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Income Tax Appellate Tribunal, “C” BENCH: KOLKATA
Per Shri A.T.Varkey, JM
This appeal preferred by the revenue against the order of Ld. CIT(A)-1, Kolkata dated 13.06.2012 for AYs 2009-10.
The first ground of appeal in AY 2009-10 is against the action of the Ld. CIT(A) in deleting the disallowance of Rs.58,27,209/- made u/s. 14A of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) read with Rule 8D of the Income-tax Rules, 1962 (hereinafter referred to as the “Rules”) is against the action of Ld. CIT (A) in not taking into consideration the decision of the Special bench of this Tribunal in the case of Chem Investment Ltd. Vs. ITO reported in 121 ITD 318.
3. Briefly stated the facts are that during the course of assessment proceedings, the AO noted that the assessee had shown investment in the Balance Sheet at the beginning and at Infinity Infotech Parks Ltd., AY 2009-10 the close of the year at Rs.954 lacs and Rs.959.56 lacs respectively. The funds were invested in equities of subsidiary and associate companies. According to the AO, any expenditure relatable to the investments irrespective of whether exempt income was earned or not, was liable for disallowance u/s. 14A of the Act read with Rule 8D of the Rules. For that proposition, he relied on the decision of the Special bench of the Tribunal in the case of Chem Investment Ltd. (supra). Thereafter, the AO worked out the disallowance under Rule 8D(2)(ii) and 8D(2)(iii) of the Rules at Rs.53,78,818/- and Rs.4,78,391/- respectively thus, aggregating to Rs.58,57,209/-. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A), who was pleased to delete the addition. Against the impugned action of the Ld. CIT(A), the revenue is before us.
We have heard both the sides and perused the records. We note that the AO has made disallowance u/s. 14A of the Act with the aid of Rule 8D(2)(ii) and 8D(2)(iii) of the Rules. The Ld. CIT(A) has taken note that AO has not brought on record any material to show that the borrowed funds were utilized by the assessee for making investments in subsidiaries and associate companies. The Ld. CIT(A) has taken note that the assessee’s own fund in the form of capital and reserve as on 31.03.2009 were to the tune of Rs.2298.04 lacs, whereas the investment in shares was only at Rs.893 lacs as on 31.03.2009. The Ld. CIT(A) has taken note that in the past years there was no disallowance in this respect. We take note that the Ld. CIT(A) rightly noted that the assessee is possessed of mixed funds which include its own funds in sufficient quantity and, therefore, presumption is that its own funds were utilized in the investments can be drawn by relying on the decision of the Hon’ble Bombay High Court in the case of Reliance Utilities & Powers Ltd. 313 ITR 340 (Bom.). Therefore, the Ld. CIT(A) has rightly deleted the proportionate interest disallowance of Rs.53,78,818/-. We note that this specific action of the Ld. CIT(A) has not been appealed against by the Revenue in the appeal before us. Therefore, the action of the Ld. CIT(A) crystallizes on this issue. Coming to the main grievance of the revenue that the Ld. CIT(A) failed to consider the decision of the Special bench of the Tribunal in the case of Chem Investments Ltd., supra before deleting the disallowance u/s. 14A of the Act, we note that the aforesaid decision of the Tribunal has since been overruled by the Hon’ble Delhi
Infinity Infotech Parks Ltd., AY 2009-10 High Court in its judgment reported in 317 ITR 33 (Del) wherein the Hon’ble High Court held that if the assessee does not receive dividend income or exempt income during the relevant previous year, the disallowance u/s. 14A of the Act read with Rule 8D of the Rules is not warranted. For the aforesaid proposition, we rely on the decision in the case of CIT Vs. Holcim India Pvt. Ltd. 272 CTR 282 (Del), CIT Vs. Cartech Energy Pvt. Ltd. 223 Taxman 130 (Guj), CIT Vs. Shivam Motors 230 Taxman 63 (All), Redington India ltd. Vs. Addl. CIT 392 ITR 663 (Mad). We note that in the appeal preferred by the revenue, the assessee did not earn any exempt income during the relevant AY 2009-10, therefore, Ld. CIT(A) was justified in deleting the disallowance as made by the AO in the assessment order by invoking sec. 14A of the Act read with Rule 8D of the Rules. Hence, ground no. 1 raised by the revenue stands dismissed.
