2012 (6) TMI 266 - HC - Income Tax

Allowable expenditure on repair- the tribunal held that the expenditure of is capital in nature Held that - The CIT (A) and the Tribunal have considered the finding against the Assessee on the basis of the survey report of the Insurance Company with no opportunity was ever given to the Assessee to dispute the correctness of the said survey report held to be violation of principles of the natural justice - It is open to ITO to collect materials to facilitate assessment even by private enquiry but if he desires to use the material so collected, the Assessee must be informed of the material and must be given an adequate opportunity to explain it and controvert the contents of it in favour of assessee. Determining the profits exempt u/s 80HH & 80-I - Mode of apportionment of expenditure Held that - As in assessment proceedings no details of expenses were furnished by the assessee to establish that the particular expenses were incurred in its particular unit out of its two units -thus in the absence of any details being made available by the Assessee the expenses incurred in the various heads are required to be treated for both the units - Tribunal attempt in order to arrive at a just figure of expenses of each unit the expenses to be bifurcated and divided in the ratio of turnover of both the units is acceptable- in favour of the Revenue.

Summary

Issues:
1. Whether the Tribunal was justified in holding that a sum of Rs.16,47,766 was not allowable as expenditure on repairs?
2. Whether the finding that the expenditure is capital in nature is based on undisclosed material and thus vitiated?
3. Whether the mode of apportionment of expenditure determining profits exempt under sections 80HH & 80-I adopted by the Tribunal is legally tenable?

Analysis:

Issue 1:
The case involved the Assessee setting up a Seed Handling Plant which was damaged and repaired. The Assessing Officer treated the repair expenses as capital expenditure, disallowing the claim under relevant sections of the Act. The CIT (A) and the Tribunal upheld this decision, considering the plant reconstruction as capital expenditure, not allowable as revenue expenditure for repairs. The Tribunal's decision was based on the changed design during reconstruction.

Issue 2:
The Assessee challenged the decision based on a survey report received by the Assessing Officer without disclosure to the Assessee. The Court held that the Assessee was deprived of a fair opportunity to challenge the survey report, violating principles of natural justice. Citing legal precedents, it was emphasized that the Assessee should have been provided with the material and an opportunity to explain it. Therefore, the finding that the expenditure was capital in nature was deemed vitiated due to the undisclosed material.

Issue 3:
Regarding the apportionment of expenses between two units of the Assessee, the Assessing Officer found a disproportionate allocation of expenses. The Assessee's explanation was deemed unsatisfactory, leading to the bifurcation of expenses based on the turnover ratio of both units. The Court upheld this method of apportionment, stating that without specific details from the Assessee, the expenses had to be treated for both units and then divided based on turnover. Consequently, the Tribunal's approach was deemed legally justified.

In conclusion, the Court ruled in favor of the Assessee on Issue 2, finding the capital expenditure classification vitiated due to undisclosed material. However, on Issue 3, the Court sided with the Revenue, upholding the Tribunal's method of apportioning expenses. The reference was disposed of, directing the Tribunal to proceed in accordance with the law.