IT : Interest under section 244A is also payable on interest portion of tax demand
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[2012] 24 taxmann.com 266 (Allahabad)
HIGH COURT OF ALLAHABAD
Lohia Starlinger Ltd.
v.
Commissioner of Income-tax*
SUNIL AMBWANI AND HET SINGH YADAV, JJ.
CIVIL MISC. WRIT PETITION TAX NO. 676 OF 2000
JULY 6, 2012
Section 244A of the Income-tax Act, 1961 - Refunds - Interest on - Assessment year 1993-94 - Whether interest under section 244A is also payable on interest portion of tax demand - Held, yes - Total tax liability of assessee was computed at Rs. 3.61 crore, which included interest liability of Rs. 1.83 crore - Assessee paid Rs. 1.74 crore in discharge of said liability - Earlier assessee had raised a claim of set off of Rs. 3.53 crore which was disallowed - Finally it was allowed and consequenlty, assessee was found eligible to have income tax refund - Revenue denied to pay interest under section 244A on ground that part payment of Rs. 1.74 crore deposited earlier by assessee was towards discharge of interest liability of Rs. 1.83 crore and no interest was payable on interest - Whether where valuable rights of refund and interest is involved, Income Tax Authorities are not required to draw assumption on quantum of amounts - Held, yes - Whether where treasury challans filed by assessee demonstrated that part payment was made as income tax, and not towards interest department was not entitled to draw any inference or presumption that amount was not deposited as tax but as interest - Held, yes - Whether, nevertheless, even if such payment was to be presumed as interest, interest under section 244A was payable on interest also - Held, yes [In favour of assessee]
FACTS
In the assessment order, the petitioner assessee was found liable to pay Rs. 3.61 crore which included interest of Rs. 1.83 crore under sections 220(2) and 234B. The assessee made payment of Rs. 1.74 crore. There was a claim of set off of Rs. 3.53 crore made by the assessee which was disallowed by the Assessing Officer. Said claim was made under section 72A(2)(ii) on account of loss incurred by a company, LML, which was amalgamated with the assessee. Said claim was allowed subsequently, and the assessee was found to have nil tax liability. Accordingly, an order of rectification was passed under section 154, whereby income-tax refund of Rs. 1.95 crores was allowed which included interest of Rs. 22.59 lakh under section 244A. However, an another order of rectification was passed whereby interest of Rs. 22.57 lakh allowed under section 244A was withdrawn, by raising a presumption that as payment made by assessee of Rs. 1.74 crore was less than total interest liability of Rs. 1.83 crore, therefore, entire payment made by the assessee was towards the interest liability and not tax liability; and under the provisions of section 244A no interest is payable on the interest paid by the assessee. The assessee moved a revision application against said order which was dismissed. Hence, instant writ petition.
HELD
The question that arises for consideration in instant case is, whether the payment made by the assessee of Rs. 1.74 crore against the total amount of Rs. 3.61 crore, which included the interest of Rs. 1.83 crore under Section 220(2) and 234-B, was paid as tax or interest. [Para 15]
The Assessing Officer's assumption in the order under section 154, that since the amount deposited was less than interest payable, it should be treated as interest and not as tax, is based upon conjectures. He did not verify, whether the amount was actually paid as tax or interest. [Para 25]
The treasury challans filed by the assessee demonstrated that the payment of Rs. 1.74 crore is as income tax, and not towards interest. The deposit is mentioned in the first column on the top as income and not as interest under section 201(1A) in the third column. The department was, thus, not entitled to draw any inference or presumption that the amount was not deposited as tax, but as interest. The amount deposited as tax could not be treated as interest. [Para 26]
Where valuable rights of refund and interest is involved, the Income Tax Authorities are not required to draw assumption on the quantum of the amounts. In this case there is no other material placed by the respondents to justify the inference other than the quantum of the amount being less than the interest payable, to support the assumption that the deposit was of interest and not of tax. [Para 27]
It is, therefore, held that the amount in question was deposited as tax and not as interest, and also that even if a presumption could be drawn that the amount was deposited as interest, the interest under section 244A(1) was payable on interest. [Para 29]
For the aforesaid reasons, the writ petition is allowed. The impugned orders are set aside insofar as they deny the refund of Rs. 22,57,869. The assessee will also be entitled to interest on this amount from the date of deposits. [Para 30]
CASES REFERRED TO
Delhi Development Authority v. ITO [1998] 230 ITR 9 (Delhi) (para 17), CIT v. Goodyear India Ltd. [2001] 249 ITR 527/117 Taxman 501 (Delhi) (para 21), CIT v. Narendra Doshi [2002] 254 ITR 606/122 Taxman 717 (SC) (para 22), Sandvik Asia Ltd. v. CIT [2006] 280 ITR 643/150 Taxman 591 (SC) (para 23), D.J. Works v. Dy. CIT [1992] 64 Taxman 91 (Guj.) (para 24), CIT v. Needle Industries (P.) Ltd. [2000] 111 Taxman 679 (Mad.) (para 24) and CIT v. Ambat Echukutty Menon [1988] 173 ITR 581 (Ker.) (para 24).
Shakeel Ahmad for the Petitoiner. Govind Krishna for the Respondent.
JUDGMENT
1. M/s Lohia Starlinger Limited (the petitioner) is a public limited company, incorporated under the Companies Act, 1956. On 1.3.1993 M/s Lohia Machinery Manufacturers Limited, a loss making company, amalgamated with the petitioner-company, carrying a total loss of Rs. 3,53,99,401/-. The original assessment under Section 143 (3) of the Income-tax Act, 1961 (the Act) for the assessment year 1993-94, was completed by Assistant Commissioner of Income-tax, Central Circle-5, Kanpur on a total income of Rs. 3,70,29,530/- as against the returned income at Nil. The claim of set off of loss of M/s Lohia Machinery Manufacturers Limited (the amalgamated company), was not allowed for want of requisite certificate under Section 72A (2) (ii) of the Act by the specified authority, during the pendency of the assessment.
2. The petitioner-company filed an appeal before the Commissioner of Income-tax (Appeals). The Appellate Authority allowed some of the reliefs. The petitioner further filed an appeal in the Income Tax Appellate Tribunal, which was pending, when this writ petition was filed.
3. The petitioner-company preferred an application under Section 119 (2) (b) of the Act to the Central Board of Direct Taxes (CBDT), New Delhi for condonation of delay in filing the certificate under Section 72-A(2)(ii). The CBDT, by its order dated 31.3.1998, condoned the delay in filing the certificate.
4. The Commissioner of Income-tax, Central Circle-5, Kanpur passed an order on 22.7.1998, giving effect to the order of CBDT dated 31.3.1998, and made computation of income as follows:-
"Consequently to give effect C.B.D.T's New Delhi order dated 31.3.98 the income of the assessee is computed as under:-
| Income assessed as per order dated 2.12.1996 | Rs. 3, 67, 51, 518/- | |
| Loss: Unabsorbed business loss of M/s Lohia Machinery Manufacturers Ltd. as per latest order of DCIT (Spl. Range)-25 Bombay | Rs. 2, 39, 52, 881/- | |
| Loss : Unabsorbed depreciation of M/s Lohia Machinery Manufacturers Ltd as per latest order of DCIT (Spl. Range)-25, Bombay (From A.Y. 89-90 to 93-94) | Rs. 1, 10, 32, 892/- | |
| Rs.3, 49, 85, 774/- | ||
| Loss: Unabsorbed investment allowance of M/s Lohia Machinery Manufacturers Ltd as per latest order claimed for Rs. 34, 69, 526/-and out of which unabsorbed investment allowance is allowed for Rs. 17,65,744/- | Rs. 17, 65, 744/- | |
| Rs. 3, 67, 51, 518/- | ||
| Rs. Nil |
The balance unabsorbed investment allowance of Rs. 17,08,782/- is allowed to be carried forward in the subsequent assessment years.
Hence, rectification is made accordingly and the total income of the assessee is computed as Nil. Issue notice of demand and refund voucher.
(R.C. PANT)
Asstt. Commissioner of Income-tax
Cen. Circle-IV, Kanpur"
5. In pursuance to the above referred order dated 22.7.1998 passed by the Assistant Commissioner of Income-tax, Central Circle-V, Kanpur under Section 143 (3)/119 (2) (b)/154 of the Act, a refund of Rs. 1, 95, 76, 025/-, including interest of Rs. 22,57,869/-was allowed under Section 244-A of the Act.
6. By an order dated 12.8.1998 passed under Section 154 of the Act, (providing for rectification of mistakes), the Assessing Authority has withdrawn the interest allowed at Rs. 22, 57, 869/-under Section 244-A of the Act. The petitioner filed a revision against the order of the Commissioner of Income-tax (Central), Kanpur under Section 264 of the Act, which was rejected on 29.3.2000, giving rise to this writ petition.
7. The Assessing Authority, in the order dated 12.8.1998 under Section 154 of the Act, has observed that on the total payment made by the assessee-company being less than the total interest payment by the assessee, it should be assumed that the entire payment to the assessee was towards the interest payable by it. Under the provisions of Section 244 (the correct number of the Section is Section 244-A), no interest is payable on the interest paid by the assessee and therefore, since the assessee has not made any payment of either of the tax or the additional tax, no interest under Section 144 is allowable to the assessee. The interest amounting to Rs. 22,57,869/-was thus withdrawn.
8. The Revisional Authority dismissed the application under Section 264 of the Act, for withdrawal of interest of Rs. 22,57,869/-vide order dated 12.8.1998, on the ground that he did not find any justification to intervene on the facts. He did not agree that there was any change of opinion by the AO at the time of passing of order under Section 154 dated 12.8.1998, and that the AO's interpretation of Section 244-A (i) was not correct. The Revisional Authority did not agree that any interest was payable on refund under Section 154 dated 22.7.1998, and the notice of demand dated 12.8.1998.
9. Shri Shakeel Ahmad, appearing for the petitioner-company submits that the petitioner is entitled to interest on the refund under Section 244-A(a)(b) of the Act. The amount, on which the interest was claimed and paid, was the amount of tax, which was deposited or adjusted with the refund of the earlier assessment year. He submits that under Section 244 of the Act the interest is also included in the word 'tax' and therefore, the interest is also payable on the amount of interest.
10. Shri Shakeel Ahmad submits that the payment of interest under Section 244-A of the Act was a debatable issue and was, therefore, outside the purview of Section 154 of the Act, which admits only rectification of mistake. There was no mistake apparent on the face on record. The order dated 22.7.1998, by which the set off of the loss of M/s Lohia Machinery Manufacturers Limited was allowed, has become final and was not subject-matter of dispute in the revision petition. The observations of the revisional authority were without jurisdiction.
11. It is further submitted by Shri Shakeel Ahmad that earlier the interest on refund was not permissible. Section 244-A was added to the Act, providing for interest on refund by Direct Tax Laws (Amendment) Act, 1987 w.e.f. 1.4.1989. Section 240 (1) and 244-A (1) and (2) are quoted as below:-
"244. (1) Where a refund is due to the assessee in pursuance of an order referred to in section 240 and the [Assessing] Officer does not grant the refund within a period of [three months from the end of the month in which such order is passed], the Central Government shall pay to the assessee simple interest at [fifteen] per cent per annum on the amount of refund due from the date immediately following the expiry of the period of [three] months aforesaid to the date on which the refund is granted.
244A. (1) [Where refund of any amount becomes due to the assessee under this Act], he shall, subject to the provisions of this section, be entitled to receive, in addition to the said amount, simple interest thereon calculated in the following manner, namely :-
(a) where the refund is out of any tax [paid under section 115WJ or] [collected at source under section 206C or] paid by way of advance tax or treated as paid under section 199, during the financial year immediately preceding the assessment year, such interest shall be calculated at the rate of [one-half per cent] for every month or part of a month comprised in the period from the 1st day of April of the assessment year to the date on which the refund is granted:
Provided that no interest shall be payable if the amount of refund is less than ten per cent of the tax as determined under sub-section (1) of section 115WE or] sub-section (1) of section 143 or] on regular assessment;
(b) in any other case, such interest shall be calculated at the rate of one-half per cent] for every month or part of a month comprised in the period or periods from the date or, as the case may be, dates of payment of the tax or penalty to the date on which the refund is granted.