Coming to ground no. 2 raised by the revenue for AY 2009-10 relates to the disallowance of interest of Rs.81,15,597/- made by the AO with reference to the interest free loans granted to subsidiaries and group associate companies.
Brief facts of the case are that in the P&L Account, the assessee had debited interest of Rs. 1095.72 lacs on the borrowed capital. The AO noted that the assessee had advanced Rs.1265.30 lacs against property/project/space etc. and corresponding amount for the preceding year was Rs.1621.89 lacs. On being asked as to why proportionate interest should not either be disallowed or capitalized, the assessee submitted that these advances were granted to its subsidiaries for project execution and also for executing projects on the principles of business expediency. However, according to AO, advance was an expense which was capital in nature and, therefore, the interest paid on advance given should be capitalized. Accordingly, the AO ascertained pro rata interest of Rs.81,15,597/- in relation to average amount of advance outstanding during the year and disallowed the same as not allowable as business expenditure. On appeal, the Ld. CIT(A) has deleted the disallowance by observing as under: “12. I have carefully considered the reasons m the impugned order supporting the disallowances of interest and the A/R's submissions objecting thereto. From the impugned order it appeared that while justifying the disallowance of interest the AO opined that advances granted by the assessee was an expense which was capital in nature and therefore
Infinity Infotech Parks Ltd., AY 2009-10 interest paid should have been capitalized. With these observations the AO estimated interest disallowable on proportionate basis. The reasons adopted by the AO for making the disallowance out of interest paid on borrowed funds; were not supported by the provisions of Sec 36(1)(iii) nor by the facts of the case. In the first instance no material was brought on record by the AO which in any manner showed that the alleged interest free advances were granted by the assessee out of its borrowed funds. From the facts discussed by the AO it appeared that during the year under consideration the aggregate of interest free Rs.16.22 crores to Rs.12.65 crores; meaning thereby there was net reduction in the interest free advances during the year under consideration. It appeared that in the past assessments; interest paid was not disallowed on the ground that interest free advances were made out of borrowed funds. The disallowance out of interest paid in the year under consideration therefore appeared unjustified when no fresh advances were granted and no disallowance was made in the earlier years’ assessments when interest free advances were granted by the assessee.
13.. From the A/R's submissions I further note that the assessee granted these advances in connection with carrying on its business of development of I T infrastructure and Real Estate projects. I find merit in the A/R's avertments that in the State of West Bengal there are statutory restrictions on land use and land holding. For this reason the assessee had to promote special purpose companies for undertaking real estate and IT infrastructure projects. For that purpose there was necessity of granting interest free advances to group /associates companies. The A/R for the assessee illustrated the need and necessity of undertaking different real estate and infrastructure projects through companies jointly promoted by the assessee in which assessee had deep economic interest. From the submissions made I find force in the A/R's explanations that interest free advances were granted for furthering assessee's economic, commercial and business interest and therefore no part of the interest was disallowable e.g. the assessee granted Rs. 100 lacs as interest free advance to DPSC Ltd under a joint venture development agreement for execution of Real Estate development project at Salt1ake. Interest free advance was similarly granted to assessee's subsidiary M/s. Kolkata Knowledge City Pvt. Ltd. which was undertaking development of a real estate project at Diamond Harbour, West Bengal. The assessee similarly advanced Rs. 100 lacs to WEBEL, a Govt. of West Bengal Undertaking for undertaking development of IT project in Salt Lake, Kolkata. Rs. 200 lacs were similarly advanced to Proximity Real Estate Pvt. Ltd for participating in the land auction at Kalyani for which the bid was presented through the said company and with whom the assessee had written understanding to participate in the development upon auction bid being successful. With reference to these specific instances the AIR was able to establish; in each case that interest free advances were granted pursuant to agreements or arrangements with the concerned parties for promoting or undertaking development of Real Estate or I T infrastructure projects and the advances were not loans simplicitor. After considering the AIR's explanations; I am satisfied that the assessee had granted interest free advances in the course of or for the purposes of its business of real estate development. In each case the assessee had deep economic, financial and commercial interest in the functioning and commercial operations of the payee companies. The amounts advanced did not represent assessee's capital outlay or capital expense of the assessee as alleged by the AO. The advances were granted to further assessee's economic and commercial interests. On these factual aspects I am convinced that the asseseee had advanced the interest free amounts in the course and for the purposes of promoting assessee's business of developing real estate and IT infrastructure projects through the agesis of the SPVs. In my considered opinion the assessee satisfied conditions prescribed in Sec 36(1)(iii) of the Act for claiming deduction for interest paid on borrowed funds. Since the advances were paid; for enabling the assessee to carry on its existing business and borrowed funds were not utilized for substantial expansion of assessee's business, there was no necessity for capitalization of interest. On the facts
Infinity Infotech Parks Ltd., AY 2009-10 available in the assessment records I hold that the assessee's claim for interest paid on borrowed capital was supported by the decision of the apex Court in the case of S. A. Builders Ltd. (288 ITR 1) and the decision of the Delhi High Court in the case of CIT Vs. Dalmia Cement Bharat Ltd. (330 ITR 595). I, therefore, do not find merit in the disallowance made out of interest paid and accordingly the AO is directed to delete interest disallowance of Rs.81,15,597/-. Ground nos. 5 and 6 are accordingly allowed.”
