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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI A.MOHAN ALANKAMONY & SHRI DUVVURU RL REDDY
आदेश / O R D E R
Per A. Mohan Alankamony, AM:-
These appeals are filed by the assessee & Revenue
directed against the order passed by the learned Commissioner
of Income Tax (Appeals)-1, Coimbatore dated 14.01.2016 in
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Appeal No.276/13-14 for the assessment year 2010-11 passed
U/s.250(6) r.w.s. 143(3) of the Act.
There is a delay of 3 days in filing the appeal by the
Revenue. The Ld.DCIT has furnished an affidavit before us stating that the delay was due to the misplacement of file and due to the time taken for tracing the file. The Ld.DR pleaded that
the short delay in filing the appeal may be condoned. The Ld.AR objected to the submission of the Ld.DR. After hearing both sides, we are of the considered view that the short delay in filing the appeal by the Revenue deserves to be condoned.
Accordingly we hereby condone the delay of 3 days in filing the appeal by the Revenue and proceed to hear the case on merits.
The assessee has raised several grounds in its appeal, however the crux of the issue is that :- (i) The Ld. Commissioner of Income Tax(Appeals) has erred in
confirming the order of the Ld.AO, who has disallowed the claim of expenditure being the repayment of loan of Rs.19.20 crores to the Orissa State Co-operative Bank
Limited under one time settlement scheme as the borrowers
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of the loan had defaulted the repayment, wherein the
assessee company had stood as guarantor. (ii) The Ld.CIT(A) has erred in confirming the order of the Ld.AO, who had disallowed an amount of Rs.53,499/- being
expenditure related to earning exempt income invoking the provision of Section 14A r.w.r. 8D of the Rules.
The Revenue has raised several grounds in its appeal, however the crux of the issue is that :-
(i) The Ld.CIT(A) has erred in deleting the disallowance made by the Ld.AO with respect to the claim of depreciation, on the Beverage division amounting to Rs.60,62,124/-. (ii) The Ld.CIT(A) has erred in directing the Ld.AO to assess
the rental income received by the assessee under the head ‘business income’.
The brief facts of the case are that the assessee is a public limited company, engaged in the business of manufacture of sugar, industrial alcohol, generation of power and soya products,
filed its return of income for the assessment year 2010-11 on 29.09.2010 declaring ‘Nil’ income under the normal provisions.
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Thereafter the return was taken up for scrutiny under CASS and
finally the assessment was completed U/s.143(3) of the Act on 30.03.2013, wherein the Ld.AO had made several additions.
Assessee’s Appeal, Ground No. 3(i) : Disallowance of the claim of expenditure of Rs.19.20 crores :- During the course of assessment proceedings, it was noticed by the Ld.AO that the assessee had claimed
Rs.19,20,16,000/- as expenditure in Profit & Loss account for the relevant assessment year. On query, it was explained by the Ld.AR before the Ld.AO as follows:-
"The assessee-company for the purpose of securing adequate irrigation facilities to its cane areas has created water users societies, viz., Sakthi Rural Development Water Users Society,Cuttack and Samthi Sugars Cane Growers Rural Development Water Users Society, Dhanakanal.
Those societies have created irrigation facilities, viz., liftinf of water from Mahanathi River and pumping the water into sugar cane fields by setting up of infrastructures for the purpose. To construct the infrastructure facilities such as setting up of motor pumps at the river points, sourcing the water, laying of pipie line for distributing the water to cane fields etc., the societies have borrowed monies from banks.
The above loans have been obtained with the arrangement that the loan would be repaid with interest out of the amounts collected from water users. The amount will be collected from water users out of their sugar cane supply proceeds payable by
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Sakthi Sugars Limited. Sakthi Sugars Limited stood as guarantor for the loans borrowed by the Societies.
Due to inadequacy of collection and other factos, the societies could not repay the loans. In such circumstances, Sakthi Sugars Limited as the guarantor to the loan has repaid the loan under one time settlement to Orissa State3 Co-operative Bank Ltd. The same amount was settled by M/s Sakthi Sugars Limited under One time Settlement Scheme (OTS) for Rs. 19,20,16,000/- and claimed as contractual obligation u/ s 37 of the Income-tax Act.
