2012 (3) TMI 582 - AT - Income Tax

Allowing the expenses though relating to previous year but crystallized and paid during the year - Held that - CIT(A) was justified in directing the Assessing Officer to allow expenses which was crystallized and paid during the year, though related to earlier year. Distribution of gifts - addition on account of articles distributed among business associates on various occasions for want of detail of persons to whom the gifts were distributed - expenditure incurred on guest house - addition on account of subscription expenses of club, or director and employees of the company - addition on account of subscription expenses of club, of Director and employees - addition paid to ESI department being additional amount charged by ESI department for delay in depositing ESI payment - disallowance u/s 14A - expenses incurred in relation to the income does not form total income

Issues Involved:
1. Allowability of expenses crystallized and paid during the year.
2. Allowability of expenses on articles distributed among business associates.
3. Allowability of guest house expenses.
4. Allowability of subscription expenses of club for directors and employees.
5. Allowability of additional amount paid to ESI department for delay in depositing ESI payment.
6. Disallowance under section 14A for expenses incurred to earn exempt dividend income.
7. Capitalization of interest paid on term loan.

Detailed Analysis:

1. Allowability of Expenses Crystallized and Paid During the Year:
The Revenue contended that the CIT(A) erred in allowing expenses amounting to Rs. 33,895/- which were related to the previous year but crystallized and paid during the year under appeal. The Tribunal upheld the CIT(A)'s decision, noting that the expenses were indeed crystallized and settled during the year under consideration, making them allowable. This decision was consistent with a similar ruling in the assessee's case for the previous assessment year, where the Tribunal had allowed such expenses as they were crystallized and paid during the relevant year.

2. Allowability of Expenses on Articles Distributed Among Business Associates:
The Revenue challenged the deletion of Rs. 4,75,471/- on account of articles distributed among business associates. The CIT(A) had allowed this claim, following his own order for the previous year. The Tribunal found that the issue was covered by earlier decisions, where it was customary to incur such expenses on occasions like Diwali, and the disallowance by the Assessing Officer was not justified. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's ground.

3. Allowability of Guest House Expenses:
The Revenue disputed the deletion of Rs. 35,000/- out of total guest house expenses of Rs. 91,032/-. The Tribunal noted that the issue was covered by its earlier decision, where it was held that guest house expenses are allowable and any ad hoc disallowance without evidence is not sustainable. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's ground.

4. Allowability of Subscription Expenses of Club for Directors and Employees:
The Revenue challenged the deletion of Rs. 11,462/- on account of club subscription expenses. The Tribunal referenced its earlier decision, which allowed such expenses, noting that they were admissible and there was no infirmity in the CIT(A)'s order. The Tribunal dismissed the Revenue's ground.

5. Allowability of Additional Amount Paid to ESI Department for Delay in Depositing ESI Payment:
The Revenue contested the deletion of Rs. 4,04,791/- paid to the ESI department for delay in depositing ESI payments, arguing it was a penalty. The Tribunal found that the amount was compensatory in nature, not a penalty, and thus allowable under section 37(1) of the Income Tax Act. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's ground.

6. Disallowance Under Section 14A for Expenses Incurred to Earn Exempt Dividend Income:
The assessee contended that the CIT(A) erred in not deleting the addition of Rs. 10,06,483/- made by the Assessing Officer under section 14A by applying Rule 8D. The Tribunal noted that the application of Rule 8D is not automatic and requires the Assessing Officer to be dissatisfied with the correctness of the assessee's claim. The Tribunal found that the Assessing Officer did not record any such dissatisfaction and remanded the issue back for fresh consideration in accordance with law, directing the Assessing Officer to give a proper opportunity to the assessee.

7. Capitalization of Interest Paid on Term Loan:
The assessee did not press this ground of appeal, and thus, the Tribunal dismissed it as not pressed.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal for statistical purposes. The issues were resolved by upholding the CIT(A)'s decisions where justified and remanding for fresh consideration where procedural lapses were identified.

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