Aggrieved by the aforesaid action of Ld. CIT(A) the revenue in appeal before us.
We have heard rival submissions and perused the details of advances granted by the assessee and other material available on record. We note that the assessee is primarily engaged in the business of developing civil infrastructure in different formats. The assessee is also engaged in developing, operating and maintaining Information Technology Parks (IT Parks) and other infrastructure projects. In view of the restrictions placed by the State laws with regard to holding of land and land use; and since the assessee undertakes development of real estate infrastructure projects through various SPVs which are established by the assessee either as subsidiary or with its JV partners for furtherance of its business objectives, detailed statement of project wise advance as filed before the lower authorities were furnished before us from which it is apparent that the advances were granted in furtherance of assessee’s principal business of developing real estate projects. The Hon’ble Supreme Court in the case of S. A. Builders Vs CIT 288 ITR 1 (SC) had an occasion to consider the issue of allowability of interest on borrowed capital where interest free loans or advances were granted to subsidiary or associate companies while allowing the claim of the assessee the Hon’ble Apex Court had recorded the following findings having bearing in the present case.
“19. We have considered the submission of the respective parties. The question involved in this case is only about the allowability of the interest on borrowed funds and hence we are dealing only with that question. In our opinion, the approach of the High Court as well as the authorities below on the aforesaid question was not correct.
In this connection we may refer to section 36(1)(iii) of the Income-tax Act, 1961 (hereinafter referred to as the " Act" ) which states that " the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession" has to be allowed as a deduction in computing the income under section 28 of the Act.
In Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 (SC) ; AIR 1979 SC 1291, this court held that the expression " for the purpose of business" occurring under the provision is wider
Infinity Infotech Parks Ltd., AY 2009-10 in scope than the expression " for the purpose of earning income, profits or gains", and this has been the consistent view of this court.
In our opinion, the High Court in the impugned judgment, as well as the Tribunal and the Income-tax authorities have approached the matter from an erroneous angle. In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) as interest free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency.
In our opinion, the decisions relating to section 37 of the Act will also be applicable to section 36(1)(iii) because in section 37 also the expression used is " for the purpose of business" . It has been consistently held in the decisions relating to section 37 that the expression " for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby.
Thus in Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155, it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly to facilitate the carrying on the business. The above test in Atherton' s case [1925] 10 TC 155 (HL) has been approved by this court in several decisions, e.g., Eastern Investments Ltd. v. CIT [1951] 20 ITR 1, CIT v. Chandulal Keshavlal and Co. [1960] 38 ITR 601, etc.
In our opinion, the High Court as well as the Tribunal and other Income-tax authorities should have approached the question of allowability of interest on the borrowed funds from the above angle. In other words, the High Court and other authorities should have enquired as to whether the interest free loan was given to the sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed.
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.
No doubt, as held in Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 (SC), if the borrowed amount was donated for some sentimental or personal reasons and not on the ground of commercial expediency, the interest thereon could not have been allowed under section 36(1)(iii) of the Act. In Madhav Prasad' s case [1979] 118 ITR 200 (SC), the borrowed amount was donated to a college with a view to commemorate the memory of the assessee' s deceased husband after whom the college was to be named. It was held by this court that the interest on the borrowed fund in such a case could not be allowed, as it could not be said that it was for commercial expediency.
Thus, the ratio of Madhav Prasad Jatia' s case [1979] 118 ITR 200 (SC) is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under section 36(1)(iii) of the Act.
In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister concern was by way of commercial expediency.
