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Income Tax Appellate Tribunal, “A” BENCH: KOLKATA
This appeal preferred by the revenue is against the order of the Ld. CIT(A)-17, Kolkata dated 30.08.2016 for AY 2010-11.
Ground no. 1 of revenue’s appeal is against the action of Ld. CIT(A) in deleting the additions made on account of rent/lease paid to the tune of Rs.4,44,59,597/-.
Briefly stated the facts are that the AO observed from the accounts of the assessee that assessee has deducted Rs.4,44,59,597/- towards rent equalization charges in its accounts. During the course of assessment proceedings, assessee was asked to provide details and allowability of such claim of expenditure. In reply, assessee has submitted that since the assessee has started following Accounting Standard- AS-19 from this year, assessee has debited in its P&L Account accrual of rent as per said the said accounting standard. However since the actual rent payable for the year was more, it has claimed as deduction for computation of taxable income. The aforesaid contention of Assessee was not Specialty Restaurants Ltd.AY 2010-11 accepted by the AO because, according to him, in case of operating lease (OL) AS-19 requires recognition of rent payable as per straight line method or any other method which is better representative of rent accrual. Further, according to AO, once assessee has followed AS-19, no departure is allowed to arrive at taxable income. According to AO, this view is further substantiated by the Hon'ble Apex court's recent observation in the case of JK Industries Ltd. [(2007) 165 Taxman 323] wherein the Hon'ble Apex Court has observed that: “Main object sought to be achieved by accounting standards which are now made mandatory is to see that accounting income is adopted as taxable income and not merely as the basis from which taxable income is to be computed”. Therefore, according to AO it is clear that once assessee on its own adopts an accounting standard, there is little freedom left for the assessee to claim rental expense more than accrual amount debited in the P&L A/c. as per AS-19. In view of this, according to AO, though the assessee claimed that the overall tax effect over a period of time appears to be neutralized, the AO did not accept the said reason to deviate from accounting standard. Accordingly, the assessee's claim of deduction as rent equalization charges amounting to Rs.4,44,59,597/- was disallowed and added back to the total income of the assessee.
Aggrieved, assessee preferred an appeal before the Ld. CIT(A), who deleted the addition by observing as under:
“The assessee, during the previous year paid the lease rental amount of Rs.217651599/- and claimed it as a deduction u/s. 30 of the Act. The assessee had debited Rs. 173192002/- in the Books of Accounts towards the lease rent as per the Accounting Standard - 19 (AS-19) which provides "lease payments under an operating lease should be recognized as an expense if the statement of profit and loss on a straight-line basis over the lease term, unless another systematic basis is more representative of the time pattern of the user's benefit". Accordingly, the assessee debited in the accounts, towards rent equalization charge, following straight-line method an amount of Rs. 44459597/-. The AO disallowed the claim 'of the assessee stating that "once assessee on its own adopts and accounting standard, there is little freedom left for the assessee to claim rental expense more than accrual amount debited in the P&L alc as per AS-19. In view of this, though assessee claimed that the overall tax effect over a period of time appears to be neutralized, but that cannot be the reason for assessee to deviate from accounting standard". I have gone through the submissions of the assessee and the findings of the AO carefully. In the earlier years rental has been claimed according to the provisions of the section 30 of the IT Act which envisages that rent paid for premises occupied by the assessee for business purposes is an allowable expense. In earlier years the total rent debited and paid by the assessee has been allowed by the AO. In the impugned assessment year the assessee has made a variation on account of AS-19 and the rent debited in the Books of Accounts is Rs.173192002/-. However, the actual rent paid during the year was Rs. 217651599/- which has been claimed, under the provisions of section 30, in the computation filed with the return
Specialty Restaurants Ltd.AY 2010-11 of income. On account of lease equalization charges it is seen in the table below that in the impugned year the amount paid towards lease rental is more than what is debited in the books of accounts. Amount (Rs.) A.Y.201O-11 Actual Rent Paid 217651599.00 Rent booked in Profit & Loss A/c as per AS-19 173192002.00 Difference: 44459597.00
However, in the subsequent years the actual rent paid is less than the amount debited in the profit and loss account. Therefore the amounts have been reversed by the "'assessee on account of lease equalization charges. For assessment year 2011-12 and 2012-13 also the assessee has claimed only the rent paid under the provisions of section 30 and the difference amount has been offered to tax as can be seen in the tables below: A.Y. 2011-12 Actual Rent Paid 259854818.00 Rent booked in Profit & Loss A/c as per AS-19 287026729.00 Difference: 27171911.00
