MAHARASHTRA STATE ROAD DEVELOPMENT CORPORATION LTD, MUMBAI V. ADDL CIT 5(2), MUMBAI

ITA 3485/MUM/2014

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 3526 (ITAT-MUMBAI)
• Duration Of Justice: 7 year(s) 11 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-04-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 14-05-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PARAG VYAS
• Keywords: Business expenditure; Revised return
• Section: 37; 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, MUMBAI BEFORE SHRI PRASHANT MAHARISHI, AM AND SHRI AMARJIT SINGH, JM ITA No. 3485/Mum/2014 (Assessment Year 2009-10) Ma h a ra sh tra S ta te Ro a d De ve lo p m e n t Co rp o ra tio n L td . P ri ya d a rsh in i P a r k, Na p e a n se a Ro a d , Mu m b a i-4 0 0 0 3 6 Vs. T h e A d d l. Co m m iss io n e r o f In co m e T a x Ce n tra l C i rcle 5 (2 ) A a ya ka r B h a va n , 5 t h F lo o r, Mu m b a i-4 0 0 0 2 0 (Appellant) (Respondent) PAN No. AAACM6833C Assessee by : Shri Dalpat Shah & Shri B.S. Sharma, CAs’ Revenue by : Shri Parag Vyas, Spl. Counsel Date of hearing: 13.04.2022 Date of pronouncement : 28.04.2022 O R D E R PER PRASHANT MAHARISHI, AM: 01. This appeal is filed by Maharashtra State Road Development Corporation Limited (assessee/ appellant) against the order of Commissioner of Income-tax (Appeals)—9, Mumbai [the learned CIT(A)] dated 14 th February, 2014 for Assessment Year 2009-10. 02. Assessee has raised the following grounds of appeal:- “1. The Commissioner of Income tax (Appeals) 9, Mumbai (Hereinafter referred to as "Ld CIT (A)") has erred in law, on facts and in the circumstances of the case, in confirming the disallowance of Rs.680.30 Page | 2 ITA No. 3485/Mum/2014 Maharashtra State Road Development Corporation Ltd.; AY 09-10 Lacs, as detailed in para 5.2 of Page No.10 of appellate order and page no.2 of the Assessment order under Section 143(3) dt. 30.12.2010 (Hereinafter referred to as the "Asst Order") towards excess interest debited by banks. 2. The Ld CIT(A) erred in law, on facts and in the circumstances of the case in confirming the disallowance of Prior Period Expenses of Rs.92,83.00 lacs, as detailed in page 11 para 5.3 of the appellate order and para 4 of Page No.2 of the Asst order, being conversion of guarantee fee payable for sovereign guarantee for Bonds issued, into share capital payable to the Government of Maharashtra.” 03. Assessee is a company engaged in the business of infrastructure development such as construction of flyovers, bridges, roads etc. It is fully owned by Govt. of Maharashtra. 04. It filed its return of income on 30 th September, 2009, declaring income of ₹382,61,28,565/- which was subsequently revised on 30 th March, 2011 at a loss of ₹518,51,54,960/-. The case of the assessee was picked up for scrutiny. Assessment order u/s 143 (3) of the income tax act, 1961 (the act) was passed on 23/12/2011 at a total loss of Rs 418,88,24,900/–. 05. The learned assessing officer has made following additions/disallowances to the total income:- a. addition on account of excess interest paid of ₹ 68,030,000/– Page | 3 ITA No. 3485/Mum/2014 Maharashtra State Road Development Corporation Ltd.; AY 09-10 b. addition of ₹ 928,300,000 on account of charging of 2% as guarantee fees by the Maharashtra government and then converting it into a capital by disallowing the guarantee fee of that amount 06. Assessee preferred an appeal before the learned CIT – A on both these counts which were confirmed. Therefore assessee is in appeal before us 07. First ground of appeal is with respect to the disallowance of ₹ 68,030,000/–. The fact shows that as per note number 4.6 of schedule forming part of the accounts it is mentioned that as per exercise undertaken by the Corporation there have been instances of excess recovery of interest are different banks to the extent of an identified sum of ₹ 680.30 lakhs. The steps are taken with respective banks and reconcile the accounts. The learned assessing officer noted that since the company is following mercantile system of accounting any payment should be treated as an advance and only the interest allowable should be provided in the books of accounts of therefore the assessee was questioned that why above sum should not be disallowed. Assessee explained that as per the exercise undertaken by the assessee