2014 (1) TMI 1756 - AT - Income Tax

Disallowance of Loss on sale of investments - addition as short term capital gain on sale of investments - Held that - Since neither the Assessing Officer nor the ld. CIT(A) has examined the details of various schemes, whether any record date was involved or not and have decided the issue on assuming that there is a record date in these schemes. In our opinion, the details of the schemes need to be examined to find out whether any record date was involved or not and therefore, in the interest of justice, we set aside the order of the Ld. CIT(A) and remit the same back to the file of Assessing Officer with a direction to first find out whether any record date is involved and then decided the issue as per law. Disallowance made u/s 14A - Held that - Rule 8D is not applicable in Assessment year 2005-06 i.e. the year before us in view of the decision of Hon ble Bombay High Court in case of Godrej & Boycee Mfg. Vs. DCIT (2010 (8) TMI 77 - BOMBAY HIGH COURT ). However, at the same Hon ble Bombay High Court also held that when Rule 8D is not applicable, reasonable disallowance can be made. We further find that during the year the assessee has made investment only to the tune of ₹ 19.40 crores in various mutual funds whereas the assessee had cash profit for ₹ 20 crores, therefore, considering the overall circumstances we are of the opinion that lump sum disallowance of ₹ 5 lakh would meet the ends of justice. Therefore, we set aside the order of the Ld. CIT(A) and direct the AO to make disallowance of ₹ 5 lakhs u/s 14A of the Act. Nature of income - agricultural income v/s income from other sources - Held that - Though it is possible for assessee to grow some crops in the vacant land but at the same time, some details should have been filed. In the absence of details, the ld. CIT(A) has already granted reasonable relief and his order does not require any further interference. Accordingly we confirm the order of the ld. CIT(A) as noted that the assessee failed to furnished the details but at the same time the amount was very small and therefore, 50% of the agricultural income was accepted. Addition u/s 40A - Held that - If an assessee makes payments at different times during the day and he has no idea that he has to pay to the same person on more than one occasion, he cannot be subjected to the statutory provision contained in s.40A(3) of the Act, unless any one payment is above ₹ 2,500. The statutory limit of ₹ 2,500 under s. 40A(3) of the Act applies to payment made to a party at a time and not to the aggregate of the payments made to a party in the course of the day as recorded in the cash book. It is to be noted that law was amended later on w.e.f. 1.4.2009 by Finance Act, 2008 by which the expression was changed from sum exceeding ₹ 20,000/- to expenditure in respect of which a payment or aggregate of payment made to a person in a day. Thus it is clear that because of decision of Hon ble Orissa High Court and other High Courts law has been amended only w.e.f. 1.4.2009. Therefore, in the present year i.e. Assessment year 2005-06 we are bound to follow the decision of Hon ble Punjab & Haryana High Court in case of CIT Vs. Bal Krishan Jagdish Chand (2007 (7) TMI 664 - PUNJAB & HARYANA HIGH COURT). Accordingly we set aside the order of the Ld. CIT(A) and delete the addition Fees paid to the Registrar of Companies for filing of Form 5 for increase of authorized capital - Held that - This issue is squarely covered against the assessee by the decision of Hon ble Supreme Court in case of Punjab State Industrial Development Corporation Ltd. Vs. CIT (1996 (12) TMI 6 - SUPREME Court as well as in case of Brooke Bond India Ltd Vs. CIT 1997 (2) TMI 11 - SUPREME Court wherein held that fees paid to the Registrar of Companies for expansion of the capital base of a company is directly related to the capital expenditure incurred by the company and although incidentally that would certainly help in the business of the company and may also help in profit-making, it still retains the character of capital expenditure since the expenditure is