Here it is seen that the assessee has disallowed Rs. 27171911.00 while filing the Income tax return since actual rent paid was less than rent debited under AS-19 according to the principles of consistency. Therefore it is seen that the assessee has applied the principle of AS-19 consistently over the three assessment years discussed above. On the issue of lease rentals the assessee has placed reliance on the decision of the Hon'ble ITAT Hyderabad in the case of Deputy Commissioner Of Income Tax vs Nagarjuna Investment Trust Ltd [65 ITD I7],wherein it was held as under: "We hold that so far as income by way of lease rental is concerned, the only income which accrues in the relevant year is the monthly installment specified in the respective lease agreements and in no circumstance, the income in excess of the monthly lease installment can be Said to have accrued in law. The excess income beyond the monthly lease installment accounted for as income on the basis of SOD method/Index method does not come within the ambit and range of taxable income within the meaning of charging provisions of the Act and, therefore, such excess income, termed as differential income in relation to lease agreements cannot be brought to tax. Similarly in the case of Reliance Industrials the Hon'ble Mumbai Tribunal vide their order dated 04.06.2001 has discussed a similar issue. The basic fact was that the assessee-company recorded annual lease rental by debiting Rs.70.83 lakhs in its books of account. However, when return was filed, assessee wrote back the amount of Rs.70,83,671 and claimed deduction of Rs. 2,11,13,040. The AO disallowed this difference of Rs.1,40,29,369 on the ground that the assessee was not entitled to claim the larger amount if a lower amount has been debited in the books because provisions of Section 145(1) make it clear that once the assessee regularly followed a particular method of accounting, it is binding on IT authorities and on the assessee. The facts of the impugned case before me are quite similar to the facts of Reliance Industrials discussed above. The disallowance made by the AO is on similar ground.
Specialty Restaurants Ltd.AY 2010-11
The Hon'ble Tribunal in this case has gone by the principle laid by the Apex Court in the case of Kedarnath Jute Mfg. Co. Ltd where the importance of entries in the Books of Accounts has been discussed. The Apex Court has observed such taxability and deductibility are not however defeated by making of entry or not making entry in the books of account. Thus, if the assessee omits to provide an income in the books of account and is following mercantile system of accounting, it is open to the AO to bring to tax such income despite the fact that no entry is made in the books of account. Similarly, this principle is applicable to the amount deductible irrespective of whether the entry is made in the books of account or not. Therefore, deductibility of an amount in the mercantile system of accounting is not a prisoner of entries being made or not being made. So the assessment of income and allow ability of expenditure are dependent on the method of accounting followed by the assessee and not dependent on entries made in the books of account. Accordingly, following the principle laid down by the Apex Court, the hon'ble Mumbai has allowed the claim of the assessee. Finally, the assessee has also placed reliance on the decision of the Apex Court in the case of Taparia Tools Ltd .., 372 ITR 605(SC) wherein it has been held as under: "(iv) That the assessee did not seek to spread this expenditure over a period of five years as in its return, it had claimed the entire interest paid upfront as deductible expenditure in the same year. When this course of action was permissible in law to the assessee as it was in consonance with the provisions of the Act which permit the assessee to claim the expenditure in the year in which it was incurred, the fact that a different treatment was given in the books of account could not be a factor which would bar the assessee from claiming the entire expenditure as a deduction. Once a return in that manner was filed, the AO was bound to carry out the assessment applying the provisions of the Act and not to go beyond the return. There is no estoppels against the statute and the Act enables and entitles the assessee to claim the entire expenditure in the manner it is claimed." The gist of the above decision is that if an expenditure has been claimed as per law and is allowable in the year in which it has been incurred then the fact that a different treatment has been given in the books of accounts would not be a bar on the assessee from claiming the entire expenditure as a deduction. Herein applying the said ratio it is observed that the lease rental of Rs. 217651599/- was paid during the previous year. The said lease rental is allowable on paid basis as per the provisions of section 30. The same has been allowed in the earlier years on payment basis. Therefore, in the Books of Accounts the Lease rental debited of Rs. 173192002/- on account of AS-19 would not bar the assessee from claiming the entire expenditure paid during the previous year as a deduction. Accordingly, the addition made by the AO of Rs. 4,44,59,597/- on this ground is hereby deleted.” Aggrieved by the aforesaid action of Ld CIT(A), the Revenue is in appeal before us.
