2011 (2) TMI 962 - AT - Income Tax

Disallowance of travelling expense - The dispute is regarding computation of disallowance under rule 6D which the AO had done with reference to each trip of the employee - Held that - As in case of CIT v. Aorow India Ltd. 1997 (7) TMI 92 - BOMBAY High Court and the decision of the Tribunal in the assessee's own case for assessment year 1994-95 held that ceiling laid down in rule 6D(2) is on the expenditure incurred in connection with each day of the journey and if calculated in accordance with the said rule for each day of travelling it would make no difference whether the calculation of allowable expenditure is made for each trip of journey or for all the journeys in the year taken together - no infirmity in the order of CIT(A) computing disallowance with reference to each trip of the employee - Decided against the assessee. Disallowance of Guest House expenses - Held that - The issue is settled by the judgment of Britannia Industries Ltd. v. CIT 2005 (10) TMI 30 - SUPREME Court in which it has been held that there being a specific provision for Guest House expenses under section 37(4)(iv) all expenses relating to Guest House such as repair, depreciation, etc. will be covered by that specific provisions - disallowance upheld - Decided against the assessee. Disallowance of 25 per cent of entertainment expenses - Held that - The issue was covered against the assessee by the decision of Tribunal in assessee's own case in assessment year 1994-95 wherein held that 25 per cent of the entertainment expenditure incurred in hotels should be treated as that pertaining to the employees accompanying the guests as against 50 per cent made by the Assessing Officer. Facts this year are identical therefore respectfully following the decision of the Tribunal in assessment year 1994-95 confirm the order of the CIT(A). Regarding cash payment - disallowance u/s 40A(3) - Held that - The assessee had not been able to establish that the payments had been made under exceptional circumstances - Decided against the assessee Regarding interest on money borrowed - Held that - It is a settled legal position that whether the two businesses are the same business or different business does not depend upon the nature of two businesses - Though the employees and funds are separately allocated for different units they are depended upon the head office for raising of funds and employees are transferable from one unit or another - assessee had raised funds for setting up of two cement units at Raipur and Shambupura and steel unit at Vikramspat Salav - The new unit being set up by the assessee was integral part of the same business and therefore interest on money borrowed has to be allowed as deduction - Decided in favor of the assessee

Issues Involved:
1. Disallowance of travelling expenses under rule 6D.
2. Disallowance of travelling expenses for foreign citizens under rule 6D.
3. Disallowance of Guest House expenses under section 37(4).
4. Disallowance of entertainment expenses.
5. Disallowance of expenses for meals during sales and press conferences.
6. Disallowance of rural development expenditure.
7. Claim of expenditure on premium for redemption of non-convertible debentures.
8. Disallowance of club expenses.
9. Disallowance under section 40A(9) for payments to schools.
10. Disallowance under section 40A(3) for cash payments exceeding Rs. 10,000.
11. Reduction of deduction claim under section 35D.
12. Expenditure on non-convertible and fully convertible debentures.
13. Sales tax exemption benefit.
14. Expenditure on sales and press conference.
15. Addition for gifts and presentation articles.
16. Proportionate premium on redemption of NCD.
17. Addition of unutilized Modvat credit.
18. Addition for club membership and subscription expenses.
19. Addition for expenditure on access road and electric transmission line.
20. Disallowance of interest paid before commencement of new business.
21. Cross objection issues regarding stock, debenture expenses, and access road expenditure.

Detailed Analysis:

1. Disallowance of Travelling Expenses Under Rule 6D:
The first dispute pertains to the disallowance of travelling expenses amounting to Rs. 1,95,620 under rule 6D. The Assessing Officer calculated the disallowance with reference to each trip of the individual employees. The CIT(A) agreed with the assessee that other expenses like telephone and local conveyance could not be considered for rule 6D but upheld computation with respect to each trip. The Tribunal upheld the CIT(A)'s order, referencing the judgment of the Hon'ble High Court of Bombay in CIT v. Aorow India Ltd. and the Tribunal's decision in the assessee's own case for the previous year.

2. Disallowance of Travelling Expenses for Foreign Citizens Under Rule 6D:
The second dispute involves disallowance of Rs. 23,977 for travelling expenses of foreign citizens under rule 6D. The assessee argued that rule 6D should not apply to non-employees and foreign citizens. The CIT(A) and the Tribunal, following the decision in the previous year, upheld the disallowance.

3. Disallowance of Guest House Expenses Under Section 37(4):
The third dispute is about the disallowance of Guest House expenses amounting to Rs. 16,87,212 under section 37(4). The CIT(A) upheld the disallowance following the decision in the previous year. The Tribunal confirmed the disallowance referencing the Supreme Court judgment in Britannia Industries Ltd. v. CIT.

4. Disallowance of Entertainment Expenses:
The fourth dispute concerns the disallowance of 25% of entertainment expenses amounting to Rs. 12,77,468. The CIT(A) restricted the disallowance to 25% following the decision in the previous year. The Tribunal upheld this decision, referencing the Tribunal's earlier decision.

5. Disallowance of Expenses for Meals During Sales and Press Conferences:
The fifth dispute involves disallowance of Rs. 8,59,074 towards meals for sales and press conferences. The CIT(A) allowed 25% of the expenditure attributing it to employees and treated the remaining 75% as entertainment expenditure. The Tribunal allowed the assessee's claim, referencing the Tribunal's decision in the previous year.