It has been repeatedly held by this court that the expression " for the purpose of business" is wider in scope than the expression " for the purpose of earning profits" vide CIT v.
Infinity Infotech Parks Ltd., AY 2009-10 Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC), CIT v. Birla Cotton Spinning and Weaving Mills Ltd. [1971] 82 ITR 166 (SC), etc.
The High Court and the other authorities should have examined the purpose for which the assessee advanced the money to its sister concern, and what the sister concern did with this money, in order to decide whether it was for commercial expediency, but that has not been done.
It is true that the borrowed amount in question was not utilized by the assessee in its own business, but had been advanced as interest free loan to its sister concern. However, in our opinion, that fact is not really relevant. What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency.
Learned counsel for the Revenue relied on a Bombay High Court deci sion in Phaltan Sugar Works Ltd. v. CWT [1994] 208 ITR 989 in which it was held that deduction under section 36(1)(iii) can only be allowed on the interest if the assessee borrows capital for its own business. Hence, it was held that interest on the borrowed amount could not be allowed if such amount had been advanced to a subsidiary company of the assessee. With respect, we are of the opinion that the view taken by the Bombay High Court was not correct. The correct view in our opinion was whether the amount advanced to the subsidiary or associated company or any other party was advanced as a measure of commercial expediency. We are of the opinion that the view taken by the Tribunal in Phaltan Sugar Works Ltd. [1994] 208 ITR 989 (Bom) that the interest was deductible as the amount was advanced to the subsidiary company as a measure of commercial expediency is the correct view, and the view taken by the Bombay High Court which set aside the aforesaid decision is not correct.
Similarly, the view taken by the Bombay High Court in Phaltan Sugar Works Ltd. v. CIT [1995] 215 ITR 582 also does not appear to be correct.
We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. The Income-tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits.
We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used
Infinity Infotech Parks Ltd., AY 2009-10 by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. ”
Further we note that the aforesaid ratio of the Hon’ble Supreme Court in S. A. Builders (supra) were reiterated by the Hon’ble Supreme Court in the later judgment in the case of CIT Vs. Munjal Corporation 298 ITR 298 (SC) and Hero Cycles Ltd. Vs. CIT 63 taxman.com 308. Applying the ratio laid in the aforesaid judgments, we note that there was business connection between assessee and the companies to whom advances were made for undertaking projects in the field of real estate and civil infrastructure. Since the assessee was an active participant in the projects undertaken by the SPVs and JVs and had deep economic interest in these entities, therefore, we hold that the advances granted by the assessee in the course of its business was due to commercial expediency, therefore, the funds advanced by assessee to SPVs and JVs were in fact used for the business purposes of the assessee and, therefore, the condition prescribed for allowing deduction u/s. 36(1)(iii) were fulfilled by the assessee. We, therefore, are not inclined to interfere with the order of the Ld. CIT(A) against deleting the interest paid, so we uphold the same and, therefore, ground no. 2 of the revenue’s appeal is dismissed.
9. Ground no. 3 of the revenue is against the order of the Ld. CIT(A) in deleting the disallowance of expenses on account of legal and professional fees relating to long term lease for Rs.6,01,800/-. The facts leading to the disallowance are that the assessee had incurred legal and professional expenses to the tune of Rs.50,13,152/-. During the assessment proceedings, the assessee had filed breakup of the legal and professional fees paid along with the copies of the bills from which the AO noted that the legal fees to the tune of Rs.12,05,300/- was incurred in connection with long term capital leases and, therefore, he disallowed the same and added back to the total income. The AO taking note that the assessee had suo moto disallowed a sum of Rs.6,03,500/- in the computation of total income, therefore, added back the balance sum of Rs.6,01,800/- (Rs.12,05,300 – Rs.6,03,500) to the total income of the assessee. On appeal, the Ld. CIT(A) deleted the addition by holding as under: “19. I have examined the submissions of the A/R. Before me the assessee furnished complete break up of the legal and professional fees of Rs.50,13,152/-; as filed before the AO. From the Infinity Infotech Parks Ltd., AY 2009-10
details furnished I have not been able to comprehend as to on what basis the AO came to conclusion that the assessee paid legal fees of Rs.12,05,300/- in connection with execution of long term leases. No cogent basis or working of the said figure is specified in the assessment order. On the contrary the A/R pointed out six specific instances of long terms leases which were executed by the assessee during the relevant year. Corresponding legal expenses paid in connection with preparation and execution of these six lease deeds were identified by the A/R and copies of relevant bills were also furnished. From the material on record; it therefore appeared that the legal expenditure actually incurred on preparation and execution of six long terms leases amounted to Rs.6,03,500/- which was suo moto disallowed by the assessee in the return filed. It therefore appeared that the additional disallowance of Rs.6,01,800/- was unwarranted and the same is ordered to be deleted.”
