2011 (10) TMI 629 - AT - Income Tax

Nature of expenditure - Revenue expenditure or capital expenditure - Held that - Most of the expenditure pertains to the project consultancy and compensation charges except an amount of ₹ 18 lakhs for construction of compound wall. As far as feasibility study and architectural services are concerned they are, certainly, in the nature of revenue expenditure. As far as other two expenses are concerned an amount of ₹ 18,00,830/- pertains to construction of compound wall in which an asset was created, therefore, that part of the expenditure becomes capital expenditure, whereas the balance expenditure, including compensation charges are concerned, no asset was created by paying this amount. Accordingly, except the amount of ₹ 18,00,830/- claimed in the above, the balance of the amount is to be allowed as revenue expenditure and, therefore ground is partly allowed to the extent stated above. As far as ₹ 18,00,830/- spent for construction of compound wall that has resulted in an asset, thus the same cannot be allowed as the expenditure as it will fall under the nature of capital expenditure. Accordingly ground No. 1 is partly allowed. Amount was paid as compensation for idle period during pendency of getting permissions - Held that - What the assessee has provided in the books of account was only a provision and the claim made by the said contractor was contingent in nature. Not only that as per the admission by the assessee itself the settlement was made on 09.10.2005 which falls in the later assessment year to an extent of ₹ 75.49 lakhs and not the entire amount of ₹ 90 lakhs. Another fact which is to be considered is that this is part of the work-inprogress of Taloja project, Maharashtra, which was set up and started functioning in later year. Therefore the expenditure cannot be considered as expenditure of abandoned project. Thus as the expenditure has not been crystallised in the year under consideration and further the expenditure is part of the setting up of a plant at Taloja which commenced later, the claim cannot be allowed as revenue expenditure in this year. Therefore, the Assessing Officer s action in treating the same as capital expenditure is upheld. The claim to the extent of ₹ 74.49 lakhs is to be examined by the A.O. whether that can be capitalised or not in the year of commencement of the Taloja project. With these observations ground No. 2 is rejected. The orders of the A.O. and the CIT(A) on this issue stand confirmed. Non-inclusion of damaged stock in valuation of closing stock - Held that - In principle we agree with the findings of the AO that stock of damaged goods should also be required to be valued at the end of the year. As regards estimation of amount of the said stock we find that there is no material available on record for estimation of the different amount of the stock than estimated by the AO. We, therefore, confirm the orders of the revenue authorities on this issue. Disallowance under section 14A - Held that - Godrej & Boyce Ltd. Mfg. Co. VS. DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT has held that application of Rule 8D is only prospective and, therefore, the said rule cannot be applied to A.Y. 2005-06. In the interest of justice, respectfully following the above decision we restore the issue to the file of the A.O. to examine the disallowance under section 14A considering the submissions of the assessee and the facts of the case, law on the subject and decide the issue afresh. Disallowance being 1/5th claimed under section 35DDA - Held that - Even though assessee claimed that it had incurred the expenditure and be allowed as deferred revenue expenditure, the amount cannot be allowed in the year as the expenditure is not in the nature of deffered revenue expenditure. As the expenditure does not pertain to the year under consideration and also similar claim was not allowed in earlier year, which assessee has not contested, there is no need to consider it in this year. Accordingly the ground 5 is dismissed. Withdrawal of interest granted by Department - Held that - On examination of the facts as placed on record and consequential orders given in this regard, we are of the opinion that this issue requires factual examination by the A.O., as consequent to the orders of the ITAT in A.Y.1993-94, some more interest was granted to assessee. Therefore, the A.O. is directed to examine the interest granted to assessee and interest offered by assessee in respective assessment years and rework out the allowable amount if the amount offered to tax stood withdrawn by the Revenue, to that extent. Cost of acquisition while computing the capital gains on sale of Matunga land - Held that - The doctrine of merger was applied resulting in drowning and sinking of inferior right into superior right. Assessee has transferred his complete rights acquired by way of tenancy rights as well as reversionary rights in the property for development. Therefore, we are of the opinion that the CIT(A) has rightly considered the amount of ₹ 3.32 crores paid in 1998 and ₹ 4.77 crores paid for vacating the tenancy as cost of acquisition of the rights transferred. The Assessing Officer s treatment of acquiring reversionary rights alone as cost of acquisition is not correct as what the assessee has acquired in 2004 from the erstwhile owner, who already surrendered tenancy right, is only part of the reversionary rights with him so that the title is complete in all respects as far as assessee is concerned. No merit in the claim of the Revenue that the lease rights acquired and tenancy rights acquired should not form part of cost of acquisition. It is also to be noted that AO allowed cost of acquiring reversionary rights as cost of purchase of land . Considering the facts of the case, we do not see any reason to interfere with the order of the CIT(A). Addition under section 36(1)(iii) - Held that - As seen from the facts available on record, assessee advanced interest free loans in earlier years and no fresh additional loan has been given in the impugned assessment year. Therefore, the findings given in the earlier year will have a consequential effect in the present assessment year. In A.Y. 2004-05, i.e. immediately preceding assessment year the matter was considered by the ITAT and the issue was restored to the file of the A.O. to examine the matter in the light of the orders in the earlier years. Addition made on account of distribution of gift articles - Held that - The expenditure incurred on school for repair of the building where employees children are also studying has resulted in creating goodwill/brand image for the assessee, therefore, the expenditure incurred is allowable as revenue expenditure. TPA - corporate guarantee addition - Held that - There is no need for making any adjustment. It is on record that HSBC Bank itself has charged an amount at 0.35% totalling to ₹ 15,95,849/- on commercial considerations. It is also on record that the Citybank has not charged any amount during the year but charged 0.25% in the immediately proceeding year, the year in which the TPO has accepted the arms length price. Assessee not only recovered the above cost incurred by it from the subsidiary company but also charged a mark up price @ 0.20% and recovered an amount of ₹ 31,82,729/-. Therefore, in view of the above facts available on record there is no need for making any adjustment on the basis of the naked quote available in the website of the Allahabad Bank, HSBC Bank and ICICI Bank where even the report itself indicate that the rates varied from 0.15% to 3%. In view of the facts of the case, we are of the opinion that there is no need to make any adjustment in the transfer pricing provisions and the order of the CIT(A) required to be confirmed