there have been instances of excess recovery of interest by different banks to the extent of ₹ 680.30 lakhs. The assessee has been taking steps to recover the matter with respective banks and reconcile the accounts since recovery is confirmed by the bankers no accounting action for the same has been taken. Further subsequent years if any amount is Page | 4 ITA No. 3485/Mum/2014 Maharashtra State Road Development Corporation Ltd.; AY 09-10 recovered, then the said amount will be offered for taxation. As these recoveries have been made by the bank it is claimed as expenditure. It was stated that this is a mere statement has been made in the notes to accounts and has no impact on the financial statements. The learned assessing officer after considering the reply of the assessee, disallowed the above sum. On appeal before the learned CIT – A he also confirmed the disallowance holding that it is clearly mentioned that the banks have charged excess interest and it is claiming refund/adjustment of such excess interest from the banks. Therefore, it is quite apparent that such excess interest is not a deductible expenditure in the hands of the assessee. 08. Learned authorised representative submitted that Both lower Authorities have ignored the fact that the said note 4.6 was merely a general note given in the Financial Statements and the appellant had merely put the objection to the Bank for excess interest charged which was neither reversed nor confirmed by the Bank as the same was under the review of the banker. Therefore, the disallowance of said Rs. 6.80 Crores needs to be deleted. It is submitted that both lower authorities have ignored the fact that any recovery in subsequent years would be offered for tax and the very fact that the appellant has offered reversal of Interest claimed of earlier years amounting to Rs. 1.53 Crores during A.Y. 2009-10. Therefore, any notional interest cannot be disallowed based on a general observations in the Financial Statement. Without Prejudice, it is submitted that both Page | 5 ITA No. 3485/Mum/2014 Maharashtra State Road Development Corporation Ltd.; AY 09-10 the lower authorities have Ignored the fact that the said disallowance of Rs. 6.80 Crores is a cumulative amount for more than 3 years and therefore in any event disallowance can be restricted to Rs. 26.29 Lakhs only which is the excess interest charged for the A.Y. 2009-10. He also referred to Page 10 of P/B showing year wise excess Interest charged by banker. 09. The learned departmental representative vehemently supported the orders of the lower authorities. He submitted that when the interest has been excess charge by the bankers to the assessee and identified by the assessee itself, there is no question of granting deduction of such interest expenditure as according to assessee itself it was not an expenditure incurred. 010. We have carefully considered the rival contention and perused the orders of the lower authorities. We find that assessee has made an exercise and found that there are several banks which has charged excess interest amounting to ₹ 68,029,972/–. This working is placed at page number 10 of the paper book. The reason to list of approximately 17 banks wherein for different years it was found that the interest has been charged excessively by those banks. Such excessive charged interest up to accounting year 2006 – 07 is ₹ 50,503,714/–, for accounting year 2007 – 08 of Rs 1,48,96,609 and for accounting year 2008 – 09 relevant to assessment year 2009 – 10 is ₹ 2,629,649/–. In fact, such interest expenditure, which is excess charge by the bank, has been Page | 6 ITA No. 3485/Mum/2014 Maharashtra State Road Development Corporation Ltd.; AY 09-10 already claimed as deduction in the respective years. For this year only such excess interest claimed by the assessee as deduction is ₹ 2,629,649/–. As the assessee itself has worked out that excess interest has been charged by the various banks, naturally this amount cannot be said to be an expenditure incurred by the assessee for the purpose of the business of the assessee for the assessment year 2009 – 10. However, the whole interest expenditure stated to be excess charged of ₹ 68,029,972/– cannot be disallowed, as it has not been claimed as expenditure during the year. During the year the total expenditure claimed which has been charged excessively by those banks is amounting to ₹ 2,629,006 and 49 only. In view of this, even if there is any disallowance it could be restricted only to the sum. Therefore, we direct the learned assessing officer to restrict the disallowance only to ₹ 2,629,649. Accordingly, ground number 1 of the appeal is partly allowed. 