MAHARASHTRA STATE FILM, STATE & CULTURAL DEVELOPMENT CORPORATION LTD,MUMBAI vs. ACIT 11(1), MUMBAI

The appeal filed by the assessee is directed against the order dated 17.10.2011 passed by the Ld CIT(A)-3, Mumbai and it relates to the assessment year-2008-09.

The assessee has filed this appeal in respect of following issues: a) Disallowance of interest expenditure u/s 43B of the Act; b) Disallowance of Repairs expenditure of Studio No.3; and c) Disallowance of road repairs expenses.

We heard the parties and perused the record. The assessee company is engaged in the business of providing infrastructure facilities for shooting and post shooting purpose. The assessment of the assessee was completed by the AO by making various additions and the appeal filed by the assessee before the ld.CIT(A) was dismissed. Aggrieved, the assessee has filed this appeal before us on the issues cited above.

The first issue relates to disallowance of interest expenditure u/s 43B of the Act. During the year under consideration, the assessee claimed interest of Rs.23.34 lakhs payable to M/s Mumbai Metropolitan Region Development Authority (MMRDA) in respect of outstanding loan taken from the above said company. The assessee claimed the interest on accrual basis, i.e., it did not pay the interest. The AO took the view that the above said interest expenditure is not allowable as per the provisions of section 43B of the Act. Accordingly, he disallowed the same. The ld. CIT(A) also confirmed the same.

The ld. Counsel appearing for the assessee submitted that the provisions of section 43B of the Act shall apply only in respect of loans taken from Public Financial Institutions, State Financial Corporation or State Industrial Investment Corporation. All the above Institutions have been defined in Explanation 4 to Section 43B of the Act. The ld. Counsel submitted that MMRDA is a Statutory Body of Government of Maharashtra and it does not fall under any of the categories stated in sec. 43B of the Act. He submitted that the term “Public Financial Institution” as defined in section 4A of the Companies Act, 1956 is required to be seen for the purposes of sec. 43B of the Income tax Act. Inviting our attention to sec. 4A of the Companies Act, the Ld A.R submitted that MMRDA will not fall under any of the categories specified in sec. 4A of the Act. He further submitted that MMRDA has been established under a separate Statute named “Mumbai Metropolitan Region Development Authority Act, 1974” as Authority and hence the same cannot be categorized as either State Financial Corporation or State Industrial Investment Corporation. Accordingly, the ld.AR submitted that the interest accrued on the loan taken form MMRDA is not covered by the provisions of section 43B of the Act.

On the contrary, the ld. DR submitted that the assessee itself has disallowed the interest payable to MMRDA u/s 43B of the Act in the earlier years and further an identical disallowance made by the AO in assessment year 2006-07 has also been accepted by the assessee. Accordingly, the ld. DR submitted that the ld. CIT(A) was justified in confirming the disallowance made by the AO.

In the rejoinder, the ld. AR submitted that there is no estoppel against the law and hence mistake committed by the assessee in the earlier years cannot be used against the assessee.

We have carefully perused the provisions of section 43B of the Act. As submitted by the ld.AR, the provisions of section 43B shall be applicable for the sum payable as interest on any loan or borrowings, inter alia, taken from any Public Financial Institution, State Financial Corporation or State Industrial Investment Corporation or scheduled bank. The expression of the terms „Public Financial Institution‟ „State Financial Corporation‟ and „State Industrial Investment Corporation‟ have been defined as under in Explanation 4 to sec. 43B of the Act: Explanation 4.—For the purposes of this section,— (a) "public financial institutions" shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956); [(aa) "scheduled bank" shall have the meaning assigned to it in the Explanation to clause (iii) of sub-section (5) of section 11;]

It is well settled proposition of law that the provisions of statute should be interpreted strictly and hence the provisions of sec. 43B of the Act can be applied only if the interest claim is hit by the said provision. Hence, what is required to be seen is as to whether MMRDA shall fall under the category of Public Financial Institutions, Schedule Bank, State Financial Corporation or State Industrial Investment Corporation. If it does not fall in any of the above said categories, then the provisions of sec. 43B cannot be applied to the impugned interest payment. We further agree with the contentions of Ld A.R, that there is no estoppel against the law and hence the fact that the assessee itself has disallowed the interest claim u/s 43B of the Act in the earlier years will not come in the way of the assessee to claim the same during the year under consideration, if the provisions of sec. 43B are not applicable to it.

