2011 (7) TMI 1153 - AT - Income Tax

Disallowance u/s 14A - Disallowance was made stating that part of administration/office/personnel cost is attributable to tax free income - HELD THAT - Following the decision of Bombay High Court judgment in the case of GODREJ AND BOYCE MFG. CO. LTD. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER 2010 (8) TMI 77 - BOMBAY HIGH COURT and decision in INCOME-TAX OFFICER, WARD 6 (2) (2) , MUMBAI VERSUS DAGA CAPITAL MANAGEMENT (P.) LTD. 2008 (10) TMI 383 - ITAT MUMBAI , We are of the opinion that the matter should be set aside for reexamining the issue afresh after giving reasonable opportunity of being heard - Matter Restored Back. Corporate Membership Fee paid to club - Capital or Revenue Expenditure - AO held that payment towards corporate membership should be treated as capital expenditure since it represents one time payment - HELD THAT - The issue is covered in favour of the assessee OTIS ELEVATOR COMPANY (INDIA) LIMITED VERSUS COMMISSIONER OF INCOME-TAX 1991 (4) TMI 53 - BOMBAY HIGH COURT , where it was held that payments of club fees enable the assessee to improve its business relations and prospects, thus must be allowed as business expenditure. We have examined if the payment made by the company for want of club membership in the name of the executives is allowable as business and revenue expenditure. In our opinion, the existence of the membership in the names of the employees should not make any difference on taxability so long as they were used for the employer s business purposes and the company has paid the FBT as per the law. Thus, impugned issue is settled in favour of the assessee - Decision in favour of Assessee. Miscellaneous expenses - Allowed Expenditure u/s 37(1) or Not? - Disallowance of 10% of the miscellaneous expenses was made on the ground that it is a not an allowable expenditure u/s 37(1) - CIT(A) restricted the disallowance to 5% - HELD THAT - The decision of CIT(A) is affirmed by us in assessee own case, therefore, we are of the opinion, the decision of the CIT(A) does not call for any interference. Disallowance on Expenditure on Running and Maintenance of Aircraft and Aviation Vehicles u/s 38(2) - Disallowance was made on total expenditue on running and maintenance of aircraft on the ground of personal use - AO adopted disallowance of 30% as against 1/7th of the claim in the past - HELD THAT - Assessee used aircraft for the mixed use and therefore, there is no dispute on the invoking of the provisions of section 38(2) of the Act. Following the decision made in AVINASH NIVRUTTI BHOSALE, VERSUS. ADDL. CIT, RANGE-3, VICE VERSA 2010 (9) TMI 1119 - ITAT PUNE , AO's decision is confirmed. Regarding the issue of use of the aviation vehicles for personal use. AO is directed to recompute the disallowance on the aforementioned case. Deduction on account of sales promotion and employee/factory welfare and Entertainment Expenditure - On considering the nature of the expenditure being expenditure on lunch, snacks, diwali sweets etc, CIT(A) confirmed the addition - HELD THAT - We find the disallowance is made applying the adhoc percentage of 5 % of the claim. In our opinion, applying such fixed percentage only creates a wrong precedent, when the AO has not made any basis for arriving at such percentage. In our opinion, when the adhocism is the basis, disallowance of an adhoc amount of ₹ 1 lakh should meet both ends of the justice. Eligible deduction in respect of cash discount received u/s 80IB - An amount is received from the raw material suppliers purchased by the assessee. Assessess's contention was these receipts are eligible for deduction derived from the undertaking of the assessee - HELD THAT - We have considered the facts of the case available before us and find that undisputedly the said amount is cash discount received by the assessee. Nothing is available before us to establish that this cash discount is in connection with the earlier payments by the assessee to the