Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “E” Bench, Mumbai
Before: Shri B.R. Baskaran (AM)& Ramlal Negi (JM)
O R D E R Per B.R. Baskaran (AM) :-
The assessee has filed the appeal for A.Y. 2006-07 and the Revenue has filed the appeal for A.Y. 2006-07 & 2007-08. All the appeals are directed against the order passed by the learned CIT(A)-12, Mumbai. All these appeals were heard together and hence they are being disposed of by this common order, for the sake of convenience.
2 Essel Infraprojects Ltd.
The assessee-company is engaged in the business of operating amusement park, infrastructure development management and finance activities.
We shall first take the appeal filed by both the parties for A.Y. 2006- 07. First issue contested by both of them relates to disallowance made by the Assessing Officer out of interest expenses claimed by the assessee. The Assessing Officer disallowed a sum of ` 1,48,10,695/- out of interest expenditure and telescoped the same against another interest disallowance of ` 13,62,536/-. The learned CIT(A) confirmed the disallowance of ` 13,62,536/- and deleted the disallowance of ` 1.48 crores referred above. Hence both the parties are in appeal before us on this issue.
Facts relating to the above said issue are stated in brief. During the year under consideration, the assessee has shown capital work-in-progress of ` 1.36 crores. The Assessing Officer took the view that interest expenditure relatable to the investment made in capital work-in-progress is required to be disallowed as per the proviso to section 36(1)(iii) of the Act. Accordingly, he worked out the interest attributable to the amount of capital work-in-progress at ` 13,62,536/- and disallowed the same.
The Assessing Officer also noticed that the assessee has given a sum of ` 25 crores to M/s. Pan India Infrastructure Pvt. Ltd. as Share application money. The Assessing Officer took the view that the assessee has diverted the interest bearing fund by giving interest free advance in the form of share application money. Accordingly, he took the view that the entire interest claim of ` 1,48,10,695/- needs to be disallowed. Since the entire interest expenditure was disallowed, the Assessing Officer did not make separate addition of ` 13,62,536/- referred above again.
In the appellate proceedings, the learned CIT(A) confirmed the disallowance of interest relatable to capital work-in-progress amounting to `
3 Essel Infraprojects Ltd.
13,62,536/- but deleted the interest disallowance of ` 1.48 crores on the reasoning that the share application money given to M/s. Pan India Infrastructure Pvt. Ltd. is for the purpose of business of the assessee.
We have heard the parties and perused the record. The first issue to be adjudicated by us relates to the interest disallowance of Rs.13,62,536/-. The Learned counsel appearing for the assessee submitted that the assessee has not borrowed any interest bearing money for executing capital work-in- progress. He submitted that the entire capital work-in-progress was met by the assessee out of internal accruals and own funds. He submitted that the loan funds have been used for the purpose of giving share application money to its subsidiary. Accordingly, he contended that there is no requirement for disallowing interest in respect of capital work-in-progress.
On the contrary, learned Departmental Representative submitted that the Assessing Officer has given finding that internal accruals of the assessee has actually worked out to negative figure, meaning thereby, the assessee has used borrowed funds for making investment in capital work-in- progress.
In the rejoinder, learned AR submitted that the learned CIT(A) has given a finding that the negative source of funds worked out by the Assessing Officer is not correct. Learned AR invited our attention to the balance sheet placed in one of the paper book and submitted that the assessee is having own funds of ` 175.93 cores, while investment made in capital work-in-progress is only ` 1.36 crores. Accordingly, he submitted that the ratio laid down by Hon'ble Bombay High Court in the case of Reliance Utilities (313 ITR 340) would squarely apply to the facts of the present case. He submitted that the loan funds have been used to make investments and the capital work-in-progress was met out of internal accruals and own funds.
4 Essel Infraprojects Ltd.
Having heard the rival submissions on this issue, we find merit in the contentions of the assessee. We noticed that the assessee itself has admitted that loan funds have been used for giving share application money to its subsidiary. We also noticed that the own funds available with the assessee is in far excess of the capital work-in-progress. Hence, we are of the view that there is no requirement to make any disallowance out of interest expenditure on account of capital work-in-progress. Accordingly, we set aside the order passed by the learned CIT(A) on this issue and direct the Assessing Officer to delete the disallowance of ` 13,62,536/-.
