M/S. TOURISM FINANCE CORPORATION OF INDIA LTD.,NEW DELHI vs. DCIT, NEW DELHI

The issues raised by the assessee are adjudicated ground wise.

The basic facts are, the assessee filed its return of income on 26/09/2008 declaring an income of Rs.23,85,42,065/- which was Tourism Finance Corporation of India Ltd. vs. DCIT processed u/s 143(1) of the Income Tax Act. 1961 (‘the Act’ for short). Subsequently, the case was selected for scrutiny and notices u/s 143(2) and 142(1) were issued and served on the assessee. In response, AR of the assessee attended and submitted the relevant information as called for.

Ground Nos.2 & 3 relating to addition of dividend income wrongly offered to tax as Debenture interest. The relevant facts are, during the assessment proceedings, the Assessing Officer observed that the audited balance sheet for the year ending 31/03/2008 reveals that income from operation was shown at Rs.58,21,92,202/-, which includes interest and other charges on loan of Rs.43,73,39,892/- as per Schedule-J to the Balance Sheet.

Aggrieved, the assessee preferred an appeal before the Ld. CIT(A)-19, New Delhi and filed detailed submissions in this regard.

Aggrieved, the assessee is in appeal before us.

At the time of hearing, the Ld. AR brought to our notice the basic facts that assessee has received dividend from preference shares and the same was wrongly declared as Debenture interest income in the earlier assessment year and he submitted that the same was rectified by the assessee during the current assessment year. He submitted that when the assessee realized that it has made patent error in declaring the above said dividend income as Tourism Finance Corporation of India Ltd. vs. DCIT interest income in the earlier year and the time for filing the rectification application u/s 154 was already over, therefore, assessee has preferred to make the adjustment in the current assessment year. He prayed that the apparent mistake may be allowed to the assessee.

On the other hand, the Ld. DR objected to the above submissions and submitted that the mistake of earlier year cannot be rectified in the current assessment year disturbing the taxable income of the current assessment year. He submitted that assessee failed to revise the return of income in assessment year 2007-08. He brought to our notice page-3 of the assessment order and submitted that the Assessing Officer has rightly disallowed the same.

Considered the rival submissions and material placed on record, we observed that the assessee has received dividend from preference shares in Asst. Year 2007-08 and by mistake the same was declared as debenture interest and offered to tax in that Asst.

With regard to ground No.4 on the issue of disallowance of loan written off. The relevant facts are, during the assessment proceedings, the AO observed from the letter dated 29/10/2010 submitted by the assessee, assessee has claimed bad debt written off during the current assessment year. The assessee has claimed the debenture loan given to Guruvayur Hotels & Resorts as non recoverable and claimed the same as bad debts to the extent of Rs.1,42,29,000/-. The Assessing Officer observed from the Schedule-F of the Balance Shee/ Annual Report submitted by the assessee and observed that the total investments of Rs.1,36,49,31,278/- as on 31/03/2008 which includes an amount of Rs.1,42,29,000/- relating to investment made in the debentures of M/s Guruvayur Hotels (P) Ltd.. These are 0% optionally convertible secured debentures. The assessee has invested in these debentures with the option to convert these debentures in equity shares of the company in future whenever option is exercised by the assessee. He further observed that this is quasi equity investments, on conversion, equity shares would be allotted to the assessee. Since, assessee has written off these

Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) and filed the detailed submissions in this regard. After considering the detailed submissions of the assessee and by relying on the decision of First Appellate Authority in Asst. Year 2006-07 wherein the Ld. CIT(A) relying on the decision of ITAT dated 30/04/2009 in assesse’s own case in various years has Tourism Finance Corporation of India Ltd. vs. DCIT decided the issue u/s 36(1)(viii) of the Act as interest on debentures. The same issue was considered and held that the interest on above said debentures are allowable u/s 36(1)(viii) of the Act. Accordingly, the same was remitted back to the AO, however, the ITAT held that the assessee is also claiming deduction under this section on receipts on account of dividends and profit on sale of investment. As per the above discussion, it was held that these two receipts are also not in the nature of income from long term finance and hence this cannot be considered for allowing deduction under section 36(1)(viii).