Aggrieved by the aforesaid order of the Ld. CIT (A) the revenue has preferred this appeal before us.
10. We have heard rival submissions and gone through the facts and circumstances of the case. We note that apart from relying on the AO’s observation in the assessment order, the Ld. DR was not able to bring any material on record to controvert the finding of the Ld. CIT(A). The Ld. DR was unable to pin point as to which of the bills were of Rs.6,01,800/- which the AO considered to be in connection with execution of long term leases. On the other hand, the Ld. AR pointed out the specific instance of long term leases executed during the year and the corresponding legal and professional expenses incurred which aggregated to Rs.6,03,500/- (the same which was already disallowed suo moto by the assessee in the computation of income). Having regard to these facts and considering the inability of the department to point out the specific items of legal expenses totaling Rs. 6,01,800/-, we are inclined to uphold the order of the Ld. CIT(A) and dismiss this ground of appeal of the revenue.
11. Ground no. 4 of the revenue is against the action of the Ld. CIT(A) in deleting disallowance of prior period expenditure of Rs.1,07,70,503/-. Briefly stated the facts are that the assessee had debited Public Issue Expenses of Rs.1,20,55,794/- in its P&L Account. From the details of the expenses, the AO found that the expenditure of Rs.1,07,70,503/- was incurred in the earlier financial year and was shown as an asset in the Balance Sheet. The AO required the assessee to explain as to why this prior period expenditure should not be disallowed. The assessee explained that the expenses of Rs.1,07,70,503/- were incurred in Infinity Infotech Parks Ltd., AY 2009-10 earlier year for proposed Public Issue of its shares and accordingly, expenses incurred were accumulated in accounts for purpose of amortization in later years. In the relevant year, however, the company had decided to abandon the plan for public issue and not proceeded further. Accordingly, the expenses to the tune of Rs.1,07,70,503/- brought forward from the earlier years together with expenses of Rs.12,85,291/- for the year, was written off in the P&L Account. The AO although allowed deduction for current year’s expenses of Rs.12,85,291/- he disallowed the claim of Rs.1,07,70,503/- treating it as prior period expenditure. On appeal, the Ld. CIT(A) deleted the disallowance made by the AO. Aggrieved by the action of the Ld. CIT(A), revenue is before us.
We have heard both the sides and perused the details placed on record. We note that the AO did not dispute the allowability of the expenditure incurred by the assessee on the proposed public issue which was later abandoned in view of the decision of the Hon’ble Bombay High Court in the case of CIT Vs. Nimbus Communication Ltd. in of 2010. However, according to AO, since the expenditure the assessee had incurred was on the proposed public issue was prior to 31.03.2008 it was not allowable in assessing the total income for AY 2009-10 because the expenditure did not pertain to the relevant previous year. We have noted that in the preceding assessment year when the expenditure was incurred it did not constitute revenue expenditure because it was intended to expand the assessee’s capital base and, therefore, is capital in nature. However, once the assessee took the decision to abandon the public issue, the expenditure incurred till then became sunk cost and irrecoverable. The decision to abandon the plan for public issue of shares was taken during the relevant year which fact has not been disputed by the AO. In the circumstances, the loss incurred by the assessee should crystallize during the FY 2008-09. Accordingly, the entire expenditure incurred till then became permissible deduction in computing income of the year when the loss stood crystallized. The assessee’s claim in this regard is supported by the decision of the jurisdictional Hon’ble Calcutta High Court in the case of CIT Vs. Binani Cement Ltd. 60 taxmann.com 384, wherein it has been held as under: 7. We accept Mr. Bajoria's submission regarding the expenditure made for construction/acquisition of new facility subsequently abandoned at the work-in-progress stage was allowable as incurred wholly or exclusively for the purpose of assessee's
Infinity Infotech Parks Ltd., AY 2009-10 business as covered by the decision in Graphite India Ltd. (supra). The issue whether such expenditure could be allowed in the relevant assessment year is however yet to be resolved.
