2010 (1) TMI 980 - AT - Income Tax

Expenditure towards repairs and maintenance - Compensation received - exclusive marketing rights - Payment made to staff club - MAT - Bad and doubtful debts to the book profit - Interest levied u/s 234D. Expenditure towards repairs and maintenance - Nature Of Expenses ''Capital Or Revenue'' - HELD THAT - The assessee being a petroleum refinery, it is very essential to carry out routine inspection as a safety measure. The cost incurred by the assessee-company for the repairs and replacements on the basis of inspection report have been spent not to create any new asset or to substitute the old one with a new asset. These are repairs and replacements of part of the machinery and not the entire machinery itself. There is no reason to hold that the said expenditure is capital in nature, following the principles established in the assessee s own case for earlier years on similar replacements and repairs of the tank. We direct the Assessing Officer to allow the sum as revenue expenditure. The ground is allowed in favour of the assessee. Nature of Compensation received - exclusive marketing rights for both controlled and decontrolled products - HELD THAT - As seen from the facts of this case, first of all the assessee had no exclusive marketing rights over the controlled products and secondly, out of the decontrolled products also the assessee has not given any exclusive marketing rights to IOC whereas it has retained certain marketing rights over both the controlled and decontrolled products on its own vide article 3. In view of this it cannot be stated that the assessee has surrendered its entire marketing rights. On the principles established in the abovesaid decision, it can only be concluded that the amount was received by the assessee towards loss of income and not loss of source of income, which is in the revenue field. Suffice to say that on the present set of facts since the assessee has no exclusive marketing rights over the controlled products and composite agreement was entered for supply of fixed quantity to IOC which was also marketing its products earlier exclusively, the amount of compensation received can only be considered as revenue and not capital receipt. Accordingly we uphold the order of the Assessing Officer and the Commissioner of Income-tax (Appeals) on this issue. The ground is rejected. Payment made to staff club - HELD THAT - In the case of CIT v. Bharat Petroleum Corporation Ltd. 2001 (3) TMI 20 - BOMBAY HIGH COURT wherein it was held that reimbursement of club expenses does not constitute contribution to any funds u/s 40A(9) of the Act so as to attract restricted provisions of this section. Respectfully following the same, we hold that the payments to staff club are not covered by the provisions of section 40A(9) and accordingly they are to be allowed as expenditure incurred wholly and exclusively for the purpose of business u/s 37(1). The Assessing Officer is directed to allow the expenditure. Ground No. 3 is allowed. MAT - Bad and doubtful debts to the book profit - HELD THAT - Once the Assessing Officer invokes the normal provisions of tax, it indirectly means that he has compared the computation u/s 115JA and decided that the income under normal provisions was more. In that situation it is to be presumed that the provision was added back to the book profit of that year. Even by means of Explanation (g) introduced to section 115JA by the Finance (No. 2) Act, 2009, with retrospective effect from April 1, 1998 the provision for bad and doubtful debts would be deemed to have been added back in computing the book profit in that year and so the amount, now credited to the profit and loss account, is to be reduced by virtue of the provision of section 115JB. In view of this there is justification in the assessee's contention in claiming the provision as deduction in the computation of book profit in this year. On the fact that the assessee had been disallowed in that year under the normal computation and by virtue of the amendment now brought with retrospective effect from April 1, 1998, the provision for bad debt is deemed to have been added back in that year withdrawal and crediting into the profit and loss account now results in double taxation. Consequently, the assessee is correct in excluding the amount while computing the income u/s 115JB. Accordingly the ground is allowed. Interest levied u/s 234D - HELD THAT - In Delhi Special Bench decision on ITO v. Ekta Promoters P. Ltd. 2008 (7) TMI 452 - ITAT DELHI-E wherein it was held that the provisions of section 234D are applicable from 1st June 2003 and not with retrospective effect, hence, the same should not be applicable in the assessee's case for the assessment year 2001-02 wherein the refund was issued before June 1, 2003. In line with the decision of the Special Bench the assessee's ground is allowed. The Assessing Officer is directed to work out the interest u/s 234D, if any, in line with the decision of the Special Bench (supra). Ground is considered allowed for statistical purposes. The appeal is partly allowed. In the result, all the appeals are partly allowed.