With regard to the disallowance of expenditure of ` 1.48 crores, we noticed that the learned CIT(A) has analysed the issue in detail and has observed that the investment made by the assessee in M/s. Pan India Infrastructure Pvt. Ltd., was in the course of carrying on its business and hence interest expenditure is not required to be disallowed. For the sake of convenience, we extract below relevant observations made by the learned CIT(A) :-
“3.5 Regarding the advance of Rs.25 crores to M/s. Pan India Infrastructure Pvt. Ltd. as share application money, I find that the contention of the appellant as given above would need b accepted. U/s 36 (1)(iii) of the IT Act interest paid "in respect of capital borrowed for the purposes of business" is a permissible deduction in the computation of profits and gains of business or profession. From the language used therein, it is evident that the availability of the deduction is subject to the following three conditions, viz. (i) Money (Capital) that is money, should have been borrowed; (ii) such borrowing should be for the purposes of business or profession of the assessee; and (iii) the assessee should have paid interest on the said amount which is claimed by him as an allowance under this clause. The real test to allow the interest as deduction u/s. 36(l)(iii) is whether this was done as a measure of commercial expediency. It has been held that in order to claim a deduction, it is enough to show that the money is expended, not on necessity and with a view to direct and immediate benefit, but voluntarily and on account of commercial expediency and in order to indirectly to facilitate the carrying on the business. It is not relevant whether the assessee has utilized the borrowed amount in its own business or has advanced the same as 5 Essel Infraprojects Ltd. interest-free loan to its sister concern. What is relevant is whether the amount so advanced was as a measure of commercial expediency or not. It is not necessary that the amount so advanced is earning profit or not but there must be some nexus between expenses and the purpose of business. If the assessee makes a claim for deduction in terms of section 36, he has to place materials in support of his claim of entitlement to the deduction. The assessee has to satisfy the assessing authority that he is entitled to obtain deduction in accordance with the taxing statute. Unless the borrowing is for the purposes of business or profession, the interest on such borrowing is not deductible. Therefore, what is to be seen is "business purpose" and what the sister-concern did with the money advanced the AO has relied upon the order of CIT v/s United Breweries (1973) 89 ITR 17 (Mys) to state that the said interest income was capital in nature and cannot be allowed. The AO has also relied upon the proviso to section 36 (I) (iii) of the IT Act to state that the investment in the shares of the subsidiary would need to be disallowed as interest-bearing loans had been used for advancing Rs.25 crores as share application money to gain control of the said subsidiary. Stating this, the AO proceeded to disallow the entire interest expenditure of Rs. 1,48,10,695/- debited in the P&L Account holding it to be capital in nature. In the submission made, it has been argued by the appellant that the AO has misunderstood the entire transactions. The submission of the appellant has been reproduced above in this order wherein it has been stated by the appellant that it is engaged in the business of infrastructure development management and finance in addition to its amusement park and water park. The wholly owned subsidiary to which these funds are provided to, take up the infrastructure project on behalf of the company. The finance provided to the wholly owned subsidiary by way of advance for share application money is for its business of infrastructure and is used for that purpose. In this case, the amount has been advanced to Pan India Infrastructure Pvt. Ltd. for development of MMKI toll road Project and the said concern further passed on the amount to its wholly owned subsidiary Maharashtra Hydrocarbon Products Pvt. Ltd. which is 50% share holder of MMKIPL which is in the business of construction management and operation of Malegaon Kopargaon road project. Therefore, it cannot be stated that the same was not for the purpose of the business of the appellant. Carefully considering the issue, I find that this contention of the appellant would need to be accepted. It is seen that the appellant has been able to connect the advance made by the appellant to its subsidiary with its business purpose. As the nexus between the advance of funds and the business of the appellant carried out through the subsidiary stands established, no disallowance u/s 36 (1) (iii) of the IT Act was warranted. It has been stated
6 Essel Infraprojects Ltd. by the Hon'ble Courts that interest on funds borrowed by the assessee for investment in a joint venture was allowable as deduction even though the borrowings were kept as share application money in the joint venture company without charging any interest. I find that the AO has also not doubted the business nexus as he has proceeded to make the disallowance under the proviso to section 36(1) (iii) of the IT Act. However, a reading of the section as reproduced above in this order clearly shows that the said proviso is not applicable on this issue. It is seen that the appellant had already completed one road project regarding the road under question and therefore, it cannot be said that that interest-bearing funds loaned in the form of share capital to its subsidiary are for, assets which had not been put to use. Accordingly, the interest payment on the amount of Fts.25 crores advanced to the subsidiary from interest-bearing funds would need to be allowed as a deduction. The AO is directed to calculate accordingly and allowed the benefit to the appellant. This ground of appeal raised by the appellant is, therefore, allowed.”