Explanation.- For the purposes of this clause, "date of payment of tax or penalty" means the date on and from which the amount of tax or penalty specified in the notice of demand issued under section 156 is paid in excess of such demand.
(2) If the proceedings resulting in the refund are delayed for reasons attributable to the assessee, whether wholly or in part, the period of the delay so attributable to him shall be excluded from the period for which interest is payable, and where any question arises as to the period to be excluded, it shall be decided by the Chief Commissioner or Commissioner whose decision thereon shall be final."
12. Shri Govind Krishna, appearing for the department, submits that the petitioner was liable to pay Rs. 3, 61, 46, 374/- as per ITNS-150 dated 3.3.1997, which included the interest of Rs. 1, 83, 53, 133/- under Section 220 (2) and 234-B of the Act; against this the petitioner made the payment of Rs. 1, 74, 10, 640/-, which is less than the interest payable by the petitioner. Thus it is assumed, that the entire payment made is towards the interest payable by the petitioner. As per Section 244-A, no interest is payable to the petitioner on the interest paid by it. The observation of the AO to this effect in the order dated 12.8.1998 is correct.
13. Shri Govind Krishna submits that the prescribed certificate for carrying forward business losses of the amalgamated company was not filed along with the return. The claim of the assessee for deduction was thus disallowed by order dated 29.3.1996 under Section 143(3) of the Act. The CBDT, by order dated 31.3.1998 under Section 119(2)(b), condoned the delay and consequently the order under Section 154 was passed on 27.7.1998, giving effect to the directions of the CBDT and a refund of Rs. 1,95,76,025/-including the interest under Section 244A of Rs. 22,57,869/- was worked out. The petitioner was liable to pay Rs. 3,61,46,374/- including the interest of Rs. 1,83,53,133/- under Section 220(2) and 234-B of the Act as per order dated 3.3.1997. Against this demand, the petitioner made a payment of Rs. 1,74,10,640/-. The total payment made by the assessee was less than the total interest payable. It is thus assumed that the payment made by the assessee was towards the demand of interest and as per provisions of Section 244-A, no interest is payable by the department on the interest paid by the assessee. Consequently an order under Section 154 of the Act was passed on 12.8.1998, rectifying the mistake and the interest allowed to the assessee under Section 244-A of the Act was withdrawn.
14. Shri Govind Krishna submits that the Assessing Authority made a mistake in allowing refund of interest of Rs. 22,57,869/-. He has a right given under Section 154 of the Act to correct the mistake.
15. The question that arises for consideration of the Court in this case is, whether the payment made by the petitioner of Rs. 1,74,10,640/- against the total amount of Rs. 3,61,46,374/- ( as per ITNS-150 dated 3.3.1997), which included the interest of Rs. 1,83,53,133/- under Section 220(2) and 234-B, was paid as tax or interest. If it was paid towards the tax, the petitioner is entitled for interest under Section 244-A of the Act on the amount of refund. If, however, the amount of deposit is treated as interest, no interest is allowed under the Act on the refund of interest.
16. Shri Shakeel Ahmad has filed a supplementary affidavit, annexing therewith the treasury challans on deposit of corporate tax on Form-0020. The company deposited Rs. 75 lacs on 31.3.1997 as income-tax; Rs. 57,15,922/- on 5.2.1997 as income tax, and thereafter Rs. 41,94,718/- on 30.3.1998 as income-tax for the assessment year 1993-1994 (Assessing Officer, KNP/AC-CC-V-12 (PAN No.20-028-CY-5940). It is stated in paragraphs-3 and 4 of the supplementary affidavit of Shri Sudhir Singh, Deputy Manager (Taxation) of the petitioner-company, that these amounts were paid as income-tax and not towards the interest.
17. In Delhi Development Authority v. ITO [1998] 230 ITR 9 the Delhi High Court, in the fact situation in which the DDA had not deducted tax at source from payment of interest made to the buyers of flats, on a finding recorded by the Income Tax Appellate Tribunal that the DDA was not obliged to deduct tax at source and the ITO refunding the amount recovered from the DDA along with interest, allowed the interest under Section 244 (1A) for the year 1988-89 and under Section 244-A for 1989-90 and 1990-91, treating the order under which the petitioner's liability was determined and recovery was made from the petitioner as assessee as the order of assessment. It was held by the Delhi High Court, that the order, under which the liability was determined to make payment and the recovery was made from the petitioner, was an order of assessment. The petitioner was an assessee and thus the order having been set aside in Appeal, Section 244 and Section 244-A were clearly attracted.
18. Section 244 (1) of the Act is attracted, where a refund is due to the assessee in pursuance to the order referred to under Section 240 (refund due on an order passed in appeal) and where the AO does not grant the refund within three months. In such case, a simple interest is to be paid by the Central Government at 15% per annum on the amount of refund due. Section 244 (1A) is attracted as interest on refund, where the refund of any amount becomes due to the assessee under the Act. In such case, he is entitled to receive in addition to the said amount simple interest calculated in the manner provided in clause (a) and (b) of Section 244 (1) of the Act.
19. It is significant to note that Section 244A (1) (a) refers to the refund out of any tax paid by way of advance tax or paid under Section 199 during the financial year immediately preceding the assessment year. Clause (b) talks of tax or penalty. It does not refer to interest. Both under Sections 244 and 244-A of the Act the interest on refund is on the amount of tax, or tax or penalty and not on the refund of interest.
20. In Delhi Development Authority (supra) the refund was of tax deposited, which was to be deducted at source from payment of interest made to the buyers of flats and not interest deposited by the Delhi Development Authority.
21. In Section 244A, the words 'refund of any amount due to the assessee', under this Act are included in the section itself. In CIT v. Goodyear India Ltd [2001] 249 ITR 527/117 Taxman 501 (Delhi) it was held as under (page 532):-
"Section 244 deals with interest on refund where no claim is needed. Sub-section (2), inter alia, provides that where a refund is due to the assessee, in pursuance of an order referred to in section 240' and the Assessing Officer does not grant the refund within the stipulated time, the Central Government is required to pay simple interest at the stipulated rate. Section 240 deals with refund on appeal, etc. This provision clearly lays down that where as a result of any order passed in appeal or other proceedings under this Act, refund of any amount becomes due to the assessee, the Assessing Officer shall, except as otherwise provided in this Act, refund the amount to the assessee without his having to make any claim in that behalf. The crucial expressions in section 240 are 'any amount which becomes due to the assessee as a result of any order passed in any appeal or other proceedings under the Act and the 'amount becomes due to the assessee'. Section 244 refers to the liability fastened on the Central Government in case of failure to grant refund within the stipulated time in a case where refund is due to the assessee in pursuance of an order referred to in Section 240. A combined reading of both the provisions makes the position crystal clear that it is any amount which becomes due to the assessee and not necessarily the tax component. Undisputedly, a sum of Rs. 1, 90, 499 which qualifies for interest became payable to the assessee on the basis of an order passed under section 240 of the Act. Merely because this was inclusive of an amount which was payable under section 214 of the Act, that would not make the position any different. It is an amount which became due to the assessee on the basis of the appellate order. Therefore, the assessee was entitled to interest in terms of section 244 of the Act. A similar view has been taken by the Gujarat High Court in D.J. Works v. Deputy CIT [1992] 195 ITR 227 and Chimanlal S. Patel v. CIT [1994] 210 ITR 419 though with different conclusions."
22. In CIT v. Narendra Doshi [2002] 254 ITR 606/22 Taxman 717 (SC), a three-judge Bench of the Apex Court affirmed the decision of the High Court where interest on interest was granted.
23. In Sandvik Asia Ltd. v. CIT [2006] 280 ITR 643/150 Taxman 591 (SC),it was held:-
"In our view, the Act recognizes the principle that a person should only be taxed in accordance with law and hence where excess amounts of tax are collected from an assessee or any amounts are wrongfully withheld from an assessee without authority of law the Revenue must compensate the assessee.
At the initial stage of any proceedings under the Act any refund will depend on where any tax has been paid by an assessee in excess of tax actually payable by him and it is for this reason that section 237 of the Act is phrased in terms of tax paid in excess of amounts properly chargeable. It is, however, of importance to appreciate that section 240 of the Act, which provides for refund by the Revenue on appeal, etc., deals with all subsequent stages of proceedings and, therefore, is phrased in terms of 'any amount' becoming due to an assessee.
The Delhi High Court in Goodyear India Ltd's case [2001] 249 ITR 527 held that an assessee is entitled to further interest under section 244 of the Act on interest under section 214 of the Act which had been withheld by the Revenue. The case of the Revenue was that interest payable to an assessee under section 214 of the Act was not a refund as defined in section 237 of the Act and hence no interest could be granted to the assessee under section 244 of the Act. The court held that for this purpose section 240 of the Act was relevant which referred to refund of any amount becoming due to an assessee' and that the said phrase would include interest and hence the assessee was entitled to further interest on interest wrongfully withheld. It is also important to appreciate that the Delhi High Court also referred to the Gujarat High Court decision in D.J. Works' case [1992] 195 ITR 227 and read it as taking the same view. This supports the view of the appellant on the correct reading of the Gujarat High Court decision.
As already noticed in paragraph supra, the Madras High Court in Needle Industries Private Ltd's case [1998] 233 ITR 370, has also interpreted the phrase 'any amount' in the same manner when considering the provisions of section 244 (1A) of the Act, which also uses the same phrase in the context of interest payable by the Revenue. In express terms the Court held that the expression referred not only to the tax but also to interest. The Court agreed with a similar view taken by the Kerala High Court in the case of Ambat Echukutty Menon [1988] 173 ITR 581. Both these were cases where the Court was called upon to decide whether further interest was payable by the Revenue on interest which had to be repaid to the assessee.
In our opinion, the appellant is entitled to interest under section 244 and/or section 244A of the Act in accordance with the terms and provisions of the said sections."
24. The Supreme Court in Sandvik Asia Ltd. (supra) has approved the opinions of Delhi High Court in Goodyear India Ltd. (supra); D.J. Works v. Dy. CIT [1992] 64 Taxman 91 (Guj.), CIT v. Needle Industries (P.) Ltd. [2000] 111 Taxman 679 (Mad.) and CIT v. Ambat Echukutty Menon [1988] 173 ITR 581 (Ker.) in holding that for the purposes of Section 244, an assessee is entitled to further interest, on interest under Section 214 of the Act, which is withheld by the revenue. Section 240 of the Act referred to refund on any amount becoming due to the assessee and the said phrase would include interest and hence assessee was entitled to further interest on interest the wrongfully withheld.
25. The petitioner was liable to pay Rs. 3, 61, 46, 374/- as per ITNS-150 dated 3.3.1997, which included interest of Rs. 1, 83, 53, 133/- under Section 220 (2) and 234-B of the Act against which the petitioner made payment of Rs. 1, 74, 10, 640/-. The AO's assumption in the order under Section 154, that since the amount deposited was less than interest payable, it should be treated as interest and not as tax, is based upon conjectures. He did not verify whether the amount was actually paid as tax or interest.
26. The treasury challans filed along with the supplementary affidavit clearly demonstrate, that the petitioner had deposited Rs. 75 lacs on 31.3.1997, Rs. 57, 15, 922/- on 5.2.1997, and Rs. 41, 94, 718/- on 30.3.1998 as income-tax, and not towards interest. The deposit is mentioned in the first column on the top as income and not as interest under Section 201 (1A) in the third column. The department was thus not entitled to draw any inference or presumption that the amount was not deposited as tax, but as interest. The amount deposited as tax could not be treated as interest.
