2012 (12) TMI 869 - HC - Income Tax

Appointment of field organizers - revenue treated it as establishment of sole selling agency system - whether a business expenditure? - Held that - The assessee created a network of field/sales organizers who rendered specific services under agreements entered into with them. This was after the sale of cement was decontrolled. As AO has neither doubted the genuineness of the payments nor held that the field organizers did not render any services as per the agreements it follows that the expenditure was rightly allowed by the CIT (Appeals) as business expenditure and his decision was rightly affirmed by the Tribunal. They cannot be called sole-selling agents within the meaning of Section 294 of the Companies Act 1956 also confirmed by a letter dated 10.11.1989 issued by the Department of Company Affairs Government of India to the assessee - in favour of the assessee. Deposits received to be treated as secured loans within the meaning of section 40A(8)(b)(1) - Held that - As decided in L.G.Balakrishnan & Bros. Ltd. Vs. CIT 1998 (4) TMI 16 - MADRAS HIGH COURT & Super Spg. Mills. Ltd. Versus Commissioner of Income-Tax. 2002 (7) TMI 8 - MADRAS HIGH COURT fixed deposits secured by a floating charge on specific assets of the company amounts to secured fixed deposits and therefore the interest paid on them cannot be disallowed to the extent of 15% under Section 40A(8) - They are therefore secured loans and interest paid on them is allowable in full under Section 36(1)(iii) without being regulated by Section 40A(8) read with Explanation (b)(i) - in favour of the assessee. Puja expenses - ITAT allowed the expenditure as business expenditure - Held that - The Tribunal has taken the correct view having regard to the inclusive nature of the expression for the purpose of the business appearing in Section 37(1) and as explained by the Supreme Court in the case of CIT v. Malayalam Plantations Ltd. (1964 (4) TMI 9 - SUPREME COURT) - in favour of the assessee. Retainership paid to tax consultant - whether covered u/s 80VV - Held that - The retairnership paid to Advocate was not in connection with income tax proceedings but for general advice relating to other laws thus the provisions of Section 80VV are not attracted. The Section as it stood at the relevant time was applicable only in respect of the expenditure incurred in pursuing income tax assessment proceedings or proceedings before the authorities under the Act. It did not apply to retainership fees paid to consultants or advocates - in favour of the assessee. Depreciation on water distribution system - whether is entitled for depreciation at the rate of plant and machinery or it is to be taken as part of the building for the purpose of depreciation - telephone exchange system - whether it is an office appliance which was entitled to investment allowance additional depreciation and extra shift depreciation allowance - Held that - The assessment year involved is 1985-86 thus the matter is more than 25 years old & after such a long lapse of time even if lesser rate of depreciation is allowable on the assets as claimed by the revenue the whole exercise would only be academic therefore return the reference of these two questions unanswered.

Summary

Issues Involved:
1. Whether the field organizers' remuneration was rightly allowed as a business expenditure?
2. Whether the interest on fixed deposits secured by a floating charge is disallowable under Section 40A(8)?
3. Whether expenses incurred on maintenance and puja of the colony temple are allowable as business expenditure?
4. Whether retainership fee paid to an advocate is disallowable under Section 80VV?
5. Whether the water distribution system and telephone exchange system are entitled to specific depreciation rates?

Analysis:

Issue 1: Field Organizers' Remuneration
The assessing officer disallowed the claim for remuneration to field organizers, but the CIT(Appeals) allowed it as a business expenditure. The Tribunal affirmed the decision based on the factual findings that the organizers contributed to the business activities. The letter from the Department of Company Affairs supported the claim, concluding in favor of the assessee. The court upheld the Tribunal's decision, ruling in favor of the assessee.

Issue 2: Disallowance of Interest on Fixed Deposits
The assessing officer disallowed a portion of the interest on fixed deposits under Section 40A(8). However, the CIT(Appeals) and Tribunal held that secured fixed deposits are not subject to disallowance. Citing judgments from the Madras High Court, the court agreed with the Tribunal's decision, ruling in favor of the assessee.

Issue 3: Expenses on Maintenance and Puja
Expenses on maintenance and puja of the colony temple were allowed as business expenditure by the CIT(Appeals) and affirmed by the Tribunal. The court concurred, citing the inclusive nature of "for the purpose of the business" under Section 37(1) and relevant case law.

Issue 4: Disallowance of Retainership Fee
The assessing officer sought to disallow the retainership fee under Section 80VV, but the CIT(Appeals) and Tribunal ruled in favor of the assessee. The court upheld this decision, emphasizing that the fee was for general advice, not related to income tax proceedings.

Issue 5 & 6: Depreciation on Assets
Regarding depreciation rates for the water distribution system and telephone exchange system, the court noted the assets' age and the impracticality of reevaluation. As a result, the court returned these questions unanswered, considering the academic nature of the exercise due to the long period elapsed.

In conclusion, the court ruled in favor of the assessee on the first four issues, while returning the last two questions unanswered due to the assets' age and the lack of practical significance in reevaluating depreciation rates.