8. The CIT(A) in his order had found as follows:
"The company claimed as allowable the expenditure on this abandoned project. While it was found to be unviable, the expenditure on it was for the purpose of business. It was not claimed or allowed earlier as business expenditure because it was of capital nature entitled to depreciation after completion and on commencement of its use for business. But since that stage is not reached-no asset having come into existence-the capital-work-in-progress had to be written off as such."
There was no challenge to such finding on facts before the learned Tribunal or even before us.
The decision in Delhi Tourism & TDC Ltd. (supra) is distinguishable on facts in as much as in that case the Delhi High Court had held that the electricity charges for power consumed was a known expenditure and the assessee, on the basis of average, could make a provision for that expenditure in every year of assessment even if no bill was received in a particular year of assessment.
Following the judgment in the case of A. Gajapathi Naidu (supra) the question to be asked is when did the expenditure claimed by way of deduction arise? There would have been no occasion to claim the deduction if the work-in-progress had completed its course. Because the project was abandoned work-in-progress did not proceed any further. The decision to abandon the project was the cause for claiming the deduction. The decision was taken in the relevant year. It can therefore be safely concluded that the expenditure arose in the relevant year.
12. Reference in this regard may be made to the decision in the case of CIT v. Indian Mica Supply Co. (P.) Ltd. [1970] 77 ITR 20 (SC) wherein the Supreme Court in considering a claim for deduction on arrear lease rents, ascertained subsequently consequent to a compromise arrived in the suit and paid in the relevant assessment year held, inter alia, as under:
The Tribunal, in the present case, had clearly found that it was only as a result of the compromise that the respondent became entitled to remain in possession of the demised land. Its liability also became ascertained only at that point of time. It cannot be disputed that the respondent incurring the expenditure had acted in the interest of and for the purpose of its business. The expenditure was not laid out for any purpose other than that of carrying on the business. The deduction was properly admissible under s. 10(2)(xv) of the Act and the matter being self-evident the High Court was fully justified in declining to accede to the prayer made under s. 66(2) of the IT Act, 1922.
Sec. 10(2)(xv) of the old Act corresponds to s. 37(1) of the present Act. Our above conclusion is fortified by the view expressed by the Supreme Court in the said decision. For the aforesaid reason the question is answered in the affirmative in favour of the assessee. The appeal is thus allowed.
Infinity Infotech Parks Ltd., AY 2009-10
13. We also rely on the decision of the Hon’ble Calcutta High Court in the case of CIT Vs. Alcove Industries Ltd. 65 taxman.com 311 wherein the Hon’ble High Court has held as under: “7. It appears from the order of the Assessing Officer that the assessee had submitted that as the project was not making profit. it was abandoned. The entire expenses were written off during the year. However the Assessing Officer disallowed the expenditure as it was not related to the current year's income. The Assessing Officer, held that the income or loss for a particular year has to be determined after taking into account the expenses incurred to earn the profit and there should direct nexus between the income and the expenses of that particular year. However, in appeal, the CIT (A) found that in the assessment year 1995-96 as the assessee had a turnover of more than Rs.99 lakhs derived from the same business, the contention of the Revenue, that there was no nexus between the expenditure claimed and income derived was not tenable. Accordingly the claim of the assessee was allowed. In appeal the Tribunal found that the revenue did not dispute the fact the Assessing Officer had allowed spread over of expenditure in earlier two years. In our view since the project was abandoned in the assessment year 1995-96 and the entire expenses was written off during the said assessment year, the issue stands covered by the judgment in Binani Cements Ltd. (supra) wherein it was held that "The decision to abandon the project was the cause for claiming the deduction. The decision was taken in the relevant year. It can therefore be safely concluded that the expenditure arose in the relevant year." (paragraph 11). In view of the law laid down in the judgment of the jurisdictional Court in Binani Cements Ltd. (supra), the judgment in Banyan Networks (I) (P) Ltd. (supra) does not require consideration. Therefore, the question no. 2 is answered in the affirmative, against the revenue and in favour of the assessee.”
Since in the present case the decision to abandon the public issue of shares was taken during the year, the loss got crystallized in the relevant year and, therefore, rightly allowed by the Ld. CIT(A). Therefore, we do not find any infirmity in the order of the Ld. CIT(A) in deleting the disallowance made by the AO, therefore, we uphold the order of the Ld. CIT(A) on this ground and thus the appeal of the revenue stands dismissed.
In the result, the appeal of revenue is dismissed.