12. On careful perusal of the order passed by the learned CIT(A) on this issue, we noticed that the learned CIT(A) has analysed the facts prevailing in the instant case in proper perspective and has taken a plausible view. Hence we do not find any reason to interfere with the order passed by him on this issue.
13. The next issue contested by the revenue relates to the disallowance of Rs.62.00 crores relating to Repairs and Maintenance. The AO noticed that the repairs and maintenance expenses claimed by the assessee has increased during the year. When called for explanations, the assessee submitted that a fire has broken out in INS Prabal Ship (kept for public viewing in the park) and the assessee had incurred a sum of Rs.78.97 lakhs in repairing the same. The AO noticed that the assessee had lodged insurance claim of Rs.62 lakhs on account of fire and the claim was shown in the Balance Sheet under the head “Loans and advances”. The AO took the view that the assessee has not credited the insurance claim amount in the Profit and loss account and accordingly assessed the same as income of the assessee.
7 Essel Infraprojects Ltd.
The Ld CIT(A) noticed that the assessee has credited “Repairs and Maintenance A/c” with the amount of Rs.62.00 lakhs, referred above, and the net figure has been debited to Profit and Loss account. Accordingly he deleted the assessment of Rs.62.00 lakhs.
We heard the parties on this issue and perused the record. The ledger account copy of M/s Repairs & Maintenance account is placed at pages 147-148 of the paper book. A perusal of the same would show that the assessee has credited the sum of Rs.62.00 lakhs to the above said account on 31.3.2006, i.e., the assessee has not shown the amount of Rs.62.00 lakhs as a separate item of credit in the Profit and Loss account and instead reduced the Repairs and maintenance account with the above said figure. The net effect is that the assessee has already offered the sum of Rs.62.00 lakhs as its income. Thus, we notice that the AO has assessed the above said amount of Rs.62.00 lakhs without properly appreciating the facts, whereas the Ld CIT(A) has deleted the same by correctly appreciating the facts. Accordingly we do not find any infirmity in the order passed by Ld CIT(A) on this issue.
We shall now take up the appeal filed by the assessee for AY 2006-07. The first issue has been dealt by us in the earlier paragraphs. The second issue contested by the assessee relates to the disallowance made u/s 14A of the Act. The assessee earned dividend income of Rs.49.34 lakhs and Long term capital gain of Rs.152.65 lakhs. The assessee did not make any disallowance u/s 14A of the Act. The AO worked out the disallowance as per Rule 8D. Since he had fully disallowed interest expenditure, the AO did not make any disallowance u/r 8D(2)(ii) of the Act. The AO worked out the disallowance u/r 8D(2)(iii) relating to administrative expenses at Rs.39,58,536/- and disallowed the same. The Ld CIT(A) also upheld the same.
8 Essel Infraprojects Ltd.
We heard the parties on this issue and perused the record. The investments held by the assessee as on 01.04.2006 and 31.3.2006 was Rs.3.55 crores and Rs.154.78 crores respectively. During the year under consideration, the assessee has invested a sum of Rs.154.67 crores in M/s Zee Telefilms Ltd and sold shares held in M/s Essel Propack Ltd and M/s Intrex India Ltd. We notice that the assessee has given workings to show that the investments made in M/s Zee Telefilms Ltd has been entirely funded by sale proceeds of other shares and the internal accruals, i.e., the assessee has demonstrated that the loan funds have not been used to make investments. It was submitted that the assessee has used its own funds only for making investments in the earlier years also. Accordingly it was submitted that the interest disallowance is not called for and the same has been accepted by Ld CIT(A) also.
