2017 (1) TMI 1438 - AT - Income Tax

Disallowance u/s. 37(2A) - expenditure on business meetings and conferences Entertainment Expenses of employees accompanying guests and expenditure of beverages provided at the annual general meeting - Held that - As decided in assessee s own case for the AY. 1996-97 the assessee claimed 25% relatably to such nature. We find the Tribunal consistently accepted 25% as claimed by the assessee . In the light of the same the assessee s claim is allowed and the revenue s ground is rejected. Disallowance of expenditure on business meetings and conferences - we direct the AO to frame the disallowance. Expenses on food and beverages provided to business associates of the company in the offices and factories allowed. While deciding the appeal for the earlier AY. the Tribunal had disallowed the telephone expenditure and had allowed expenditure incurred on food. Respectfully following the orders of the two earlier years telephone expenses claimed by the assessee stand disallowed and expenditure incurred under the head food expenses is allowed as per the order of the last AY. Ground No. 3 is partly allowed. Depreciation on leased assets - Held that - We find that initially the SI had denied to have any transaction with the assessee company. But later on it confirmed that it had supplied electricity meters to ASEPB that it had received 11. 19 lakhs from the assessee that the FAA had not alleged that the letter of SI was not genuine that his only objection was the late submission of the letters of the SI and the failure of the assessee to produce the evidence during the assessment proceedings. In our opinion the stand taken by the FAA was not justifiable. If he had any doubt about the genuineness of the transaction he himself should have made further enquiries or should have directed the AO to conduct further investigation. The assessee is entitled to file additional evidences before the appellate authorities. Non filing of evidence before the AO or late filing of evidences cannot be the base for denying a legitimate claim made by an assessee. We have perused the documents relied upon by the assessee and a perusal of those documents clearly establish that assessee had made payment to SI and the APSEB was in possession of the assets leased by the assessee. Therefore reversing the order of the FAA we decide Ground. in favour of the assessee. Compensation received upon termination of distributorship - nature of receipt - revenue or capital - Held that - After the judgment delivered in the case of Shaw Wallace (1932 (3) TMI 18 - Bombay High Court) a principle is being followed in the tax jurisprudence that there is a difference between compensation or damages paid or received for non-performance of a contract entered into in the course of business and compensation or damages paid for discontinuance of the business itself. The former may be treated as income but the amount paid for terminating a business cannot ordinarily be deemed to be income from that business taxable under the Act. In the one case one gives up the source from which the income arises; in the other one merely gives up anticipated profits which would have accrued to him if the contract had not been discontinued or terminated for cash payment. In the first case amount in question will not be taxable but in the other it will be. In the case before us it is found that a contract was entered into by the assessee with JV and on termination of the agreement it received solatium. The terms of and conditions of the termination-agreement clearly prove that the there was loss of source of income of the assessee. So reversing the order of the FAA we decide ground against the assessee. Reduction of claim u/s. 80-IA on account of expenditure falling under section 35 - Held that - Before us Representatives of the sides agreed that the matter needs further verification and could be restored back to the file of the AO. Accordingly we direct him to decide the issue afresh after affording a reasonable opportunity to the assessee. Ground is decided in favour of the assessee in part. Deduction u/s. 80HHC - whether sales tax collected by the assessee would form part of total turnover for the purpose of computing deduction u/s. 80HHC? - Held that - Both the parties agreed that this issue is covered in favour of the assessee by the decision of the Hon ble Bombay High Court in the case of CIT vs. Sudarshan Chemicals Industries Ltd. (2000 (8) TMI 73 - BOMBAY High Court) . In the light of the aforesaid decision we uphold the order of the CIT(A). - Decided against revenue Receipt from lease rentals and finance and service charges on hire purchase contract as per the provisions of clause (baa) of Explanation to section 80-HHC - Held that - Identical issue was decided in favour of the assessee in its own case for the AY 1995-96 wherein held clause (baa) is not applicable to the finance and service charges received by the assessee. Further this income has already been included in the business turnover of the assessee company. Accordingly we direct the AO not to reduce 90% of the finance and service charges from the profits of the business. Deduction allowable u/s. 80HHC shall be recomputed accordingly. We would also like to add that principle of netting is a Judicially settled principle