Assessee is thus entitled to claim deduction both under Sec.36(1)(vii) and Sec.36(1)(viia) of the Act. The only limitation is that the amount of deduction shall not exceed the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account. In the present case there is no dispute that provisions of Sec.36(1)(viia) applies to the Assessee and also the fact the amount of deduction relating to bad debts written off is limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account.
In the case of the Assessee there is no dispute that there was no credit balance in the provision account and therefore whole of the bad debts written off would in effect be in excess of the credit balance (which is nil) in the provisions account. Therefore the whole of the bad debts written off would be deductible u/s.36(1)(vii) of the Act. The fact that this sum has been omitted to be claimed in the return of income has been amply demonstrated by the Assessee. Even in the reassessment proceedings the AO has no answer to the claim of the Assessee in this regard and has merely observed in his order that there is no evidence produced by the Assessee. The book entries and the return of income before the AO are enough evidence to come to the conclusion that the amount in question was not claimed in the return of income though the Assessee could have claimed it legitimately. In the given circumstances, we are of the view that there is no merit in the ground raised by the Revenue. Consequently, the ground of appeal of the revenue is dismissed and the order of CIT(A) in this regard is upheld.
INCOME TAX APPELLATE TRIBUNAL, MUMBAI
Dy. C.I.T-3(3) Vs. M/s. Small Industries Development Bank of India
ITA No.: 7143/Mum/2008 – Assessment Years: 2004- 05
M/s. Small Industries Development Bank of India Vs. Dy. C.I.T-3(3),
ITA No.: 6771/Mum/2008 – Assessment Years: 2004- 05
Date of Pronouncement: 15.02.2012
ORDER
Per N. V. Vasudevan (JM):
ITA No. 7143/Mum/2008 is an appeal by the Revenue, while ITA No.6771/Mum/2008 is an appeal by the assessee. Both these appeals are directed against the order dated 30.08.2008 of CIT-32, Mumbai relating to the Assessment Year 2004- 05.
2. The appeal by the Revenue was filed on 17.12.2008 and the appeal by the assessee was filed on 27.11.2008. The assessee is a public sector undertaking and, therefore, as per the decision of Hon’ble Supreme Court in the case of ONGC Vs CCE [1995] Suppl(4) SCC 541 permission of the committee of disputes was necessary for filing the appeal before the Tribunal. The committee on disputes did not permit the Revenue to raise Ground No. 1 in its appeal and similarly the COD did not give permission on Ground Nos. 2 and 3 raised by the assessee in its appeal. The COD has granted permission to raise additional ground in assessee’s appeal. However, the Hon’ble Supreme Court in Civil Appeal No. 1883 of 2011 in the case of Electronic Corporation of India vs. Union of India vide order dated 17.02.2011 has held that the direction of the Hon’ble Supreme Court of India that earlier directions of the Hon’ble Supreme Court for permission of Committee on disputes for filing appeals by public sector undertakings has failed and therefore had to be recalled and accordingly recalled the aforesaid directions. As a result, all the grounds raised by the assessee as well as by the Revenue are required to be considered. We proceed accordingly.
3. ITA No.6771/Mum/2008 is an appeal by the Assessee. Ground no. 1 raised by the assessee in its appeal is with regard to disallowance of Rs.56,99,160 being proportionate amortised amount of lease premium paid to Mumbai Metropolitan Regional Development Authority (MMRDA) in respect of leasehold land treating them as capital expenditure. The Assessee was incorporated on 2nd April 1990 by a special statute viz., “The Small Industries Development Bank of India Act, 1989” (“SIDBI Act”). According to section 50 of the SIDBI Act, SIDBI was exempt from income tax till the amendment under section 142 of the Finance Act, 2001 which deleted the section 50 of the SDBI Act with effect from 1 April 2002 i.e. A. Y. 2002-03. Due to this amendment by way of deletion of section 50 of SIDBI Act, SIDBI became liable to income tax with effect from A. Y. 2002-03. The Assessee was operating from Nariman Point in Mumbai. However, to facilitate the assessee’s business operations and to enable management and conduct of its business to be carried on more efficiently and more profitab1y, it entered into an agreement to lease dated 03.12.1999 for obtaining plot of land on lease with Mumbai Metropolitan Regional Development Authority (MMRDA). As per the clause 6 of the said agreement, the assessee paid Lease premium of Rs.45,59,32,224/- for grant of lease for the term of 80 years from the date of grant of possession of land. The assessee has to pay nominal amount of annual ground rent which is as follows:
(Clause 7 of the agreement).
