2013 (1) TMI 830 - AT - Income Tax

Business Expenditure - Annual Event Celebration expenses - Whether the expenditure incurred on carrying out a contract work on annual event celebrated by the naval staff is allowable under section 37 of the I.T. Act, 1961 - HELD THAT - the amount was contributed to the function of Naval Staff which is necessary for the purpose of a business, being a contractor doing the work in the Naval facility,therefore expenditure is allowable under section 37(1). The expenditure should be allowed as deduction under section 37 of the I.T. Act 1961.

Issues Involved:
1. Deletion of addition made by AO on account of adjustment in respect of payment of lease rental for Dredger Hector.
2. Deletion of addition of Rs. 80,51,038/- in respect of Dredger Saga.
3. Consideration of VG Bouw Certificate and third-party quotations for determining the arm's length price (ALP).
4. Adjustment in respect of the hire charges paid for the vessel Hector.
5. Disallowance of Rs. 4,14,62,866/- on account of release of retention money against the issue of Bank Guarantee.
6. Disallowance of Rs. 22,46,641/- being expenses on repair work for dredger.
7. Disallowance of contribution of Rs. 3,15,000/- to annual celebration of the Naval Staff.

Detailed Analysis:

1. Deletion of Addition for Lease Rental of Dredger Hector:
The CIT(A) deleted the addition of Rs. 2,43,77,621/- made by the AO, stating that the transaction was entered into when the parties were independent, thus the price paid was at arm's length. The CIT(A) rejected the VG Bouw certificate due to uncertainties and accepted third-party quotations as a basis for comparison, finding the differences minimal and within the permissible range of 5%.

2. Deletion of Addition for Dredger Saga:
The CIT(A) deleted the addition of Rs. 80,51,038/- for Dredger Saga, stating that the difference between the actual payment and third-party quotations was less than 5%. The CIT(A) applied the proviso to section 92C(2), allowing a margin of 5% from the arithmetical mean of more than one price computed by the most appropriate method.

3. Consideration of VG Bouw Certificate and Third-Party Quotations:
The TPO rejected third-party quotations as not contemporaneous and relied on the VG Bouw certificate for determining the ALP. The CIT(A) found the VG Bouw certificate unsuitable due to uncertainties and preferred third-party quotations. The Tribunal upheld the CIT(A)'s decision, stating that the quotations were contemporaneous to the date of the agreement and could be accepted as authentic data under Rule 10B(4).

4. Adjustment for Hire Charges of Vessel Hector:
For the AY 2003-04, the CIT(A) deleted the addition of Rs. 1,72,02,723/- made by the TPO, stating that the transaction was entered into when the parties were independent. The Tribunal affirmed the CIT(A)'s order, finding no change in facts and rejecting the VG Bouw certificate due to uncertainties.

5. Disallowance of Retention Money:
The CIT(A) deleted the disallowance of Rs. 4,14,62,866/- for retention money released against a bank guarantee, stating that the income did not accrue until the contract was completed to the satisfaction of the contractee. The Tribunal upheld this decision, relying on the precedent set in the assessee's own case and other judicial pronouncements.

6. Disallowance of Repair Expenses:
The CIT(A) deleted the disallowance of Rs. 22,46,641/- for repair expenses, stating that the expenditure was incurred during the year and the genuineness was not doubted. The Tribunal upheld this decision, finding no reason to differ from the CIT(A)'s findings.

7. Disallowance of Contribution to Naval Staff Celebration:
The CIT(A) allowed the deduction of Rs. 3,15,000/- contributed towards the annual celebration of the Naval Staff, stating that the expenditure was incurred for business purposes and created goodwill. The Tribunal upheld this decision, finding the expenditure allowable under section 37(1).

Conclusion:
The Tribunal upheld the CIT(A)'s decisions on all counts, rejecting the Revenue's grounds and confirming that the transactions were at arm's length, the retention money did not accrue as income until the contract completion, and the repair expenses and contributions were allowable deductions.

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