2012 (12) TMI 682 - AT - Income Tax

Rural development expenses - disallowance - Held that - Expenses incurred by the assessee on rural development in the villages near the assessee s factory are disallowed as these expenses have no nexus with the business carried on by the assessee - in favour of Revenue. Provision for contractual liability towards 3rd party manufacturers/ convertors in relation to excise duty - disallowance - Held that - Assessee was following mercantile system of accounting as per which contractual liability accrued on the date of its ascertainment and was allowable in the year of ascertainment. In this case, the liability was pending in dispute and therefore, the same had not been incurred during the year. Facts this year are identical and, therefore, respectfully following the decision of the Tribunal in the year 1994-95, order of CIT(A)disallowing the claim is confirmed - in favour of Revenue. Unexplained sale of milk fat - Held that - There was nothing on record found during the survey to show that the assessee had made sale outside the books of account. The milk fat was subject to excise duty and it was recorded in the excise register. The assessee had given detailed breakup of the cans. Even if the weight of each can was taken as same i.e. 50Kg. the total weight of fat on basis of production log sheet was 417476 Kg and as per excise register the same was at 470674 Kg - as on the days the discrepancy was noted, there was no mention of milk fat cans produced in the production log sheet. Order of CIT(A)set aside and addition made is deleted - in favour of assessee. Interest paid to the Income tax department - disallowance - Held that - Assessee had adjusted the interest paid against the interest received on refund. The interest paid to Income tax department is not allowable as deduction the view supported in the case of Dy. CIT vs. Sandvik Asia Ltd. 2011 (6) TMI 563 - ITAT, PUNE . Inclusion of Miscellaneous income sales tax and excise duty refund in the total turnover - Held that - Miscellaneous income which included trade discounts, miscellaneous sales, sales tax, excise duty etc. had to be included in the total turnover except the sales tax and excise duty which did not contain an element of turnover as decide in the case of CIT vs. Lakshmi Machine Works 2007 (11) TMI 29 - CESTAT, CHENNAI - order of CIT(A) is confirmed except in relation to sales tax and excise duty which will be excluded from the total turnover. Reduction of 90% of interest from profit of business while computing deduction u/s 80HHC - Held that - 90% of net interest income is required to be reduced after deducting expenses incurred having nexus with earning of interest income as held in M/s ACG Associated Capsules Pvt. Ltd. 2012 (2) TMI 101 - SUPREME COURT OF INDIA - issue restored to AO for working out 90% of net interest income after allowing opportunity of hearing to the assessee. Computation of Capital Gain - sale of land and building - Held that - Land and building has to be bifurcated for the purpose of computation of capital gain and since depreciation in some years has been allowed in respect of building portion, the capital gain in respect of building portion has to be computed as short term capital gain under section 50. The gain in respect of land portion has to be computed as long term capital gain as per method prescribed in the Act. Since assessee has invested the long term capital gain in NABARD Bonds, assessee would be entitled to deduction under section 54 EC even in respect of short term capital gain computed under section 50 in respect of building portion, if the same was held for more than three years - issue is thus restored to the file of AO. Disallowance of payment to consultants, gifts etc - Held that - Expenditure incurred wholly and exclusively in connection with the business or on commercial expediency. The assessee has included Rs.1.50 lacs for deduction u/s 35DDA which means the deduction has been claimed over a period of time whereas the same could have been claimed and allowed under section 37 wholly in the relevant year. Therefore, making the claim in respect of payment to consultant under section 35 DDA does not adversely impact the revenue - in favour of assessee. Disallowance of repairs/renovation to the building - Held that - Assessee has incurred an expenditure on redevelopment of Cadbury House and considering the smallness of the amount involved this could not be considered as expenditure on total renovation of the building therefore has to be allowed as expenditure on repair of the building. As regards canteen building, assessee had spent substantial amount of Rs.12,63,378/- on renovation of the building in assessment year 2001-02, thus considering the nature of building and substantial expenditure incurred it has to be considered as expenditure on total renovation and thus capital in nature & allowing depreciation of the same.

Summary

Issues Involved:

1. Disallowance of rural development expenses.
2. Disallowance of provision for contractual liability towards excise duty.
3. Addition due to sale of milk fat outside books of account.
4. Addition of interest paid to the Income Tax Department.
5. Inclusion of miscellaneous income in total turnover for section 80HHC.
6. Reduction of 90% of interest from profit of business for section 80HHC.
7. Computation of capital gain on sale of land and building.
8. Disallowance of payments related to VRS.
9. Disallowance of repairs to the building.
10. Levy of interest under section 234C.
11. Disallowance of garden maintenance expenditure.