27. Where valuable rights of refund and interest is involved, the Income Tax Authorities are not required to draw assumption on the quantum of the amounts. In this case there is no other material placed by the respondents to justify the inference other than the quantum of the amount being less than the interest payable, to support the assumption that the deposit was of interest and not of tax. To test the assumption, if we deduct the interest of Rs.1, 83, 53, 133/- out of the total amount of Rs. 3, 61, 46, 374/- liable to be paid by the petitioner, the amount of tax comes to Rs. 1, 77, 93, 241/-, which is more than the amount deposited by the petitioner.
28. We also find that the revisional order did not give any reason other than supporting the same reasons given by the AO in the order under Section 154 of the Act and also does not refer to any reasons other than those given by the AO that since the amount deposited was less than the interest to be paid, there will be an assumption that the petitioner had deposited the amount as interest and not the tax.
29. On the aforesaid discussion, we hold that the amount in question was deposited as tax and not as interest, and also that even if a presumption could be drawn that the amount was deposited as interest, the interest under Section 244A (1) of the Act, was payable on interest.
30. For the aforesaid reasons, the writ petition is allowed. The orders passed by the AO dated 12.8.1998 under Section 154 of the Act, and the order in revision dated 17.7.2000 for the assessment year 1993-94 are set aside insofar as they deny the refund of Rs. 22, 57, 869/-. The petitioner-company will also be entitled to interest on this amount from the date of deposits.
A glance at the provisions of section 271(1)(c) of the Income-tax Act, 1961, suggests that in order to be covered by it, there has to be concealment of the particulars of the income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his income. The meaning of the word "particulars" used in section 271(1)(c) would embrace the details of the claim made. Where no information given in the return is found to be incorrect or inaccurate, the assessee cannot be held guilty of furnishing inaccurate particulars. In order to expose the assessee to penalty, unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By no stretch of imagination can making an incorrect claim tantamount to furnishing inaccurate particulars. There can be no dispute that everything would depend upon the return filed by the assessee, because that is the only document where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. To attract penalty, the details supplied in the return must not be accurate, not exact or correct, not according to the truth or erroneous.Where there is no finding that any details supplied by the assessee in its return are found to be incorrect or erroneous or false there is no question of inviting the penalty under section 271(1)(c). A mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing inaccurate particulars.
INCOME TAX APPELLATE TRIBUNAL, MUMBAI
ITA No. : 5900/Mum/2011
Assessment Year: 1998-99
M/s. Reliance Infrastructure Limited (Formerly known as BSES Ltd.)
Vs.
ACIT-10(1)
Date of Pronouncement: 01.08.2012
O R D E R
Per AMIT SHUKLA, J.M.:
This appeal has been preferred by the assessee against order dated 01.06.2011 passed by the Ld. CIT(A) -21, Mumbai in relation to the penalty proceedings u/s.271(1)(c) for the A.Y. 1998-99. The only issue involved in this appeal is levy of penalty of Rs. 31,36,815/- on account of disallowance of interest u/s.220(2) amounting to Rs. 89,62,329/-.
2. The brief facts of the case are that the assessee under the head "interest and other charges" had debited an amount of `.2056.50 lakhs on account of "guarantee & other charges". During the assessment proceedings from the perusal of these details, the A.O. noticed that the assessee has also claimed an amount of `.89,62,329/- in respect of interest paid u/s.220(2) for the A.Y. 1991-92. The A.O. was of the opinion that interest in question was clearly in the nature of income-tax and was not allowable expenditure under the provisions of the Act. The A.O. required the assessee as to why such an interest amount should not be disallowed and added back to the total income. In response, the assessee agreed that the said claim was clearly disallowable and due to bonafide mistake the said interest was grouped under the head "guarantee and other charges". Therefore, the same was added back in the computation of income. Accordingly, the said claim of Rs. 89,62,329/- stood disallowed.
3. The A.O. thereafter, initiated the penalty proceedings u/s.271(1)(c) on this disallowance. Before the A.O. in the penalty proceedings, it was submitted that the amount of interest u/s.220(2) was included due to bonafide mistake made in the computation of income and it had neither concealed any income nor had furnished any inaccurate particulars of income thereof. It was further explained that during F.Y. 1997-98 it had received interest u/s.244A amounting to Rs. 711.21 lakhs which was credited to the P & L account and had paid interest u/s.220(2) at Rs. 89.62 lakhs which was debited to the P & L account under the head "guarantee & commissioner charges". Accordingly, the assessee offered to tax on the net interest income of Rs. 621.59 lakhs. Since the interest u/s.220(2) was clubbed with "guarantee and other charges", it was not possible for appellant to identify the interest expenditure and offer the same for disallowance. On this explanation of netting off interest and bonafide mistake, it was requested that the penalty proceedings should be dropped. However, the A.O. did not agree with the assessee's contention and after relying upon the various court decisions, he levied the penalty of Rs. 31,36,815/-.
4. Before the Ld. CIT(A) the same contentions were reiterated and was submitted that purely due to bonafide mistake that the said interest u/s. 220(2) could not be added back in the computation of income. Reliance was also placed on the decision of Reliance Petro Products Ltd. reported in 322 ITR 158. The Ld. CIT(A) too confirmed the said penalty on the ground that the claiming of interest paid u/s.220 was not only on incorrect claim but also goes in reducing the interest income and, therefore, penalty has been rightly levied.
5. Before us, the learned Sr. Counsel submitted that this was a mistake on factual aspect and expenditure was claimed on a bonafide belief that the same was "guarantee & commission charges". He further contented that the various decisions of the Tribunal have held that the interest received and interest paid to Income Tax Department can be netted and same is permissible. In this regard reliance was placed on the decision of the Mumbai Bench of the Tribunal in the case of DCIT vs. Bank of America NT & SA, reported in (2011) 47 SOT 124, wherein the Hon'ble ITAT after taking into account several decisions of the High Court and Tribunal has come to conclusion that netting of interest u/s.244 and 220(2) is permissible. Lastly, he submitted that on these facts there cannot be case of furnishing of any inaccurate particulars of income, as the moment the A.O. brought to the notice of the assessee, it had agreed for disallowance. In support of this contention, he has relied upon the decision of the ITAT Mumbai Bench in the case of M/s. B. S. I. S LTD., in ITA No. 2935/Mum/2003.
6. On the other hand, the learned Sr. DR submitted that there could not be any better case for confirming the penalty, as under no provision of law interest u/s.220 can be held to be allowable expenditure. Such a claim definitely amounts to furnishing of inaccurate particulars of income. He thus relied upon the findings of the Ld. CIT(A).
7. We have carefully considered the rival submissions and also perused the material placed on record. From the records it is seen that the assessee under the head "interest and other charges" has debited an amount of Rs. 2056 lakhs on account of "guarantee and other charges" which also includes interest u/s.220(2) paid to the Income Tax Department for a sum of Rs. 89,62,329/- for the A.Y. 1991-92. Before the A.O. following explanation was given during the course of the penalty proceedings:
"8. We would like to bring out to your honour that during the financial year 1997-98 we had received interest u/s.244A amounting to Rs. 711.21 lakhs which was credited to the profit and loss account and had paid interest u/s.220(2) of Rs. 89.62 lakhs which was debited to the profit & loss account under the head "Guarantee & commission charges". Accordingly, we had offered to tax the net interest income of Rs. 621.59 lakhs. Since the interest u/s.220(2) was clubeed with guarantee and commission charges, it was not possible for us to identify the interest expenditure and offer the same for disallowance. We had claimed the interest expenditure as an allowable expenses since the same was included with guarantee and commission charges which qualify as eligible business expenditure.
It was a mistake on our part and penalty proceedings cannot be initiated since we had claimed the expenditure on a bonafide belief that the same were guarantee and commission charges. We rely on the following judgments in support of our contention that penalty proceedings under section 271(1)(c) cannot be initiated in case of bonafide mistakes:
• CIT vs. Reliance Petroproducts Ltd. [2010 (322 ITR 158) (SC)].
• CIT vs. Shahabad Co-op Sugar Mills Ltd. [322 ITR 73] P & H].
• CIT v. Milex Cable Industries (261 ITR 675) [Gujarat High Court]
• Colour House vs. ACIT (53 ITD page 245)
• CIT vs. Shanti Sports Enterprises (217 ITR 243)
• CIT vs. Ask Enterprises Ltd. (230 ITR 48) [Bombay HC]."
7.1 Thus the assessee has given all the particulars except for the fact that in the computation of income such interest was not added back to the total income and the same was immediately included when the A.O. pointed out, at the first instance. From the above explanation, it can be inferred that the assessee had a bonafide belief that the interest received u/s.244A amounting to Rs. 711.21 lakhs and interest paid u/s.220 of Rs. 89.62 lakhs can be netted and the net interest is to be offered for tax. This view of the assessee as submitted by the learned Counsel is also supported by the various decisions of the ITAT Mumbai Benches. Therefore, such an explanation cannot be held to be incorrect or malafide. The assessee's case is also covered by the ratio and principle laid down by the Hon'ble Supreme Court in the case of CIT vs. Reliance Petroproducts Ltd. (supra), wherein the lordship has observed and held as under :-
"A glance at the provisions of section 271(1)(c) of the Income-tax Act, 1961, suggests that in order to be covered by it, there has to be concealment of the particulars of the income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his income. The meaning of the word "particulars" used in section 271(1)(c) would embrace the details of the claim made. Where no information given in the return is found to be incorrect or inaccurate, the assessee cannot be held guilty of furnishing inaccurate particulars. In order to expose the assessee to penalty, unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By no stretch of imagination can making an incorrect claim tantamount to furnishing inaccurate particulars. There can be no dispute that everything would depend upon the return filed by the assessee, because that is the only document where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. To attract penalty, the details supplied in the return must not be accurate, not exact or correct, not according to the truth or erroneous.
Where there is no finding that any details supplied by the assessee in its return are found to be incorrect or erroneous or false there is no question of inviting the penalty under section 271(1)(c). A mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing inaccurate particulars."
8. Thus in view of the facts and circumstances of the case we do not find any reason to confirm the penalty levied by the A.O. u/s.271 (1)(c) and accordingly the same is cancelled.
9. In the result, the appeal filed by the assessee is allowed.
Order pronounced on this 1st day of August, 2012.
IT : Payment of principal towards vehicles taken under financial lease is not allowable as business expenditure
■■■
[2012] 24 taxmann.com 124 (Delhi - Trib.)
IN THE ITAT DELHI BENCH 'F'
Rio Tinto India (P.) Ltd.
v.
Assistant Commissioner of Income-tax, Circle 15(1), New Delhi*
U.B.S. BEDI, JUDICIAL MEMBER
AND A.N. PAHUJA, ACCOUNTANT MEMBER
IT Appeal No. 363 (Delhi) of 2012
[Assessment Year 2007-08]
JUNE 22, 2012
I. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment Year 2007-08 - Assessee had taken certain vehicles on financial lease and had capitalized these as per AS-19 - It had claimed deduction of certain sum being repayment of principal as business expenditure - Assessing Officer disallowed same on ground that said payment had been incurred for creation of capital asset and was for enduring benefit of assessee - Whether on facts Assessing Officer was justified in holding so - Held, yes [In favour of revenue]
Section 32 of Income-tax Act, 1961 - Depreciation - Allowance/Rate of - Assessment Year 2007-08 - Assessee took certain vehicles on financial lease and as per agreement between assessee and lessor, assessee was not entitled to claim any relief as owner of vehicle and lessor financer would have exclusive ownership of vehicle till full payment - Whether assessee could not claim depreciation on assets taken on lease - Held, yes [In favour of revenue]
II. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 2007-08 - Assessee was engaged in providing services for development of mining sector in India - It contributed towards building fund of Federation of Indian Mineral Industries (FIMI) of which it was a member and claimed deduction thereof as business expenditure - Whether contribution made by assessee towards building fund of FIMI was with a view to obtain a commercial advantage and not for purpose of securing any capital assets and, therefore, same was allowable as revenue expenditure - Held, yes [In favour of assessee]
Circulars and Notifications : Circular No. 2 of 2001, dated 9-2-2001
FACTS-I
During the relevant assessment year, the assessee had taken certain vehicles on financial lease under leas agreement with LPIN and had capitalized same in its books of account in accordance with the requirement of AS 19 on leases issued by the Institute of Chartered Accountants of India which requires capitalization of assets acquired by the lessee in the financial lease agreement. The assessee had claimed deduction of certain amount of principal payments towards financial lease. The Assessing Officer disallowed this expense on the basis that it had been incurred for the creation of a capital asset and was for the enduring benefit of the concern. Further, he concluded that the assessee was not entitled to depreciation on leased assets, the lessor being entitled to claim depreciation as per Circular No. 2, dated 9-2-2001 issued by the CBDT.
