2014 (4) TMI 1112 - AT - Income Tax

Guest House Expenses - Held that - Assuming the situation of non-existence of the guest house of the company in that place then such employees would have stayed in a hotel or guest house run by third parties and made payments to them for use of their facilities and accordingly payments made to outside parties would have been treated as travelling expenses incurred by the company for its business. Therefore the user of guest house facilities provided by the company to the employees of the company in connection with discharge of their official duties does not alter the basic character of the expenditure.Ultimately such expenses are connected with the travelling by such employees and therefore should be treated accordingly irrespective of the fact that such employees stayed in the guest house of the company.In view of the above facts and circumstances, we direct the AO to allow the deduction of amount received from parent departments as expenditure in the nature of travelling expenses ;and in accordance with Rule 6D of the IT Rules. Thus we direct that the addition to the extent of recoveries made by the assessee be allowed as a deduction - Decided in favour of assessee Disallowance of AGM Expenses of the shareholders under appeal u/s.37(2A) / 37 (2) - Held that - We decide the issue of Disallowance of AGM Expenses of the shareholders against the assessee for all as the expenditure incurred on serving tea coffee and soft drinks is covered by the Explanation 2 to section 37(2A)/(37(2). In the Explanation 2 it is stipulated that the expenditure on provision of hospitality of every kind by the assessee to any person whether by way of provision of food or beverages or in any other manner whatsoever would be entertainment expenditure.The sweep of the words entertainment expenditure found in the Explanation 2 to section 37(2A)is wide and broad to cover every expenditure on provision of hospitality of every kind to any person other than the employees at the place of their work. Decided against assessee Payments to TSRDC contributions to TSRDS that was an independent entity registered under the Societies Act in favour of the assessee Contributions to Tata Sports Board allowed in favour of the assessee Contributions to various Institutions at Jamshedpur in favour of the assessee for all the three AY.s. Fees paid to Consultants for Feasibility Studies - expenditure in question has to be allowed as a deduction being a revenue expenditure Disallowance on account of tea coffee served to the visitors restricted @25%. Foreign travel expenses disallowed - Held that - As no evidence was produced to establish the fact of participation by the employee of the assessee, whereas in the subsequent year FAA has held that the employee had participated in international tournament. Thus there is difference in the submissions made by it and the finding given by the FAA.In our opinion in absence of a valid claim by the assessee, FAA had rightly rejected the appeal of the assessee Loss on valuation of foreign currency convertible bonds - Held that - Loss suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance-sheet is an item of expenditure under section 37(1) of the Income-tax Act 1961.For valuing the closing stock at the end of a particular year the value prevailing on the last date is relevant. This is because profit/loss is embedded in the closing stock. While anticipated loss is taken into account anticipated profit in the shape of appreciated value of the closing stock is not brought into account as no prudent trader would care to show increase in profits before actual realization. This is the theory underlying the rule that closing stock is to be valued at cost or market price whichever is lower.The expression any expenditure has been used in section 37 of the Income-tax Act 1961 to cover both expenses incurred as well as an amount which is really a loss even though such amount has not gone out from the pocket of the assessee See case of Woodward Governor India P. Ltd 2009 (4) TMI 4 - SUPREME COURT - Decided in favour of assessee Contribution to approved superannuation fund(ASF) allowed in favour of assessee vide the judgment of Hon ble Supreme Court in the case of CIT vs.Sirpur Paper Mills 1999 (3) TMI 8 - SUPREME Court Payment for holiday plan at hotels as guest house expenses - Held that - This issue stands covered in favour of the assessee by the decision of the Tribunal in assessee s own case or the A.Y. 1992-93.We find the Tribunal in the said order has given a finding that the assessee satisfies all the requisite conditions as provided in Explanation r.w. second proviso to subsection (4) of section 37 as existing at the relevant time and therefore the assessee is found to be entitled to deduction. Accordingly the ground raised by the Revenue was dismissed. - Decided in favour of assessee Exclusion of sales tax excise duty for 80HHC deduction - Held that - While calculating the deduction under section 80HHC(3)(b) of the Income-tax Act 1961 for computing the total turnover of exports out of India of trading goods excise duty and sales tax are not to be included. The object of the Legislature in enacting section 80HHC was to confer a benefit on profits accruing with reference to export turnover. Just as commission received by an assessee is relatable to exports and yet it cannot form part of turnover excise duty and sales tax also cannot form part of the turnover for the purposes of section 80HHC. Just as interest commission etc. do not emanate from the turnover so also excise duty and sales tax do not emanate from such turnover. Since excise duty and sales tax do not involve any such turnover such taxes have to be excluded. Foreign Travel Expenses - Held that - The employee had participated in chess tournament nt. Accordingly he had allowed the expenditure incurred by the assessee

Summary

Issues Involved:
1. Expenditure on maintenance of certain buildings.
2. Recovery of guest house expenses under Rule 6D.
3. Disallowance of AGM expenses.
4. Expenditure on business meetings and conferences.
5. Disallowance of Tata Steel Rural Development Society expenditure.
6. Contributions to Tata Sports Board.
7. Contributions to various institutions at Jamshedpur.
8. Fees paid to consultants for feasibility studies.
9. Right share issue expenses.
10. Contributions to Institute for Metal and Mineral Workers.
11. Disallowance under Rule 6B for calendars and diaries.
12. Disallowance of expenditure on tea and coffee served to visitors.
13. Disallowance of expenditure on payments made to clubs.
14. Expenditure on partly convertible debenture.
15. Foreign travel expenses.
16. Expenditure on digging of wells.
17. Loss on valuation of foreign currency convertible bonds.
18. Provision for leave salary.
19. 20% of initial contribution to approved superannuation fund.
20. Payment for holiday plan at hotels as guest house expenses.
21. Exclusion of sales tax and excise duty for 80HHC deduction.