We place reliance on the following judicial pronouncements, wherein the ITAT/High Court have held that discharge of corporate guarantee is a business expenditure allowable u/ s 37.
CIT vs Rudra Industrial Commercial Corporation 20 taxmann.Com
ACIT Vs. W.S.lndustries (India) Private Limited 128 ITD 98 (Chennai)"
6.1 After examining the issue, the Ld.AO rejected the claim of expenditure of Rs.19.2 crores because of the following reasons:-
1) The assessee is not in the business of providing bank guarantee and it was only in the business of manufacturing sugar, industrial alcohol, generation of
power and manufacturing soya products. 2) The relationship between the assessee and the farmers are only for purchase of raw materials.
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3) The societies for whom the assessee had given bank
guarantee are independent organizations providing support to the farmers. 4) Providing infrastructure facilities to the farmers is a benefit
provided to the farmers and not linked to the business of the assessee. 5) The assessee is entitled to claim, the amount paid by it to
the bank in lieu of the bank guarantee, from the societies. 6) There is no business link between the societies and the assessee. 7) The mismanagement of funds which had resulted in the
loss to the society cannot be adjusted against the profit in the books of accounts of the assessee. 8) The society is formed for the mutual benefit of its
subscribers and for their common purposes and not for the benefit of the assessee.
6.2 On appeal, the Ld.CIT(A) agreeing with the view of Ld.AO that there is no business connection in the legal sense between the assessee company and the co-operative society except in
similarity of name, confirmed the order of the Ld.AO. The
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Ld.CIT(A) further held that since the loan amount of Rs.19.2
crores was obtained by the co-operative society against the
guarantee provided by the assessee which was to be deployed
for creating capital assets, the same cannot be treated as revenue
expenditure in the hands of the assessee because it falls in the
capital field.
6.3 Before us, the Ld.AR reiterated the arguments made
before the Ld. Revenue authorities. The main argument of the
assessee was that the assessee had provided guarantee to the
societies in order to help the farmers in the near vicinity to
increase their agricultural produce because it is from them the
assessee is dependent for procuring raw materials. It was
therefore submitted that the main intention for providing such bank
guarantee was to improve the business of the assessee and
therefore, there is a direct business nexus on the transaction.
Hence, it was pleaded that the loss suffered by the assessee may
be allowed as deduction U/s.37 of the Act. The Ld.DR on the
other hand, relied on the orders of the Revenue authorities and
argued in support of the same.
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6.4 We have heard the rival submissions and carefully perused
the materials on record. From the order of the Ld.AO and the Ld.CIT(A), the entire facts of the case are not clear. The assessee has also not produced before us any documents such
as the agreement between the assessee and the societies, the resolution passed by the society in its general meeting, the nature of work executed by the society, the reasons for the loss incurred
by the society, the reasons for the society not to repay the loan, etc.. Thus the genuineness of the transaction has not been brought out vividly by the assessee before us and it is not clear from the Orders of the Ld. Revenue Authorities. Therefore, in the
interest of justice, we remit back the matter to the file of Ld.AO for fresh consideration.
Assessee’s Appeal, Ground No. 3(ii) : Disallowance U/s. 14A r.w.r. 8D of the Rules of Rs.53,499/- :-
From the facts of the case, it appears that the Ld. Revenue Authorities had invoked the provisions of Section 14A r.w.r 8D of the Rules, because the assessee had made investment for earning exempt income and the expenditure relating to such
investment was not disallowed by the assessee. We do not find
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any infirmity on the order of the Ld. Revenue authorities on this
issue because they have only followed the provisions of the Act. Therefore the order of the Ld.CIT(A) and the Ld.AO on this issue is hereby confirmed.
Revenue’s Appeal, Ground No. 4 (i) : Deletion of the addition made on account of disallowance of depreciation of Rs.60,62,124/- :- It was noticed by the Ld.AO that the assessee had claimed depreciation of Rs.60,62,124/- with respect to its beverage plant at Sivaganga. The Ld.AO further observed that
the assessee has not used those machineries for the purpose of its business. Therefore, the provisions of Section 32 of the Act was not complied with. Accordingly the claim of depreciation
amounting to Rs.60,62,124/- was disallowed and added back to the income of the assessee.