6. Disallowance of Rural Development Expenditure:
The sixth dispute is about the disallowance of Rs. 8,02,237 for rural development expenditure. The CIT(A) confirmed the disallowance following the decision in the previous year. The Tribunal restored the issue to the Assessing Officer for fresh consideration.

7. Claim of Expenditure on Premium for Redemption of Non-Convertible Debentures:
The seventh dispute concerns the claim of Rs. 4 crores incurred as premium on redemption of non-convertible debentures. The CIT(A) allowed 1/9th of the expenditure on a pro-rata basis. The Tribunal upheld this decision, referencing the Tribunal's earlier decision and the Supreme Court judgment in Madras Industrial Investment Corpn. Ltd. v. CIT.

8. Disallowance of Club Expenses:
The eighth dispute involves the disallowance of Rs. 57,410 for club expenses. The CIT(A) directed the Assessing Officer to verify if these expenses were already considered for disallowance as part of entertainment expenses. The Tribunal upheld this order.

9. Disallowance Under Section 40A(9) for Payments to Schools:
The ninth dispute is regarding the disallowance of Rs. 19,05,496 under section 40A(9). The CIT(A) confirmed the disallowance following the decision in the previous year. The Tribunal allowed the assessee's claim, referencing the Tribunal's decision in the previous year.

10. Disallowance Under Section 40A(3) for Cash Payments Exceeding Rs. 10,000:
The tenth dispute involves the disallowance of Rs. 2,79,827 under section 40A(3) for cash payments exceeding Rs. 10,000. The CIT(A) confirmed the disallowance as the assessee could not substantiate the claim of exceptional circumstances. The Tribunal upheld this decision.

11. Reduction of Deduction Claim Under Section 35D:
The eleventh dispute is about the reduction of the claim of deduction under section 35D from Rs. 13,69,143 to Rs. 1,28,752. The CIT(A) confirmed the action of the Assessing Officer. The Tribunal dismissed the ground as not pressed by the assessee.

12. Expenditure on Non-Convertible and Fully Convertible Debentures:
The twelfth dispute involves the expenditure on non-convertible and fully convertible debentures. The Tribunal dismissed the ground as not pressed by the assessee since the expenses had already been allowed.

13. Sales Tax Exemption Benefit:
The thirteenth dispute is regarding the sales tax exemption benefit amounting to Rs. 1,14,51,012. The Tribunal admitted the additional ground raised by the assessee and restored the issue to the Assessing Officer for fresh consideration after examining the incentive scheme framed by the U.P. Government.

14. Expenditure on Sales and Press Conference:
The fourteenth dispute involves the expenditure incurred on sales and press conferences totaling Rs. 11,45,432. The CIT(A) treated 25% of the expenditure as pertaining to employees and allowed the same. The Tribunal upheld this decision.

15. Addition for Gifts and Presentation Articles:
The fifteenth dispute concerns the addition of Rs. 3,05,796 for gifts and presentation articles in excess of Rs. 1000 per article. The CIT(A) allowed the claim of the assessee. The Tribunal upheld this decision.

16. Proportionate Premium on Redemption of NCD:
The sixteenth dispute is regarding the allowability of proportionate premium on redemption of NCD. The Tribunal upheld the CIT(A)'s decision to allow the expenditure over a period of 9 years.

17. Addition of Unutilized Modvat Credit:
The seventeenth dispute involves the addition of Rs. 39,42,289 on account of unutilized Modvat credit. The CIT(A) deleted the addition following the judgment of the Hon'ble Supreme Court in CIT v. Indo Nippon Chemicals. The Tribunal upheld this decision.

18. Addition for Club Membership and Subscription Expenses:
The eighteenth dispute is about the addition of Rs. 67,350 for club membership and subscription expenses. The CIT(A) allowed the claim following the judgment of the Hon'ble High Court of Mumbai in Otis Elevator Co. (India) Ltd. v. CIT. The Tribunal upheld this decision.

19. Addition for Expenditure on Access Road and Electric Transmission Line:
The nineteenth dispute concerns the addition of Rs. 8,49,13,250 for expenditure on the construction of access road and laying of 132 KV electric transmission line. The CIT(A) allowed the claim of the assessee. The Tribunal, however, held that the expenditure was capital in nature and set aside the CIT(A)'s order.

20. Disallowance of Interest Paid Before Commencement of New Business:
The twentieth dispute involves the disallowance of Rs. 2,73,29,413 for interest paid before the commencement of the new line of business. The CIT(A) allowed the claim of the assessee. The Tribunal upheld this decision, referencing the Tribunal's earlier decisions and the Supreme Court judgment in Core Healthcare Ltd.

21. Cross Objection Issues Regarding Stock, Debenture Expenses, and Access Road Expenditure:
The cross objection issues raised by the assessee were mostly dismissed as infructuous or restored to the Assessing Officer for fresh examination. The Tribunal upheld the CIT(A)'s decisions where applicable.

Conclusion:
The Tribunal provided a detailed analysis of each issue, mostly upholding the CIT(A)'s decisions and referencing relevant judgments. The appeals and cross objections were partly allowed, with some issues restored to the Assessing Officer for fresh consideration.

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