We have noticed that the AO has disallowed a portion of administrative expenses by applying the provisions of Rule 8D(2)(iii) of I.T Rules. The year under consideration being AY 2006-07, the provisions of Rule 8D shall not apply to the year under consideration as per the decision rendered by Hon’ble jurisdictional Bombay High Court in the case of Godrej & Boyce Manufacturing Co Ltd (328 ITR 81). The Ld A.R submitted that the investment in M/s Zee Telefilms Ltd was made only on 28-03-2006, i.e., 3 days prior to the close of the year. We also notice that the assessee has held shares in two quoted companies, four unquoted companies, two subsidiaries and units in one mutual fund. The assessee has sold shares in two companies as discussed earlier and purchased shares in Zee Telefilms Ltd and other five companies. Besides the above, the assessee has received dividend income and earned Long term capital gains on sale of shares of two companies. Thus, we notice that the transactions carried on by the assessee company were limited during the year under consideration. We notice that the Ld CIT(A) had restricted the disallowance to 10% of the dividend income in the succeeding year and the same has been accepted by the assessee. Accordingly, considering the factual matrix available during
9 Essel Infraprojects Ltd. the year under consideration, we are of the view that the disallowance u/s 14A of the Act may be restricted to the same level of 10% of dividend income and the same, in our considered view, would work out to a reasonable figure for making disallowance. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to restrict the disallowance to 10% of the exempt dividend income earned by the assessee during the year under consideration.
The next issue contested by the assessee relates to the addition of Rs.1,45,749/- made on the basis of AIR information. The assessee had shown income from M/s Kamat Hotels (P) Ltd. However the income shown by the assessee from the above said hotel was lesser than the amount shown in AIR information by Rs.1,45,749/-. Since the assessee did not reconcile the same, the AO added the difference and the Ld CIT(A) also confirmed the same.
We heard the parties on this issue. According to Ld A.R, the assessee has reconciled the TDS amount vis-à-vis the rental income declared by the assessee and hence the error, if any, has occurred at the end of M/s Kamat Hotels (P) Ltd. Accordingly it was submitted that the assessee should not be penalized for the error, if any, committed by the other person. We notice that the difference noticed by the AO requires to be reconciled. According to the assessee, it has duly declared the receipts and the same has been reconciled with TDS amount also. Accordingly it was contended that the mistake, if any, should have occurred at the end of M/s Kamat Hotels P Ltd. Since it is a matter requiring reconciliation, we are of the view that this issue needs to be examined afresh at the end of the AO. Accordingly we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to call for the details from M/s Kamat Hotels P Ltd. After seeking explanations from the assessee on the details collected by the AO, the AO may take appropriate decision in accordance
10 Essel Infraprojects Ltd. with the law. We also direct the assessee to assist the AO in collecting details from M/s Kamat Hotels P Ltd.
The next issue contested by the assessee relates to the disallowance of depreciation claim of Rs.97,118/-. The AO noticed that the Tax auditor has reported in the tax audit report that the assessee has claimed 100% depreciation on machineries costing less than Rs.5000/- each. The total amount of said claim was reported at Rs.97,118/-. Since the Income tax Act does not provide for writing off of 100% in respect of machineries costing less than Rs.5000/- each, the AO disallowed the above said claim. The Ld CIT(A) also confirmed the same, since the Tax auditor has reported the same.
The contention of the assessee is that it had claimed 100% depreciation on machineries costing less than Rs.5000/- each, only under the Companies Act for book purposes and it has disallowed the entire amount of book depreciation while computing total income. It was submitted that the depreciation has been claimed for income tax purposes as per applicable rates only.
We have heard Ld D.R on this issue and perused the record. The question of disallowing depreciation claimed at higher rate of 100% would arise only if such a claim has been made in the depreciation working made for income tax purposes. According to the assessee, it has claimed 100% only for book purposes under the Companies Act. It was submitted that the book depreciation of Rs.3,63,34,199/- claimed in the profit and loss account has been disallowed fully and the depreciation for income tax purposes has been claimed at applicable rates only. We notice that the above said explanation of the assessee has not been examined by the tax authorities. In the computation of total income made in the assessment order, we notice that the AO has also disallowed the above said amount of book depreciation and allowed depreciation for income tax purposes at 11 Essel Infraprojects Ltd.
Rs.2,41,65,640/-. If the above said figure of Rs.2.41 crores does not include the depreciation amount of Rs.97,118/-, then there is no requirement of disallowing the same again. Accordingly we set aside this to the file of the AO for the limited purpose of verifying as to whether the depreciation of Rs.2.41 crores allowed by the AO includes the amount of Rs.97,118/- or not. If it is not included, then the AO should delete the addition of Rs.97,118/-, otherwise the addition shall be sustained. The order of Ld CIT(A) passed on this issue stands set aside accordingly.