Summary

Issues Involved:
1. Disallowance of expenses for abandoned projects.
2. Addition of non-inclusion of damaged stock in valuation of closing stock.
3. Disallowance under section 14A.
4. Disallowance under section 35DDA.
5. Withdrawal of interest granted by the Department.
6. Cost of acquisition for computing short-term capital gain.
7. Addition under section 36(1)(iii) for interest-free loans to subsidiaries.
8. Disallowance of expenses for distribution of gift articles.
9. Disallowance of expenses for repair of school.
10. Transfer pricing adjustment on account of corporate guarantee.

Detailed Analysis:

1. Disallowance of Expenses for Abandoned Projects:
The assessee claimed expenses for setting up paint plants in Pondicherry and Taloja, which were later abandoned. The A.O. disallowed these expenses as capital in nature. The CIT(A) upheld the disallowance. The ITAT, however, allowed most of the expenses for the Pondicherry project as revenue expenditure except for the construction of a compound wall, which was capital in nature. For the Taloja project, the ITAT upheld the disallowance as the expenditure was not crystallized in the year under consideration and was part of work-in-progress.

2. Addition of Non-Inclusion of Damaged Stock in Valuation of Closing Stock:
The A.O. added a value for damaged stock to the closing stock, which the assessee had valued at nil. The ITAT upheld the A.O.'s addition, consistent with earlier years' orders, confirming that damaged stock should be valued at the end of the year.

3. Disallowance under Section 14A:
The A.O. disallowed Rs. 52.40 lakhs under section 14A by applying Rule 8D. The CIT(A) confirmed this. The ITAT restored the issue to the A.O. to re-examine the disallowance, noting that Rule 8D is applicable prospectively and should not apply to A.Y. 2005-06.

4. Disallowance under Section 35DDA:
The assessee claimed 1/5th of Rs. 2,52,488/- under section 35DDA. The A.O. disallowed this, and the CIT(A) upheld the disallowance, following earlier years' orders. The ITAT confirmed the disallowance, noting the expenditure did not pertain to the year under consideration.

5. Withdrawal of Interest Granted by the Department:
The assessee claimed a deduction for interest withdrawn by the Revenue, which was offered as income in earlier years. The ITAT directed the A.O. to examine the interest granted and offered in respective years and rework the allowable amount.

6. Cost of Acquisition for Computing Short-Term Capital Gain:
The CIT(A) allowed the cost of acquiring lease rights and removal of tenants as part of the cost of acquisition for computing short-term capital gain on the sale of Matunga land. The ITAT upheld this, noting the expenditure incurred in acquiring tenancy rights forms part of the cost of the property.

7. Addition under Section 36(1)(iii) for Interest-Free Loans to Subsidiaries:
The A.O. disallowed interest on interest-free loans to subsidiaries. The CIT(A) gave relief, and the ITAT restored the issue to the A.O. to examine in light of earlier years' findings.

8. Disallowance of Expenses for Distribution of Gift Articles:
The A.O. disallowed 50% of the expenses for distributing gift articles. The CIT(A) deleted this disallowance. The ITAT restricted the disallowance to 10% of the total expenses, consistent with earlier years.

9. Disallowance of Expenses for Repair of School:
The CIT(A) allowed the expenditure for repairing a school as business expenditure. The ITAT confirmed this, noting the expenditure created goodwill and was allowable as revenue expenditure.

10. Transfer Pricing Adjustment on Account of Corporate Guarantee:
The TPO made an adjustment based on a 3% rate for corporate guarantees. The CIT(A) deleted the adjustment, noting the actual rates charged by the banks were lower, and the assessee had recovered costs with a markup. The ITAT upheld the CIT(A)'s decision, finding no need for adjustment based on the facts.

Conclusion:
The ITAT provided a detailed analysis for each issue, considering relevant case laws and facts. The decisions were partly in favor of the assessee and partly in favor of the Revenue, ensuring a balanced and justified outcome.