by following the findings of the Tribunal for AY 2004-05, we restore this issue back to the file of the AO to determine the amount of income from toll road. Since, this issue relates to estimation of income, the same is also restored back to the file of the AO to decide in accordance with our findings given in assessee’s appeal for ground no.11 and additional ground. 1.
The next issue that came up for our consideration from ground no.5 of revenue’s appeal is depreciation on leased assets. The assessee has claimed a sum of Rs.6,42,53,527/- depreciation on leased assets. The AO has disallowed depreciation on leased assets on the ground that leases transaction of the assessee are in the nature of finance transaction, therefore, depreciation claimed on those leased assets is not allowable.
The Ld. AR for the assessee, at the time of hearing, submitted that this issue is covered in favour of the assessee by the decision of the ITAT for AY 2004-05, where, the Tribunal, by following its earlier order for AYs 1996-97 to 2003-04, allowed the claim of the assessee. The Ld. AR further submitted that now this issue has been settled by Hon’ble Supreme Court in the case of ICDS Ltd. 350 ITR 527(SC), where the Hon’ble Supreme Court held that depreciation on leased assets is allowable irrespective of fact that such leased transactions are in the nature of finance lease or operating lease.
Having heard both sides and considered the material available on record, we find that this issue has been considered by the Co-ordinate Bench for AY 2004-05 and by 39 INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITED following its earlier order for AY 1996-97 to 2003-04 deleted additions made by the AO towards depreciation on leased assets. Relevant findings of the Tribunal are as under:-
In Ground No. 2, the revenue is aggrieved by allowance of depreciation of Rs.6.13 crores on leased assets which were disallowed by the AO on the premises that the lease transactions mere only loan transactions and the assessee was not the owner of the leased assets. The Ld. AR contended that the matter is already covered in assessee’s own case by Tribunal where the assessee has been found to be eligible to claim the said depreciation beginning from AY 1996-07 to 2003-04. The copies of Tribunal order has been placed in the paper-book. 21.1 We find that the Ld. CIT(A) has allowed the relief to the assessee in the impugned AY by observing that the depreciation has been allowed by AO from AY 1989-90 to AY 1995-96 and predecessor CIT(A) has decided the issue in favor of assessee from AY 1996-97 to 2003-04. Further, we find that the revenue agitated the matter from 1996-97 to 2003-04 before Tribunal in different appeals, the copies of which have been placed in the paper-book. A perusal of the same reveals that the issue stand squarely covered in assessee’s favor for all these year and therefore, following the same, we are inclined to hold that the assessee was eligible to claim depreciation on leased assets and consequently the revenue’s ground of appeal
stands dismissed.
68. In this view of the matter and consistent with view taken by the Co-ordinate Bench, we are of the considered view that there is no error in the findings of the Ld. CIT(A) while deleting additions made towards depreciation on leased assets, hence, we are inclined to uphold the findings of the Ld. CIT(A) and reject the ground taken by the Revenue.
69. The next issue that came up for our consideration from ground. 6 of Revenue’s appeal is expenditure on club facilities. The Ld. AR for the assessee, at the time of hearing, submitted that this issue is covered in favour of the assessee by the decision of Hon’ble Bombay High Court in asessee’s own case for AY 1997-98 in Income Tax Appeal No.2402 of 2013 where under identical set of facts, the Hon’ble High Court by following its earlier decision in the case of Otis Elevator Co. (India) Ltd. vs CIT (1992) 195 ITR 682
40 INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITED (Bom.) held that Club membership fee paid to the club is in the nature of revenue expenditure, which is allowable as deduction.
Having heard both sides and considered the material available on record, we find that Hon’ble Bombay High Court has considered an identical question of law in assessee’s own case for AY 1997-98 and by following its earlier order in case of of Otis Elevator Co. (India) Ltd. vs CIT (1992) 195 ITR 682 (Bom.) held that expenditure incurred on club facilities is revenue in nature, which is allowable deduction. Therefore, respectfully following the decision of the Hon’ble Bombay High Court in assesseee’s own case, we direct the AO to delete the additions made towards disallowance of payments to Clubs.
The next issue that came up for our consideration from ground no.7 of Revenue’s appeal is deletion of disallowance made on account of lease equalisation reserve on of book profit u/s 115JB of the Act.
The Ld. AR for the assessee, at the time of hearing, submitted that this issue is covered in favour of the assessee by the decision of ITAT, Mumbai, for AY 2004-05, however, the Tribunal has restored back the issue to the file of the AO to compute allowance considering tax depreciation instead of book depreciation. The Ld. AR further submitted that once it is held that lease equalisation reserve is allowable deduction, then amount considered in audited statements has to be considered for deduction and value cannot be replaced on the basis of tax depreciation.
We have heard both sides and perused the material available on record. This issue has been considered by the Tribunal for AY 2004-05, where, in respect of normal
41 INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITED provisions of lease equalisation reserve, the issue has been restored back to the file of the AO to re-compute lease equalisation reserve, considering tax depreciation instead of book depreciation. However, in respect of determination of book profit and the relevancy of computation of lease equalisation reserve by taking note of depreciation as per Income Tax may not be appropriate. But fact remains that since the Tribunal has already considered this issue, we do not want to deviate from the findings recorded by the Tribunal for AY 2004-05. Hence, we restore this issue also to the file of the AO and direct him to re- compute book profit by taking note of findings of the Tribunal in assessee’s own case for AY 2004-05 and also considering the latest judgment of Hon’ble Supreme Court in the case of CIT vs Virtual Soft Systems Ltd. in Civil Appeal No.4358 to 4376 of 2018.
In the result, appeals filed by the Revenue for all assessment years are partly allowed for statistical purpose.
As a result, appeals filed by assessee and appeals filed by the Revenue are treated as partly allowed for statistical purpose.
Order pronounced in the open Court on 30/04/2019.