-From Commencement of the term of lease upto the end of 3 years- Nil
-From 4th year upto the 20th year of the tem of lease – 1% of the premium amount
-From the 21st year upto the 50th year of the term of lease- 2% of the premium amount
-From the 51st year of term of lease upto the end of the term of lease – 3% of the premium amount
For the first three years the assessee had the authority to enter upon the said plot of land for the purpose of erecting office building. The lease deed proper was to be executed after the said period of three years. As the lease period was of 80 years, the aforesaid premium was amortised over the said period, which according to the Assessee was as per the generally accepted accounting policy followed by the assessee and proportionate amount of Rs.56,99,160/- i.e. for the period 01.04.2003 to 31.03.2004 had been debited to accounts and claimed as deduction. According to the Assessee, the Lease premium of Rs.45,59,32,224/- paid to MMRDA though stated as premium, is nothing but rent paid in advance. Hence, this expenditure was for the sole purpose of assessee‘s business and, as such, eligible for deduction. The Assessee thus claimed that the sum of Rs.45,59,32,224/- representing lease premium is rent paid in advance and hence is business expenditure allowable u/s 37(1) of the Income Tax Act, 1961.
4. The AO however, did not allow the claim for deduction made by the assessee holding that the price paid by the assessee was for acquisition of rights to a capital asset and, therefore, cannot be allowed as revenue expenditure.
5. On appeal by the assessee, the Ld. CIT(A) confirmed the order of the AO and in doing so follow the order of the Ld. CIT(A) in assessee’s own case for the A.Y. 2002-03 and 2003-04 in Appeal No.209B/04-05 and 278/04-05 dated 17.03.2006. Before us, it is not in dispute that the Special Bench of the Tribunal in the case of Mukand Ltd. 106 ITD 231 (Mum) (SB) has already taken a view that similar expenditure was capital in nature. Though the dispute in the aforesaid case related to lease of land from MIDC, the same principle will apply to the lease in the case of the assessee as well. The Mumbai Bench of the ITAT in the case of National Stock Exchange of India Ltd. vs. ACIT in ITA No. 3799/Mum/2004 vide order dated 27.04.2011 was also pleased to hold that expenditure in respect of lease from MMRDA in the nature of premium paid was capital in nature. In view of the aforesaid decisions, we are of the view that ground no. 1 raised by the assessee in its appeal is without any merit, consequently the same is dismissed.
6. Ground No.2 raised by the assessee reads as follows :-
“2. On the facts and in the circumstances of the case and in law the learned CIT(A) Commissioner of Income Tax (Appeals) [CIT(A)] erred in confirming the disallowances of Rs.50,00,000/- being 5% of dividend income u/s.14 A and reducing exemption u/s.10 of the Income Tax Act, 1961, assuming that an expenditure of Rs.50,00,000/- must have been incurred for earning dividend income and the reasons assigned by him for doing so are wrong and contrary to the facts and circumstances of the case, the provisions of the Income Tax Act, 1961 and the Rules made thereunder.”
6.1 This ground of appeal can be conveniently decided together with the Ground No. 1 raised by the Revenue in its appeal, which reads as follows:-
“2.1 The appellant has claimed in the Computation of Total Income an amount/of Rs. 9,72,58,640/- (after disallowing Rs.86,86,554/- on assumption basis by prorating exempt income upon total income into expenses other than interest expense) as dividend income exempt u/s.10 of the Income Tax Act, 1961. However, the learned Assessing Officer has disallowed a further sum of Rs. 5,60,82,366/- out of the interest and finance charges and administrative and other expenses (Rs. 704.01 crores) by assuming the same as expenditure incurred in relation to earning of the tax free income, by invoking the provisions of Section 14A of the Income Tax Act, 1961. The learned A.O. has disallowed these proportionate expenses in the ratio of exempt income to total receipts.