On appeal, the Commissioner (Appeals) upheld the order passed by the Assessing Officer.
On second appeal :
HELD-I
Admittedly, vehicles have been taken under a finance lease arrangement and not under operational lease, Article 2.2 of the agreement entered into by assessee with LPIN provides for arrangement for the registration & insurance of the vehicles and inter alia, stipulates that vehicles shall be insured and registered in the name of the client, i.e., the assessee as required under the Motor Vehicles Act, 1988. In terms of article 2.2, LPIN is required to pay for maintenance of vehicles. Article 3 of the agreement provides for lease period while article 4 provides for payment of lease rentals in advance for every quarter and stipulates that in case, LPIN is required to make advance payment to the manufacturer/dealer to book the vehicle ordered by the client, the client shall be liable to pay to LPIN a simple interest computed using the contracted interest rate as built in the quotation for the period starting from the date of payment to the manufacturer/dealer till the date of delivery of the vehicle. Besides, the assessee is also required to deliver a promissory note for each vehicle, for such sum as may be required by LPIN based on the lease rentals and LPIN may seek a bank guarantee/corporate guarantee, guaranteeing due payment by the assessee of any amounts that may be due under this Agreement. [Para 6.1]
In the light of terms and conditions of the lease agreement, it is apparent that the assessee entered in to a financing lease arrangement with LPIN for taking certain vehicles for its use. A finance lease is one where the lessee uses the asset for substantially the whole of its useful life and the lease payments are calculated to cover the full cost together with interest charges. It is, thus, a disguised way of purchasing the asset with the help of a loan. An operating lease is an other type of lease where the asset is not wholly amortized during the non-cancellable period, if any, of the lease and where the lessor does not rely for his profit on the rentals in the non-cancellable period. In view of various terms and conditions of the lease agreement the assessee is not entitled to deduction of payment of principal amount under the aforesaid financing arrangement. The assessee did not place any material, controverting the aforesaid findings recorded by the Commissioner (Appeals) and various clauses of the agreement. Accordingly, the findings of the Commissioner (Appeals) in upholding disallowance of claim for deduction towards payment of principal amount, were not to be interfered with. [Para 6.3]
As regards alternate claim of depreciation, no doubt in terms of clause 2.2(ii) & (iii) of the agreement the registration of the vehicle and insurance is in the name of the lessee, not even a whisper has been made by the assessee in the light of terms and condition stipulated in the agreement, whereunder, the assessee is not entitled to claim any right, title or interest in the vehicle and/or parts, components thereof other than that of a lessee or contest LPIN's sole and exclusive ownership thereof. In terms of the agreement, the assessee agreed that the assessee shall not claim any relief by way of any deduction, allowance or grant available to LPIN as the owner of the vehicle under the Act, or under any other statute, rule, regulation or guideline issued by the Government of India or any statutory authority and not do or omit to do or be done any act, deed or thing whereby LPIN is deprived, whether wholly or partly, of such relief by way of deduction, allowance or grant. Inter alia, the assessee is also required to provide to LPIN, at the end of each financial year of LPIN, such information as it may require to claim relief by way of deduction, allowance, or grant, as the owner of the vehicle under the Act, and the assessee undertook to comply with and observe, at all times, all the terms and conditions of the agreement. In view of these specific covenants in the agreement, especially when the assessee did not make even a whisper in the light of terms and conditions stipulated in the agreement, the alternate claim of the assessee could not be accepted. [Para 7]
FACTS-II
The assessee was engaged in providing services for development of mining sector in India. It claimed deduction of certain sum contributed towards building fund of Federation of Indian Mining Industries (FIMI) of which it was a member. The Assessing Officer disallowed the said claim on the ground that assessee failed to establish that expenditure was incurred for business purposes. On appeal, the Commissioner (Appeals) confirmed disallowance holding that said amount was in nature of donation and, thus, capital in nature.
On second appeal :
HELD-II
Undisputably, the assessee is rendering services to the mining industry. The said Federation has over 44 years of experience in mining technology solutions for the mineral industry. In 1966, the individual mine operators and associations established an all-India federation, a non-profit corporate body under the Companies Act, 1956 to promote the interests of mining, mineral processing, metal making and other mineral-based industries and to attend to the problems faced by them in lease grants, renewals, tenures, production, taxation, trade, exports, labour, etc. The Federation envelopes in its fold mining, mineral processing, metal making, cement and other mineral-derived industries as well as granite, stone, marble and slate industries - private, joint and public sectors of the country. It represents the entire non-fuel mining and mineral processing activities of the nation. Apparently, the expenditure incurred by the assessee by way of contribution towards building fund of the said Federation, is for commercial consideration and it is not incurred for the purpose of securing any capital assets. The contribution towards building fund of Federation of Indian Mineral Industries, of which the assessee is a member, has been incurred with a view to obtaining a commercial advantage and is allowable as revenue expenditure. [Para 17.1]
EDITOR'S NOTE
The assessee failed to submit necessary information required by Assessing Officer in support of its claim of preliminary expenses and similar disallowance had been upheld by Commissioner (Appeals) in earlier years without any challenge. The disallowance by Assessing Officer in instant year was held to be justified.
CASE REVIEW
Asea Brown Boveri Ltd. v. IFCI [2006] 154 Taxman 512 (SC); Association of Leasing & Financial Service Companies v. Union of India [2011] 2 SCC 352; Sundaram Finance Ltd. v. State of Kerala AIR 1966 SC 1178; CIT v. Instalment Supply Ltd. [2012] 207 Taxman 19/20 taxmann.com 779 (Delhi) (para 6.3), K.T.M.T.M. Abdul Kayoom v. CIT [1962] 44 ITR 689, Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT [1997] 223 ITR 101/[1996] 89 Taxman 92, CIT v. T.V. Sundaram Iyengar & Sons (P.) Ltd. [1990] 186 ITR 276, Addl. CIT v. Rajasthan Spg. & Wvg. Mills Ltd. [2005] 274 ITR 465/[2004] 137 Taxman 123 (Ker.), L.H. Sugar Factory & Oil Mills (P.) Ltd. v. CIT [1980] 125 ITR 293 (SC) and CIT v. Co-operative Sugars Ltd. [2008] 304 ITR 259/[2009] 178 Taxman 123 (Ker.) (para 17.1) followed.
Indusland Bank Ltd. v. Addl. CIT [2012] 19 taxmann.com 173 (Mum.) (SB) (para 7) distinguished.
CASES REFERRED TO
D.P. Chirania & Co. v. CIT [1978] 112 ITR 12 (Kar.) (para 2.2), CIT v. Ashok Leyland Ltd. [1972] 86 ITR 549 (SC) (para 2.2), CIT v. Ashok Leyland Ltd. [1969] 72 ITR 137 (Mad.) (para 2.2), CIT v. Ashok Leyland Ltd. [1972] 86 ITR 549 (SC) (para 2.2), Southern (H.M. Inspector of Taxes) v. Borax Consolidated Ltd. [1942] 10 ITR (Supp) 1 (KB) (para 2.2), Indusland Bank Ltd. v. Addl. CIT [2012] 19 taxmann.com 173 (Mum.) (SB) (para 4), J.M. Shares & Stock Brokers Ltd. v. Dy. CIT [2007] 109 ITD 329 (Mum.) (para 5), Asea Brown Boveri Ltd. v. IFCI [2006] 154 Taxman 512 (SC) (para 6.3), Association of Leasing & Financial Service Companies v. Union of India [2011] 2 SCC 352 (para 6.3), Sundaram Finance Ltd. v. State of Kerala AIR 1966 SC 1178 (para 6.3), CIT v. Instalment Supply Ltd. [2012] 207 Taxman 19/20 taxmann.com 779 (Delhi) (para 6.3), CIT v. Chandulal Keshavlal & Co. [1960] 38 ITR 601 (SC) (para 13), CIT v. Kamal & Co. [1993] 203 ITR 1038/[1994] 76 Taxman 565 (Raj.) (para 13), CIT v. Chemicals & Plastics India Ltd. [2007] 292 ITR 115/165 Taxman 158 (Mad.) (para 15), CIT v. Co-operative Sugars Ltd. [2008] 304 ITR 259/[2009] 178 Taxman 123 (Ker.) (para 15), Addl. CIT v. Rajasthan Spg. & Wvg. Mills Ltd. [2005] 274 ITR 465/[2004] 137 Taxman 367 (Raj.) (para 15), K.T.M.T.M. Abdul Kayoom v. CIT [1962] 44 ITR 689 (SC) (para 17), Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT [1997] 223 ITR 101/[1996] 89 Taxman 92 (SC) (para 17), CIT v. T.V. Sundaram Iyengar & Sons (P.) Ltd. [1990] 186 ITR 276 (SC) (para 17) and L.H. Sugar Factory & Oil Mills (P.) Ltd. v. CIT [1980] 125 ITR 293 (SC) (para 17).
Nageshwar Rao for the Appellant. B.R.R. Kumar for the Respondent.
ORDER
A.N. Pahuja, Accountant Member - This appeal filed on 24.01.2012 by the assessee against an order dated 25.11.2011 of the ld. CIT(A)-XVIII, New Delhi, raises the following grounds:-
1. "The entire order of the CIT(A)-XVIII [CIT(A)] is based on conjectures, surmises, incorrect application of law and erroneous assumptions and is hence liable to be quashed.
2. That the CIT(A) has grossly erred in facts and law by upholding the order of the ACIT, Circle 15(1) [AO] in disallowing the principal payments made towards finance lease amounting to Rs. 11,03,600/- alleging that such payment is towards acquisition of capital asset and accordingly, is an expenditure of capital nature.
2.1 Without prejudice to the above ground, the CIT(A) has also erred in facts of the case and in law by upholding order of the Assessing Officer of not allowing depreciation u/s 32 of the Act on cost of assets taken on lease.
3. That the CIT(A) has grossly erred in facts and law by upholding the order of the AO in disallowing preliminary expenses amounting to Rs. 31,000/- alleging that complete details/explanation were not provided during the course of assessment proceedings.
4. That the CIT(A) has grossly erred in facts and law by upholding the order of the AO in disallowing contribution made towards Federation of Indian Mining Industries building fund amounting to Rs. 50 lacs alleging that the same has not been incurred wholly and exclusively for the purpose of business.
The above grounds are mutually exclusive and without prejudice to each other.
The appellant craves leave to add, alter, amend, modify or withdraw any one or more of the above grounds of appeal."