With the above observations, the Ld. CIT(A) observed that long terms finance given under Explanation (h) to Section 36(1)(viii) does not qualify for the debentures. Further, he observed that assessee has filed a copy of the debentures subscriptions agreement. Clause 2.8, 2.10 and 2.11 of the agreement were reproduced in his order at page 8 of the order. As per the above clause of the agreement, the Ld., CIT(A) observed that the debentures holders can redeem the above debentures in full or in part at any time at the discretion of the debenture holders. The Tourism Finance Corporation of India Ltd. vs. DCIT debenture holders had an option to get the listing of the debentures, in one or more recognized stock exchange(s) as may be stipulated by them and make such other arrangements to give effect to listing of these debentures. Further, debentures holders had an option to convert into equity. With the above observation, the Ld. CIT(A) observed that the right to redeem the debentures at any time means, it is not falling under the category of ‘long term finance’ in terms of Explanation (h) to section 36(1)(viii) and the assessee has not shown how the assessment order is erroneous on this issue. With the above observation, he dismissed the grounds raised by the assessee.

Aggrieved, the assessee is in appeal before us.

At the time of hearing, the Ld. AR brought to our notice page 164 of the PB which is the decision of ITAT for Asst. Years 1995- 96 & 1997-98 in & 2612/Del/2002, Asst. Year 2000- 01 & 2001-02 in ITA No. 5213 & 4439/Del/2003 and for Asst.

On the other hand, the Ld. DR objected to the above submissions and he brought to our notice page 164 of the PB wherein the ITAT has remitted the issue to the AO to determine whether the debentures issued by the assessee are long term or short term based on the period of repayment of these debentures.

Considered the rival submissions and material placed on record, we observed from the record that the assessee has issued convertible debentures to M/s Guruvayur Hotels & Resorts (P) Ltd. as part of its nature of business to grant loans as a secured debentures, to be on the safe of side, the assessee purchased the debentures from M/s Guruvayur Hotels & Resorts with various conditions including conversion into shares or redeemed prematurely at the option. We observed from the record, the issue

Ground No.5, relevant facts are, during the assessment proceedings, the Assessing Officer observed from computation of deduction u/s 36(1)(viii) of the Act and observed that assessee has claimed the deduction of Rs.3,95,75,000/-. On perusal of the record, he observed that the assessee has not correctly bifurcated its income into long term finance and other income. After considering the submissions of the assessee, the Assessing Officer reworked the deduction u/s 36(1)(viii), he observed that the deduction u/s 36(1)(viia) also to be amended. Accordingly, he observed that the deduction u/s 36(1)(viia)(c) of the Act shall be allowed in respect of any provision for bad and doubtful debts made by a Public Financial Institution or a State Financial Corporation or a State Industrial Investment Corporation, an amount not exceeding 5% of the total income to claim the deduction under this section in order to claim the deduction, the assessee has to make provision for bad and doubtful debts during the previous year. The assessee has claimed Rs.1,13,68,502/- (5% of taxable income after deduction u/s 36(1)(vii) i.e. 5% of Rs.22,73,70,041/-) towards deduction under this section. He

The Assessing Officer observed that as per the details filed by the assessee, provision for bad and doubtful debts made during the previous year is Rs.73,00,000/- but no such amount is evident from the profit and loss account. Rather, it is submitted by the assessee in the statement of provision for bad and doubtful debts filed during the course of assessment proceedings that provision for bad and doubtful debts made in the earlier year have been written back during the year of Rs.7,50,00,000/-. Therefore, instead of creating provisions, the assessee has reversed the excess provision created in earlier years. Hence, the basic condition to make provision for bad and doubtful debts to claim deduction u/s 36(1)(viia) is not complied with by the assessee.

Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) and filed detailed submission, for the sake of repetition, the same is reproduced below:

After considering the submissions of the assessee, the Ld. CIT(A) dismissed the ground raised by the assessee with the below observation:

Aggrieved with the above order, the assessee is in appeal before us.

