2013 (5) TMI 720 - AT - Income Tax

Disallowance of expenditure incurred on telephones at guest house - Held that - CIT(A) confirmed the addition following the decision of his predecessor for earlier assessment year i.e. 1994-95 following the decision of Mumbai Bench in the case of M/s. Hindustan Lever Ltd Vs IAC 1996 (3) TMI 161 - ITAT BOMBAY-A - Against assessee. Disallowance of Community Welfare and Rural Development expenditure - Held that - As decided in assessee s own case relating to A.Y. 1990-91 wherein the Tribunal on the basis of the judgement of S.A. Builders Ltd. Vs CIT 2006 (12) TMI 82 - SUPREME COURT has allowed the expenditure incurred by the assessee towards Community Welfare and Rural Development Programme in computing the taxable income. Thus following the decision of the Tribunal, AO is directed to allow the expenditure. In favour of assessee. Addition made in respect of Modvat credit - CIT(A) confirmed addition - Held that - As decided in assessee s own case followed the decision of the Hon ble Supreme Court in the case of Indo Nippon Chemicals Co. Ltd (2003 (1) TMI 8 - SUPREME Court) wherein held that Modvat credit on account of excise duty was not includable in the valuation of closing stock, thus direct the AO to delete the additions. In favour of assessee. Disallowance of third party commission paid during the previous year - Held that - Tribunal in assessee s own case has confirmed the disallowances made by the CIT(A) on the ground that if details of payment of commission are not coming from the assessee, such payments made in respect of contract awarded by Public Sector companies, to held as expenses incurred against public policy and therefore not entitle to be deducted in the light of the proviso to Sec. 37. Against assessee. Disallowance of pre-operative expenses - Held that - It is found that as per the accounting practice of the assessee company, pre-operative expenditure incurred by the unit were accounted for in capital work-in-progress in the books of the unit and subsequently transferred to the head office for the capitalization. Thus it is not in dispute that the expenditure of Jharsuguda Cement works, amount works out to Rs. 24,94,727/- which should have been claimed in A.Y. 1994-95. Ground is partly allowed. Disallowance of claim for depreciation in respect of certain assets given on lease by the assessee - Held that - As decided in I.C.D.S. Ltd. Vs CIT 2013 (1) TMI 344 - SUPREME COURT wherein the Apex Court has allowed depreciation in the case of sale and leased back transaction. In favour of assessee. Disallowance made u/s. 40A(3) - CIT(A) deleted the addition - Held that - A perusal of the explanation given by the assessee show that it is covered by the exception provided under Rule 6-DD(j) as it stood at that point of time. After considering the facts in the light of the exception provided under Rule 6-DD(j) prior to 1.12.1995,no reason to interfere with the findings of the CIT(A). Expenditure on construction of Jetty at Gujarat Cement Works Project - revenue v/s capital expenditure - Held that - Tribunal in assessee s own case in A.Y. 1994-95 has followed the decision of National Organic Industries ltd. 1993 (2) TMI 48 - BOMBAY High Court to allow the expenditure - against revenue. Unforeseeable losses in computation of value of work-in-progress amounting to Rs. 9.60 crores - Held that - After considering the facts and the submissions of the assessee in the light of accounting standard issued by the ICAI and the fact that the practice followed by the assessee from year to year consistently recognized by the Accounting Standard should be accepted - against revenue. Interest on borrowed funds for Hirmi Cement unit - Held that - The claim of the assessee that the Hirmi Cement plant formed a part of the existing cement business of the assessee company was accepted by the Ld. CIT(A) who rejected the view of the AO that these are pre-operative expenses need to accepted following the previous year assessments - against revenue. Disallowance of 25% of estate maintenance expenditure - Held that - Relying on the certificate issued by the auditors of the company, the ld. CIT(A) directed the AO to consider such certificates wherein it has been stated to confirm that no capital expenditure was included in the estate maintenance expenses and take a fresh decision in the matter of such adhoc disallowance. A perusal of the Paper Book shows that for A.Y. 1990-91 to 1993-94 the adhoc disallowance has been reduced to 10%. A similar view has been taken by the Tribunal in A.Y. 1994-95 which need to be followed in this year also - Partly in favour of revenue. Claim of depreciation on foreign exchange loss - Held that - The issue now stand covered in favour of the assessee by the decision of Woodward Governor India Pvt. Ltd 2009 (4) TMI 4 - SUPREME COURT wherein held that loss suffered by the assessee on account of fluctuation in the rate of foreign exchange has on the date of the balance sheet is an item of expenditure u/s. 37(1). Disallowance of Rs. 15,00,000/- out of Conference expenses treating the same as in the nature of entertainment expenditure - Assessee submitted that Conference expenses represents expenditure incurred on holding seminars and conferences of stockists and distributors and therefore deserves to be allowed - Held that - However, after the amendment to provisions of Sec. 37(2) such expense do have an element of entertainment, thus direct the AO to reduce the disallowance by 50%. The assessee will get a relief of Rs. 7,50,000/- accordingly.

Issues Involved:
1. Disallowance of telephone expenses at guest house.
2. Disallowance of community welfare and rural development expenses.
3. Addition regarding Modvat credit.
4. Disallowance of third-party commission.
5. Addition of excise duty liability.
6. Disallowance under Section 40A(9) for contribution to Marine Navy Officers Welfare Fund.
7. Disallowance of expenditure on prospecting and drilling for limestone.
8. Disallowance of pre-operative expenses.
9. Disallowance of mining development expenditure.
10. Disallowance of expenses on Nasik Glass Works.
11. Disallowance of depreciation on leased assets.
12. Deduction claims under Sections 80HHC and 80HHE.
13. Disallowance of depreciation on assets at cement works.
14. Fees for club memberships.
15. Disallowance under Section 40A(3) for cash payments.
16. Expenditure on construction of Jetty.
17. Claim for unforeseeable losses in work-in-progress.
18. Interest on borrowed funds for Hirmi Cement unit.
19. Expenses for laying power lines at Nasik Glass Works.
20. Depreciation on foreign exchange loss.
21. Conference expenses treated as entertainment expenditure.
22. Interest under Section 234B.