2. Adverting first to ground nos. 2 & 2.1 in the appeal, facts, in brief, as per relevant orders are that return declaring income of Rs. 2,83,48,467/- filed on 01.11.2007 by the assessee, engaged in providing services for the development of mining sector in India, after being processed u/s 143(1) of the Income-tax Act, 1961 (hereinafter referred to as the Act), was selected for scrutiny with the service of a notice issued u/s 143(2) of the Act. During the course of assessment proceedings, the Assessing Officer (A.O. in short) noticed that the assessee debited an amount of Rs. 11,03,660/- on account of principal payment towards financial lease. While analyzing the definition of financial lease, the AO asked the assessee as to why the claim be not disallowed. In reply, the assessee submitted that they had taken certain vehicles in terms of a financial lease arrangement and capitalized the same in their books in accordance with accounting standard-19 on 'Leases' issued by the Institute of Chartered Accountants of India. Though the depreciation on capitalized leased vehicles was debited to P & L account, the same was added back in the computation of income. It was further pointed out that circular no. 2 of 2001 dated 9th February, 2001, issued by CBDT clarified that accounting standard-19 by itself did not have any implications on the allowance of depreciation on assets acquired under the finance lease agreement in the hands of the lessee and also the amount of lease charges incurred during the year will be allowed as deduction. Accordingly, the repayment of principal amount of Rs. 11,03,660/- was reduced from the computation of income, the assessee submitted. However, the AO did not accept the submissions of the assessee on the ground that in schedule 15 to the accounts, clause 1(f) on leases reads as under:-
"Assets acquired under leases where the Company has substantially all the risks and rewards of ownership, are classified as finance leases."
2.1 Moreover, Accounting Standard 19 on leases, inter alia, stipulated as under:-
"4.7.1 The lease has to recognize it as capital asset and liability and depreciation and financial charge is charged in the P L account in place of lease rent payment.
4.7.2 Thus, the accounting standard recognizes that the principal payment towards acquisition of the asset is capital in nature."
2.2 Accordingly, while referring to circular no. 2 dated 9th February, 2001 issued by CBDT, the AO concluded that the said circular does not help the assessee and the assessee is not entitled depreciation on base payments, only the lessor being entitled to claim depreciation. Therefore, while referring to decisions in D.P. Chirania & Co. v. CIT [1978] 112 ITR 12 (Kar.); CIT v. Ashok Leyland Ltd. [1972] 86 ITR 549 (SC); CIT v. Ashok Leyland Ltd. [1969] 72 ITR 137 (Mad.) affirmed in CIT v. Ashok Leyland Ltd. [1972] 86 ITR 549 (SC); Southern (H.M. Inspector of Taxes) v. Borax Consolidated Ltd. [1942] 10 ITR (Supp) 1 (KB), the AO concluded that the principal payments towards financial lease being for acquisition of assets, are capital in nature and, therefore, could not be allowed as revenue expenditure.
3. On appeal, the ld. CIT(A) upheld the findings of the AO while rejecting claim for depreciation on the leased assets, in the following terms:
"4.2 I have carefully considered the assessment order and the submission made by the ld. AR. The facts of the case are that during the relevant assessment year the appellant had taken certain vehicles on financial lease and had capitalized these in its books of account in accordance with the requirement of AS 19 on leases issued by the Institute of Chartered Accountants of India which requires capitalization of assets acquired by the lessee in the financial lease agreement. The AO noted that the assessee had deducted an amount of Rs. 11,03,660/- being principal payments towards financial lease and disallowed this expense on the basis that it has been incurred for the creation of a capital asset and is for the enduring benefit of the concern. Facts of the case as confirmed during the course of the appellate proceedings show that the vehicles are registered in the name of the appellant company, the insurance policy is also on its name. The lease is for the period of 48 months. If the cost of one vehicle is Rs. 16,20,439/-, the principal and interest payment over the lease term is Rs. 16,87,212/-. The appellant has not claimed depreciation u/s 32 of the Act in accordance with CBDT Circular No. 2/2001 dated 09.02.2001.
The appellant has paid Rs. 11,03,660/- as principal payment towards financial lease besides making payment on account of interest. The AO has allowed payment of interest as revenue expenses but has treated Rs. 11,03,660/- as a capital expenses. Since, the lease period is for 48 months thus the appellant gets enduring benefit of the vehicles for the period of lease. The terms and conditions of the agreement shows that it is a financial lease in which the vehicle has been financed by the lessor while the ownership and the right to use vehicle remains with the lessee. The lessee is using the vehicle/asset for substantial part of its economic life and may even continue to use the asset even after the expiry of the lease period by making a notional payment for the vehicle. Even the registration of the vehicle and insurance is in the name of the lessee. All the terms and conditions of the lease agreement show that the appellant has entered into a financial lease and not an operational lease and thus only interest payment can be allowed as an expense and not the repayment of principal. The appellant's claim for allowing the depreciation in case it is held to be the owner of the vehicle cannot be accepted in view of the CBDT Circular No. 2/2001 dated 09.02.2001 and the decision of the Hon'ble ITAT-Mumbai in the case of J.M. Shares and Stock Brokers v. DCIT [2009] 311 (A.T.) 0115. The addition of Rs. 11,03,660/- made by the AO is, therefore, upheld."
4. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. AR on behalf of the assessee while carrying us through the impugned order contended that the assessee is entitled to deduction of Rs. 11,03,660/- on account of payment of principal amount under the lease finance arrangement. Alternatively, the ld. AR sought depreciation on the original amount of assets taken on financial lease in the light of decision dated 14.3.2012 in IndusInd Bank Ltd. v. Addl. CIT [2012] 19 taxmann.com 173 (Mum.)(SB).
5. On the other hand, the ld. DR supported the findings of the ld. CIT(A), relying, inter alia, on the decision in the case of J.M. Shares and Stock Brokers Ltd. v. Dy. CIT [2007] 109 ITD 329 (Mum.).
6. We have heard both the parties and gone through the facts of the case as also the decisions relied upon by both the sides. Indisputably, the assessee claimed deduction of Rs. 11,03,660/- towards principal amount payable under the lease agreement entered into with M/s Lease Plan India Ltd. [LPIN] on 18.4.2006 for taking on lease certain vehicles for its use. Admittedly, vehicles have been taken under a finance lease arrangement and not under operational lease. In this connection clause 1(f) of notes to the accounts [pg. 22 of the PB] reads as under:-
"1(f) Leases
"Assets acquired under leases where the Company has substantially all the risks and rewards of ownership, are classified as finance leases. Such leases are capitalized at the inception of the lease at lower of the fair value or the present value of the minimum lease payments and a liability is created for an equivalent amount. Each lease rental paid is allocated between the liability and the interest cost, so as to obtain a constant periodic rate of interest on the outstanding liability for each period.
Assets acquired as leases, where a significant portion of the risk and rewards of ownership are retained by the lessor, are classified as operating leases. Lease rentals are charged to the profit and loss account on accrual basis."
6.1 Here, we may also have a look at the relevant terms and conditions of the agreement with LPIN. Article 2.2 of the agreement with LPIN provides for arrangement for the registration & insurance of the vehicles and inter alia, stipulates that vehicles shall be insured and registered in the name of the client i.e. the assessee as required under the Motor Vehicles Act, 1988. In terms of Clause (vi) of Article 2.2 LPIN is required to pay for maintenance of vehicles. Article 3 of the agreement provides for lease period while the Article 4 provides for payment of lease rentals in advance for every quarter and stipulates that in case, LPIN is required to make advance payment to the manufacturer/dealer to book the vehicle ordered by the client, the client shall be liable to pay to LPIN a simple interest computed using the contracted interest rate as built in the quotation for the period starting from the date of payment to the manufacturer/dealer till the date of delivery of the vehicle. Besides, the assessee is also required to deliver a promissory note for each vehicle, for such sum as may be required by LPIN based on the lease rentals and LPIN may seek a bank guarantee/corporate guarantee, guaranteeing due payment by the assessee of any amounts that may be due under this Agreement and under the relevant order. Article 10 of the agreement, stipulating rights, title and interest in the vehicles, reads as under:
"Client's convenants"
Article 10
"During the subsistence of this Agreement and till the vehicle is delivered back to LPIN in good order and condition in terms hereof, the client shall;
10.1 not claim any right, title or interest in the vehicle and/or parts, components thereof other than that of a lessee or contest LPIN's sole and exclusive ownership thereof.
10.2 use and operate the vehicle carefully and maintain it in conformity with the manufacturer manual and LP driver's manual and comply with all statutory and other requirements of law, rules, regulations or directions applicable to use and operation of the vehicle in that behalf. The client shall not do or omit to do, cause to be done any act or thing by which the warranties and performance guarantees given by the manufacturer would be invalidated or become unenforceable, wholly or partly.
10.3 Not transfer, assign or otherwise dispose of or purport to transfer, assign or dispose of LPIN's rights or obligations or interest hereunder by way of mortgage, charge, sublease, sale or other assignment, hypothecation, pledge, hire, encumbrance, license or otherwise in any manner part with the possession of the vehicle or any part thereof or allow or purport to do or allow or create any lien, charge, attachment or other claim of whatsoever nature on the vehicle or any part thereof.
10.4 indemnify and keep indemnified LPIN, at all times, against any loss or seizure of the vehicle under distress, execution or other legal process or destruction or damage to the vehicle by fire, accident or other cause, from any claim or demand arising out of the use/handling of the vehicle, or any risk or liability for death or loss of limb of any person whether employee of the client or any third party and hold LPIN harmless, against all losses, damages, claims, penalties, expenses, suits or proceedings of whatsoever nature made, suffered or incurred consequent thereupon and for this purpose take out such workmen's compensation as may be necessary, customary or the practice in the business carried on by the client.
10.5 (i) not claim any relief by way of any deduction, allowance or grant available to LPIN as the owner of the vehicle under the Income-tax Act, 1961 or under any other statute, rule, regulation or guideline issued (or as may be amended and existing from time to time) by the Government of India or any statutory authority and not do or omit to do or be done any act, deed or thing whereby LPIN is deprived, whether wholly or partly, of such relief by way of deduction, allowance or grant. The client shall, at the end of each financial year of LPIN, provide to LPIN such information as it may require to claim relief by way of deduction, allowance, or grant, as the owner of the vehicle under the Income-tax Act, 1961 and the client undertakes to comply with and observe, at all times, all the terms and conditions to be complied with or observed in respect of the use of the vehicle to entitle LPIN to obtain such relief.
(ii) In case of a sale and lease back, the client agrees to make available all necessary documents immediately on request of LPIN to enable the endorsement of LPIN's name as financier and transfer of name, if required, in the registration certificate of the vehicle. In case the required documents are not available or the transfer of name is not allowed by the concerned registration authorities, the client agrees to foreclose the vehicle as per the provisions of this agreement and also agrees to pay to LPIN all losses including the depreciation loss under the Income-tax Act, 1961 or any amendments or replacement to such law.
10.6 sign, execute and deliver all such documents as may be reasonably requested by LPIN, in relation to the vehicle, including such forms, affidavits, powers of attorney etc., as may be required to be filed with the transport authorities or the insurance companies.
10.7 authorise LPIN to sell, alienate, transfer, charge, hypothecate or otherwise encumber the said vehicles and in this regard, to sign and deliver necessary forms, documents and/or to give notice to the appropriate Regional Transport Authority for effecting transfer of the said vehicles at the end of the lease period.
10.8 authorise LPIN to fill in, alter, amend, sign or complete such forms, documents or papers relating to the regional transport office or the insurance companies and to give full and complete effect thereof."
6.2 Article 12 of the agreement, concerning sale and lease, stipulates as under:
Sale and lease back
"Article 12
12.1 In case of sale and lease back of vehicles, quotation will be provided by LPIN based on information provided by the client as per LIPN requirement. Client will provide all the required documents as requested by LPIN along with the order confirmation.
12.2 If any of the information/documents provided by the client is found to be incorrect, or if LPIN discovers that the condition of the vehicle is such that it requires resetting of either the residual value or the maintenance budget, LPIN reserves the right to recalculate the lease rentals according to the correct figures and/or condition. If the particular vehicle shall cease and the client will need to pay to LPIN the outstanding book value and the applicable taxes. In order to assess the condition of the vehicles, the client on LPIN's advice, will make available the identified vehicles at a place and time mutually agreed upon.