Detailed Analysis:

1. Expenditure on Maintenance of Certain Buildings:
The Tribunal upheld the disallowance of expenditure on maintenance of certain buildings under Section 37(4) of the Income-tax Act, 1961, following its decision in earlier assessment years (AYs) 1987-88, 1989-90, and 1990-91.

2. Recovery of Guest House Expenses Under Rule 6D:
The Tribunal decided in favor of the assessee, allowing the deduction of recoveries from parent departments as traveling expenses as per Rule 6D of the Income-tax Rules, 1962, based on earlier Tribunal decisions.

3. Disallowance of AGM Expenses:
The Tribunal upheld the disallowance of AGM expenses, treating them as entertainment expenditure under Section 37(2A)/37(2), in line with earlier decisions for AYs 1987-88, 1989-90, and 1990-91.

4. Expenditure on Business Meetings and Conferences:
The Tribunal upheld the disallowance of expenditure on business meetings and conferences, treating them as entertainment expenditure, following its earlier decisions.

5. Disallowance of Tata Steel Rural Development Society Expenditure:
The Tribunal allowed the expenditure on Tata Steel Rural Development Society, recognizing it as business expenditure, based on its earlier decisions and the Memorandum of Settlement (MOS) with workers.

6. Contributions to Tata Sports Board:
The Tribunal allowed the contributions to Tata Sports Board as business expenditure, following its earlier decisions in favor of the assessee.

7. Contributions to Various Institutions at Jamshedpur:
The Tribunal allowed the contributions to various institutions at Jamshedpur, recognizing them as business expenditure, based on its earlier decisions.

8. Fees Paid to Consultants for Feasibility Studies:
The Tribunal allowed the fees paid to consultants for feasibility studies as revenue expenditure, following its earlier decisions.

9. Right Share Issue Expenses:
The Tribunal upheld the disallowance of right share issue expenses as capital expenditure, following the Supreme Court decisions in Brooke Bond India Ltd. and Punjab State Industrial Development Corporation Ltd.

10. Contributions to Institute for Metal and Mineral Workers:
The Tribunal upheld the FAA's order to verify the contributions to the Institute for Metal and Mineral Workers, directing the AO to allow the claim if it was for training employees.

11. Disallowance Under Rule 6B for Calendars and Diaries:
The Tribunal upheld the disallowance of expenditure on calendars and diaries under Rule 6B, following its earlier decisions.

12. Disallowance of Expenditure on Tea and Coffee Served to Visitors:
The Tribunal directed the AO to restrict the disallowance to 25% of the expenditure on tea and coffee served to visitors, following its earlier decisions.

13. Disallowance of Expenditure on Payments Made to Clubs:
The Tribunal upheld the disallowance of expenditure on payments made to clubs as entertainment expenditure, following its earlier decisions.

14. Expenditure on Partly Convertible Debenture:
The Tribunal allowed the expenditure on partly convertible debentures as revenue expenditure, following the Rajasthan High Court decision in Secure Meters.

15. Foreign Travel Expenses:
The Tribunal upheld the FAA's order for AY 1994-95, disallowing part of the foreign travel expenses due to lack of evidence of employee participation, but allowed the expenses for AY 1995-96, recognizing employee participation.

16. Expenditure on Digging of Wells:
The Tribunal allowed the expenditure on digging of wells as business expenditure, recognizing it as part of the MOS with workers.

17. Loss on Valuation of Foreign Currency Convertible Bonds:
The Tribunal allowed the loss on valuation of foreign currency convertible bonds as revenue expenditure, following the Supreme Court decision in Woodward Governor India P. Ltd.

18. Provision for Leave Salary:
The Tribunal upheld the FAA's order allowing the provision for leave salary, following its earlier decisions and the Supreme Court decision in Bharat Earthmovers Ltd.

19. 20% of Initial Contribution to Approved Superannuation Fund:
The Tribunal upheld the FAA's order allowing the entire initial contribution to the approved superannuation fund, following its earlier decisions and the Supreme Court decision in Sirpur Paper Mills.

20. Payment for Holiday Plan at Hotels as Guest House Expenses:
The Tribunal upheld the FAA's order allowing the payment for holiday plan at hotels as guest house expenses, following its earlier decisions.

21. Exclusion of Sales Tax and Excise Duty for 80HHC Deduction:
The Tribunal decided in favor of the assessee, excluding sales tax and excise duty from total turnover for 80HHC deduction, following the Supreme Court decisions in Catapharma (India) P. Ltd. and Lakshmi Machine Works.

Conclusion:
The Tribunal's decisions largely followed precedents set in earlier years and higher court rulings, resulting in a mix of allowances and disallowances for the assessee's claims. The appeals filed by the assessee were partly allowed, while the appeals of the AO were dismissed.