2013 (7) TMI 1045 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of expenditure incurred on expansion of the Export Oriented Undertaking (EOU) as capital expenditure.
2. Disallowance of lease rent paid.

Summary:

Issue 1: Disallowance of Expenditure on EOU Expansion
The assessee appealed against the Dispute Resolution Panel (DRP) confirming the disallowance of Rs. 1,10,74,365/- incurred on the expansion of the EOU, treating it as capital expenditure. The assessee capitalized the expenditure in the books but claimed it as a deduction in the income tax return, arguing it was an expansion of the existing business. The Assessing Officer (AO) and DRP held that the expenditure was of enduring nature and thus capital expenditure, as the new unit was not in the same premises and considered a new setup.

The assessee relied on the Madras High Court decision in CIT vs Sakthi Sugars Ltd., where similar expenses were treated as revenue expenditure. The DRP's decision was contested on the grounds that the new unit, although separated by distance, was part of the same business under common management. The Tribunal noted that neither the AO nor the DRP detailed the nature of expenses, and the assessee did not provide specifics. The Tribunal remanded the matter to the AO to re-adjudicate in light of the Sakthi Sugars case, allowing the appeal for statistical purposes.

Issue 2: Disallowance of Lease Rent Paid
The assessee claimed Rs. 12,42,820/- as lease rent in the income tax return, while only Rs. 3,98,733/- was debited in the books. The AO disallowed the excess amount due to lack of explanation, and the DRP confirmed this. The assessee argued that the difference was due to the accounting treatment under AS-19, which should not affect the tax deduction as per CBDT Circular No. 2 of 2001.

The Tribunal held that if the lease agreement indicated the lessor retained ownership, the lease rent is deductible. If ownership transferred to the lessee, the cost should be capitalized, and only the interest portion deductible. Due to the absence of the lease agreement, the Tribunal remanded the issue to the AO for fresh adjudication, allowing the appeal for statistical purposes.

Conclusion:
The appeal was allowed for statistical purposes, with both issues remanded to the AO for re-adjudication based on detailed examination and relevant legal precedents.