directly related to the expansion of the capital base of the company. Consent fees to Punjab Pollution Control Board (PPCB) for enhancement of plant capacity - Held that - Similar expenditure was held to be allowable by Hon ble Punjab & Haryana High Court in case of CIT Vs. Industrial Cables (India) Ltd. (2006 (12) TMI 499 - PUNJAB & HARYANA HIGH COURT) wherein pollution certificate was valid for 15 years but still the expenditure was held to be allowable. Following this decision we set aside the order of the Ld. CIT(A) and delete the addition. Allowability of business promotion expenditure - 50% deduction was allowed u/s 80G - Held that - First of all the assessee has not submitted any details regarding a sum of ₹ 5 lakh towards Indo-Pak Games. In any case no TDS has been deducted and therefore Section 40(a)(ia) is also applicable and these payments are not allowable. As far as payment to Mother India Foundation is concerned, same is eligible for deduction u/s 80G and 50% deduction has been allowed by the Assessing Officer then this amount cannot be allowed even as business expenditure. Therefore, we find nothing wrong with the order of the Ld. CIT(A) and confirm the same. Payment to Truck Operators Union (TOU) - Held that - The consideration was charged by the transporter from the truck owner and or operator and hire charges were paid by the assessee directly to the truck owner and therefore, it was held that there was no contract between the assessee and local purchaser and truck owner. But in case before us, the payment has been made directly to the TOU from whom the trucks have been arranged most probably at fixed rate therefore, the contract has to be assumed between the assessee and the TOU because all the payments have been made to the TOU. Even the bills were issued by the TOU are not in respect of trip but they are in terms of ₹ 50,000 for various trucks put together. Since the assessee has not submitted further details therefore, only assumption is that the assessee had a contract with the TOU and paid freight accordingly. therefore, we confirm the addition of ₹ 67,57,763/-. As far as the payment to M/s Chenab Textile is concerned a different legal principle would be applicable. In that case the assessee was selling goods to Chenab Textile and the goods were sent on FOR basis but the freight was paid by M/s Chenab Textile which in turn was raising debit notes to the assessee against the payment of freight. Therefore, what ever TDS was required to be deducted from the truck that should have been deducted by M/s Chenab Textile. As far as the assessee is concerned, it was only reimbursement of expenditure incurred by M/s Chenab Textile and therefore, no TDS was required to be deducted and therefore, we set aside the order of the Ld. CIT(A) and delete the addition of ₹ 8,54,452/-. Sales tax subsidy - revenue v/s capital receipt - Held that - There was no other document or material to substantiate the assessee s contention that the sales tax subsidy of the kind under consideration should be treated as capital receipt and not a revenue receipt or to show that the kind of subsidy under consideration was given to the assessee for creation of capital assets as an aid to setting up of the unit. Rather, it was evident that the subsidy was an operational subsidy provided by the State after the industry had been set up and commenced commercial production. In the absence of material to show that the subsidy was to enable it to carry out capital investment it could not be presumed that such a subsidy was a capital subsidy Additions u/s 145A - AO found that the Excise duties and other dues etc. have not been included in the valuation closing stock, therefore, he included these sums in the closing stock but refused to add the same in the opening stock - Held that - Adjustment to be made u/s 145A is to be made both in respect of opening stock as well as closing stock. we set aside the order of Ld. CIT(A) and direct the Assessing Officer to adjust the value of opening as well as closing stock and only the net difference should be added to the income of the assessee.

