2010 (8) TMI 635 - AT - Income Tax

Disallowance Revenue or capital expenditure Depreciation on R&D Bad debts Condonation of delay - In the case of buyback of shares however there is no permanent change in the capital structure of the company - On comparing provisions of Sec 77A and Sec 81 of the Act it is found that many conditions for issue of bonus share are parameteria with provisions relating to buyback of shares - In my considered opinion therefore the expenditure incurred on buyback of shares was not a capital expenditure as there was neither permanent change in the capital structure of the company nor benefit of enduring nature was received by the appellant - The A.O. is therefore directed to deleted the disallowance of Rs.28,21,321 - This ground of revenue is dismissed Regarding depreciation - The AO held that since the assessee was always allowed deduction for capital expenditure towards purchase of R&D assets u/s. 35, the assessee could not be allowed deduction once again in respect of depreciation of these assets as and by way of revenue expenditure - Tribunal by its order dated 9.9.2005 in ITA No. 363/K/2005 for AY 2000-01 Accordingly this ground of the appeal is dismissed According to the AO, the payment was not permissible because the payments represented penalties paid at check posts for infraction of law - Each local authority has its own set of rules regarding documentation and the truck drivers being semi literate, the deficiencies can be found in the documents - In this view of the matter and also in the absence of any contrary material brought on record by the revenue authorities at the time of hearing - This ground of appeal of the revenue is also dismissed Regarding write off of bad debts - Though the appellant was not in the business of granting of loans, the loan advanced to Marvel was in the course of appellant s business and therefore it was a trade loan or advance - The A/R explained that the appellant could not take steps for execution of the decree & recover the decretal amount because Marvel was declared as a sick company by BIFR and therefore appellant lost all hopes of recovery of the decretal amount through legal process - the Madhya Pradesh High Court in the case of Mrs. Geeta Sanohi vs. CIT ( 277 ITR 388) - Even though the decree was issued by the Court in 1994 the appellant could not obtain any payment from Marvel for 8 years because no legal proceedings were possible after the debtor was declared sick by BIFR Decided in the favour of the assessee Regarding short term capital loss - It is a settled legal proposition that a deeming provision of the taxing statue should be strictly construed - The facts of this case were not disputed by the revenue authorities at the time of hearing and since the Ld. CIT(A) has given relief to the assessee by placing reliance on the decision of ITAT on similar facts Decided in the favour of the assessee Regarding club subscription fees - The terms of appointment of Sri S. K. Alagh, as MD were in conformity with provision of Schedule XIII to the Companies Act 1956 which permitted companies to provide perquisite to the working director; by way of membership fees of upto two clubs - The Madras High Court in the case of CIT Vs. Sundaram Industries Ltd. (1999 -TMI - 15776 - MADRAS High Court) and Bombay High Court in the case of Otis Elevator Co. (India) Ltd. Vs. CIT (1991 -TMI - 21958 - BOMBAY High Court) Accordingly decided in the favour of the assessee

Issues Involved:
1. Classification of share buyback expenses as revenue or capital expenditure.
2. Allowability of depreciation on assets used in Research & Development (R&D).
3. Deductibility of penal payments made at check posts.
4. Qualification of write-off of bad debts as arising from regular business.
5. Allowability of short-term capital loss on sale of units.
6. Deductibility of club subscription fees for the director's individual membership.

Detailed Analysis:

1. Classification of Share Buyback Expenses:
Issue: Whether expenses of Rs. 28,21,321 on share buyback are revenue expenses and hence allowable.
Judgment: The assessee company claimed the share buyback expenses as revenue expenditure under Section 37(1) of the Income-tax Act. The Assessing Officer (AO) disallowed the claim, treating it as capital expenditure. The CIT(A) deleted the disallowance, reasoning that buyback of shares did not result in a permanent change in the capital structure or provide an enduring benefit. The ITAT upheld the CIT(A)'s decision, noting that the expenses were incurred in the course of business and did not result in a permanent reduction of share capital.

2. Allowability of Depreciation on R&D Assets:
Issue: Whether depreciation of Rs. 15,75,868 on assets used in R&D is allowable.
Judgment: The AO disallowed the depreciation on the grounds that the assessee had already claimed deduction for capital expenditure on R&D assets under Section 35. The CIT(A) deleted the disallowance, following the ITAT's previous decision in a similar case. The ITAT upheld the CIT(A)'s decision, finding no infirmity and noting that the issue had been settled in the assessee's favor in earlier years.

3. Deductibility of Penal Payments at Check Posts:
Issue: Whether penal payments of Rs. 5,36,769 made at check posts are allowable expenses.
Judgment: The AO disallowed the payments, treating them as penalties for infraction of law. The CIT(A) deleted the disallowance, stating that the payments were compensatory in nature to avoid delays in delivery of goods and not for infraction of law. The ITAT upheld the CIT(A)'s decision, agreeing that the payments were compensatory and not penal, and thus allowable as business expenditure.

4. Write-off of Bad Debts:
Issue: Whether the write-off of bad debts of Rs. 1,04,63,615 qualifies as arising from the regular business of the assessee.
Judgment: The AO disallowed the write-off, arguing that the loan was not advanced in the course of the assessee's business. The CIT(A) allowed the write-off, noting that the loan was advanced to a supplier in the course of business and was written off after the debtor was declared sick by BIFR. The ITAT upheld the CIT(A)'s decision, agreeing that the loan was advanced for business purposes and the loss was incurred in the course of business.

5. Allowability of Short-Term Capital Loss:
Issue: Whether the disallowance of short-term capital loss of Rs. 1,08,30,324 on sale of units was justified.
Judgment: The AO disallowed the loss, applying Section 94(7), which limits the loss to the extent of exempt dividend income if the units are sold within three months of the record date. The CIT(A) allowed the full loss, noting that the units were sold after the three-month period. The ITAT upheld the CIT(A)'s decision, confirming that the sale was beyond the three-month period and thus did not attract the provisions of Section 94(7).

6. Deductibility of Club Subscription Fees:
Issue: Whether club subscription fees of Rs. 7380 paid for the director's individual membership is an allowable expenditure.
Judgment: The AO disallowed the expenditure, treating it as not incidental to the assessee's business. The CIT(A) deleted the disallowance, noting that the fees were part of the director's perquisites as per the terms of employment and supported by judicial precedents. The ITAT upheld the CIT(A)'s decision, agreeing that the expenditure was allowable as business expenditure.

Conclusion:
The appeal by the revenue was dismissed on all grounds, with the ITAT upholding the CIT(A)'s decisions. The expenses on share buyback, depreciation on R&D assets, penal payments at check posts, write-off of bad debts, short-term capital loss on sale of units, and club subscription fees were all deemed allowable as business expenditures.

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