2012 (11) TMI 626 - AT - Income Tax

Employees contribution to PF and ESI - Disllowance as the payment made beyond due date - Held that - As decided in CIT Vs. M/s Nuchem Ltd. 2010 (2) TMI 959 - PUNJAB AND HARYANA HIGH COURT that where the employees share of contribution to ESI or PF is made before the due date of filing the return of income, no disallowance is warranted. As in the present case assessee had deposited the said amount of employees share of PF and ESI admittedly before the due date of filing the return of income & only in respect of the month of June, 2005, the said amount was paid on 21.7.2005 one day later than the grace period but before the due date of filing the return of income. Thus the total amount is allowable as an expenditure in the hands of the assessee - against revenue. Deduction under section 80IC on the profits of Baddi unit - whether any part of the head office expenditure was attributable to the Baddi unit for determining eligible profits ? - Held that - Except selling & distribution all are the expenses attributable to different units being run by the assessee and no part of the said expenditure could be held to be attributable to the Baddi unit, even to the extent of its turnover to the total turnover. The direct expenses of other units, in no manner can be attributed to Baddi unit. Similarly the selling and distribution expenses are not to be considered as Baddi unit is computing its income by reflecting sales of its manufactured items at predetermined price and transferring part of its margin of profits to the head office and retail units, which at the end of year had declared profits, which are assessable in the hands of assessee itself. In case these margin of profits are excluded from head office and included in the hands of Baddi unit, the resultant figure after debiting even the allocated expenditure on selling and distribution, would be eligible for the benefits of deduction u/s 80IC - direct the AO to recompute the disallowance u/s 80IC by excluding 2.54% of the total expenditure of Directors salary, Directors traveling & conveyance expenses, legal & professional expenses and Auditors remuneration being attributable to Baddi unit - partly in favour of assessee. Disallowance & capitalizing interest - Held that - The said land was claimed to be business asset of the assessee and was declared in the schedule of fixed asset at Sr.No.1. The total investment in the land reflected by the assessee was at ₹ 2.12 crores. In addition , during the year under consideration the reserve surplus of assessee company had increased from ₹ 4.81 crores to ₹ 8. 39 crores implying there by generation of funds by the assessee company itself out of its business activities. As AO has failed to refer to any borrowed funds utilized for the purposes of investment in the said fixed asset no disallowance warranted - in favour of assessee. Freight in and freight out payment - non deduction of TDS - Held that - As decided in Merilyn Shipping & Transports Versus ACIT, Range-1, Visakhapatnam 2012 (4) TMI 290 - ITAT VISAKHAPATNAM that where the amount payable to the payee has been paid during the year under consideration itself and no amount is payable at the close of the year, no disallowance is warranted under section 40(a)(ia) of the Act for non- deduction of tax at source. As in present case the total amount on account of freight has been paid during the year itself and nothing is payable at the close of the year; consequently no disallowance is warranted - in favour of assessee. Interest free loans and advance given to related party - Held that - Though the plea of the assessee before the authorities below was that the advances made to the said parties were not loan accounts and the assessee was having purchase/sale transactions with these concerns during the year under consideration, the CIT (Appeals) had allowed the claim of the assessee both on account of availability of funds with the assessee and also the non-consideration of the entries debited to the account of M/s Shivam Industries. Thus the issue raised by the assessee needs to be relooked by the AO by considering the plea of the assessee and in view of the ratio laid down by the Hon ble Supreme Court in S.A. Builders Vs. CIT (2006 (12) TMI 82 - SUPREME COURT) that in case the advances between the assessee company and two concerns were on account of business transactions, no disallowance was warranted under section 36(1)(iii) - remit the issue back to the file of the AO for reconsideration - in favour of revenue by way of remand. Expenditure incurred for increase in Authorised Capital of the Company - Revenue v/s Capital - Held that - As decided in Brook Bond India Ltd. Vs. CIT 1997 (2) TMI 11 - SUPREME COURT though the increase in the capital results in expansion of the capital base of the company and incidentally that would help in the business of the company and may also help in the profit-making, the expenses incurred in that connection still retain the character of a capital expenditure - against assessee. Disallowance under section 14A r.w.r. 8D - Held that - As held in Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT (2010 (8) TMI 77 - BOMBAY HIGH COURT) that the provisions of Rule 8D will be held to be prospective applicable from assessment year 2008- 09 onwards no merit in the orders of the authorities in applying the provisions of Rule 8D for computing the disallowance under section 14A of the Act in the hands of the assessee relating to assessment year 2007- 08 - no merit in invoking the provisions of section 14A of the Act in assessment year 2008 - 09 where the income from the said investment in SBI Mutual Funds has been offered to tax. no merit in invoking the provisions of section 14A of the Act in assessment year 2008 - 09 where the income from the said investment in SBI Mutual Funds has been offered to tax. - in favour of assessee. Construction of building on lease hold land - Disallowance of expenditure - Held that - We are in conformity with the orders of the authorities below that the said expenditure incurred by the assessee is capital expenditure and the assessee is entitled to the claim of depreciation on the said assets. Reliance placed by the assessee on the ratio laid down in CIT Vs. Hi Line Pens (P) Ltd. 2008 (9) TMI 25 - HIGH COURT DELHI is misplaced as there Court had allowed the claim of the assessee on account of expenditure on repairs and renovation of rented premises, whereas in the present facts of the case before us, the assessee had incurred the said expenditure on the construction of the building itself from which it had carried on its business in the later period - against assessee. Expenditure on Air Conditioners and coolers and mobile phones - disallowance - Held that - The above said expenditure incurred by the assessee is purely capital expenditure and is not to be allowed as revenue expenditure, though the assessee is entitled to the claim of depreciation on the said asset - against assessee. Expenditure on modification of premises - Held that - As the assessee failed to produce bills in respect of the said expenditure no merit in the claim of the assessee - against assessee. Addition invoking provisions section 36(1)(iii) - Held that - The issue has not been considered by the authorities below in proper perspective and the addition has been made merely because the loan had been raised by the assessee company. The finding of the AO in this regard that the amount has been invested in the land account, does not come out from the documents filed by assessee. In the interest of justice the issue is to be restored back to the file of the AO to decide the same de - novo - in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Disallowance of Employees' Contribution to PF and ESI
2. Computation of Deduction under Section 80IC
3. Disallowance under Section 36(1)(iii)
4. Disallowance under Section 14A
5. Classification of Expenditure as Capital or Revenue
6. Applicability of TDS Provisions under Section 194C
7. Interest-Free Loans and Advances to Related Parties

