2012 (8) TMI 230 - AT - Income Tax

Addition on account of discount allowed by the State Government on early repayment of deferred sales tax, loan holding the same to be income of the assessee for the year and not a capital receipt as claimed by the assessee - difference between the payment made against the future liability on account of deferred sales-tax is a capital receipt and could not be treated as a remission of cessation of liability assessable under section 41(1)(1) of the Act - addition made by the Assessing Officer in the instant case by invoking the provisions of section 41(1) of the Act is untenable In favor of assessee Addition on account of debit balance written off on reconciliation Held that - Claim is on account of small balances, which were outstanding from the various customers on account of rejections, counting shortage etc., Since the amounts were not recovered, the same have been written off as irrecoverable - lower authorities were not justified in rejecting the claim of the assessee - ground raised by the Revenue is accordingly dismissed. Guarantee commission paid to the Directors of the Company Held that - What the company loses by way of guarantee commission, it would gain by saving of interest and avoidance of restrictive covenants. The payment of guarantee commission was, therefore, commercially justified - payment, therefore, could not be called in question as being influenced by any extra-commercial considerations and it must be taken that it passed all the test laid down in section 40(c) - whole of the guarantee commission shall be allowed - guarantee commission was not excessive and was an allowable deduction - ground raised by the Revenue is accordingly dismissed. Applicability of Clause (ii) of sub-rule(2) of Rule 8(D) of the I.T. Act - funds of the assessee are from a common pool and there was no exclusively pertaining to capital expenditure on purchase of equipment - assessee received Dividend income which it claimed as exempt - assessee has an outstanding loan - on which it has paid interest Held that - Matter remanded to the file of the AO for making reasonable disallowance under section 14A r.w. Rule 8D in the light of the decision of the Hon ble Bombay High Court in the case of Godrej Boyce Manufacturing Company ltd. (2010 (8) TMI 77 - BOMBAY HIGH COURT ) - Assessee is Partly-allowed.

Summary

Issues Involved:
1. Addition under Section 41(1) of the Income Tax Act.
2. Allowability of expenses related to debit balance written off.
3. Allowability of guarantee commission paid to Directors.
4. Disallowance of share issue expenses under Section 35D.
5. Applicability of Rule 8D for disallowance under Section 14A.

Issue-wise Detailed Analysis:

1. Addition under Section 41(1) of the Income Tax Act:
The primary issue raised by the assessee was the addition of Rs. 57,19,206/- under Section 41(1). The Assessing Officer (AO) had added this amount as income, considering the discount on early repayment of deferred sales tax as a revenue receipt. The CIT(A) upheld this addition. However, the Tribunal referred to its decision in the assessee's own case for the assessment year 2004-05, where it was held that the difference between the payment made against future liability on account of deferred sales tax is a capital receipt and not assessable under Section 41(1). Consequently, the Tribunal allowed the ground raised by the assessee and directed the AO to delete the addition.

2. Allowability of Expenses Related to Debit Balance Written Off:
The Revenue challenged the CIT(A)'s deletion of Rs. 8,20,390/- out of the total Rs. 8,44,835/- written off as sundry balances. The AO had disallowed the entire amount due to lack of detailed reconciliation with M/s. Bajaj Auto Ltd. The CIT(A) allowed the claim based on reconciled accounts submitted by the assessee. The Tribunal upheld the CIT(A)'s decision, referencing the Tribunal's previous decision for the assessment year 2004-05 and the Supreme Court's ruling in TRF Ltd. v. CIT, which states that post-01-04-1989, the assessee only needs to establish that the debt has been written off.

3. Allowability of Guarantee Commission Paid to Directors:
The AO disallowed Rs. 16,57,657/- paid as guarantee commission to the Directors, deeming it excessive and unreasonable. The CIT(A) allowed the deduction, distinguishing it from the case of Triveni Engineering Works and relying on the decision of the Allahabad High Court in L.H. Sugar Factories and Oil Mills Pvt. Ltd., which supported the commercial justification for such payments. The Tribunal upheld the CIT(A)'s decision, finding no infirmity and noting the reasonableness of the commission at 0.25%.

4. Disallowance of Share Issue Expenses under Section 35D:
The assessee's ground challenging the disallowance of Rs. 18,94,491/- as share issue expenses was dismissed. The assessee conceded that the issue was decided against them by the Supreme Court in Brook Bond India Ltd., which ruled such expenses are not deductible.

5. Applicability of Rule 8D for Disallowance under Section 14A:
The Revenue's appeal on the disallowance under Section 14A, concerning Rs. 4,39,315/- attributed to interest on funds used for exempt income, was addressed. The CIT(A) had directed the AO to make disallowance as per Clause 3 of sub-rule (2) of Rule 8D. The Tribunal restored the issue to the AO for reconsideration in light of the Bombay High Court's decision in Godrej & Boyce Manufacturing Co. Ltd. v. DCIT, directing a fresh determination of the disallowance.

Conclusion:
- ITA No. 388/PN/2012 by the Assessee was allowed.
- ITA No. 1269/PN/2010 by the Assessee was partly allowed.
- ITA No. 756/PN/2010 by the Revenue was dismissed.
- ITA No. 1301/PN/2010 by the Revenue was partly allowed for statistical purposes.

Order Pronounced:
The judgment was pronounced in the open court on 30th May 2012.