The next issue relates to the disallowance of bidding expenses of Rs.2,76,76,530/-. The assessee had incurred the above said expenses in connection with filing bids for modernization of Mumbai and Delhi Airports. The AO treated the same as capital expenditure, being pre-commencement expenses and accordingly disallowed the same. The Ld CIT(A) also confirmed the view taken by the AO.
The case of the assessee is that it is engaged in the business of infrastructure development and hence expenses incurred in filing bids are part of its business expenditure. The explanations given by the assessee before Ld CIT(A) are extracted below for the sake of convenience:- “Ld A.0. disallowed Rs. 2,76,75,5301/- being amount incurred for making and filing bids for modernization of Mumbai and Delhi airports. The Ld. A0 disallowed the claim considering the expenses to be either a capital loss or capital expenditure being pre-commencement expenses and project considered as new line of business and expenses being shown in the Profit & Loss Account as exceptional item. Submissions
The assessee is engaged in the business of infrastructure development management and finance in addition to its amusement parks and water parks as per the Memorandum of Association of the company. The name of the company is also changed from Pan India Paryatan Limited to Essel Infraprojects Limited to reflect the addition to the infrastructure business activities carried on by the company. The business of infrastructure requires filing bids, tenders for getting work i. e. Roads, bridges, Airports, Ports etc to prove capabilities to execute such contract
12 Essel Infraprojects Ltd. and price to be charged for the contract etc. These bids many times fail for any reason including technical or financial reasons and the lowest with technical capabilities wins the bid. For making bid or tender submission requires highly technical knowledge financial and commercial understanding and sometimes require help of outside consultants, JV Partners, etc. for technical and financial support all these require huge expenses to be incurred.
The question arises in whether such expenses on the tenders, bids for getting business in the line of business of the assessee are in the nature of revenue or capital?
Main Objects as per the Memorandum of Association are as under.
To purchase, erect or otherwise acquire and equip, any other amusement center, public or private parks or other hotels in Bombay or elsewhere in India or in any other part of the world or to carry on the business of public amusements coach, cab, carriage, motor car, proprietors, livery stable keepers, importers and brokers of food live stock and hair dressers, perfumers, clubs, baths, dressing rooms, reading, writing and newspaper rooms, libraries, ground and places of amusement, recreation sports and to own and/or run cinema houses, theatres, concert halls, circus properties picture places, studios, dramas or other entertainment.
To construct, improve, maintain, develop, work, manage, carry out or control any building, factories, works, roads, ways, railways, sidings, bridges, wells, reservoirs, water courses, wharfs warehouses, electric works, shops, stores, chawls and other building for housing work people and other otherwise assist to take part in the construction, improvement maintenance, development, working management and control any infrastructure related projects and/or other works and convenience which may seem connected directly or indirectly to advance the interest of the company and to join the other person and/or other company doing any of these things. Infrastructure activities carried on by the assessee are as under :- The assessee has given Rs. 25 Crores to Pan India 1) Infrastructure Private Limited, its wholly owned subsidiary company which is engaged in infrastructure activities.
The assessee also proposes to develop Multi product Special 2) Economic Zone (SEZ) project in the Gorai - Manori - Uttan region. The assessee has obtained in-principle approval from the State as well as the Central Government for development of the SEZ. This 13 Essel Infraprojects Ltd. activity has started during the year.
The Company has incorporated a wholly owned subsidiary 3) Essel Airport Infrastructure Private Limited.
The assessee had in response to the "invitation to register an 4) expression of interests" issued by the Airports Authority of India ("AAP) for the Restructuring and Modernization of Mumbai and Delhi Airport, submitted the bid. The consortium of the assessee was declared as a pre- qualified bidder to submit the technical and financial bid for the said project by the AAI. The ultimate bid was however given in favour of other competitive bidder. During the year the assessee has incurred expenses of Rs. 27,675,530/-for the purpose of making designing, layouts and other documents required for the purpose of the bid. The details of expenses are enclosed. The expenses mainly consists of Consultants Fees of Rs. 14,058,745/- and Bank Guarantee and other related bank charges of Rs. 8,411,034/, As the ultimate bid was awarded to some other bidder, the expenses have been debited to Profit and Loss account for the year and grouped under Exceptional Items, as required by Accounting Standard.