6.2. During the previous year 2003-04 relevant to assessment year 2004-05 the assessee earned tax free dividend income of Rs. 10.59 Crores. It was submitted by the assessee that the entire dividend income is from investments which were funded out of its own resources and own resources far exceeded the amount of investments made. Hence, no interest expense was incurred for earning the exempt income. Further, it was also submitted that the assessee‘s staff was not required to make any efforts or follow up for collecting the said income and as these investments are long term and no specific efforts are required for buying and selling frequently. Thus, there is no specific utilization of staff or other infrastructure in earning the said income. The Assessee therefore submitted that no expenses were incurred for earning the Tax-free dividend income. The Assessee also submitted that if at all indirect expenses, other than interest by pro-rating exempt income upon total income x expenses, other than interest would work out to Rs.86,86,554. This was disallowed by the Assessee on its own in the computation of income. The A.O. however held that the Assessee company failed to bring any material on record to prove that no expenses were incurred to earn income which did not form part of the total income under the Act. He disallowed proportionate business expenses in the ratio of dividend and interest income to total receipts. Total receipts during the previous year was Rs.1151.39 Crores out of which income claimed exempt was Rs.10.59 Crores. The proportion of total receipts to income exempt was thus 0.92%. The AO therefore worked out proportionate disallowance of Rs.6,47,68,920 The administrative, interest and finance charges and other expenses during the previous year was Rs.704.01 Crores. Since the Assessee had worked out disallowance on its own at Rs.86,86,554 the difference amount of Rs.5,60,82,366 was added by the AO to the total income by way of disallowance u/s.14A of the Act.
7. On appeal by the assessee, the Ld. CIT(A) held that no part of the interest expenses can be disallowed u/s.14A of the Act, as the assessee had own funds which were sufficient to cover the investment and that there was no material brought on record to show that borrowed funds has been used for making investments necessitating disallowance of interest expenses u/s.14A of the Act. The assessee on his own has disallowed a sum towards administrative and other expenses incurred to earn the income that does not form the total income under the Act in view of the provision of section 14A of the Act. Before the Ld. CIT(A), the assessee submitted that the said disallowance have to be deleted because administrative and other expenses do not vary with dividend income and that no specific expenditure has actually been incurred for earning exempt income. On this submission, the Ld. CIT(A) held as follows:-
“5.6 I have considered the submissions made by the appellant and also, perused orders of the Assessing Officer and the paper book filed on behalf of the appellant. I have also gone through the decisions relied on by the AR for the assessee. According to the decision of the Tribunal in the case of WIMCO SEEDLINGS Ltd. (supra) only expenditure, which has been proved to have been incurred in relation to the earning of tax free income, can be disallowed, and the section cannot be extended to disallow even expenditure which is assumed to have been incurred for the purpose of earning the tax free income. According to the said decision, the word ‘incurred’ refers to the factual spending of the expenditure in relation to the exempt income and does not refer to a deemed spending or assumed spending for the purpose.
5.7 In the instant case, however, I find that the appellant has on his own accepted the disallowance of business expenses on proportionate basis presuming that expenditure was incurred towards earning tax free interest and dividend income. In the case of Gherzi Eastern Ltd, ITA No.6562/Bom/94 vide order dated 23.9.2002, Hon’ble Mumbai Tribunal held that some administrative expenditure was definitely attributable towards earning of the dividend as rightly cited by the AO in the assessment order in addition to other judgements. It cannot be the case of the appellant that not even a single penny of administrative expenditure incurred as per P & L account can be said to be attributable to the earning of dividend income. If a tax payer intentionally maintains his accounts in such an amalgamated manner and does not deliberately maintain separate accounts of expenses incurred for earning of exempt dividend income, the only recourse for revenue authorities (and even for the tax payer) would be estimation of such expenditure in a logical and rational manner looking to the facts and circumstances of the case. The AR has argued that the activity of earning of dividend income involves negligible expenses. I agree that the only activities which can be attributed to it are management’s decision making process regarding investment and thereafter collection and deposit of dividend warrants. Towards these activities, in my view, the ends of justice would be served if the administrative expenditure the dividend income which would be around Rs. 50 lacs. I therefore uphold disallowance to the extent of Rs. 50,00,000/- and the balance amount is deleted.”