Detailed Analysis:

1. Disallowance of Rural Development Expenses:
The first dispute concerns the disallowance of Rs.1,24,201/- spent on rural development near the assessee's factory. The AO disallowed these expenses due to lack of business nexus, and CIT(A) upheld the disallowance based on previous years' decisions. The Tribunal confirmed the disallowance, finding the facts identical to the earlier year.

2. Disallowance of Provision for Contractual Liability Towards Excise Duty:
The second dispute involves the disallowance of Rs.61,44,628/- as a provision for contractual liability towards third-party manufacturers for excise duty. The AO disallowed it following the decision in the earlier year, and CIT(A) confirmed it. The Tribunal upheld the disallowance, noting that the liability was pending in dispute and not incurred during the year, consistent with the decision in the assessment year 1994-95.

3. Addition Due to Sale of Milk Fat Outside Books of Account:
The third dispute is the addition of Rs.70,10,096/- for the sale of milk fat outside the books of account. The AO made the addition based on discrepancies noted during a survey, which CIT(A) confirmed. The Tribunal deleted the addition, finding no evidence of unaccounted sales outside the books, aligning with the decision in the assessment year 1998-99.

4. Addition of Interest Paid to Income Tax Department:
The fourth dispute concerns the addition of Rs.30,26,788/- paid as interest to the Income Tax Department. The AO disallowed the interest payment, and CIT(A) confirmed it. The Tribunal upheld the disallowance, referencing the Third Member decision in the case of Dy. CIT vs. Sandvik Asia Ltd., which supports the non-allowability of such interest as a deduction.

5. Inclusion of Miscellaneous Income in Total Turnover for Section 80HHC:
The fifth dispute involves the inclusion of miscellaneous income, including sales tax and excise duty refund, in the total turnover for computing deduction under section 80HHC. The AO included these receipts, and CIT(A) confirmed it. The Tribunal upheld the inclusion except for sales tax and excise duty, which should be excluded based on the Supreme Court judgment in CIT vs. Lakshmi Machine Works.

6. Reduction of 90% of Interest from Profit of Business for Section 80HHC:
The sixth dispute is about reducing 90% of interest from the profit of the business for section 80HHC. The AO excluded 90% of gross interest, confirmed by CIT(A). The Tribunal set aside the order, directing the AO to reduce 90% of net interest income, following the Supreme Court decision in ACG Associated Capsules Ltd.

7. Computation of Capital Gain on Sale of Land and Building:
The seventh dispute concerns the computation of capital gain on the sale of land and building. The AO treated the property as a composite unit and computed short-term capital gain under section 50, which CIT(A) confirmed. The Tribunal held that land and building should be bifurcated for capital gain computation, with land treated as a long-term capital gain and building as a short-term capital gain under section 50. The issue was restored to the AO for recomputation.

8. Disallowance of Payments Related to VRS:
The eighth dispute involves the disallowance of Rs.4,13,540/- related to VRS, including payments to consultants, gifts, and incentives. The AO disallowed the claim, confirmed by CIT(A). The Tribunal allowed the deduction for gifts paid to employees at the time of retirement and the consultant's fees, considering the latter as business expenditure under section 37.

9. Disallowance of Repairs to the Building:
The ninth dispute is the disallowance of Rs.18,61,490/- for repairs, including redevelopment, construction of a cycle stand, and renovation. The AO treated the expenditure as capital, confirmed by CIT(A). The Tribunal allowed the expenditure on redevelopment as revenue but upheld the capital treatment for the cycle stand and substantial renovation of the canteen building.

10. Levy of Interest Under Section 234C:
The tenth ground regarding the levy of interest under section 234C was not pressed during the hearing and was dismissed as not pressed.

11. Disallowance of Garden Maintenance Expenditure:
The eleventh ground concerning the disallowance of garden maintenance expenditure was also not pressed during the hearing and was dismissed as not pressed.

Conclusion:
The appeal was partly allowed, with specific issues being upheld or remanded for further consideration based on the Tribunal's detailed analysis and adherence to precedents and legal principles.