Detailed Analysis:

1. Disallowance of Telephone Expenses at Guest House:
The tribunal confirmed the disallowance of Rs. 27,78,984/- for telephone expenses at the guest house, following the precedent set in the assessee's own case for the earlier assessment year 1994-95.

2. Disallowance of Community Welfare and Rural Development Expenses:
The tribunal allowed the expenditure of Rs. 5,11,379/- incurred on community welfare and rural development, directing the AO to allow the expenditure based on the decision in the assessee's own case and the Supreme Court's judgment in S.A. Builders Ltd. vs. CIT.

3. Addition Regarding Modvat Credit:
The tribunal directed the AO to delete the addition of Rs. 195.28 lakhs concerning Modvat credit, following the Supreme Court's decision in Indo Nippon Chemicals Co. Ltd., which held that Modvat credit on excise duty was not includable in the valuation of closing stock.

4. Disallowance of Third-Party Commission:
The tribunal confirmed the disallowance of Rs. 1,66,07,391/- for third-party commission, as the payments were not substantiated and were considered expenses incurred against public policy under Section 37 of the Act.

5. Addition of Excise Duty Liability:
The tribunal directed the AO to delete the addition of Rs. 1.28 crores for excise duty liability on stock of finished goods in bonded warehouses, following the tribunal's earlier decisions in the assessee's own case.

6. Disallowance Under Section 40A(9):
The tribunal directed the AO to delete the addition of Rs. 2,83,200/- contributed to the Marine Navy Officers Welfare Fund, following the tribunal's earlier decisions in the assessee's case.

7. Disallowance of Expenditure on Prospecting and Drilling for Limestone:
The tribunal directed the AO to delete the addition of Rs. 25,44,500/-, as the expenditure was for setting up a new cement plant and was considered revenue in nature, following the tribunal's earlier decisions.

8. Disallowance of Pre-Operative Expenses:
The tribunal allowed the expenditure for Hirmi, Pipavav, and Tadpatri cement works, directing the AO to allow the claim, except for the Jharsuguda cement works expenses, which were prior period expenses.

9. Disallowance of Mining Development Expenditure:
The tribunal directed the AO to allow the expenditure of Rs. 4,62,15,906/-, as it was included in the pre-operative expenses claim.

10. Disallowance of Expenses on Nasik Glass Works:
The tribunal directed the AO to allow the expenses of Rs. 58.04 lakhs for Nasik Glass Works, as it was part of the existing business of the assessee company.

11. Disallowance of Depreciation on Leased Assets:
The tribunal directed the AO to allow the depreciation of Rs. 69.02 crores on leased assets, following the Supreme Court's decision in I.C.D.S. Ltd. vs. CIT.

12. Deduction Claims Under Sections 80HHC and 80HHE:
The tribunal allowed parts (a) and (b) of the claims, directing the AO to give relief accordingly. Part (c) was disallowed, following the Supreme Court's decision in Ipca Laboratories.

13. Disallowance of Depreciation on Assets at Cement Works:
The tribunal directed the AO to allow depreciation as claimed by the assessee, following the tribunal's earlier decisions in the assessee's case.

14. Fees for Club Memberships:
The tribunal dismissed the revenue's appeal, confirming the allowance of Rs. 41,26,745/- for club memberships, following the tribunal's earlier decisions.

15. Disallowance Under Section 40A(3):
The tribunal dismissed the revenue's appeal, confirming the deletion of disallowance of Rs. 5,07,281/- for cash payments, as the payments were covered by the exceptions under Rule 6-DD(j).

16. Expenditure on Construction of Jetty:
The tribunal dismissed the revenue's appeal, confirming the allowance of Rs. 25.86 crores as revenue expenditure, following the Supreme Court's decision in Associated Cement Co. Ltd.

17. Claim for Unforeseeable Losses in Work-in-Progress:
The tribunal dismissed the revenue's appeal, confirming the allowance of Rs. 9.60 crores for unforeseeable losses, following the tribunal's earlier decisions in the assessee's case.

18. Interest on Borrowed Funds for Hirmi Cement Unit:
The tribunal dismissed the revenue's appeal, confirming the allowance of Rs. 5,16,84,000/- for interest on borrowed funds, following the tribunal's earlier decisions in the assessee's case.

19. Expenses for Laying Power Lines at Nasik Glass Works:
The tribunal dismissed the revenue's appeal, confirming the allowance of Rs. 1.80 crores for laying power lines, following the tribunal's earlier decisions in the assessee's case.

20. Depreciation on Foreign Exchange Loss:
The tribunal dismissed the revenue's appeal, confirming the allowance of depreciation on foreign exchange loss, following the Supreme Court's decision in CIT vs. Woodward Governor India Pvt. Ltd.

21. Conference Expenses Treated as Entertainment Expenditure:
The tribunal directed the AO to reduce the disallowance by 50%, giving the assessee a relief of Rs. 7,50,000/-.

22. Interest Under Section 234B:
The tribunal directed the AO to charge interest as per law while giving appeal effect to the order.

Conclusion:
The appeals filed by the assessee for assessment years 1995-96 and 1996-97 were partly allowed, and the appeals filed by the revenue for the same assessment years were also partly allowed.

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