Issue-wise Detailed Analysis:

1. Disallowance of Employees' Contribution to PF and ESI:
The assessee contested the disallowance of Rs. 1,23,327/- for late payment of employees' contribution to PF and ESI. The CIT (Appeals) allowed payments made within the grace period but upheld the disallowance for one payment made beyond the grace period. The Tribunal referenced the jurisdictional High Court ruling in CIT Vs. Nuchem Ltd., which allows deductions if payments are made before the due date of filing the return. The Tribunal directed the deletion of the disallowance and upheld the CIT (Appeals) decision for payments within the grace period, dismissing the Revenue's appeal on this ground.

2. Computation of Deduction under Section 80IC:
The assessee's claim for deduction under Section 80IC was partly disallowed due to improper allocation of expenses between the head office and the Baddi unit. The Tribunal noted that separate books were maintained for the Baddi unit, and the profits were computed based on predetermined transfer prices. The Tribunal directed the exclusion of certain head office expenses from the allocation but allowed the allocation of Directors' salary, traveling expenses, legal and professional expenses, and auditors' remuneration. The Tribunal instructed the Assessing Officer to recompute the deduction accordingly.

3. Disallowance under Section 36(1)(iii):
The Revenue's appeal against the deletion of disallowance for interest on borrowed funds used for purchasing land was dismissed. The Tribunal found no nexus between the borrowed funds and the purchase of land, noting sufficient self-generated funds by the assessee. The Tribunal upheld the CIT (Appeals) decision, dismissing the Revenue's ground.

4. Disallowance under Section 14A:
The assessee's appeal against the disallowance under Section 14A was allowed. The Tribunal held that Rule 8D could not be applied retrospectively for the assessment year 2007-08, and no administrative expenses were incurred for the short-term investment in SBI Mutual Funds. The Revenue's appeal on this ground was dismissed. For the assessment year 2008-09, the Tribunal found no merit in invoking Section 14A as the income from the investment was offered to tax.

5. Classification of Expenditure as Capital or Revenue:
The assessee's claim for revenue expenditure on constructing a building on leased land and other items was disallowed as capital expenditure. The Tribunal upheld this classification, allowing depreciation on the assets. The Tribunal dismissed the assessee's claim for revenue treatment of expenses on electrical equipment, office equipment, and modifications to premises, affirming the Assessing Officer's decision.

6. Applicability of TDS Provisions under Section 194C:
The Revenue's appeal on the non-deduction of TDS on freight payments was dismissed. The Tribunal noted that the payments to individual truck owners did not exceed Rs. 50,000/- annually, and the Special Bench ruling in ACIT Vs. Merilyn Shipping & Transports supported no disallowance under Section 40(a)(ia) if amounts were paid during the year.

7. Interest-Free Loans and Advances to Related Parties:
The Tribunal remitted the issue of interest-free loans to sister concerns back to the Assessing Officer for re-examination, considering the business transactions and the Supreme Court ruling in S.A. Builders Vs. CIT. The Tribunal directed the Assessing Officer to verify the business nature of transactions and allow credit for purchase/sale entries in the accounts.

Conclusion:
The Tribunal provided a detailed analysis and directions for each issue, ensuring compliance with legal precedents and proper allocation of expenses. The appeals were partly allowed or dismissed based on the merits of each case, with specific instructions for recomputation and re-examination by the Assessing Officer where necessary.