Depreciation on residential flats ‘no justification in restricting it to 5%; A Sec 80HHC – for computation of book profit u/s 115JA, adjusted book profit is to be adopted; Loss incurred in money- lending of surplus funds is capital loss : ITAT

CHENNAI, JAN 11, 2008 : SEVERAL issues are before the Tribunal.

1. Disallowance of depreciation on residential buildings. The assessee company is engaged in the business of manufacturing and sale of automobile vehicles. The assessee’s case was selected for scrutiny and completed u/s. 143(3). It was noticed by the Assessing Officer that the assessee has claimed depreciation on the five residential flats plus undivided interest in land. The AO restricted the depreciation in respect of five flats at 5% in place of 10%. The assessee was not successful with the Commissioner (Appeals) and is before the Tribunal.

The Tribunal referred to CBDT’s letter F. No.10/14166- IT(A-1) DATED 12-12-19 66 and held that it is in unambiguous language and no second interpretation is required and so the AO was not justified in restricting the depreciation to 5% in respect of the five residential flats which are used by the employees of the assessee company.

2. A Disallowance of expenditure in relation to earning dividend income. It was noticed by the AO that the assessee company had earned income from dividend at Rs. 4,32,01,609/ – in the previous year relevant to the assessment year 2000-01 and the assessee had claimed the said amount as exempt u/s. 10(33) of the Act. The AO estimated the expenditure at 5% of the gross receipts and the same was disallowed which amounted to Rs.21,60,080/ – The CIT (Appeals) confirmed the said disallowance.

The Tribunal observed thatthe AO has not given any reasons but made ad-hoc disallowance at 5% of the gross receipts of dividend. The said disallowance is not sustainable. The AO has to work out the exact expenditure incurred by the assessee for earning the dividend income. This issue is therefore, restored to the file of the AO for fresh adjudication.

3. Disallowance of wealth-tax. The assessee has claimed wealth-tax paid under the Wealth-tax Act, 1957 on the value of the residential building and car forming part of the business assets of the assessee
company. The AO rejected the contention of the assessee that in view of Explanation to section 40(iia) of the Act, this tax relates to the value of the assets of business of the assessee and hence it is outside the scope of the disallowance.

The Tribunal observed, “The wealth-tax paid in pursuance section 40 of the Finance Act, 1983 was with reference to value of a particular asset of the business of the assessee. Moreover, the decision of the Supreme Court in the case of Indian Aluminium Co. Ltd. Vs. CIT was nullified by introducing amendment by insertion of sub-clause (iia) to section 40(a) and there is a specific bar to allow deduction in respect of wealth-tax.” So the order is confirmed

4. Computing deduction u/s. 80HHC: – whether the assessee is entitled to adopt the book profit as profits of the business. The assessee has taken the figure of book profit in place of the profits of business for the purpose of computing the deduction u/s.80HHC and which was reduced as per clause (viii) to section 115JA(2) of the Act.

The DR was fair enough to submit that this issue is covered in favour of the assessee by the decision of the Special Bench of Mumbai ITAT.

Respectfully following the decision of the Special Bench of ITAT, Mumbai in the case of Syncome Formulations (I) Ltd., the Tribunal held that for computing the deductions u/s.80HHC for the purpose of computation of the book profit u/s.115JA, the adjusted book profit is to be adopted and not the profit computed under the normal provisions of the Income-tax Act.

5. Disallowing the claim of the assessee in respect of bad debts amounting to Rs.83,41,614/ – and further enhancing the claim of bad debts to the extent of Rs.4,80,71,436/ -. While filing the return of income, the assessee company had claimed a deduction of Rs.83,41,614/ – as bad debts with qualifier provision written of in the asst. Year 1998-99. During the course of assessment proceedings, the assessee filed a letter and enhanced the claim of bad debts to Rs.4,80,71,436- . The assessee company had made loan advances to M/s. Bangur Finance Ltd. (in short BFL). The total amount due from BFL
was Rs.8,91,82,466/ – and the amount advanced by the assessee company to BFL was secured by 4,68,630 shares of Bank of Rajasthan which was held by the assessee company as a security against the loan advanced to BFL. There was a default on the part of BFL to make the repayment. The assessee company could realize only Rs.91,82,466/ – on account of interest which was offered tax. As against the balance amount due, BFL had paid an amount of Rs.7,64,669/ – towards repayment of the debts due and the assessee company had also adjusted and amount of Rs.13,56,522/ – on account of dividend received on the shares of Bank of Rajashthan. In sum and substance, after the above adjustment, the total amount due as on 31-3-1998 was Rs.7,78,809/ -. There was litigation between the assessee company and BFL by filing suit and criminal cases for recovery of the amount due and finally the Calcutta High Court ordered that the shares offered as security be sold at the rate which is Rs.1.25 above the prevailing market rate and if the shares are not sold within two weeks, then the shares shall be vested with assessee company. Since the shares could not be sold, the shares were vested with the assessee and the shares were delivered in August, 1999 and thereafter, the said shares were sold by the assessee company in December, 1999 and realized part of the amount towards the loan advance made to BFL.

The AO noted that the assessee is engaged in the manufacture of heavy vehicles and money lending and banking are not the principal activities of the assessee. The assessee mad the advance of surplus funds available with it for earning interest and as the assessee could not recover the principal, the same is written off as irrecoverable. The AO noted that the advances are transactions on capital account and, therefore, the loss suffered by the assessee is capital loss which is neither admissible u/s.36(1)(vii) nor u/s.37(1) of the Act. The AO, therefore, made the disallowance of the entire claim of the assessee on account of bad dents written off.

The Tribunal observed that the loss incurred by the assessee is on account of the loan advances to BFL from which the assessee company had earned interest. It was the surplus fund of the assessee which was utilized for advancing loan with the intention of earning interest, but assessee is not a money lender. It is common in the commercial practice that if surplus money is available then the business invests the same for earning interest instead of keeping it idle. The said investment would be capital in nature as surplus funds are invested with a view to earn interest. The assessee is also not a dealer in securities and investments. ‘ A So the loss sustained by the assessee in respect of the loan advanced to BFL is in the nature of capital loss and is not allowable u/s.28 of the Act also.

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