12.3 In case the vehicle is previously financed, payment will be released by LPIN after receiving all the documents requested by LPIN. In case LPIN agrees to release payments without certain documents and if such documents are not provided to LPIN by the client within two weeks of release of the payment, LPIN will reserve the right to foreclose the lease of the particular vehicle and the client will need to pay to LPIN the outstanding book value and all the applicable taxes.
12.4 If for any reason it is not possible to transfer the registration certificate of the vehicle in the name of the client and/or it is not possible to endorse the registration certificate with LPIN's name as the 'lessor', LPIN will reserve the right to foreclose the lease of the particular vehicle and the client will need to pay to LPIN the outstanding book value and all the applicable taxes. "
6.3 In the light of aforesaid terms and conditions of the agreement it is apparent that the assessee entered in to a financing lease arrangement with LPIN for taking certain vehicles for its use. A finance lease is one where the lessee uses the asset for substantially the whole of its useful life and the lease payments are calculated to cover the full cost together with interest charges. It is thus a disguised way of purchasing the asset with the help of a loan. An operating lease is any other type of lease where the asset is not wholly amortised during the non-cancellable period, if any, of the lease and where the lessor does not rely for his profit on the rentals in the non-cancellable period. This distinction has been explained in Asea Brown Boveri Ltd v. IFCI [2006] 154 Taxman 512 (SC), Association of Leasing & Financial Service Companies v. Union of India [2011] 2 SCC 352 & Sundaram Finance Ltd v. State of Kerala AIR 1966 SC 1178. In a recent decision dated 17.4.2012 in CIT v. Instalment Supply Ltd. [2012] 207 Taxman 19/20 taxmann.com 779 (Delhi), Hon'ble jurisdictional High Court concluded that, financial lease is a transaction current in the commercial world, the primary purpose whereof is the financing of the purchase by the financier. In the light of view taken in these decisions, on analyzing various terms and conditions of the agreement with LPIN, we are of the view that the assessee is not entitled to deduction of payment of principal amount under the aforesaid financing arrangement. The ld. AR on behalf of the assessee did not place any material before us, controverting the aforesaid findings recorded by the ld. CIT(A) and various clauses of the agreement and facts narrated before us stare in the face of the assessee. Accordingly, we are not inclined to interfere with the findings of the ld. CIT(A) in upholding disallowance of claim for deduction of Rs. 11,03,660/- towards payment of principal amount.
7. As regards alternate claim of depreciation, no doubt in terms of the clause 2..2 (ii) & (iii) of the agreement the registration of the vehicle and insurance is in the name of the lessee, not even a whisper has been made before us by the ld. AR in the light of terms and condition stipulated in Article 10 of the agreement, particularly clauses 10.1. & 10.5, whereunder, the assessee is not entitled to claim any right, title or interest in the vehicle and/or parts, components thereof other than that of a lessee or contest LPIN's sole and exclusive ownership thereof. In terms clause 10.5 of the agreement, the assessee agreed that the assessee shall not claim any relief by way of any deduction, allowance or grant available to LPIN as the owner of the vehicle under the Income-tax Act, 1961 or under any other statute, rule, regulation or guideline issued by the Government of India or any statutory authority and not do or omit to do or be done any act, deed or thing whereby LPIN is deprived, whether wholly or partly, of such relief by way of deduction, allowance or grant. Inter alia, the assessee is also required to provide to LPIN, at the end of each financial year of LPIN, such information as it may require to claim relief by way of deduction, allowance, or grant, as the owner of the vehicle under the Income-tax Act, 1961 and the assessee undertook to comply with and observe, at all times, all the terms and conditions of the agreement. In view of these specific covenants in the agreement, especially when the ld. AR did not make even a whisper before us in the light of terms and conditions stipulated in Article 10 of the agreement, we are not prepared to accept the alternate claim of the assessee. As regards certain observations in respect of depreciation available to the lessee in the decision of Special Bench in Induslnd Bank Ltd. (supra), which was the case of a lessor and not the lessee, since the relevant terms and conditions of the agreement in that case, have not been placed before us nor the ld. AR stated as to why the terms and conditions stipulated in Article 10 of the agreement in the instant case, are not applicable, we are of the opinion, that the said decision is not of any assistance to the assessee.
8. In the light of aforesaid discussion, ground nos.2 & 2.1 in the appeal are dismissed.
9. Ground no.3 in the appeal relates to disallowance of Rs. 31,000/- on account of preliminary expenses. The AO noticed that the assessee claimed deduction for an amount of Rs. 31,000/- towards preliminary expenses. Despite specific request made by the AO, the assessee did not submit the relevant details, resulting in disallowance of the amount.
10. On appeal, the ld. CIT(A) upheld the disallowance in the following terms:-
"5.1 I have carefully considered the facts of the case as well as the submissions made by the learned AR. I find that the appellant has failed in providing necessary information and in explaining how the expenses come in the ambit of section 35D. The right of the Assessing Officer to ask for details is paramount and it cannot be denied as he has to scrutinize the underlying expenses. Similar issue on the same ground, for assessment year 2006-07, has already been upheld by my predecessor ld. CIT(A). This ground of appeal is accordingly dismissed and /the addition of Rs. 31,000/- is upheld."
11. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A).Neither the ld. AR on behalf of the assessee nor the ld. DR made any submissions before us on this ground.
12. We have gone through the facts of the case. Indisputably, the assessee failed to submit necessary information required by the AO in support of the claim of expenses written off while in the preceding assessment year, similar disallowance has been upheld by the ld. CIT(A). Since the ld. AR did not place any material before us controverting the aforesaid findings of the ld. CIT(A) so as to enable us to take a different view in the matter, we are not inclined to interfere. Therefore, ground no.3 in the appeal is dismissed.
13. Ground no.4 in the appeal relates to disallowance of an amount of Rs. 50 lacs on account of contribution towards Federation of Indian Mining Industries Building Fund. To a query by the AO during the course of assessment proceedings, the assessee replied that Federation of Indian Mining Industries was engaged in liaisoning with various Government bodies on mining related issues and since it provides support to mining industries and the assessee is rendering services to the mining industries, the expenditure was wholly and exclusively incurred for the purpose of business. However, the AO did not accept the submissions of the assessee on the ground that the assessee failed to establish that expenditure was incurred wholly and exclusively for the purpose of business. Inter alia, the AO relied upon decision in CIT v. Chandulal Keshavlal & Co. [1960] 38 ITR 601 (SC) and distinguished the decision relied upon by the assessee in CIT v. Kamal & Co. [1993] 203 ITR 1038/[1994] 76 Taxman 565 (Raj.).
14. On appeal, the ld. CIT(A) upheld the disallowance, holding as under:-
"6.1 I have carefully considered the assessment order and the submission made by the learned AR. The payments of Rs. 50 lacs is towards the building fund of FIMI i.e. Federation of Indian Mineral Industries. The payment cannot be said to be for the purpose of business and revenue in nature. The appellant's plea that the payment has been made to FIMI as it provides support to the mining industries and therefore should be allowed as revenue expense is not acceptable. The expense is in the nature of donation and is capital in nature cannot be said to have been incurred wholly and exclusively for the purpose of business as required under the provisions of section 37(1) of the Act. The same is, therefore, rejected."
15. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. AR on behalf of the assessee relied upon the decision in CIT v. Chemicals & Plastics India Ltd. [2007] 292 ITR 115/165 Taxman 158 (Mad); CIT v. Co-operative Sugars Ltd., [2008] 304 ITR 259/[2009] 178 Taxman 123 (Ker.); Addl. CIT v. Rajasthan Spg. & Wvg. Mills Ltd. [2005] 274 ITR 465/[2004] 137 Taxman 367 (Raj.) while contending that since activities of the FIMI are closely linked with the welfare of mining industry, the expenditure is admissible as revenue .
16. On the other hand, the ld. DR supported the findings of the ld. CIT(A) on the ground that the amount conferred enduring benefit to the assessee, spread over a number of years and thus, could not be allowed as revenue expenditure.
17. We have heard both the parties and gone through the facts of the case as also the aforesaid decisions relied upon by the ld. AR.. As is apparent from the aforesaid facts, an amount of Rs. 50,00,000/- has been contributed towards building fund of Federation of Indian Mineral Industries, the assessee being one of the members of the said Federation. The ld. CIT(A) treated the amount in the nature of donation and capital in nature. Whether the amount is revenue or capital in nature, Hon'ble Apex Court in K.T.M.T.M. Abdul Kayoom v. CIT [1962] 44 ITR 689 held that each case depends on its own facts and close similarity between one case and another is not enough, even a significant detail may alter the entire aspect. It was observed that what is decisive is the nature of business, the nature of the expenditure, the nature of the right acquired, and their relation inter se, and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases. In Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT [1997] 223 ITR 101/[1996] 89 Taxman 92, Hon'ble Apex Court held that the correct test is that of commercial expediency. In Chemicals & Plastics India Ltd. (supra), Hon'ble Madras High Court while adjudicating as to whether or not the amount of Rs. 1.5 lakhs paid towards the construction of building of the Madras Chamber of Commerce was allowable as business expenditure, held that since the contribution made by the company is for the Chamber of Commerce, whose activities are closely linked with the welfare of the corporate entities, who are members therein and whose interest are taken care of by the Chamber of Commerce, irrespective of whether the expense incurred is compulsory or otherwise., it satisfies the commercial expediency test. In CIT v. T.V. Sundaram Iyengar & Sons (P.) Ltd. [1990] 186 ITR 276, Hon'ble Apex Court upheld the findings of the ITAT that the amount advanced by the assessee-employer for construction of houses under "Subsidised Industrial Scheme" for its employees would be in the nature of a revenue expenditure and the fact that the scheme was not for any temporary or particular duration makes little difference to the nature of the expenditure. In Rajasthan Spg. & Wvg. Mills Ltd. (supra) contribution to the export promotion fund made by the assessee for promoting its business interest by augmenting exports was held to be incurred and laid out wholly and exclusively for the purpose of the assessee's business. In L.H. Sugar Factory & Oil Mills (P.) Ltd. v. CIT [1980] 125 ITR 293 (SC) the Hon'ble Supreme Court allowed the contribution made by a sugarcane factory for construction of a road, at the request of the District Collector. Following this decision, Hon'ble Kerala High Court in Co-operative Sugars Ltd. (supra) held that the contribution made by the company at the suggestion of the State Minister concerned, for sharing of cost incurred for cement lining of an irrigation canal serving sugarcane cultivators was allowable as revenue expenditure under section 37(1) of the Act, as it went to the advantage of the company in the form of better supply of sugarcane.
17.1 In the instant case, the assessee, rendering services to mining Industry, contributed towards building fund of Federation of Indian Mineral Industries, of which the assessee is a member. Indisputably, the assessee is rendering services to the mining industry The said federation has over 44 years of experience in mining technology solutions for the mineral Industry. In 1966, the individual mine operators and associations established an all-India federation, a non-profit corporate body under the Companies Act, 1956 to promote the interests of mining, mineral processing, metal making and other mineral-based industries and to attend to the problems faced by them in lease grants, renewals, tenures, production, taxation, trade, exports, labour, etc. The Federation envelopes in its fold mining, mineral processing, metal making, cement and other mineral-derived industries as well as granite, stone, marble and slate industries - private, joint and public sectors of the country. It represents the entire non-fuel mining and mineral processing activities of the nation. Apparently, the expenditure incurred by the assessee by way of contribution towards building fund of the said federation, is for commercial consideration and it is not incurred for the purpose of securing any capital assets. In the light of view taken in the aforesaid decisions, we are of the opinion that contribution towards building fund of Federation of Indian Mineral Industries, of which the assessee is a member, has been incurred with a view to obtaining a commercial advantage and is allowable as revenue expenditure. In view thereof, ground no. 4 in the appeal is allowed.
18. Ground no.1 in the appeal being general in nature, does not require any separate adjudication while no additional ground having been raised before us in terms of residuary ground in the appeal, accordingly, these grounds are dismissed.