8. Aggrieved by the relief granted by the Ld. CIT(A), the Revenue was preferred Ground No. 1 before the Tribunal. Aggrieved by the action of the Ld. CIT(A) in sustaining addition to the extent of Rs.50,00,000/- the assessee has raised Ground No. 2 in its appeal.
9. We have heard the rival submissions. As far as the disallowance of direct expenses in the form of interest is concerned, the finding by the Ld. CIT(A) is that borrowed funds on which interest was paid had not been used for making investments which yielded tax free income. Therefore, disallowance of direct expenses was rightly deleted by the Ld. CIT(A). As far as the administrative and other expenses are concerned we find that it is a case where estimation was required to be made. We are of the view that considering the circumstances of the case, estimation at 5% of the dividend income made by the Ld. CIT(A) is reasonable. Accordingly, we uphold the order of the Ld. CIT(A). Consequently, Ground No. 1 of the Revenue and Ground No. 2 raised by the assessee are dismissed.
10. Ground No. 3 raised by the assessee reads as follows :
“3. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) [CIT(A)] erred in confirming the excess interest charged under section 234C of the Income Tax Act, 1961 amounts to Rs.51,07,946/- and the reasons assigned for doing so are wrong and contrary to the provisions of the Income Tax Act, 1961, and the Rules made there under.”
11. On the issue raised by the assessee in Ground No. 3, the plea of the assessee was that due to circumstances beyond its control and because of the events that happened after the date of payment of third installment of advance tax, there was a short fall in payment of advance tax leading to levy of interest u/s.234C of the Act and in the light of the circumstances set out in para 6.1 of the Commissioners order, the assessee prayed that interest u/s.234C should not be charged. The Ld. CIT(A) on an examination of the plea of the assessee was of the view that the circumstances mentioned by the assessee have to be examined by the Commissioner of Income Tax in exercise of his administrative powers. As far as the AO and the First Appellate Authorities are concerned they cannot take into consideration these circumstances to delete interest u/s.234 of the Act. Ground No. 3 is by the assessee is directed against the aforesaid order of the Ld. CIT(A).
12. We have heard the submissions of the learned counsel of the assessee. We are of the view that the order of the Ld. CIT(A) on this issue does not call for any interference. As rightly held by him the circumstances set out by the assessee have to be considered only in an petition for waiver of interest made to the administrative authorities and cannot be made in the appellate proceedings in which only liability to tax can be subject matter of the proceedings. Consequently, Ground No. 3 raised by the assessee is dismissed.
13. The assessee has filed an application for admission of the following additional grounds of appeal:
ADDITIONAL GROUNDS OF APPEAL
4(a) On the facts and in the circumstances of the case the lower authorities ought to have considered and allowed the deduction of Rs.51,83,50,000/- paid as contribution to the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) being expenditure incurred wholly and exclusively for the purpose of business, and not doing so is wrong and contrary to the facts of the case, the provisions of the Income Tax Act and the Rules and regulations made thereunder.
b) The leanred Assessing Officer ought to have granted the said deduction irrespective of the fact that the Appellant had not made any such claim of deduction for contribution to CGTMSE of Rs.51,83,50,000/- in the Return of Income.
c) The Appellant prays that deduction be allowed in light of the following:
That the contribution is deductible being expenditure incurred for meeting the objects of the business of the appellant; The proposition laid down in National Thermal Power Corporation vs. CIT (229 ITR 383) (SC); The principle laid down in Circular No.14(XL-35) dated 11-4-1995 of the Central Board of Direct Taxes and The principle laid down in Commissioner of Income-tax v. Chandulal Keshavalal & Co. [1960] 38 ITR 601 (SC).