Summary

Issues Involved:
1. Current repairs: Rs. 53,90,835
2. Feasibility studies: Rs. 22,09,481
3. Income from surrender of marketing rights: Rs. 43,00,00,000
4. Set-off of unabsorbed depreciation and business loss: Rs. 46,76,06,005
5. Revised computation of income as per the revised return filed by the appellant

Detailed Analysis:

1. Current Repairs: Rs. 53,90,835
The assessee claimed a total expenditure of Rs. 5.06 crores towards repairs and maintenance, out of which Rs. 1,57,19,390 was considered capital expenditure by the Assessing Officer (AO) and disallowed. The Commissioner of Income-tax (Appeals) granted partial relief, but the assessee contested Rs. 48,68,495 for repairs to tanks and Rs. 5,22,340 for replacement of slop trays and chimney trays. The AO and Commissioner of Income-tax (Appeals) deemed these as capital expenditures due to their non-recurring nature. However, the Tribunal held that these expenditures were for repairs and replacements necessary for the functioning of the plant and did not create new assets or enduring benefits. Thus, the Tribunal directed the AO to allow Rs. 53,90,835 as revenue expenditure.

2. Feasibility Studies: Rs. 22,09,481
The Tribunal noted that this issue had been decided in favor of the assessee in earlier assessment years (1994-95 to 1998-99). Following these precedents, the Tribunal directed the AO to allow the expenditure as revenue expenditure.

3. Income from Surrender of Marketing Rights: Rs. 43,00,00,000
The AO treated Rs. 43 crores received from IOC for surrendering marketing rights as revenue receipts, arguing that the amount was part of the business receipts. The Tribunal examined the agreement and found that the marketing rights for controlled products remained with PSU marketing companies, and CRL had limited marketing rights for decontrolled products. The Tribunal concluded that the compensation received was for the loss of income rather than the loss of a source of income, which meant it was a revenue receipt. The Tribunal upheld the AO's and Commissioner of Income-tax (Appeals)'s decision, rejecting the assessee's claim that it was a capital receipt.

4. Set-off of Unabsorbed Depreciation and Business Loss: Rs. 46,76,06,005
The assessee's claim for set-off of unabsorbed depreciation and business loss of CRBL was pending due to the absence of a certificate under section 72A(2) at the time of assessment and appeal. The Tribunal directed the AO to examine the issue afresh in light of the certificate received and consider the set-off of unabsorbed depreciation and business loss, as well as the allowance of depreciation at the written down value as per law.

5. Revised Computation of Income as per the Revised Return Filed by the Appellant
The Tribunal did not adjudicate this issue as there was no permission from the Committee on Disputes (COD).

I.T.A. No. 1128/Coch/2004:
- Feasibility Study Expenditure: Rs. 87,25,972: The Tribunal directed the AO to allow this expenditure as revenue expenditure, consistent with earlier decisions.
- Surrender of Marketing Rights: The Tribunal rejected the assessee's ground, holding that the surrender of marketing rights was a revenue receipt.

I.T.A. No. 1129/Coch/2004:
- Surrender of Marketing Rights: The Tribunal upheld the AO's and Commissioner of Income-tax (Appeals)'s decision, rejecting the assessee's claim.
- Feasibility Study Expenditure: Rs. 120.02 lakhs: The Tribunal directed the AO to allow this expenditure as revenue expenditure.
- Payment to Staff Club: Rs. 2,30,000: The Tribunal held that payments to staff clubs are not covered by section 40A(9) and should be allowed as business expenditure under section 37(1).
- Writing Back of Provisions for Bad and Doubtful Debts: Rs. 6,34,74,000: The Tribunal allowed the exclusion of this amount from book profits under section 115JB, as the provision was deemed to have been added back in the year it was made.
- Levy of Interest under Section 234D: Rs. 2,84,775: The Tribunal directed the AO to work out the interest under section 234D in line with the Special Bench decision in ITO v. Ekta Promoters P. Ltd.

Conclusion:
All appeals were partly allowed, with detailed directions provided for each issue. The Tribunal's decisions were based on a thorough examination of facts, legal precedents, and statutory provisions.