suppliers who sold the material to the assessee. Regarding accounting method also, there is no material available before us to know as to how the said discount amount was maintained by the assessee in its ledger. Further, we find that the supreme Court in the case of M/S LIBERTY INDIA VERSUS COMMISSIONER OF INCOME TAX 2009 (8) TMI 63 - SUPREME COURT , has confirmed the ratio relied upon by the A.O. In our opinion, for the sake clarity of the facts, we find that the matter should be set aside to the file of the A.O for want of facts as well as application of law as it existed now. Apart from other facts, AO must demonstrate the immediate nexus of these cash discount receipts vis a vis purchases or to the payments to the suppliers of the raw materials purchased by the assessee. Carry Forward of Unabsorbed Depreciation of Amalgamating Co - Charging of MAT u/s 115JB - A company has been amalgamated with assessee co - Issue is whether the Unabsorbed depreciation of amalgamating company is eligible for reduction from the book profit of the assessee as per (iii) to Explanation (1) of 115JB - AO, further observed that provision of 72A are not followed. HELD THAT - After going through the provisions of sec. 115JB, it is clear that the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account is entitled for reduction out of the net profit adjustment as per said Explanation I. In our opinion, once amalgamation is legally and validly done, the impugned loss or unabsorbed depreciation looses its earstwhile identity and practically it shall be loss and unabsorbed depreciation of the assessee company unless the principle of tax neutrality, which is the core principle for the business reengineering provisions, is violated. Nothing is brought our notice by the revenue to demonstrate any such violation. In effect of Amalgamation, the unabsorbed depreciation of amalgamating company, has become the unabsorbed depreciation of the assessee. Therefore, the impugned unabsorbed depreciation is the unabsorbed depreciation of the assessee by virtue of amalgamation and it can no longer be considered as unabsorbed depreciation of the amalgamated company. Therefore, clause (iii) of Explanation (1) to section 115JB definitely covers the impugned unabsorbed depreciation and the same has to be considered in favour of the assessee. Further, we find that the AO has not brought anything on to the records to demonstrate that the assessee failed to fulfil the conditions specified in the said section 72A . Thus, the relevant arguments of the DR are dismissed. Deduction u/s 80-HHC - CIT (A) held that, Excise Duty and Sales Tax to be excluded from the total turnover for the purpose of computation of deduction - HELD THAT - This issue is settled at the level of Hon ble supreme Court in the case of COMMISSIONER OF INCOME-TAX VERSUS LAKSHMI MACHINE WORKS 2007 (4) TMI 202 - SUPREME COURT , wherein it is held that excise duty and sales tax are not includible in total turnover in the formula contained in section 80-HH(3). We accordingly uphold the order of the CIT(A) - Decision against Assessee. Deduction u/s 80-IB - Scrap generated out of manufacturing process - business income or not? - The A.O observed that the scrap is not a bye product of the assessee and hence the sale of the same cannot be treated as the business income of the unit and hence not eligible for deduction u/s 80-IB - HELD THAT - The said issue is also covered in favour of the assessee by virtue of Madras High Court judgment in the case of FENNER (INDIA) LTD. VERSUS COMMISSIONER OF INCOME-TAX. (NO. 2) 1998 (4) TMI 67 - MADRAS HIGH COURT for the proposition that the profit on sale of scrap material since had a direct link or nexus with the industrial undertaking and therefore, it is eligible for deduction u/s 80IB. Considering the similarity in language used in sections 80HH and 80IB of the Act, we are of the considered opinion that the assessee should succeed in this regard also - Decision in Favour of Assessee.