13.1 The assessee has also filed an application for admitting additional evidence in support of the additional grounds of appeal. The additional evidences sought to be filed before us as additional evidence are (i) copy of the Trust Deed of Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) (ii) copy of deed of modification of CGTMSE and (iii) document evidencing the contribution made by the assessee to CGTMSE. The admission of the aforesaid additional grounds was opposed by the Ld. DR for the reason, that claim cannot be made by the assessee for the first time before the Tribunal. It was also argued that the additional evidence cannot be admitted at this stage and no grounds have made out for admission of the additional grounds. It was also argued that admission of the additional grounds would require examination of facts and even the Hon’ble Supreme Court in the case of NTPC (supra) have laid down that additional evidences can be admitted provided facts are already available on record.
14. We have considered the submissions of the learned counsel for the assessee and the Ld. DR. The limited request of the assessee is to send back the matter to the lower authorities. The deduction is claimed by the assessee under the provisions of section 36(1)(xii) of the Act which lays down that any expenditure incurred by a corporation if its is constituted by a Central, State or a Provisional Act and if such expenditure is incurred for the objects and purposes authorized by the Act under which it is constituted or established, should be allowed as a deduction. We are of the view that the existences of the aforesaid conditions have to be seen by perusal of the objection purpose mentioned in the Act, under which the assessee was constituted. It has to be further seen that whether the Trust Deed by which CGTMSE was constituted and the contribution made by the assessee to CGTMSE fall within the objection purpose authorized by the Act by which the assessee was constituted or established. We are of the view that this may not require adjudication of any disputed fact. Consequently, we reject the objection of the Revenue. We admit the additional ground, as the purpose of the proceedings under the Act is to determine the correct taxable income of assessee. Since the matter requires examination by the AO, we direct the AO to examine this claim after giving opportunity to the assessee and in the light of the additional evidence, which we admit because it is necessary for decision on the claim made by the Assessee. Ground No. 4 is accordingly, considered as allowed.
15. In the result, the appeal by the assessee is partly allowed.
16. ITA No. 7143/Mum/2008 is an appeal by the Revenue. Ground No. 1 has already been decided while deciding Ground No. 2 raised by the assessee for the reason stated therein. Thus ground no. 1 of the Revenue is accordingly, dismissed.
17. Ground No. 2 raised by the Revenue reads as follows:-
“2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing to grant deduction on account of bad debts written off at Rs.25,25,55,044/- u/s.36(1)(vii) of the I.T. Act, 1961 which was not claimed by the assessee in the return of income.”
18. It was the claim of the Assessee before CIT(A) that during the captioned assessment year, the assessee had written off bad debts to the tune of Rs.25,25,55,044/- as irrecoverable in the accounts but failed to claim the deduction u/s.36(1)(vii) in the Return of Income. The claim was made by the Assessee for the first time before CIT(A). In the Assessment order the learned A.O. did not have any occasion to consider the claim of the Assessee. Before CIT(A), the Assessee submitted that the learned A.O. should have allowed the deduction u/s.36(1)(vii) irrespective of the fact that the assessee had not made any such claim of deduction for bad debts of Rs.25,25,55,044/- in the return of income.
18.1 It was submitted that the entire bad debts written-off in the accounts as irrecoverable by the appellant is allowable u/s. 36(1)(vii) in view of the following:
i) deduction u/s.36(1)(vii) is independent of deduction granted in earlier years, u/s.36(1)(viia) (c).
ii) Further as required by the proviso to section 36(1)(vii), opening balance at the commencement of the financial year, namely opening balance in provision account as on 01.04.2004 alone is to be considered in arriving at the credit balance in provision for bad and doubtful debts u/s.36(1)(viia). In the present case there will only be a debit balance of Rs.181.40 crore as detailed below and there will not be any credit balance. Hence, the entire bad debts writeen off of Rs.25,25,55,044/- should have been allowed as deduction u/s.36(1)(vii).
Rs. Crores