19. No other plea or argument was made before us.
20. In the result, appeal is partly allowed.
IT : After amendment by Finance Act, 2002 for claiming deduction under section 80-IA(4) infrastructure facility is only required to be developed and there is no condition that assessee should also operate same
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[2012] 23 taxmann.com 345 (Indore)
IN THE ITAT INDORE BENCH
Sanee Infrastructure (P.) Ltd.
v.
Assistant Commissioner of Income-tax, 3(1), Bhopal*
JOGINDER SINGH, JUDICIAL MEMBER AND R.C. SHARMA, ACCOUNTANT MEMBER
IT APPEAL NO. 12 (IND.) OF 2011
[ASSESSMENT YEAR 2007-08]
JUNE 8, 2012
Section 80-IA of the Income-tax Act, 1961 - Deductions - Profits and gains from infrastructure undertakings - Assessment year 2007-08 - Whether after amendment by Finance Act, 2002 for claim of deduction under section 80-IA(4) infrastructure facility is only required to be developed and there is no condition that assessee should also operate same - Held, yes - Whether, after amendment, since assessee is not required to operate infrastructure facility, payment for development of such infrastructure is required to be made by Government only - Held, yes - Assessee, engaged in construction of roads for Government Departments, claimed deduction under section 80-IA - Assessing Officer noticed that assessee was relying on Government fund for construction work and assessee was only executing a works contract and there was no mobilization of sources of its own - Accordingly, Assessing Officer rejected assessee's claim - Whether in view of post amendment situation, Assessing Officer was required to examine terms and conditions of each and every contract entered into by assessee with Government to find out whether assessee had worked simplicitor as a contractor or as a developer of infrastructure facility as a whole - Held, yes [Matter remanded]
Circulars & Notification : Circular No.4 of 2010, dated 18-5-2010
FACTS
The assessee was engaged in the construction of roads for the Government departments. In the return of income, the assessee had claimed deduction under section 80-IA in respect of infrastructure project undertaken by it. The Assessing Officer noticed that the assessee had been given payments step by step during the construction period. There was no fund mobilization by the assessee to complete the project. The assessee was relying on Government fund for construction work, hence, as per the Assessing Officer, the assessee was only executing a works contract and there was no mobilization of sources of its own. After referring to the Explanation as substituted by the Finance (No. 2) Act, 2009 with retrospective effect from 1-4-2000, the Assessing Officer held that the assessee had executed only works contract awarded by the State Government and Central Government, hence, no deduction under section 80-IA(4) could be allowed. The Commissioner (Appeals) confirmed the disallowance made by Assessing Officer.
On second appeal
HELD
The assessee has claimed deduction under section 80-IA(4) in respect of various contracts awarded by the Government for development of infrastructure facilities of new roads and widening of existing roads and construction of new lanes i.e. converting existing single lane to double lane roads. [Para 9]
It is very clear from the amended provisions of section 80-IA(4) by Finance Act, 2002 and applicable w.e.f. 1-4-2002 that infrastructure facility, after amendment is required to be :-
(i) developed, or
(ii) maintained and operated, or
(iii) developed, maintained and operated.
Whereas as per the earlier law, the infrastructure facility was required to be -
(i) developed,
(ii) maintained and operated, or
(iii) developed, maintained and operated.
Thus, as per the amended law, development of infrastructure facility is sufficient for claim of deduction under section 80-IA(4) with effect from assessment year 2002-03. The relevant assessment year under consideration is also assessment year 2002-03 for which amended provisions of law is applicable. [Para 10]
Main reason for Assessing Officer's action for denial of the deduction was that the assessee was merely a contractor and not developer of infrastructure facility as a whole. The Assessing Officer also observed that at some instances, the assessee has only undertaken upgradation including construction of bridge and culvert, improvement and widening of new B. T. etc., which as per Assessing Officer did not amount to development of new infrastructure. In this respect, the assessee placed on record CBDT Circular No.4 of 2010 dated 18-5-2010, according to which widening of an existing road by constructing additional lane as part of a highway would be regarded as new infrastructure facility for the purpose of section 80-IA(4)(i ). Now it is necessary to analyze various conditions which are required to be fulfilled for claim of deduction under section 80-IA(4). Conditions stipulated in sub-clause (a ) of sub-section (4)(i) with regard to the enterprise being owned by the company registered in India is duly fulfilled. Since the assessee is a company registered in India, therefore, this condition is duly fulfilled by the assessee. Condition stipulated in sub-clause (b) requiring that the assessee company to enter into agreement with the Central or State Government for development of new infrastructure facility is also fulfilled in this case. However, condition stipulated under sub-clause (c), which required that the assessee has started operating and maintaining infrastructure facility on or after 1-4-1995, does not appear to be fulfilled and require a relook in the matter by the Assessing Officer. [Para 11]
Coming to the main objection of the revenue to the effect that the assessee was a contactor and not developer in view of the fact that the assessee was paid by the Government in respect of the work undertaken by it and assessee has not invested his own funds for completing the project nor assessee has recovered the same through operating the facility thereafter, after amendment by the Finance Act, 2002 for claim of deduction under section 80-IA(4) infrastructure facility is only required to be developed and there is no condition that assessee should also operate the same. Thus, after amendment, when the assessee is not required to operate the facility, the payment for development of such infrastructure is required to be made by the Government only. However, as per pre-amended law when the assessee was not only required to develop but also required to operate and maintain the infrastructure facility, there was collection of revenue through toll tax by which assessee could have recovered not only its cost part but also profit thereon. After amendment, when assessee undertakes to develop the infrastructure facility only, it is the Government who will make payment to assessee in respect of infrastructure facility developed by it in terms of agreement so entered into with Government. Thus, there is no infringement of conditions for claim of deduction under section 8O-IA(4) when the Government has made payment to the assessee in respect of the project of infrastructure development undertaken by it in terms of respective agreement entered into with Government. It is pertinent to mention here that for claim of deduction, the infrastructure project should be completely developed by the assessee and not part of it. Even when the assessee undertakes development of only part of infrastructure facility, it shall not be entitled for claim of deduction. In the instant case, it appears that the Assessing Officer has not minutely examined the terms of the agreement executed with Government Department. It is also pertinent to mention here that the proposition advanced by Revenue with reference to the decision of the Special Bench in the case of B.T. Patil & Sons Belgaum Construction (P.) Ltd. v. Asstt. CIT [2010] 35 SOT 171 (Mum.) (LB) was with respect to the assessment years 2000-01 and 2001-02, which was before the amendment brought in by the Finance Act 2002, therefore, the assessee's eligibility for claim of deduction is required to be examined with reference to the amended provisions of law with effect from 1.4.2002. [Para 12]
In view of the above discussion and in the interest of justice, this appeal is restored back to the file of Assessing Officer with a direction to examine the terms and conditions of each and every contract entered into by the assessee with the Government to find out whether the assessee has worked simplicitor as a contractor or as a developer of infrastructure facility as a whole. Minute examination of terms and conditions of each contract is required to be undertaken, even though the assessee has placed on record some of the letters of the Government Department, which has allotted the development work to the assessee, which, prima facie, gives impression that the assessee was given work of development of infrastructure facility. However, these letters of the Department are required to be read alongwith the detailed terms and conditions of the main agreement/contract entered into by the assessee with these departments while allotment of work. [Para 13]
In the result, the appeal of the assessee is allowed in part for statistical purposes. [Para 14]
Asstt. CIT v. Indwel Linings (P.) Ltd. [2009] 122 TTJ 137 (Chennai) (para 6), Asst. CIT v. Bharat Udyog Ltd. [2008] 24 SOT 412 (Mum.) (para 6), Patel Engg. Ltd. v. Dy. CIT [2005] 94 ITD 411 (Mum.) (para 6) and B.T. Patil & Sons Belgaum Construction (P.) Ltd. v. Asstt. CIT [2010] 35 SOT 171 (Mum.) (LB) (para 7).
Anil Khabya for the Appellant. Keshav Saxena for the Respondent.
ORDER
R.C. Sharma, Accountant Member - This is an appeal by the assessee against the order of the learned CIT(A) dated 26.10.2009 for the assessment year 2007-08.
2. The only grievance of the assessee relates to decline of claim of deduction u/s 80IA of the Income Tax Act, 1961 in respect of Infrastructure Projects developed by the assessee.
3. Rival contentions have been heard and record perused. The first, in brief, are that the assessee is engaged in the construction of roads for the Government departments. In the return of income, the assessee has claimed deduction u/s 80IA of the Act in respect of infrastructure project undertaken by the assessee. After verifying the details of project undertaken, the AO reached to the conclusion that the assessee has given payments step by step during the construction period. There is no fund mobilization by the assessee to complete the project. The assessee is relying on Government fund for construction work, hence, as per the AO, the assessee was only executing a works contract and there was no mobilization of sources of its own. After referring to the Explanation as substituted by the Finance (No. 2) Act, 2009 with retrospective effect from 1.4.2000, the AO held that the assessee has executed only works contract awarded by the State Government and Central Government, hence, no deduction under section 80IA(4) could be allowed to the assessee.
4. By the impugned order, the learned CIT(A) confirmed the disallowance by observing as under :-
"In the appellant's case, the various government departments have issued the tenders and the work contract has been awarded to the person who quotes the minimum rates. Similarly, the appellant had filed the tenders for various projects and was awarded the contract in respect of the projects mentioned in detail in the assessment order on which deduction u/s 80IA has been claimed for the year under consideration. The AO has made the disallowance on the ground that the most of the roads built by the appellant during the year under onsideration deos not amount to creation of new infrastructure facilities as the appellant has simply executed the work for upgradation/repairing/maintenance of old roads. In addition to the above, the projects also falls squarely under the expression "works contract" awarded by various government departments of MP and hence falls within the mischief of the Explanation to section 80IA.
It is pertinent to note from the schedule of payments that the appellant is given payment for the work done step by step during the period of construction. There is no mobilization of fund by the appellant to complete the project undertaken by him. Thus, it is clear that the appellant is a work contractor and relying on the government fund for the execution of work contract. Therefore, the appellant is not entitled to the deduction u/s 80-IA. Reliance is placed in the case of Asstt. CIT v. Indore Linings (P) Ltd [2009] 122 TTJ (Chennai) 137 wherein it is held that benefit of section 80IA is available only to a developer and not a contractor, thus, where assessee took contract work of insitu cement lining for water supply project of Gujarat Water Supply and Sewerage Board it was to be held that assessee was doing only contract work and as such benefit of section 80IA could not be extended to it. This issue has also been decided by Hon'ble Indore Tribunal in the favour of the department in the case of ACIT 3(1) Bhopal v. R.K. Gupta Contractor & Engineers Pvt. Ltd. Bhopal for A.Y. 2006-07 reported in ITA No. 517/Ind/2009 wherein it is held that provisions of 80-IA is not applicable to business referred in subsection (4) of section 80IA meaning thereby that the benefit under this section will not be granted to a "work contractor". The issue has also been decided in the case of B.T. Patil & Sons Constn. (P) Ltd. v. Asstt. CIT [2010] 35 SOT 171 (Mum) (LB)."