We have heard rival submissions and gone through facts and circumstances of the case. We note that the assessee has incurred actual rent to the tune of Rs.21.76 cr. and as per AS 19 has shown Rs.17.31 cr. in its P&L Account which is perused from page 15 of the paper book and the Ld. CIT(A) has taken note that the assessee has consistently been Specialty Restaurants Ltd.AY 2010-11 following the accounting standard AS 19 for AYs 2010-11, 2011-12 and 2012-14. This finding of fact has crystallized, since the department has not challenged the finding of fact as recorded by the Ld. CIT(A). We note that in earlier years the total rent debited and paid by the assessee has been allowed by the AO. In the impugned assessment year the assessee has made a variation on account of AS-19 and the rent debited in the Books of Accounts is Rs.17,31,92,002/-. However, the actual rent paid during the year was Rs. 21,76,51,599/- which has been claimed, under the provisions of section 30, in the computation filed with the return of income. It has to be kept in mind that if an expenditure has been claimed as per law and is allowable in the year in which it has been incurred, then the fact that a different treatment has been given in the books of accounts would not be a bar for the assessee from claiming the entire expenditure as a deduction. We find that the lease rental of Rs. 217651599/- was paid during the previous year. The said lease rental is allowable on paid basis as per the provisions of section 30 of the Act. We note that the same has been allowed in the earlier years on payment basis. Therefore, in the Books of Accounts the Lease rental debited of Rs. 173192002/- on account of AS-19 would not bar the assessee from claiming the entire expenditure paid during the previous year as a deduction. Accordingly, we find no infirmity in the action of the Ld. CIT(A) in deleting the addition made by the AO of Rs. 4,44,59,597/-. Therefore, we confirm the action of Ld CIT(A). This ground of appeal of revenue is dismissed.
6. The next ground of revenue’s appeal is against the action of Ld. CIT(A) in deleting the disallowance made by AO u/s. 14A of the Act. Briefly stated facts as observed by the AO are as under:
“3. On perusal of the audited balance sheet it reveals that during the year under consideration, the assessee had tax exempt dividend income of Rs.6,63,717/- out of its investment in shares/units of mutual fund. But the assessee has offered nothing for disallowance under sec. 14A, in its return of income. The assessee was asked to give computation of 14A disallowance as per Rule 8D. The A/R made a written submission in this connection, but could not provide any satisfactory explanation for not deducting amount of expenses in relation to earning exempt income as per provisions of Rule 8D. The contention of the assessee is not acceptable because assessee has substantial investment from which assessee has earned substantial exempted income. Assessee has not maintained separate accounts which prove that assessee has incurred expense in relation to earning exempt income only to the extent of claim of the assessee. Therefore, the disallowances under section 14A is called for and computed as under: i) As per Rule 8D(2)(i): Nil Specialty Restaurants Ltd.AY 2010-11 ii) As per Rule 8D(2)(ii): disallowance under rule 8D(2)(ii) = interest (A) x (B)/(C) where, "A" stands for "amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the year; "B" stands for "the average of value of investment, income from which does not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; and "C" stands for "the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year". On perusal of audited balance sheet submitted by assessee it is seen that the average value of investments in shares and units of mutual funds is Rs.2,77,34,496/- (B). Average value of assets is (Rs.81,61,34,1501- + Rs.95,82,97,165/-) / 2 = Rs.88,72,15,658/- (C) and expenditure by way of interest is Rs.14266169/- (A) Therefore, disallowance under rule 8D(2)(ii) = interest ( A) x ( B ) 1 ( C) = Rs. 14266169/- x Rs.27734496/- Rs.887215658/- = Rs.4,45,963/- iii) The average value of investment which as per Rule 8D(2)(iii) is worked out as : Opening investment + Closing investment = Rs.l5,000/- + Rs.5,54,53,991/- 2 2 = Rs. 2,77,34,496/- Therefore, disallowance u/s.8D(2)(iii) = 0.5% of the average of value of investment = 0.5% of Rs.2,77,34,496/- = Rs.l,38,672/- 3.1 Total disallowance as per Rule 8D(2)(i) 8D(ii) & 8D(2)(iii) comes to Rs.5,84,635/- {Rs.4,45,963/- + Rs.l,38,672/- - Rs. 1,47,702/- (Already disallowed) } = Rs. 4,36,933/- and the same is added back in computing the income.”