8.1 On appeal, the Ld.CIT(A) following the decision of the
Chennai Bench of the Tribunal for the assessment year 2008-09 in ITA No.614/Mds/2012 and 867/Mds/2012 dated 30.01.2015, allowed the appeal of the assessee in its favour.
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8.2 Since, the Ld.CIT(A) has only followed the order of the
Chennai Bench of the Tribunal on this issue, we do not find it necessary to interfere with his order. Accordingly this ground raised by the Revenue is decided against it.
Revenue’s Appeal, Ground No. 4(ii) : Assessment of rental income of Rs.46.76 lakh under the head ‘business income’:-
It was observed by the Ld.AO that the assessee had a rental income of Rs.73,80,239/- which was disclosed by the assessee under the head ‘business income’. Since, as per the
provisions of the Act, the rental income has to be taxed under the head ‘income from house property’, the Ld.AO completed the assessment accordingly.
9.1 On appeal, the Ld.CIT(A) following the decision of the Tribunal on the same issue for the earlier year held the matter in favour of the assessee.
9.2 On perusing the order of the Tribunal, we find that the Tribunal has arrived at such decision due to the Board circular
issued by the CBDT which states as follows:-
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DEPRECIATION DEVELOPMENT REBATE
SECTION 32" SECTION 33
Attention is invited to the Board's Letter No. F. 10/97/63-IT(AI), dt. the 29th Feb., 1964, addressed to the CIT, in which instructions were issued, inter alia, that development rebate should not be allowed on air-conditioners and fans given by an employer for the personal use of the employees or directors at their residence, on the ground that the said plant and machinery were not wholly used for the purpose of the assessee's business.
The question has been re-examined by the Board recently in the light of Board's Letter F. NO. 9/26/IT/60, dt. the 21st March, 1960 in which it was clarified that quarters built by the employers for the accommodation of their employees must be regarded as buildings used for the purpose of the business and depreciation allowed thereon, where the occupation by the employee of the property owned by the employer is subservient to and necessary for the purpose of their duties. It is considered that what applies to buildings applies also to the fans, air- conditioners and refrigerators fitted to those buildings, as those are amenities which virtually form part of such buildings.
On reconsideration therefore the Board have decided, in supersession of the instructions issued in their letter dt. the 29th Feb., 1964, that fans, air-conditioners, refrigerators etc. provided by the employer at the residence of the employees should be considered to have been used wholly for the purpose of the employer's business and full depreciation as may be admissible in accordance with the rules, should be allowed in the assessment of the employer. Where such assets have been installed on or before the 31st March, 1965, development rebate may also be allowed in respect of these assets, if the rebate is otherwise admissible.
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Further on perusing the facts of the case, we find that the assessee has received rental income not only from its employees but also from other private parties. The details of the same are
extracted herein below for reference:
Rent For Amount (Rs.) Employees quarters 46,76,622 Bank Building, Post office 11,73,617 building, co-op. stores building, telephone exchange and rent from premises situated in the sugar mill compound Flat Park avenue 2,70,000 Industrial shed 3,00,000 Corporate office building 9,60,000 Total 73,80,239
Thus we find that only with respect to the rental income of
Rs.46,76,622/-, the assessee has received rental income from its employees for providing quarters. All other rental income is with respect to third parties and the circular has no bearing on them.
Therefore, we hereby hold that the rental income received from the assessee’s employees for providing quarters to the extent of Rs.46,76,622/- shall be treated as business income and the
balance amount shall be treated as ‘income from house property’ as per the provisions of the Act.
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In the result, the appeal of the assessee is partly allowed for statistical purposes and the appeal of the Revenue is partly allowed.
Order pronounced on the 23rd June, 2017 at Chennai.
Sd/- Sd/- (धु�वु� आर.एल रे�डी) (ए. मोहन अलंकामणी) ( Duvvuru RL Reddy ) ( A. Mohan Alankamony ) �या�यक सद�य /Judicial Member लेखा सद�य / Accountant Member
चे�नई/Chennai, �दनांक/Dated 23rd June, 2017
JR आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. �नधा�रती/Assessee 2. राज�व/Revenue 3. आयकर आयु�त (अपील)/CIT(A) 4. आयकर आयु�त/CIT 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF