2012 (12) TMI 238 - AT - Income Tax

Disallowance u/s 40(a)(ia) - TDS u/s 194H - Assessee has paid brokerage and sales promotion expenses without deducted TDS Held that - Following the decision in case of Merilyn Shipping & Transports (2012 (4) TMI 290 - ITAT VISAKHAPATNAM) held that disallowance u/s 40a(ia) can be made only when the amount is payable as on 31st March of every year and it cannot be invoked to disallow expenditure which had actually been paid during the previous year without TDS. To verify the same fact issue remand back to AO Revenue or capital expenditure - Refurbishment of showrooms debited to Renovation and repairs AO argued that spent for new show-rooms and the payments include interior and exterior works, furniture, Mannequins, racks, light fittings, partitions etc., which is going to provide the assessee benefit of enduring nature. Whether setting up a new showroom would amount to starting a new business or is it only an expansion of the existing business - Assessee is already in the business of retail trading of Reebok footwear and shoes In two different locations the assessee would be carrying on the business of retail trading in Reebok shoes and footwear Held that - As the goods in which the assessee is trading are one and the same, merely by opening new showrooms it cannot be said that the assessee is starting a new business. Whether the expenditure on civil and electrical works incurred in leasehold premises would fall in the capital field Held that - Lease is for a period of 4 years only and the assessee was to pay for lease rental as well interest-free security deposit for the lease and also that the assessee is required to incur the expenditure for interior and exterior works for carrying on the business as per brand specifications. Therefore, it cannot be said that the assessee is deriving an enduring benefit nor can it be said that any capital asset has been created in favour of the assessee. Expenditure incurred is revenue in nature. In favour of assessee Expenditure on Keyman insurance policy - Partners of firm - AO held that as these partners are not employees of the firm Held that - As the partners are connected with the business of the assessee and therefore are covered by the second part of the meaning given in the Explanation to Sec.10(10D). the premium paid on the Keyman insurance policies taken by the assessee on the life of its partners is allowable as expenditure. In favour of assessee

Issues Involved:
1. Disallowance of expenditure on refurbishment of showrooms as capital expenditure.
2. Allowance of only 50% depreciation on the impugned expenditure.
3. Disallowance of expenditure on the purchase of Keyman insurance policies.
4. Disallowance of expenditure on sales promotion.
5. Disallowance of expenditure on brokerage under section 40(a)(ia) for want of deduction of tax at source under section 194H.
6. Levy of interest under sections 234B and 234C.

Detailed Analysis:

1. Disallowance of expenditure on refurbishment of showrooms as capital expenditure:
The assessee, a partnership firm engaged in retail trading of Reebok Footwear, incurred expenses on new showrooms and claimed these as revenue expenditure. The Assessing Officer (AO) treated the expenditure as capital, arguing it provided an enduring benefit and was for new showrooms. The CIT(A) partially upheld this, treating some expenses as capital and others as revenue. The Tribunal found that opening new showrooms was an expansion of existing business, not a new business. It held that expenditure on leasehold premises, even if providing enduring benefit, does not create a capital asset in favor of the assessee. Thus, the expenditure was deemed revenue in nature.

2. Allowance of only 50% depreciation on the impugned expenditure:
Since the Tribunal allowed the expenditure on refurbishment as revenue in nature, there was no need to adjudicate the issue of depreciation.

3. Disallowance of expenditure on the purchase of Keyman insurance policies:
The AO disallowed the expenditure on Keyman insurance policies for partners, stating they were not employees. The Tribunal noted that under section 10(10D) of the Act, Keyman insurance includes policies on individuals connected with the business. The partners were connected with the business, thus the expenditure was allowable. This was supported by precedent and a relevant circular.

4. Disallowance of expenditure on sales promotion:
The Tribunal found that the issue of disallowance under section 40(a)(ia) for non-deduction of tax at source was covered by the Special Bench decision in Merilyn Shipping & Transports. Disallowance under section 40(a)(ia) applies only if the amount is payable as of 31st March, not if paid during the year. The issue was remanded to the AO to verify the payment status.

5. Disallowance of expenditure on brokerage under section 40(a)(ia) for want of deduction of tax at source under section 194H:
Similar to the sales promotion expenses, the Tribunal remanded the issue to the AO to verify if the amounts were paid during the year. If not payable as of 31st March, section 40(a)(ia) disallowance does not apply.

6. Levy of interest under sections 234B and 234C:
The Tribunal noted that the levy of interest under sections 234B and 234C is consequential. The AO was directed to provide consequential relief based on the Tribunal's findings.

Conclusion:
The Tribunal allowed the appeal partly, holding the refurbishment expenditure as revenue, allowing the Keyman insurance policy expenditure, and remanding issues related to section 40(a)(ia) disallowances for verification. The levy of interest was directed to be consequentially adjusted.

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