2011 (4) TMI 784 - AT - Income Tax

Training and selection fees expenses - Allocation of capital expenditure - Whether the Tribunal was justified in law in including the original cost of the plant and machinery any part of the expenses incurred for (i) staff training (ii) insurance and (iii) power and fuel in ascertaining the actual cost for the purpose of allowance of development rebate and deprecation allowance - As per the Hon ble Bombay High Court in the case of Belapur Co ltd has held that expenditure incurred on foreign tour undertaken for the purchase of a capital assets as also for study of diffuser working has to be capitalized for the purpose of allowing deprecation and development rebate thereon - The Hon ble High Court has held that the Tribunal was right in upholding the direction of the AAC to capitalise the expenditure on the foreign tours for the purpose of depreciation and development rebate and to allow the same on such figure as the ITO arrived at. Assessee submission that since the other expenditure incurred by the assessee has been capitalised in the ratio of the cost of the assets; therefore, the same ratio may be applied for capitalizing the training expenses - According to him, in the instant case, the training expenditure relates to plant and machinery only, therefore, the same should be allocated to plant and machinery. The expenditure relatable to the installation of the machinery can at best be construed as a part of the cost of the plant and machinery which can be capitalized - Find from the order of the CIT(A) that he has given a finding that the assessee has not produced the full details regarding the training expenses paid to the foreign consultant. The submission of the ld counsel for the assessee that since the Assessing Officer has not asked for those details, therefore, the same were not given, in our opinion, does not find force in it. Although, the assessee in the paper book has given the invoice wise details of payment including TDS, it is also not clear as to whether the TDS so deducted has been properly deposited to the credit of the Central Government account in terms of provisions of sec. 40(a) of the I T Act - Accordingly, set aside the order of the CIT(A) and restore the matter to the file of the Assessing Officer to decide the issue afresh and in accordance with law after giving due opportunity of being heard to the assessee - The ground raised by the assessee is accordingly allowed for statistical purpose.

Summary

Issues Involved:
1. Disallowance of training expenses amounting to Rs. 3,15,75,394/-.
2. Alternative contention for capitalization of the said expenditure and allowance of depreciation thereon.
3. Compliance with provisions of section 40(a) regarding TDS on payments to foreign consultants.

Detailed Analysis:

1. Disallowance of Training Expenses:
The assessee claimed a deduction for training expenses amounting to Rs. 3,93,79,324/-, of which Rs. 3,15,75,394/- was incurred prior to the commencement of production. The Assessing Officer (AO) disallowed this amount, citing that expenses incurred before the start of production cannot be allowed as revenue expenditure during the year. The AO relied on the Supreme Court decision in Tuticorin Alkali Chemicals and Fertilizers Ltd vs CIT. The CIT(A) upheld this disallowance, noting that only expenditure incurred during the year can be allowed against the income of the year. The Tribunal agreed, stating that since the expenditure was incurred before the business commenced, it is pre-operative and cannot be allowed as revenue expenditure for the assessment year in question.

2. Alternative Contention for Capitalization and Depreciation:
The assessee alternatively argued that if the expenditure is not allowed as revenue, it should be capitalized, and depreciation should be granted. The CIT(A) rejected this, stating that the AO did not have the opportunity to examine the genuineness of the payments due to insufficient details provided by the assessee. The Tribunal found merit in the assessee's argument but noted that only the expenditure related to the installation of machinery could be considered part of the cost of plant and machinery for capitalization. The Tribunal referred to the Calcutta High Court decision in CIT vs New Central Jute Mills and the Bombay High Court decision in CIT vs Belapur Co Ltd, which supported the capitalization of certain pre-production expenses for depreciation purposes. The Tribunal directed the AO to re-examine the details and determine the appropriate amount to be capitalized and allowed for depreciation.

3. Compliance with Section 40(a) Provisions:
The CIT(A) also rejected the claim on the grounds that the assessee did not provide evidence of compliance with TDS provisions under section 40(a) for payments made to foreign consultants. The Tribunal noted that while the assessee provided invoice-wise details and TDS deductions, it was unclear if the TDS was deposited as required. The Tribunal instructed the AO to verify the compliance with TDS provisions and allow the expenditure accordingly if the requirements were met.

Conclusion:
The Tribunal restored the matter to the AO for fresh examination, directing the AO to verify the genuineness of the training expenses, compliance with TDS provisions, and determine the appropriate amount for capitalization and depreciation. The appeal by the assessee was partly allowed for statistical purposes, and the revenue's cross-objection was allowed.