The Ld A.0. has altogether gone on wrong notion and misunderstanding of facts and hence he termed these expenses being pre-operative or pre- commencement hence capital in nature. He considered the project as new line of business hence capital in nature. It is proposal and in principle approval of Govt. etc makes it capital in nature as per the observations of the Ld A.0. and Company's proposal to take up the project through its WOS-Essel Airports Infrastructure Pvt. Ltd.
Contrary to his understanding the business of the assessee is infrastructure development, management, etc hence all expenses relating to it from procurement of project, execution and managing are revenue in nature. There are always expenses incurred for getting project that pre- commencement but it is relating to its business hence revenue in nature, it is not the assessee setting up capital assets like factory etc. for running and earning income. He understood projects means capital account. Hence these are biding and tender related expenses pre-commencement and pre- awarding of contract but still revenue expenses. When the assessee is engaged in the business of infrastructure each project may be huge and different some may be building roads, metro rail, stadiums, other may be port, Airport, bridges, dams, etc hence these cannot be termed as new line of business or new business but 14 Essel Infraprojects Ltd. are all part of existing business of infrastructure hence revenue in nature. Making bids require (RFP-Request for proposal) from the authority/concern in principle approval to bid (qualified to bid) and govt. calling bids, sometimes technical first and the financial bids or together. Hence in principle proposal does not make it capital project. To qualify for in principle and proposal (RFP) is first step to enter the ring without this you cannot bid even and bidding is also proposal till you are selected it is proposal it is accepted or not it depends upon so many factors and other competitors. The in principle or bidding or proposal are like giving CV for employment you go on giving C Vs till you are selected and CV making, filing, appearing for interview etc are akin to RFP, bidding but these are for big projects hence require huge expenses for making layouts, designs, schemes, financial data, estimates, etc.
Had the bidding done by the assessee been successful, the project would have allotted to the assessee. However, that would not have made assessee owner of the Airport itself even in that scenario the expenses are on revenue account. Hence, in any case the assessee could not become owner of the asset for which bid is made, whether the bid is allotted or not.
The assessee has incurred these expenses on the making of proposal/bid/tender for Airport renovation being for its infrastructure business are expenses of revenue in nature, neither capital nor non- business or personal expenses hence allowable u/s 37 of the Act.
The Ld A.0. has observed that these expenses are reflected as exceptional item and shown below the line in Profit & Loss Account as also netted off against profit on sale of Jaipur Park hence he concluded that these are capital in nature.
The nature of expenses is not decided by its disclosure in the accounts. The revenue and capital or any other item can be grouped under exceptional items below the line as per accounting standard or accounting practice and it is mainly done so that results of operations can be clearly visible to the stakeholders. The exceptional item are exceptional including non-recurring, huge in volume amount which can distort company's operational results hence grouped and shown separately. While grouping the revenue and capital in one group does not change in nature of each other. Finally the way in which the accounting entries are made by an assessee does not decide the nature or allowability of expense.
15 Essel Infraprojects Ltd.
Hon 'ble Supreme Court in Badridas Daga (34 ITR 10) after referring to the decision in Chimavis case, Gresham Life Assurance Society vs Styles and Pondicherry Railways Cos case, their Lorships proceeded to observe:
"The result in that when a claim is made for a deduction for which there is no specific provision in section 10 (2) whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed provided of course there is no prohibition against it, express or implied, in the Act." This view is also upheld by Apex Court in Sutlej Cotton Mills Ltd. (116 ITR 1) and jurisdictional High Court in Dempo & Co. (P) Ltd. (206 1TR 291) wherein it was held that "whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter".
Section 37 of the IT Act, 1961
Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".
The infrastructure have continued in the subsequent years and the assessee has applied for a number of bids as is evident from the copy of balance sheet and profit & loss account for the later years. The airport expenses are incurred wholly and exclusively for the infrastructure business and are neither capital nor personal in nature hence allowable u/s 37(1) of the Act."
As noticed earlier, the Ld CIT(A) upheld the view taken by the AO by holding that the assessee has commenced a new line of business and the same is not linked to the existing business of the assessee. He also observed that the 16 Essel Infraprojects Ltd. projects were under preparatory stage and the assessee itself has capitalized the expenditure, which indicates that the benefit would accrue to the assessee in the future.