hence if there is a nexus between the receipts and the expenses incurred in connection with thereof the set off should be made and only 90% of the net balances should be excluded and in the event of expenditure is more than the receipt nothing is liable to be excluded under Clause (baa) of explanation to Section 80HHC of the Act Deduction claimed u/s. 80-IA - AO reduced the amounts in question i. e. miscellaneous income while computing the profits - Held that - We find that the issue of miscellaneous income for computing the deduction u/s. 80-IA of the Act has been dealt in the case of Maxcare Laboratories (2004 (6) TMI 259 - ITAT CUTTACK) held whenever the Legislature had intended to give the benefit of deductions to the wider extent of income and not only to income derived from the industrial undertaking it has used expressions like profit attributed to . To give an extended benefit the statute has used the words income derived from any business of an industrial undertaking . Thus any income generated out of an act which is required to be undertaken essentially for carrying on the business of industrial undertaking is to be considered for computing the deduction under section 80-IA Depreciation on leased assets - Held that - Held that As the assessee was the owner of the assets leased out to different parties so it was entitled to claim depreciation. The FAA had gone through the lease agreements confirmation letters and other relevant material. As the existence of assets and their use is in doubt so the AO in our opinion was not justified in denying the claim of depreciation made by assessee. We also find that FAA had allowed depreciation @50% as the assets were used for less that 180 days during the year under consideration. It is also a fact that two of the lessees are state electricity boards i. e. APSEB and RSEB. Both of them have confirmed the lease transaction and installation of machinery/ assets. The FAA had observed that it could not be alleged that govt. undertakings had colluded with the assessee to mislead and defraud the govt. of its reveune by giving wrong confirmations. So we do not see any infirmity in the order of the FAA. Confirming his order we decide the Ground against the AO. Deduction u/s. 80HHC for computation of profits u/s. 115JA - Held that - We find that the FAA had asked the AO to pass a speaking order after considering the submission of the assesse. If he has not passed the order till date he is directed to follow the instruction of the FAA to consider the cases relied upon by the AR before us and to pass an order within period of three months of receipt of this order. Ground No. 3 is allowed in favour of the assessee in part Disallowance of expenditure incurred on Mango Bridge - revenue or capital - Held that - We find that the assessee had contributed a sum of 3. 18 crores to construct a new bridge that AO had not brought on record /any fact to prove that assessee gained enduring benefit by partial contribution to the construction of the new bridge. In our opinion the bridge facilitated the better transportation of the goods to and from the factory site. If the assessee is received any benefit it was at an advantage of revenue nature. Therefore we are of the opinion that order of FAA does not suffer from any legal infirmity. Endorsing the same we decide Ground against the AO. Disallowance of expenditure on additional water lines - revenue or capital - Held that - The facts of the case under consideration were similar to the facts of the case of Chougule Chemiclas Pvt. Ltd. (1994 (12) TMI 16 - BOMBAY High Court) held that the expenditure incurred on laying new pipeline for augmenting the existing water supply in the factory premises was allowable as revenue expenditure. Disallowance of vendor development expenses - AO found that the assessee had treated the said expenditure as deferred revenue expenditure - Held that - We find that the assessee had incurred an expenditure of 37. 70 crores that in the books of account it had treated the expenditure as deferred revenue expenditure that in the computation of income and during the assessment proceedings it claimed that expenditure was of revenue nature that the AO had not given any finding about allowability of the expenditure that the expenditure was incurred for developing the tools/components. In our opinion the entries in the books of account do not decide allowability of expenditure as revenue expenditure. Nor are the books decisive to hold an expenditure as capital expenditure. What has to be seen is the nature of expenditure. The FAA has given categorical finding of fact that expenditure did not add to the fixed capital of the assessee or helped it in acquiring the source of profit. Therefore in our opinion the FAA was justified in allowing the expenditure as revenue expenditure - Decided against AO Disallowance of consultancy fee paid on account of business process reengineering - Held that - We find that the AO had allowed half of the expenditure for the year under consideration that the assessee had availed the services of a consultancy firm to improve the working of the company. As that fee was paid for improving the existing system therefore in our opinion the order of the FAA does not suffer from any legal infirmity in allowing claim - Decided against AO.