Aggrieved by the said order, assessee preferred an appeal before the Ld. CIT(A), who deleted the addition by observing as under:
“The assessee has suo moto made a disallowance u/s. l4A of Rs 1,47,702/-. The AO observed that the assessee had made substantial investments during the previous year from which it had earned a significant amount, of exempted income. As the assesses had not maintained separate accounts with regard to expenses incurred for earning exempted and taxable income the AO was not satisfied with the disallowance offered by the assessee of Rs.147702/- and accordingly he invoked Rule 8D. The total disallowance as per Rule 8D came to Rs. 584635/- and after excluding the disallowance offered by the assessee of Rs.147702/- the AO made the addition of Rs.436933/-. I have perused the submissions of the assessee. On perusal of the accounts of the assessee it is seen that the investment in mutual funds increased from a meager sum of Rs.15000/- to Rs. 5,54,78,991/-. It is therefore seen that almost the entire investment in mutual funds has been made by the assessee during the relevant previous year. On perusal of the balance sheet it is observe at secure loans have increased from Rs. 18.21 Cr to Rs.19.47Cr. The assessee has argued that own funds have been utilized for the purposes of making investments. The assessee has accordingly considered proportionate interest expenditure to the tune of Rs. 290114/- for computing the disallowance under Rule 8D(2)(ii). The AO
Specialty Restaurants Ltd.AY 2010-11 however has taken the entire interest expenditure of Rs. 1,39,76,056/- . The assessee has also substantiated the purpose of the loans: (a) Term Loan (b) Foreign Currency Non Resident Loan (c) Cash Credit (d) Car Loan On consideration of all the facts above it is seen that the claim of the assessee that the investment has be made from the own funds seems reasonable. The reserves and surplus of the assessee increased from Rs. 55.23 crs. to Rs. 64.88Crs. The share application money received during the year was Rs. 4Crs. Proportionate disallowance out of term loan interest of Rs.290114/- has suo moto been considered by the assessee. Therefore, no further disallowance out of interest expenses, under Rule 8D(2)(ii), is warranted in this case as the investments during the previous year were acquired out of own funds. The addition made of Rs. 4,36,933/- made by the AO is hereby deleted.” Aggrieved by the aforesaid order of Ld CIT(A), the revenue is in appeal before us.
We have heard rival submissions and gone through the facts and circumstances of the case. We note that the Ld. CIT(A) has taken note that the assessee has made investments to earn exempt income from funds which included its own funds in sufficient quantity. In such a scenario, then a presumption can be drawn that its own funds were utilized for earning exempt income. This factual finding of the Ld. CIT(A) we concur after having perused the Balance Sheet and this finding of fact recorded by the Ld. CIT(A) could not be dislodged by the department before us. In such a scenario, relying on the ratio laid down by the Hon’ble Bombay High Court in CIT-vs.- Reliance Utilities & Power Ltd. reported in 313 ITR 340 (Bom.), we confirm the order of Ld. CIT(A). Therefore, this ground of appeal of revenue is dismissed.
In the result, appeal of revenue is dismissed.
Order is pronounced in the open court on 10/10/2018