011. Ground number 2 is with respect to the disallowance of ₹ 9283 lakhs being guarantee charges recovered by government of Maharashtra. The fact shows that the assessee is a company owned by government of Maharashtra. Government of Maharashtra had taken a decision in its meeting held on 20 October 1997 to provide government guarantee to the assessee by charging a guarantee fee at the rate of 0.25% for the projects. Further, on seventh of November 2002, the government of Maharashtra in a cabinet meeting decided to charge guarantee fee and subsequently to convert guarantee fee Page | 7 ITA No. 3485/Mum/2014 Maharashtra State Road Development Corporation Ltd.; AY 09-10 into equity share capital of the assessee. Further, on 24 February 2010, the guarantee fee payable is decided at the rate of 2% and it is a cashless transaction resulting into creation of equity share capital of the appellant. In terms of those resolutions assessee was to pay ₹ 9000 283 lakhs as a guarantee fee to government of Maharashtra which was to be converted into equity share capital of the assessee company. Therefore, the guarantee fee was considered as expenditure allowable to the assessee. In the revised return, such claim was made. The learned assessing officer disallowed the above claim stating that the entire loss claimed on this account of ₹ 9000 283 lakhs is not allowable because this scheme of arrangement of government of Maharashtra is not contributing and capital but charging 2% as guarantee fee from Assessee Company and giving it back in the form of share capital. He further held that this arrangement is nothing but increasing revenue loss on one hand and Simon tenuously increasing capital of the company. Accordingly, he disallowed the guarantee fee paid of ₹ 9 283 lakhs. Assessee preferred appeal before the learned CIT – A who also confirmed the same is no stating that such losses accumulated and also pertain for earlier years also that is why it is claimed as a prior period expenses. At the time of filing of the original return, the appellant has not claimed such expenses because in real terms it is not expenditure because the entire amount is coming back to the appellant company in the form of share capital from the government. He further held that it is a paper Page | 8 ITA No. 3485/Mum/2014 Maharashtra State Road Development Corporation Ltd.; AY 09-10 transaction between the State government and the appellant company whose permanent result is increasing the capital of the appellant from the funds of the appellant. He therefore held that under the circumstances, the disallowance of such circular transaction on paper has correctly been disallowed by the AO and the same is confirmed. 012. Contesting the above addition, the learned authorised representative made following submissions The appellant is wholly owned undertaking of the State Government of Maharashtra. The appellant charged additional Guarantee fees payable to the State Government of Maharashtra as Guarantor to the Bonds issued by the Appellant in earlier years which was confirmed on issuance of GR by the State Government after 31.03.2009 and therefore was shown as Prior Period expenses in the Financial Statement in pursuance of AS-5 issued by the ICAI. The appellant settled part of the said Guarantee Fees by issue of Equity Shares to the State Government of Maharashtra who owns the Appellant. 2.2. A.O: Para 4 The AO disallowed this expenditure on the ground that it is a scheme of arrangement wherein the State Government is not contributing any fund to the capital and the Appellant pay the due Guarantee Commission in the form of Equity Capital So this arrangement is nothing but increase in losses and equity share capital of the Appellant. Page | 9 ITA No. 3485/Mum/2014 Maharashtra State Road Development Corporation Ltd.; AY 09-10 2.3. CIT (A): Para 5.3 (Page 11). The CIT(A) confirmed the addition on flimsy ground that it is a prior period expenses and paper transaction between State Government and the Appellant. 