At the time of hearing, the Ld. AR brought to our notice the relevant facts of this ground and brought to our notice page 106 of the PB which is statements of assessable income wherein the assessee has claimed deduction of Rs.1,13,68,502/- calculated @ 5% of Rs.22,73,70,041/-. He submitted that during assessment proceedings, the Assessing Officer observed that the assessee has Tourism Finance Corporation of India Ltd. vs. DCIT maintained bad and doubtful debts account and assessee has also written back during the year of Rs.7.5 Crore and also created the provision for bad debts. The bad and doubtful debts created during the current year for Rs.73 lakh. The Assessing Officer considered the written back doubtful debts of Rs.7.5 Crores and after adjustment of current years provision, he observed that the provisions of doubtful debts became negative to the extent of Rs.6.77 Crore. Accordingly, AO denied the deduction claimed by the assessee u/s 36(1)(viia) by observing that the provision of doubtful debts becomes negative. He submitted that the method adopted by the Assessing Officer is not proper, he submitted that the creation of provision for doubtful debts is continuous process and the reversal was made towards write back of recovery of loan relating to previous years. What is relevant is the creation of provision for the current assessment year which has to be considered for allowing the deduction u/s 36(1)(viia) of the Act. In this regard the Ld. AR relied on the decision of ITAT, Cochin Bench in the case of Kannur District Co-operative Bank Ltd. vs. ACIT, [2012] 20 taxman.com 667, the same is placed at 309 of PB

On the other hand, the Ld. DR objected to the submissions of the assessee and he heavily relied on the findings of the Lower Authorities. He also relied on the same case law relied on by the assessee in the case of Kannur District Co-operative Bench Ltd. (supra) and he pointed out that in the case of provision of created for a particular debts needs enhancement, only enhanced amount should be treated as new provision for the purpose of section 36(viia), in case, the assessee’s plea is accepted, he submitted that this issue may be remitted back to AO for proper verification.

Considered the rival submissions and material placed on record, we observed that assessee created provision for doubtful debts every year as per the guidelines of the RBI, it is continuous process of creation of provision and claim of deduction. The deduction u/s 36(1)(viia) is available only to the extent of creation of provision. In the present case, the assessee has created the provision for the current assessment year to the extent of Rs.73 lacs and at the same time, the Assessing Officer observed that assessee has also written back of Rs. 7.5 Crores during the current year which is reversal of provision for doubtful debts created in the earlier years. In the net effect, the provisions for doubtful debts becomes negative at the end of the current year to the extent of Rs.6.77 lakhs.

On careful reading of section 36(1)(viia), it is as under:.

From the above, it is relevant to note that the section 36(1)(viia), starts with “in respect of any provision for bad and doubtful debts made by” it denotes in order to claim the deduction under this section the assessee has to create provision for bad and doubtful debts then only the assessee can claim deduction to the extent of permitted under this Act. In the given case, the assessee falling under section 36(1)(viia) (c) of the Act and assessee is allowed to claim deduction at 5% of the total income after adjusting any deduction under this Clause and Chapter-VIA. In the given case, we observed that the assessee in fact, created the provision for the current assessment year to the extent of Rs.73 lakh and based on the provisions, the assessee is allowed to claim the deduction as per the calculation given by the Assessing Officer himself at page-11 of the order i.e., 5% of Rs.32,68,21,841/- i.e. Rs.1,63,41,092/- are to be allowed to the extent of creation of Tourism Finance Corporation of India Ltd. vs. DCIT provision by the assessee during the year. In this regard, the assessee has created the provision of Rs.73 Lakhs, therefore, the assessee is eligible to claim the deduction under this section to the extent of Rs.73 Lakhs.

In our considered view, the assessee has submitted before the authorities that assessee has created provision for Rs.73 Lakhs during the year, however, it was not properly explained before authorities. What is relevant is creation of provision for the current assessment year as per the guidelines of the RBI.