Summary

Issues Involved:
1. Disallowance of Leave Encashment
2. Disallowance under Section 14A
3. Disallowance of Corporate Membership Fee
4. Disallowance of Miscellaneous Expenses
5. Disallowance on Gifts and Presentations
6. Disallowance on Running and Maintenance of Aircraft
7. Disallowance on Sales Promotion and Employee/Factory Welfare Expenditure
8. Allocation of Expenses for Determination of Profits under Section 80-IA
9. Deduction under Section 80-IB on Miscellaneous Income
10. Deduction under Section 80-HHC
11. Deduction of Carried Forward Unabsorbed Depreciation under Section 115JB
12. Deduction under Section 80-IA on Deferred Payment Interest
13. Exclusion of Excise Duty and Sales Tax from Total Turnover for Section 80-HHC
14. Deduction under Section 80-IB on Scrap Sales

Comprehensive Issue-wise Analysis:

1. Disallowance of Leave Encashment:
The ground relating to the disallowance of Rs. 14,36,972/- for incremental provision on account of 'Leave Encashment' was dismissed as not pressed by the assessee.

2. Disallowance under Section 14A:
The disallowance of Rs. 50,000/- made under Section 14A was set aside for re-examination in light of the Bombay High Court judgment in Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT, considering the implementation of Rule 8D prior to the amendment.

3. Disallowance of Corporate Membership Fee:
The disallowance of Rs. 27,000/- for corporate membership fees was reversed in favor of the assessee. The expenditure was deemed aimed at business purposes, and the existence of membership in the names of employees did not affect its taxability as long as it was used for business purposes.

4. Disallowance of Miscellaneous Expenses:
The disallowance of 10% of miscellaneous expenses was restricted to 5% by the CIT(A) and affirmed by the tribunal, following the decision in the assessee's own case for previous assessment years.

5. Disallowance on Gifts and Presentations:
The disallowance was restricted to Rs. 4,50,000/- by the CIT(A) and affirmed by the tribunal, following the decision in the assessee's own case for previous assessment years.

6. Disallowance on Running and Maintenance of Aircraft:
The disallowance of Rs. 4,08,697/- and Rs. 18,18,129/- for personal use of aircraft was directed to be recomputed in line with the tribunal's decision in the case of M/s Kirloskar Oil Engines Ltd., restricting the disallowance to 1/7th of the claim.

7. Disallowance on Sales Promotion and Employee/Factory Welfare Expenditure:
The disallowance of Rs. 1,22,879/- was partly allowed by reducing the adhoc disallowance to Rs. 1 lakh, considering the nature of the expenditure and lack of basis for the fixed percentage.

8. Allocation of Expenses for Determination of Profits under Section 80-IA:
The issue was set aside to the files of the AO for re-examination in line with the tribunal's decision for the AY 1997-98, with directions to file relevant orders during the set aside proceedings.

9. Deduction under Section 80-IB on Miscellaneous Income:
The matter was set aside to the AO for re-examination of the eligibility of Rs. 44,24,715/- as cash discount received for deduction under Section 80-IB, with directions to establish the immediate nexus of these receipts to the trading activity.

10. Deduction under Section 80-HHC:
The ground was dismissed as withdrawn by the assessee.

11. Deduction of Carried Forward Unabsorbed Depreciation under Section 115JB:
The tribunal allowed the deduction of Rs. 1,85,52,844/- on account of carried forward unabsorbed depreciation of the amalgamating company, rejecting the revenue's argument that the unabsorbed depreciation should not be considered for reduction from the book profit.

12. Deduction under Section 80-IA on Deferred Payment Interest:
The issue was set aside to the AO for re-examination in light of the Bombay High Court judgment in the case of CIT Vs. Vidyut Corporation.

13. Exclusion of Excise Duty and Sales Tax from Total Turnover for Section 80-HHC:
The tribunal upheld the CIT(A)'s decision to exclude excise duty and sales tax from the total turnover for the purpose of computation of deduction under Section 80-HHC, following the Supreme Court's decision in CIT Vs. Laxmi Machine Works.

14. Deduction under Section 80-IB on Scrap Sales:
The tribunal dismissed the revenue's appeal and upheld the CIT(A)'s direction to allow deduction under Section 80-IB on scrap sales, following the Madras High Court judgment in the case of M/s Fenner India Ltd.

Conclusion:
The tribunal's consolidated order addressed various disallowances and deductions claimed by the assessee, providing detailed directions for re-examination and affirming decisions based on precedents and judicial pronouncements. The appeals were partly allowed, dismissed, or set aside for further examination as per the issues involved.