5. Against the above order, the assessee is in further appeal before us.
6. It was contended by the learned counsel for the assessee, Shri Anil Khabya, that the assessee has carried out development work of new roads and awarded by Government Deptt/Agencies. Complete detail has been filed on record. He further submitted that in some cases, existing old road facilities have been converted into infrastructure facility by widening the existing roads and by construction of new lanes i.e. thus converting existing single lane road to double lane roads etc. Conversion of existing roads into infrastructure facilities is also considered as 'development of infrastructure facility. Reliance was placed on Circular 4 of 2010 dated 18-05-2010 according to which widening of an existing road by constructing additional lanes as a part of a highway project by an undertaking would be regarded as a new infrastructure facility for the purpose of section 80IA(4)(i) of Act. The most important aspect was that the entire development/construction work has been executed by the assessee. The assessee has not executed only a part of construction work of infrastructure facility. The assessee was also under obligation to maintain these new roads for number of years after development. He further submitted that the assessee contracts with Government Deptt/Agencies cannot be termed as a "work contract simpliciter" These contracts were in the nature of "development" work with attached legal obligation of maintenance. The appellant has utilized substantial financial resources, both fund based and non-fund based (such as bank guarantees , performance guarantees), to execute these projects. Merely because, the appellant has been paid for development and construction work subsequently, could not be a reason to deny the assessee the benefit of deduction u/s 80IA(4). The CIT(A) has relied upon 3 Tribunal decisions cited at Page 6 para 2 of his order. All those cases have no relevance with the facts of appellant cases and the same were decided on the basis of special facts of those particular cases. In all those cases, the appellants were engaged in performance of "part of contract" and not the entire development work. The case of Asstt CIT v. Indwel Linings (P.) Ltd. [2009] 122 TTJ 137 (Chennai) was not related to Road Construction. In the case of appellant, the appellant has constructed the entire new roads. The appellant was also under legal obligation to maintain these new roads for number of years. Thus the ratio decided in those cases cannot be applied to the facts of appellant case. As per the learned counsel for the assessee, the case of the appellant is covered by the decision of Hon'ble Mumbai Bench in the case of Asstt. CIT v. Bharat Udyog Ltd [2008] 24 SOT 412. In that case, the appellant was a contractor of infrastructure facility. The A.O. denied the benefit on the ground that the assessee which was only a contractor constructing an infrastructure facility like road on behalf of the developer for a sum of profit and was not having stake in financial viability of the project. Allowing the deduction u/s 80IA(4)(i), the Hon'ble Tribunal held that an assessee who is only engaged in the developing the infrastructural facility i.e., road and not engaged in the 'operating and maintaining' the said facility is entitled to the benefits of the deduction under section 80-IA(4).-Patel Engg. Ltd. v. Dy. CIT [2005] 94 ITD 411 (Mum.) 646" Mr. Khabya further contended that ]the Explanation inserted by Finance (No. 2) Act, 2009 which has been inserted below sub-clause (13) of Section 80IA applies only in relation to a business referred to in sub-section (4) which is in the nature of work contract awarded by any person including the Central or State Government. The business of the appellant is not in the nature of work contract simpliciter. The appellant is undertaking execution of entire infrastructure facility along with obligation of maintenance for number of years. The appellant is not engaged in business of execution of only part of civil work so as to be described as "work contractor". The Explanation relied by the A.O. does not disentitle the appellant from substantive benefit conferred by Section 80IA(4)(i) of the Act.
7. On the other hand, the learned CIT DR, Shri Keshav Saxena, submitted that the assessee was merely a contractor and no infra-structure facilities have been developed by him on his own land. As per the learned CIT DR for claiming deduction u/s 80IA(4) of the Act, the infra-structure project should be owned by the assessee. He further relied on the observations made in the case of B.T. Patil & Sons Belgaum Construction (P.) Ltd. v. Asstt. CIT [2009] 126 TTJ 577 /[2010] 35 SOT 171 (Mum.) (LB) wherein it was held that the assessee should be involved in planning and development of infra-structure facilities as a whole. The assessee should carry out the construction work as per the requirements of State Government and cannot deviate even an inch from the plan assigned to it. Our attention was also invited to following observations in the order which read as under :-
"Another significant word used here is "owned" which indicates that the infrastructure facility should be owned by a company so as to be entitled to deduction under this section. From the copies of agreement entered into by the assessee with the State Government/statutory authorities, it is amply clear that only the concerned authority, and not the assessee, has been described as "owner" in unambiguous words. In these agreements the assessee has been referred to as a joint venture for carrying out the specified work only. It is axiomatic that the doing of work assigned to assessee, religiously in accordance with the given specifications subject to the terms and conditions of the agreement and control of the authority, cannot put it in the capacity of owner. Even if the assessee had to make some investment, for the time being, in the shape of purchase of some raw material or incurring of labour etc., which is recouped from time to time by furnishing bills, the assessee cannot claim itself as owner of the work done by it. The assessee is a mere contractor whose tender has been accepted by the competent authorities for carrying out the specified job, the property in respect of which vests with such Government or local authority. It is, therefore, clear that since the work done by the assessee is not owned by it, it does not satisfy sub-cl. (a) of s. 80IA(4)(i)"
8. The ld. CIT DR further contended that the assessee is not the owner of infrastructure facility and, therefore, did not satisfy the condition of ownership as per sub-clause (a) of Section 80IA(4)(i). For this purpose, our attention was also invited to the, decision of the B.T. Patil & Sons Belgaum Construction (P.) Ltd. (supra), according to which infrastructure facility should be owned by the company so as to be entitled for deduction under this section. As per ld. CIT DR, the assessee is a mere contractor whose tender has been accepted by competent authorities for carrying out the specific jobs, the property in respect of which vested with such Government or Local Authority. He further submitted that the decision relied by the ld. Authorized Representative in the case of Bharat Udyog Ltd. (supra) was passed on 30th June, 2008, and was based on the decision of Patel Engg. Ltd., (supra) which was over ruled by the decision of Special Bench in the case of B.D. Patil & Sons Belgaum Construction (P.) Ltd. (supra).
9. We have considered the rival submissions and have gone through the orders of the authorities below and also deliberated on the case laws cited by ld. CIT DR and ld. Authorized Representative in the context of factual matrix of the case. From the record, we found that the assessee has claimed deduction u/s 80IA(4) In respect of various contracts awarded by the Government for development of infrastructure facilities of new roads and widening of existing roads and construction of new lanes i.e. converting existing single lane to double lane roads. Relevant provisions of the law for claim of exemption u/s 80IA(4), which was amended by the Finance Act, 2002 and applicable w.e.f. 1.4.2002 i.e. assessment year 2002-03 reads as under :
"Deduction in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc.
80-IA. (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed in computing the total income of the assessee, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business for ten consecutive assessment years.
(4) This section applies to -
(i) Any enterprise carrying on the business of (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining any infrastructure facility which fulfils all the following conditions, namely :-
(a) It is owned by a company registered in India or by a consortium of such companies or by an authority or a board or a corporation or any other body established or consititutedn under any Central or State Act;
(b) It has entered into an agreement with the Central Government or a State Government or a local authority6 or any other statutory body for (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining a new infrastructure facility;
(c) It has started or starts operating and maintaining the infrastructure facility on or after the Ist day of April, 1995 :
Provided that where an infrastructure facility is transferred on or after the Ist day of April, 1999 by an enterprise which developed such infrastructure facility (hereafter in this section referred to as the transferor enterprises) to another enterprise (hereafter in this section referred to as the transferee enterprise) for the purpose of operating and maintaining the infrastructure facility on its behalf in accordance with the agreement with the Central Government. State Government, local authority or statutory body, the provisions of this section shall apply to the transferee enterprise as if it were the enterprise to which this clause applies and the deduction from profits and gains would be available to such transferee enterprise for the unexpired period during which the transferor enterprise would have been entitled to the deduction, if the transfer had not taken place.
Explanation :- For the purposes of this clause, "infrastructure" means -
(a) A road including toll road, a bridge or a rail system
(b) A highway project including housing or other activities being an integral part of the highway project.
(c) A water supply project, treatment system, irrigation project, sanitation and sewerage system or solid waste management system;
(d) A port, airport, inland waterway, inland port or navigational channel in the sea."
10. It is very clear from the amended provisions of the law that infrastructure facility, after amendment is required to be :-
(i) developed or
(ii) maintained and operated or
(iii) developed, maintained and operated.
Whereas as per the earlier law, the infrastructure facility was required to be -
(i) developed,
(ii) maintained and operated or
(iii) developed, maintained and operated
Thus, as per the amended law, development of infrastructure facility is sufficient for claim of deduction u/s 80IA(4) w.e.f. assessment year 2002-03. The relevant assessment year under consideration is also assessment year 2002-03 for which amended provisions of law is applicable.
11. Main reason for Assessing Officer's action for denial of the deduction was that the assessee was merely a contractor and not Developer of infrastructure facility as a whole. The Assessing Officer also observed that at some instances, the assessee has only undertaken upgradation including construction of bridge and culvert, improvement and widening of new B. T. etc, which as per Assessing Officer did not amount to development of new infrastructure. In this respect, the ld. Authorized Representative placed on record CBDT Circular No.4 of 2010 dated 18.5.2010, according to which widening of an existing road by constructing additional lane as part of a high way approach would be regarded as new infrastructure facility for the purpose of Section 80IA(4)(i) of the Income-tax Act, 1961. Now we analyze various conditions which are required to be fulfilled for claim of deduction u/s 80IA(4) as narrated above. Conditions stipulated in sub clause (a) of sub-Section (4)(i) with regard to the enterprise being owned by the company registered in India is duly fulfilled. Since the assessee is a company registered in India, therefore, this condition is duly fulfilled by the assessee. Condition stipulated in sub-clause (b) requiring that the assessee company to enter into agreement with the Central or State Government for development of new infrastructure facility is also fulfilled in this case. However, condition stipulated under sub-clause (c), which required that the assessee has started operating and maintaining infrastructure facility on or after 1st day of April, 1995, does not appear to be fulfilled and require a relook in the matter by the Assessing Officer.
12. Now coming to the main objection of the ld. CIT DR to the effect that the assessee was a Contactor and not developer in view of the fact that the assessee was paid by the Government in respect of the work undertaken by it and assessee has not invested his own funds for completing the Project nor assessee has recovered the same through operating the facility thereafter. As per our considered view, after amendment by the Finance Act, 2002 for claim of deduction u/s 80IA(4) infrastructure facility is only required to be developed and there is no condition that assessee should also operate the same. Thus, after amendment, when the assessee is not required to operate the facility, the payment for development of such infrastructure is required to be made by the Government only. However, as per pre-amended law when the assessee was not only required to develop but also required to operate and maintain the infrastructure facility, there was collection of revenue through toll tax by which assessee could have recovered not only its cost part but also profit thereon. After amendment, when assessee undertakes to develop the infrastructure facility only, it is the Government who will make payment to assessee in respect of infrastructure facility developed by it in terms of agreement so entered with Government. Thus, we do not find any infringement of conditions for claim of deduction u/s 80IA(4) when the Government has made payment to the assessee in respect of the project of infrastructure development undertaken by it in terms of respective agreement entered into with Government. It is pertinent to mention here that for claim of deduction, the infrastructure project should be completely developed by the assessee and not part of it. Even when the assessee undertakes development of only part of infrastructure facility, it shall not be entitled for claim of deduction. In the instant case, it appears that the Assessing Officer has not minutely examined the terms of the agreement executed with Government Department. It is also pertinent to mention here that the proposition advanced by ld. CIT DR with reference to the decision of the Special Bench in the case of B.T. Patil & Sons Belgaum Construction (P.) Ltd. (supra) was with respect to the assessment years 2000-01 and 2001-02, which was before the amendment brought in by the Finance Act 2002,therefore, the assessee's eligibility for claim of deduction is required to be examined with reference to the amended provisions of law w.e.f. 1.4.2002.
13. In view of the above discussion and in the interest of justice, we restore this appeal back to the file of Assessing Officer with a direction to examine the terms and conditions of each and every contract entered by the assessee with the Government to find out whether the assessee has worked simplicitor as a contractor or as a developer of infrastructure facility as a whole. Minute examination of terms and conditions of each contract is required to be undertaken, even though the assessee has placed on record some of the letters of the Government Department, which has allotted the development work to the assessee, which, prima facie, gives impression that the assessee was given work of development of infrastructure facility. However, as per our considered view, these letters of the Department are required to be read alongwith the detailed terms and conditions of the main agreement/contract entered by the assessee with these departments while allotment of work.
14. In the result, the appeal of the assessee is allowed in part for statistical purposes.
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