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2016 (9) TMI 390 - AT - Income TaxDisallowance of expenditure incurred on renovation of showroom - Allowability of revenue expenditure - Held that - We hold that expenditure was not incurred on any capital outlay. Therefore, the expenditure is revenue in nature. Even the provisions of Explanation 1 to section 32 cannot be invoked in the present case as there was no construction of any structure, extension, improvement to the building as involved. Therefore, we direct the AO to allow the same as revenue expenditure. Deemed dividend u/s. 2(22)(e) - Held that - Condition precedent that advances were not received by shareholders is not satisfied. Therefore, the amount cannot be brought to tax as deemed dividend in the hands of the assessee-firm. However, we make it clear that it is open to the department to initiate appropriate action to bring to tax dividend in the hands of the registered shareholder by the process known to law. Deduction under section 80IA - Held that - For the purpose of computing eligible profits under section 80IA, losses incurred prior to commencement of initial year should not be reckoned. We hold that since loss incurred prior to the initial year of eligible business need not be deducted for the purpose of computing amount of allowance under section 80IA(5)
Issues Involved:
1. Disallowance under Section 40(a)(ia) of the Income-tax Act. 2. Disallowance of payment of gratuity under Section 43B. 3. Treatment of expenditure on showroom renovation as capital expenditure. 4. Treatment of expenditure on fencing as capital expenditure. 5. Addition of deemed dividend under Section 2(22)(e). 6. Deduction under Section 80IA. Issue-wise Detailed Analysis: 1. Disallowance under Section 40(a)(ia) of the Income-tax Act: The assessee raised the issue of disallowance of ?1 lakh under Section 40(a)(ia). However, since this ground was raised for the first time before the Tribunal without any application for admission of additional grounds, it was dismissed without adjudication. 2. Disallowance of payment of gratuity under Section 43B: The assessee challenged the disallowance of ?4,62,107/- under Section 43B. Similar to the first issue, this ground was also raised for the first time before the Tribunal without any application for admission, leading to its dismissal without adjudication. 3. Treatment of expenditure on showroom renovation as capital expenditure: The assessee claimed ?17,18,671/- spent on showroom renovation as revenue expenditure. The AO treated it as capital expenditure and allowed depreciation at 10%. The CIT(A) confirmed this treatment. The Tribunal, however, held that the expenditure incurred on false ceiling, flooring, painting, etc., did not result in the creation of any new asset and should be treated as revenue expenditure. The Tribunal directed the AO to allow the expenditure as revenue expenditure, referencing the principles laid down by the Supreme Court in CIT vs. Madras Auto Services Pvt. Ltd. (233 ITR 463). 4. Treatment of expenditure on fencing as capital expenditure: The Tribunal applied the same reasoning as in the showroom renovation issue to the expenditure on fencing, holding it as revenue in nature. Consequently, the expenditure on fencing was also directed to be allowed as revenue expenditure. 5. Addition of deemed dividend under Section 2(22)(e): The AO treated ?29,02,161/- received by the assessee-firm from its sister concern as deemed dividend. The CIT(A) deleted this addition, following the Delhi High Court's decisions in CIT vs. Gopal Clothing Pvt. Ltd. (350 ITR 67) and CIT vs. Ankitech P. Ltd. (340 ITR 14), stating that since the assessee-firm was not a shareholder in the company, the amount could not be taxed as deemed dividend. The Tribunal upheld this view, referencing the jurisdictional High Court's decision in Bagmane Constructions (P) Ltd. vs. CIT (277 CTR 338)(Kar), which held that deemed dividend could only be taxed in the hands of the shareholder, not the concern. 6. Deduction under Section 80IA: The AO denied the deduction under Section 80IA, stating that there were no eligible profits after setting off brought forward business loss and depreciation losses. The CIT(A) allowed the deduction, following the jurisdictional High Court's decision in CIT vs. Swarnagiri Wire Insulations P Ltd. and the Supreme Court's decision in Synco Industries Ltd. vs. AO (ITO) (299 ITR 444). The Tribunal upheld the CIT(A)'s decision, stating that losses incurred prior to the initial year of eligible business need not be deducted for computing the deduction under Section 80IA. Conclusion: The assessee's appeal was partly allowed for statistical purposes, and the revenue's appeal was dismissed. The Tribunal directed the AO to allow the expenditures on showroom renovation and fencing as revenue expenditures and upheld the CIT(A)'s deletion of the deemed dividend addition and the allowance of the deduction under Section 80IA.
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