2010 (8) TMI 1005 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of administrative expenses.
2. Disallowance of employees' contribution to PF and ESIC.
3. Disallowance of rent paid for accommodation.
4. Disallowance of tools expenditure.

Issue-wise Detailed Analysis:

1. Disallowance of Administrative Expenses:
The first issue concerns the confirmation of disallowance of Rs. 37,23,017/- on account of share of administrative expenses. The assessee firm shared administrative expenses with Avion System Inc, USA, a related concern. The ratio of expense sharing changed significantly from 69.05% in AY 2004-05 to 33.76% in AY 2005-06. The Assessing Officer (AO) required the assessee to explain this variation and provide documentary proof, which the assessee failed to do convincingly. The AO concluded that the assessee's share should have been 42.68%, resulting in an addition of Rs. 37,23,017/- due to lack of evidence and the assessee's inability to justify the change in expense sharing ratio. The CIT (A) confirmed the addition, noting that the assessee failed to furnish details regarding revenue generated by the parent/associate company vis-`a-vis the revenue generated by the assessee company from their India-related projects. The Tribunal allowed the assessee's appeal on this ground, noting that the reimbursement from the parent company was not a matter of right but was at the sole discretion of the parent company, ensuring a minimum guaranteed post-tax return of 5% of gross revenues.

2. Disallowance of Employees' Contribution to PF and ESIC:
The second issue involves the disallowance of employees' contribution to PF and ESIC amounting to Rs. 3,38,670/- due to delayed payment. The CIT (A) directed the AO to allow payments made within the due date, including the grace period, for PF contributions but confirmed the disallowance for ESIC contributions not made within the grace period. The Tribunal, following the decision in CIT v. Alom Extrusions Ltd., allowed the deduction for employees' contribution to PF and ESIC if paid before the due date for filing the return of income. As it was undisputed that the amounts were paid before the due date of filing the return, the Tribunal allowed this ground of appeal.

3. Disallowance of Rent Paid for Accommodation:
The third issue pertains to the disallowance of Rs. 75,000/- paid as rent for accommodation provided to a visiting consultant of the parent company. The AO disallowed the expenditure, considering it a gratuitous payment and not a business expenditure. The CIT (A) confirmed the disallowance, noting that the payment was in connection with business requirements and covered by section 194J, requiring TDS deduction. The Tribunal upheld the CIT (A)'s decision, agreeing that the rent was part of the professional services rendered by the consultant and required TDS deduction. The Tribunal also noted that even if considered a gratuitous payment, it could not be allowed as a business expenditure.

4. Disallowance of Tools Expenditure:
The fourth issue involves the disallowance of Rs. 78,918/- claimed as tools expenditure. The AO treated the expenditure as capital in nature, allowing depreciation and disallowing Rs. 59,188/-. The CIT (A) confirmed this, observing that the tools were used for implementing new projects and had an enduring advantage. The Tribunal upheld the CIT (A)'s decision, noting that the tools were capital in nature and formed part of the block of assets, allowing only depreciation on them.

Conclusion:
The appeal filed by the assessee is partly allowed. The Tribunal allowed the appeal concerning the disallowance of administrative expenses and employees' contribution to PF and ESIC but upheld the disallowances related to rent paid for accommodation and tools expenditure.