Ground No.6. Brief facts of the case are, during the assessment proceedings, the Assessing Officer observed that the assessee has earned dividend of Rs.1,56,58,624/-. When the assessee was asked to explain why the expenses relating to earning of the dividend income as per Rule 8D should not be disallowed. In response, the assessee submitted as under:

After considering the above submissions, the Assessing Officer rejected the same and observed that the reply of the assessee on the issue under consideration does not fulfill the requirements laid down u/s 14A of the Act r.w. Rule 8D of the IT Rules. The Assessing Officer by relying on the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT in Rule 8D and above said decision which are as under: • The provisions of section 14A and Rule 8D are constitutionally valid. • The basic object of Section 14A is to disallow the direct and indirect expenditure incurred in relation to income which does not form part of the total income. • The insertion of Section 14A was curative and declaratory of the intent of the Parliament. The basic principle of taxation is that only net income, namely, gross income minus expenditure that is taxable. Once the test of proximate cause, based on the relationship of the expenditure with tax exempt income is established, a disallowance would have to be effected under Section 14A. • What merits emphasis is that the jurisdiction of the Assessing Officer to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not part of the total income. The satisfaction of the Assessing Officer must be arrived at on an objective basis, It is only when the Assessing Officer is not satisfied with the claim of the assessee, that the legislature directs him to follow the method that may be prescribed. • In the event the Assessing Officer is not satisfied with the correctness of the claim made by the assessee, he must record reasons for his conclusion.

After observing above, the Assessing Officer observed that he is not satisfied with the method of computation for disallowance submitted by the assessee and also recorded his satisfaction for disallowance u/s 14A of the Act. He proceeded to disallow interest and administrative expenses by applying Rule 8D and determined the disallowance under Rule 8D(2)(ii) to the extent of Rs.4,51,13,315/- and under Rule 8D(2)(iii) at Rs.4,61,900/- and further disallowed the administrative expenses of Tourism Finance Corporation of India Ltd. vs. DCIT Rs.1,84,50.384/-, in total, he has disallowed Rs.6,77,25,599/- u/s 14A of the Act.

Aggrieved with the above, the assessee preferred an appeal before the Ld. CIT(A) and Ld. CIT(A) after considering the submissions of the assessee dismissed the grounds raised by the assessee by relying on the First Appellate Order for Asst. Year 2009-10 with the observation that the findings of the First Appellate order for Asst. Year 2009-10 are adopted mutatis mutandis in this case.

Aggrieved with the above order, the assessee is in appeal before us.

At the time of hearing, the Ld. AR brought to our notice findings of the Assessing Officer in his order and submitted that the assessee has earned Rs.1,56,58,624/- whereas the Assessing Officer by applying on Rule 8D disallowed the amount of Rs.6,72,25,599/- by rejecting the Explanation as well as detailed working submitted by the assessee. He submitted that the issue under consideration is squarely covered in assessee’s own case in Asst. Year 2010-11 to Asst. Year 2015-16. The assessee has filed a Tourism Finance Corporation of India Ltd. vs. DCIT separate supplementary paper book consisting of ITAT Order. He relied on the above decisions and prayed that the similar direction may be given in the current assessment year as well.

On the other hand, the Ld. DR fairly accepted that the issue under consideration is covered in favour of the assessee.

Considered the rival submissions and material placed on record, we observed that the Assessing Officer has disallowed interest expenditure as well as administrative expenses u/s 14A by prominently allocated the relevant expenditure based on the Rule 8D. Before us, the Ld. AR of the assessee submitted that the interest expenditure disallowed by the Assessing Officer as not called for, considering the fact that the assessee has sufficient interest free funds in the business to make the investments in various securities which are exempt from tax. It is brought to our notice that similar issue was considered by the Co-ordinate Bench in assessee’s own case from Asst. Year 2010-11 to Asst. Year 2015-16. The relevant decisions are filed in the supplementary paper book by the assessee. For Asst. Year 2009-10, in ITA

Respectfully following the above decision, we are inclined to allow the grounds raised by the assessee and direct the Assessing Officer to follow the method of disallowance adopted in above said decision of the Co-ordinate Bench. Accordingly, we direct the Assessing officer to follow the same by applying 0.5% of the Tourism Finance Corporation of India Ltd. vs. DCIT average value of investments made by the assessee. Accordingly, ground raised by the assessee allowed.

In the result, the appeal filed by the Assessee is partly allowed.