Summary

Issues Involved:

1. Excess disallowance under Section 37(2A) of the Income Tax Act, 1961.
2. Disallowance of expenses incurred at the staff inspection house.
3. Depreciation on leased assets.
4. Compensation received upon termination of distributorship.
5. Reduction of claim under Section 80-IA.
6. Disallowance under Rule 6D of the Income Tax Rules, 1961.
7. Disallowance under Rule 6B of the Income Tax Rules, 1961.
8. Deduction claimed under Section 36(1)(iii) of the Act.
9. Expenditure incurred at Jamshedpur for civic and social obligations.
10. Disallowance under Section 40A(9) of the Act.
11. Provision for warranty.
12. Deduction under Section 80HHC.
13. Receipt from lease rentals and finance and service charges on hire purchase contract.
14. Depreciation on leased assets leased to APSEB, RSEB, and NELCO.
15. Expenditure on Mango Bridge.
16. Expenditure on additional water lines.
17. Vendor development expenses.
18. Consultancy fee for business process reengineering.

Detailed Analysis:

1. Excess Disallowance under Section 37(2A):
The Tribunal allowed the assessee’s claim for entertainment expenses, business meetings, and conferences, following its consistent decisions in previous years. The AO was directed to frame the disallowance in light of these precedents.

2. Disallowance of Expenses at Staff Inspection House:
The Tribunal disallowed telephone expenses but allowed food expenses, following the decision of the Hon’ble Apex Court in Britannia Industries. The ground was partly allowed.

3. Depreciation on Leased Assets:
The Tribunal reversed the FAA’s order and allowed depreciation on leased assets, as the assessee proved the genuineness of the transactions with APSEB and SI. The Tribunal emphasized the importance of additional evidence and directed the AO to allow the depreciation claim.

4. Compensation Received upon Termination of Distributorship:
The Tribunal reversed the FAA’s order, holding that the compensation received was a capital receipt as it resulted from the termination of a source of income. The ground was decided in favor of the assessee.

5. Reduction of Claim under Section 80-IA:
The Tribunal restored the issue to the AO for further verification, directing him to decide the matter afresh after providing a reasonable opportunity to the assessee. The ground was decided in part favor of the assessee.

6. Disallowance under Rule 6D:
Following the Tribunal’s decision in earlier years, the ground was decided against the AO, confirming that the disallowance under Rule 6D was not justified.

7. Disallowance under Rule 6B:
The Tribunal dismissed the AO’s ground, confirming the FAA’s order that no disallowance could be made under Rule 6B, as the presentation articles did not bear any logo or company name.

8. Deduction under Section 36(1)(iii):
The Tribunal upheld the FAA’s order, confirming the allowance of interest on borrowed capital under Section 36(1)(iii), as the borrowed capital was utilized in the existing business.

9. Expenditure at Jamshedpur for Civic and Social Obligations:
The Tribunal decided against the AO, following its earlier decisions, and upheld the FAA’s order allowing the deduction of such expenditure as it was incurred for the business’s community development and welfare activities.

10. Disallowance under Section 40A(9):
The Tribunal followed its earlier decision and allowed the claim, confirming that the payments to clubs and associations were not disallowable under Section 40A(9).

11. Provision for Warranty:
The Tribunal upheld the FAA’s order, allowing the provision for warranty expenses, following its decisions in earlier years.

12. Deduction under Section 80HHC:
Following the Hon’ble Bombay High Court’s decision in CIT vs. Sudarshan Chemicals Industries Ltd., the Tribunal upheld the FAA’s order, confirming that sales tax collected did not form part of the total turnover for computing deduction under Section 80HHC.

13. Receipt from Lease Rentals and Finance and Service Charges:
The Tribunal decided against the AO, confirming that finance and service charges received by the assessee were not to be reduced by 90% under clause (baa) of Explanation to Section 80HHC.

14. Depreciation on Leased Assets to APSEB, RSEB, and NELCO:
The Tribunal confirmed the FAA’s order allowing depreciation on leased assets, as the transactions were genuine, and the assets were used for business purposes.

15. Expenditure on Mango Bridge:
The Tribunal upheld the FAA’s order, allowing the expenditure as revenue expenditure, as it facilitated better transportation of goods to and from the factory site.

16. Expenditure on Additional Water Lines:
Following the Hon’ble Bombay High Court’s decision in Chougule Chemicals Pvt. Ltd., the Tribunal upheld the FAA’s order, allowing the expenditure as revenue expenditure.

17. Vendor Development Expenses:
The Tribunal upheld the FAA’s order, allowing the expenditure as revenue expenditure, as it was incurred for developing tools/components and did not add to the fixed capital of the assessee.

18. Consultancy Fee for Business Process Reengineering:
The Tribunal confirmed the FAA’s order, allowing the entire consultancy fee as revenue expenditure, as it was incurred for improving the existing business processes.

Conclusion:
The Tribunal’s judgment comprehensively addressed each issue, often relying on precedents and consistent decisions from previous years. The appeals were partly allowed, with several grounds decided in favor of the assessee, emphasizing the importance of additional evidence and the nature of expenditures in determining their allowability.