Summary

Issues Involved:
1. Disallowance of Loss on Sale of Investments
2. Disallowance under Section 14A
3. Disallowance of Interest and Other Expenses under Section 14A
4. Treatment of Agricultural Income
5. Disallowance under Section 40A(3)
6. Treatment of Filing Fees for Increase in Authorized Capital
7. Treatment of Consent Fee Paid to Punjab Pollution Control Board
8. Disallowance of Business Promotion Expenses
9. Disallowance under Section 40(a)(ia) for Freight Payments to Truck Operators Union
10. Disallowance of Freight Expenses under Section 40(a)(ia)
11. Treatment of Sales Tax Exemption/Subsidy as Revenue Receipt
12. Valuation of Stock under Section 145A

Detailed Analysis:
1. Disallowance of Loss on Sale of Investments:
The issue pertained to the disallowance of Rs. 68,000 as a business loss on the sale of mutual funds, invoking Section 94(7). The CIT(A) confirmed the disallowance, stating the units were purchased and sold within the stipulated period. The Tribunal remitted the matter back to the Assessing Officer (AO) to verify the record dates of the schemes involved.

2. Disallowance under Section 14A:
The AO made a disallowance under Section 14A due to the assessee's dividend income and investments. The CIT(A) upheld this disallowance. The Tribunal, referencing the Bombay High Court's decision in Godrej & Boycee Mfg. Vs. DCIT, ruled Rule 8D inapplicable for the assessment year 2005-06 and allowed a lump sum disallowance of Rs. 5 lakhs.

3. Disallowance of Interest and Other Expenses under Section 14A:
Linked with the above issue, the Tribunal concluded that a reasonable disallowance of Rs. 5 lakhs would suffice, considering the assessee had sufficient surplus funds for investments.

4. Treatment of Agricultural Income:
The AO treated the agricultural income as income from other sources due to insufficient details. The CIT(A) accepted 50% of the income as agricultural. The Tribunal upheld the CIT(A)'s decision, citing the lack of detailed evidence from the assessee.

5. Disallowance under Section 40A(3):
The AO disallowed Rs. 46,800 for cash payments exceeding Rs. 20,000, treating them as split payments to avoid Section 40A(3). The CIT(A) upheld this. The Tribunal, referencing the Punjab & Haryana High Court's decision in CIT Vs. Bal Krishan Jagdish Chand, deleted the disallowance, as the law was amended only from 1.4.2009.

6. Treatment of Filing Fees for Increase in Authorized Capital:
The AO and CIT(A) treated the filing fees of Rs. 12,50,000 as capital expenditure based on the Supreme Court's decisions in Punjab State Industrial Development Corporation Ltd. Vs. CIT and Brooke Bond India Ltd Vs. CIT. The Tribunal upheld this treatment.

7. Treatment of Consent Fee Paid to Punjab Pollution Control Board:
The AO and CIT(A) treated the consent fee of Rs. 20,000 as capital expenditure. The Tribunal, relying on the Punjab & Haryana High Court's decision in CIT Vs. Industrial Cables (India) Ltd., allowed the expenditure as revenue.

8. Disallowance of Business Promotion Expenses:
The AO disallowed Rs. 6 lakhs for business promotion, including payments to Indo Pak Games and Mother India Foundation. The CIT(A) confirmed this. The Tribunal upheld the disallowance due to lack of details and non-deduction of TDS.

9. Disallowance under Section 40(a)(ia) for Freight Payments to Truck Operators Union:
The AO disallowed Rs. 67,57,763 for non-deduction of TDS on payments to the Truck Operators Union (TOU). The CIT(A) upheld this. The Tribunal confirmed the disallowance, distinguishing it from the United Rice Land Ltd. case, as payments were made directly to TOU.

10. Disallowance of Freight Expenses under Section 40(a)(ia):
The AO disallowed Rs. 8,54,452 paid to Chenab Textile for freight. The CIT(A) upheld this. The Tribunal deleted the disallowance, treating it as a reimbursement of expenses, not requiring TDS deduction.

11. Treatment of Sales Tax Exemption/Subsidy as Revenue Receipt:
The AO and CIT(A) treated the sales tax exemption of Rs. 6,86,63,769 as a revenue receipt, following the Punjab & Haryana High Court's decision in CIT V. Abhishek Industries Ltd. The Tribunal upheld this treatment.

12. Valuation of Stock under Section 145A:
The AO included excise duties in the closing stock but not in the opening stock. The CIT(A) deleted the addition. The Tribunal directed the AO to adjust both the opening and closing stock values, following the Delhi High Court's decision in CIT Vs. Mahavir Aluminum Ltd.

Conclusion:
Both appeals were partly allowed, with several issues remitted back to the AO for reconsideration or adjustment as per legal precedents. The Tribunal's decisions were based on established case laws and statutory interpretations, ensuring a fair and just outcome.