We heard the parties on this issue and perused the orders passed by the tax authorities and the submissions made by the assessee. The question of treating pre-commencement expenses as capital expenditure would arise only if the assessee is creating its own capital asset. In this case, the assessee is, inter alia, engaged in infrastructure development. The object clause of the assessee makes it clear the objective of formation of the assessee company. Even though the assessee might not have carried the infrastructure development business earlier, the very fact that the assessee changed its name would show that the assessee has commenced the infrastructure development business in this year. This fact is further fortified by the fact that it has submitted its bid to acquire infrastructure projects. The impugned bidding expenses have been incurred by the assessee in connection to filing bids for infrastructure development and it could not succeed in the bidding.
The Ld CIT(A) has observed that the assessee has capitalized the expenses, which appears to be against the facts available on record. The AO himself has observed that the assessee has claimed the impugned expenses as deduction under the head “Exceptional items” in the Profit and Loss account. Thus, we notice that the Ld CIT(A) has proceeded to decide this issue on wrong appreciation of facts.
In our view, these expenses have been incurred by the assessee in the course of carrying on its business and hence the same has to be allowed as deduction, since it has been incurred in furtherance of the business activities of the assessee. Ld A.R relied upon the decision rendered by Hon’ble Bombay High Court in the case of CIT Vs. Essar Oil Ltd (ITA (Lodg.) No.921 of 2006 dated 16.10.2008 to support the contentions of the 17 Essel Infraprojects Ltd.
assessee. We have gone through the said order. The assessee before Hon’ble High Court was engaged in the business of operation of rings for extraction of oil and undertaking other oil related activities. It incurred certain expenses on bidding in connection with exploration of oil. The question that arose was whether the expenditure incurred on unsuccessful bidding is allowable as deduction. The Tribunal held that the expenditure incurred on bidding, even if it is unsuccessful, should be allowed as deduction. The Hon’ble Bombay High Court held that the finding recorded by the Tribunal is finding of fact and hence no question of law arises.
We have earlier noticed that the assessee has incurred bidding expenses in the course of carrying of its business activities in furtherance of its business objects. Hence the expenses incurred on bidding, even if the bid was unsuccessful, should be considered to be revenue expenses and should be allowed. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the impugned disallowance.
We shall now take up the appeal filed by the revenue for AY 2007-08. The first issue relates to the disallowance of interest expenditure. As in AY 2006-07, the AO took the view that the share application money given by the assessee to its wholly owned subsidiary company M/s Pan India infrastructure P Ltd should be considered as diversion of interest bearing funds. Accordingly he disallowed the interest expenditure claimed by the assessee. The Ld CIT(A), as held by him in AY 2006-07, took the view that the share application money given by the assessee is for the purpose of business of the assessee and accordingly allowed the claim of the assessee. The revenue is aggrieved by the said decision.
We have considered an identical issue while disposing the appeal of the revenue for AY 2006-07 in the earlier paragraphs and we have upheld the view taken by Ld CIT(A) on the identical issue. Consistent with the view taken therein, we uphold the view taken by Ld CIT(A) on this issue.
18 Essel Infraprojects Ltd.
The next issue contested by the revenue relates to the disallowance made u/s 14A of the Act. The AO computed the disallowance u/s 14A of the Act as per Rule 8D of IT rules. The Ld CIT(A) restricted the disallowance to 10% of the dividend income. Revenue is aggrieved by the said decision of Ld CIT(A).
We have heard the parties on this issue. The Hon’ble jurisdictional Bombay High Court has held in the case of Godrej Boyce Manufacturing co ltd (328 ITR 81) that the provisions of Rule 8D shall be applicable from AY 2008-09 onwards. It has further held that the disallowance u/s 14A should be computed on a reasonable basis for earlier years. We have considered an identical issue in AY 2006-07 and taken the view, by considering the disallowance upheld by Ld CIT(A) in AY 2007-08, that disallowance of 10% of the dividend income would be a reasonable disallowance in view of limited activities in the investment portfolio. The Ld A.R submitted that the facts are identical in AY 2007-08 also. We notice that the Ld CIT(A) has restricted the disallowance to 10% of the dividend income and the same was followed by us in AY 2006-07. Accordingly we do not find any reason to interfere with the order passed by Ld CIT(A) on this issue.
In the result, both the appeals filed by the revenue are dismissed and the appeal of the assessee for AY 2006-07 is treated as allowed.
Order has been pronounced in the Court on 11.1.2017.