In the paper book, the assessee has not furnished the “Object clauses” of MMRDA. There should not be any dispute that the object clauses shall determine the nature of MMRDA and only if one examines the object clause, he can decide as to whether it falls in any of the categories prescribed in sec. 43B of the Act. Accordingly, in our view, this issue requires fresh examination at the end of the assessing officer. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore the same to the file of the assessing officer with the direction to adjudicate this issue afresh by examining the object clause of MMRDA and whether it shall fall in any of the categories of financial institutions prescribed in sec. 43B of the Act and there after decide about the applicability of the provisions of sec. 43B to the impugned interest payment.

The next issue relates to the expenditure incurred on repairs of Studio No.3. The AO took the view that the Studio No.3 was completely damaged in a fire and the assessee has to re-built it afresh and hence the expenditure incurred on re-construction of Studio No.3 is capital in nature. Accordingly, he disallowed the claim of 35.37 lakhs and allowed depreciation thereon at the rate of 10% resulting in a net disallowance of Rs.31.83 lakhs. The ld. AR submitted that Studio No.3 was partially damaged by a fire that occurred in the year 2002. However, the Studio No.3 was continued to be let out for film shooting purposes. Inviting our attention to pages no.8 to 11 of the paper book, the ld.AR submitted that the assessee has declared the income derived from letting out the Studio No.3 in the assessment years 2007-08 to 2009-10, which fact clearly shows that the Studio No.3 was not fully damaged. The assessee, after expiry of about 7 years from the date of occurrence of the fire, has incurred impugned expenditure to carry out the repairs in Studio No.3. He

On the contrary, the ld. DR placed reliance on the orders of authorities below.

Having heard the rival contentions, we are of the view that there is merit in the submissions made by the ld.AR. There is no dispute with regard to the fact that the fire occurred long back in the year 2002 and even after the said occurrence and damage, the assessee has proved that it has continued to give Studio No.3 on hire and earned income. That very fact shows that the Studio No.3 was not completely damaged by fire. Hence, we are of the view that there is merit in the submissions of the assessee that the expenditure of Rs.35.37 lakh was incurred only to preserve Studio No.3 by carrying out repair works. Further, no material was brought on record by the assessing officer to show that the assessee has built any new asset by incurring this expenditure. Under these set of facts we are of the view that the expenditure incurred by the assessee should be allowed as revenue expenditure. Accordingly, we set aside the order of ld. CIT(A) on this issue and direct the AO to delete the disallowance.

The next issue relates to the disallowance of expenditure incurred on re-surfacing of the roads. The assessee had incurred an amount of Rs.1.44 cr. on resurfacing of the roads and claimed the same as revenue expenditure. But the AO took the view that the expenditure incurred on resurfacing of roads and asphaltic treatment of the roads is capital in nature. Accordingly, he disallowed the claim of the assessee and allowed depreciation at the rate of 10% thereon resulting in net disallowance of Rs.1.30 cr. The ld. CIT (A) also confirmed the same.

The ld. AR submitted that the assessee has not built any new road but it has carried out only repairs to the existing road by re-surfacing it and carrying out asphaltic treatment thereon. He submitted that the assessee has been incurring such kind of repair expenses every year. The ld. AR submitted that the assessee had incurred a sum of Rs.78.22 Lakhs in the immediately preceding year and Rs.13.81 lakhs and Rs.29.76 lakhs respectively in the years relevant to the assessment years 2009-10 and 2010-11. In all the three years, the repair expenses have been allowed by the assessing officer.

The ld. AR submitted that the assessee owns large area of land having an extent of 512 acres of land and hence there is huge stretch of roads inside the land. Since the assessee allows its land and building for film shooting, which is usually carried out by using heavy equipments and also by erecting various temporary structures, it results in frequent damage of roads. Further the roads are damaged by natural calamities including rains. Hence the assessee was constrained to carry out re- surfacing of huge stretch of roads every year. Accordingly, he submitted that the expenditure incurred by the assessee should be allowed as revenue expenditure. The ld. AR also placed reliance on the decisions rendered by the Hon‟ble Bombay High Court in the case of CIT V/s Chemaux Ltd (1994) 74 Taxman 0201 and in the case of Bharat Forge Co.Ltd V/s CIT (1999) 240 ITR 0654 (Bom).

On the contrary, the ld. DR submitted that the expenditure incurred by the assessee has given benefit of enduring nature and hence the ld. CIT(A) has confirmed the view taken by the AO by following the decisions rendered by the Hon‟ble Supreme Court in the cases of Shri Mangayarkarsasi Milll P Ltd V/s (315 ITR 114 (SC) and Ballimal Naval Kishore and Another (224 ITR 414 (SC).

In the result, the appeal filed by the assessee is treated as allowed.