2.4. Submissions 2.4.1. The date wise events for increased rate of Guarantee Commission is mentioned In Para 4.1 of CIT(A) order on Page 3 to 4. 2.4.2. Details of the Prior Period expenses are in the Financial Statements at Note 4.8 to Notes to Accounts (Refer Page 104 & Schedule 18 on Page 94 of the P/B.). 2.4.3. Both the lower authorities have ignored the fact that the said Guarantee Commission was claim as "Prior Period Expenses" as the same was crystalized & accrued based on the GR issued by the State Government of Maharashtra on 23.03.2010.i.e. after the Balance sheet period of 31.03.2009 but before signing of the Balance sheet on 21.2.2011. (Copy of GR at Pg 49 of P/B) 2.4.4. It is submitted that the same is allowable business expenditure U/sec. 37 as under the Income tax Act there is no prohibition that expenditure can not be paid in the form of equity share. 2.4.5. The appellant has relied upon following judicial decisions: Page | 10 ITA No. 3485/Mum/2014 Maharashtra State Road Development Corporation Ltd.; AY 09-10 (i) CIT V/S IPCL 74 taxmann.com 163 (Guj). ii) CIT V/S Karnataka Power Corpn. Ltd 281 Taxman 600 (Karnatak) (iii)Saurashtra Cement & Chemical Ind Ltd 80 Taxman 61 (Guj) iv) Tata Communications Ltd V/S JCIT 32 taxmann.com 199 (Mum) (v) DCIT V/S Motech Software (P) Ltd. 63 SOT 17 (Mum) 013. The learned departmental representative vehemently supported the orders of the lower authorities. 014. We have carefully considered the rival contention and perused the orders of the lower authorities. Fact shows that government of Maharashtra in view of guarantee given for the funding of the various projects of the assessee, is charging guarantee commission. Such guarantee commission is never paid by the assessee to the government of Maharashtra but is converted into equity capital by government of Maharashtra. Now the question that arises is whether the government guarantees charges recovered by the government of Maharashtra from assessee is an allowable expenditure or not. The lower authorities have stated that this is a circular transaction is no amount is paid by the assessee but it is converted by government of Maharashtra into equity capital. The assessee has claimed deduction of the above sum stating that it has accrued before the due date Page | 11 ITA No. 3485/Mum/2014 Maharashtra State Road Development Corporation Ltd.; AY 09-10 of finalization of accounts and therefore, as events are occurring after the balance sheet date, such provisions are made and claim is made for deduction of the government guarantee fee. It is an undisputed fact that guarantees fee is an expenditure incurred by the assessee. It is also not in dispute that it has been incurred by the assessee during the year and crystallized during the year. Therefore, the corporate guarantee fee payable by the assessee to the government of Maharashtra has OF an expenditure incurred by the assessee for the purposes of the business. Therefore, we hold that the expenditure has been incurred by the assessee during the year for the purposes of the business therefore it is allowable to the assessee under the provisions of Section 37 (1) of the. Mere fact that it has been converted into equity capital by government of Maharashtra does not change the character of expenditure of guarantee fee paid by the assessee. It is a manner of payment of such expenditure by assessee to government of Maharashtra. Further, the conversion of guarantee fee is also backed by the Cabinet committee decision of the government of Maharashtra. Therefore, it cannot be stated that these are mere paper transactions. In view of this, we reverse the findings of the lower authority and direct the learned assessing officer to delete the disallowance of ₹ 9283 lakhs on account of guarantee fee paid to government of Maharashtra. Accordingly, ground number 2 of the appeal is allowed. 015. Accordingly, appeal of the assessee is partly allowed. Page | 12 ITA No. 3485/Mum/2014 Maharashtra State Road Development Corporation Ltd.; AY 09-10 Order pronounced in the open court on 28 .04.2022. Sd/- Sd/- (AMARJIT SINGH) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Mumbai, Dated: 28.04.2022 Sudip Sarkar, Sr.PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, True Copy// Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai