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2009 (6) TMI 681 - AT - Income TaxDisallowance of deduction u/s 43B - excise duty paid during the year represented PLA balance - assessee claimed deduction on payment basis with respect to amount deposited through Personal Ledger Account (PLA) as per Rule 173G of the Central Excise Rules, 1944 - AO disallowed the deduction on the ground that the impugned payment made in advance, without accrual of liability, is not deductible u/s 43B - CIT(A) has sustained the action of the AO. HELD THAT - We find that Special Bench of Tribunal in the case of Glaxo Smithkline Consumer Healthcare Ltd. 2007 (7) TMI 334 - ITAT CHANDIGARH held that in respect of expenditure stated in section 43B which are allowable only on actual payment, for claiming deduction in respect of such expenses which also includes payment of excise duty, it is not necessary that liability to pay duty must be incurred first and only thereafter payment of such duty is to be made for the purpose of allowance thereof. It was held that deduction for tax, excise duty etc. is allowable u/s 43B on payment basis even before incurring liability to pay such amount. Since in the present case the amount is already paid by way of excise duty, though lying in PLA balance, yet the same is payment towards excise duty and hence allowable in terms of section 43B. Disallowance of prior period expenses - As per assessee liability has been crystallized settled during the year - assessee claimed miscellaneous expenses on account of tour and travel expenses of employees, internal audit fee, electrical repair fee etc. relating to preceding years that were not booked in earlier years - AO disallowed the expenses for the reason that since the assessee is maintaining its books of account on mercantile system and hence deduction in respect of expenses which do not pertain to the year cannot be allowed. CIT(A) noted that the expenses are in the nature of day-to-day running expenses pertaining to the business, the same are allowable only in the year in which the liability was incurred and hence not allowable for this year. HELD THAT - We find that the assessee is a body corporate. It has a set system for approving the payment of expenditure. The assessee therefore, accounts for the expenses when same is approved by prescribed authority within the organization. Admittedly, the expenses pertaining to business for day-to-day running. Since the bills or claims were made during the year, it can be said that the liability became known for the first time when such claim was made. Accordingly, the same is allowable in the year in which the liability got crystallized. Similar view has been adopted in the case of Saurashtra Cement Chemical Industries Ltd. 1994 (10) TMI 30 - GUJARAT HIGH COURT . We therefore, direct the AO to examine whether such expenses are incurred wholly and exclusively for the purpose of business and if so found, allow the same irrespective of the year in which it pertains as the liability in regard to these expenses got crystallized during the relevant previous year. As regards expenses pertaining to the year under appeal but debited to the profit loss account of subsequent assessment year i.e., assessment year 1996-97, the assessee has raised specific ground in this regard which has not been disposed of by the CIT(A). We, therefore, direct the CIT(A) to decide this ground after affording reasonable opportunity of being heard to the assessee. The assessee shall place necessary material as to when the liability got crystallized so that the expenses may be allowed in appropriate assessment year. Disallowance of Interest u/s 43B - interest on loans due to Financial Institutions which was actually paid by the appellant during the previous year by way of allotment of shares to the Financial Institution - AO disallowed the claim for deduction of unpaid interest of the amalgamating company discharged by the assessee amalgamated company by issue of shares, inter alia - as per DR what the assessee discharged is not liability towards interest incurred by the assessee but by way of liability taken over. Therefore, the nature of payment in the hands of the assessee is not by way of expenses towards interest but towards unpaid liability of erstwhile company - Since the assessee has not incurred the liability in respect of interest, even under section 43B, the same is not allowable - CIT(A) confirmed the disallowance made by the AO. HELD THAT - In the present case it is seen that the liability is discharged by way of issuance of shares and not actual payment by way of legal tender. What is allowable under section 43B is in respect of deduction otherwise allowable under this Act. The deduction allowable under the Act is in respect of various sums referred to in sections 30 to 37 of the Act. Interest on any loan or borrowing is one such sum referred in section 36(1)( iii ) of the Act. Therefore, for the purpose of allowability, the amount should be in the nature of expenditure. The word expenditure is not defined under the Act Hon ble Supreme Court in the case of Indian Molasses Co. Ltd. v. CIT 1959 (5) TMI 5 - SUPREME COURT held that expenditure is equal to expense and expense is money laid out by calculation and intention though in many uses of the word this element may not be present, as when one speaks of a joke of another s expense. But the idea of spending in the sense of paying out or away money is the primary meaning which is relevant. Expenditure is thus, what is paid out or away and is something which has gone irretrievably. It is seen that the liability was discharged by way of issuance of shares. When the assessee issues shares the assessee does not incur any expenditure as the assessee is not to make any payment legally towards shares issued. The shares cannot be equated with debentures, which is purely by way of loan and the same are required to be repaid on maturity. However, in respect of shares the company is under no obligation to make any payment in respect of such shares where shareholders accept payment of pro rata dividend when such dividend is declared. Thus by issuance of shares the assessee cannot be said to have incurred any expenditure and hence issuance of shares in lieu of interest liability cannot be considered to have been payment towards expenditure. Accordingly the interest liability discharged is not an allowable expenditure. This ground is accordingly dismissed. Disallowance on unabsorbed investment allowance of Amalgamated company since merged with effect from 1-4-1994 - assessee claimed carry forward and set off of unabsorbed investment allowance of the amalgamating company. The claim was disallowed by the AO, inter alia, on the ground that the amalgamated company was entitled to set off of only unabsorbed depreciation and unabsorbed business losses of the amalgamating company in terms of section 72A, provided the condition laid down in that section were fulfilled. According to the AO, the benefit of unabsorbed investment allowance of the amalgamating company could not have been claimed by the amalgamated company. The CIT(A) upheld the findings of the AO. HELD THAT - Section 72A contains the provision relating to carry forward and set off of accumulated loss and unabsorbed depreciation of allowance in a case of amalgamation or de-amalgamation etc. However, it does not provide for carry forward and set off of any unexplained investment allowance. Therefore, CIT(A) was incorrect in applying provision of section 72A in respect of unabsorbed investment allowance. On the contrary sub-section (6) of section 32A provides for carry forward and set off of unabsorbed investment allowance. Though the attention of the CIT(A) was drawn to the provision of section 32A(6), the same has been overlooked. We, therefore, direct the AO to allow the benefit of unabsorbed investment allowance of erstwhile Flowmore Polyesters Ltd. Amalgamated company in terms of section 32A(6) and if the conditions specified in section 32A(6) are complied with, the amount of unabsorbed investment allowance be allowed in the hands of the assessee company.
Issues Involved:
1. Disallowance of rent, repairs, and depreciation under section 37(4) of the Income-tax Act. 2. Disallowance of deduction under section 43B for excise duty paid. 3. Disallowance of prior period expenses. 4. Disallowance of set-off/carry forward of unabsorbed depreciation and business loss of the amalgamated company. 5. Disallowance of interest on loans due to financial institutions under section 43B. 6. Disallowance of unabsorbed investment allowance of the amalgamated company. 7. Disallowance of revenue expenditure not charged to the Profit and Loss Account. Detailed Analysis: 1. Disallowance of Rent, Repairs, and Depreciation: The first ground of appeal was dismissed as the appellant's counsel conceded that the issue was decided against the assessee based on the Supreme Court's decision in Britannia Industries Ltd. v. CIT [2005] 278 ITR 546. Consequently, this ground was not pressed and dismissed for want of prosecution. 2. Disallowance of Deduction under Section 43B for Excise Duty Paid: The assessee claimed deduction under section 43B for Rs. 25,25,139 deposited through the Personal Ledger Account (PLA) as excise duty. The Assessing Officer disallowed the deduction, arguing it was an advance payment without an accrued liability. However, it was agreed by both parties that the issue was covered in favor of the assessee by the Special Bench decision in Dy. CIT v. Glaxo Smithkline Consumer Healthcare Ltd. [2007] 107 ITD 343 (Chd.)(SB). The Tribunal held that the deduction for excise duty is allowable on a payment basis even before incurring the liability, thus allowing the assessee's claim. 3. Disallowance of Prior Period Expenses: The assessee claimed miscellaneous expenses relating to prior periods, arguing that the liability crystallized in the current year upon receipt of bills and claims. The Assessing Officer disallowed these expenses, citing the mercantile system of accounting. The Tribunal, referencing the Gujarat High Court's decision in Saurashtra Cement and Chemical Industries Ltd. v. CIT [1995] 213 ITR 523, held that expenses are allowable in the year the liability crystallized. The Tribunal directed the Assessing Officer to verify the expenses' business nature and allow them if they were incurred for business purposes. Additionally, the Tribunal instructed the CIT(A) to address the issue of expenses debited to the subsequent year's profit and loss account. 4. Disallowance of Set-off/Carry Forward of Unabsorbed Depreciation and Business Loss: The assessee did not press these grounds, and they were dismissed for want of prosecution. 5. Disallowance of Interest on Loans Due to Financial Institutions under Section 43B: The assessee claimed a deduction for Rs. 1,620 lakhs as interest paid by issuing shares to financial institutions. The Assessing Officer disallowed the claim, stating it was not made through a revised return and that the liability was not taken over by the assessee. The Tribunal noted that the liability was discharged by issuing shares, which does not constitute actual payment as per Explanation 3C to section 43B. Consequently, the interest liability discharged by issuing shares was not considered an allowable expenditure. 6. Disallowance of Unabsorbed Investment Allowance of the Amalgamated Company: The assessee claimed carry forward and set-off of unabsorbed investment allowance under section 32A(6). The Assessing Officer and CIT(A) disallowed the claim, applying section 72A, which does not cover unabsorbed investment allowance. The Tribunal directed the Assessing Officer to allow the unabsorbed investment allowance if the conditions of section 32A(6) were met. 7. Disallowance of Revenue Expenditure Not Charged to the Profit and Loss Account: This ground was not pressed by the assessee and was dismissed for want of prosecution. Conclusion: The appeal was partly allowed, with specific directions for re-examination and allowance of certain claims based on the crystallization of liabilities and statutory provisions.
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