2013 (11) TMI 618 - HC - Income Tax

Deductibility of expenditure for community development u/s 37(1) - Charity or allowable expenditure Held that - Expenses contributed for religious functions, charitable institutions, social clubs and charity such as donating a borewell to the municipality, etc. would not fall within the expenditure contemplated under Section 37(1) of the Act - Expenditure towards the religious funds, charitable institutions, social clubs or for charity do not stand to the test of commercial expediency. In any case, the expenditure under these heads cannot be stated to be exclusively for the purposes of business of the respondent-assessee and to allow it. That apart, the respondent-assessee has failed to place any material, in support of their case so as to claim the aforementioned expenditure under this head as contemplated by Section 37(1) of the Act as being commercial expediency Decided in favor of Revenue. Nature of expenditure Capital expenditure or Revenue expenditure Claimed expenditure incurred by assessee for repairs and removal of machinery to make way for short mix plant installation as revenue expenditure Held that - Expenditure in not a revenue expenditure In the present case, case the machinery was only shifted within the same premises of the factory to make way for short mix plant installation. It is clear from the facts that shifting of the machinery was for installation of a new short mix plant. The expenditure incurred for installation of the new plant would not amount a revenue expenditure and that will have to be treated as capital expenditure. Expenditure incurred for removal of existing machinery to make way for installation thereof. The arrangement, i.e. shifting of old machinery to make way for installation of new machinery, may give the assessee an enduring benefit of better and more efficient production over a period of time. Thus, the expenditure incurred for removal of the existing machinery only to make way for installation of new machinery, therefore, cannot be allowed under Section 37(1) of the Act Decided in favor of Revenue. Deduction under Sections 80HHC and 80I of the IT Act Held that - No details were given about the new plant and machineries installed during the relevant assessment year. On the contrary it has accepted that the plant and machineries purchased were erected in the earlier year of assessment. If such plant and machineries were erected earlier to the present assessment year, those machineries cannot be considered as new machineries in order to claim deduction under Section 80HH & 80 I Assessee should have made out claim during assessment year when new plants and machineries purchased during relevant assessment year. When the assessee had purchased the new machineries in the earlier assessment year and has installed the same, such unit cannot be treated as new unit for the present assessment year. It was open to the respondent-assessee to establish their claim/case for seeking deduction of such huge amounts before the AO by producing/adducing materials/evidence in support thereof. For the relevant years, they did not either place any materials or adduce any evidence before the authorities below nor did they ask for any such opportunity at any point of time till the present appeals were argued before this Court for final disposal Decided in favor of Revenue. Bad-debt deduction u/s 36(1)(vii) Held that - Debt had become bad and they had written-off in the books of account. It is not in dispute that the books of account for the relevant year were placed before the Assessing Officer. Thus, it is clear that the Tribunal allowed to write off Rs.28,166/- as bad debt for the previous year on the basis of materials placed on record Decided against the Revenue. Deduction u/s 40A(9) of the Income tax act Held that - Donation given by the assessee would not be a donation/contribution contemplated by sub-section (9) of Section 40A of the Act. It cannot be stated that the assessee gave donation or contributed for setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act or other institution - Donation given by the asseesee for the purpose, as reflected in the forgoing paragraph, was wholly and exclusively for the welfare of its employees and also for carrying on business of the assessee more efficiently by having contended labour force - Donation is not covered under Section 40A(9) of the Act. Purchase of paintings is a revenue expenditure or not u/s 37(1) of the Income Tax Act Held that - Expenditure incurred by the assessee for atheistic purpose or for having better working environment cannot be treated as capital expenditure Decided against the Revenue. Depreciation on goodwill u/s 32(1) of the Income tax act Held that - Having regard to the intent of the legislature, goodwill was not covered for depreciation under Section 32 of the Act. The definition of actual cost under Section 43(1) of the Act cannot be read to cover goodwill as an asset for which the assessee had to pay and which can be termed as actual cost of the assets to the assessee. The Tribunal apportioned the cost of goodwill to various other assets acquired by the assessee thereby increasing the cost of other assets and allowing depreciation thereon, which is not legally sustainable Decided in favor of Revenue.

Summary

Issues Involved:

1. Revenue expenditure vs. capital expenditure for repair and removal of machinery.
2. Deduction under Sections 80HH and 80I for new industrial undertakings.
3. Allowability of provision for bad and doubtful debts.
4. Donations to Khandesh Education Society and applicability of Section 40A(9).
5. Revenue expenditure vs. capital expenditure for modification of buildings, office repairs, and purchase of paintings.
6. Allocation of goodwill to fixed assets for depreciation purposes.
7. Stock transfers at market price vs. cost price for deduction under Sections 80HH and 80I.
8. Inclusion of excise duty and sales tax in total turnover for deduction under Section 80HHC.
9. Allowability of community development expenses as business expenditure.

Detailed Analysis:

1. Revenue Expenditure vs. Capital Expenditure for Repair and Removal of Machinery:

The Tribunal allowed the expenditure of Rs.3,22,484/- for removal of machinery as revenue expenditure. However, the High Court found this unsustainable, citing the Supreme Court judgment in Sitalpur Sugar Works Ltd. The expenditure was deemed capital in nature because it provided enduring benefits and was not merely for carrying on the concern but for setting it up with greater advantages. Thus, the expenditure was not allowed under Section 37(1) of the IT Act.

2. Deduction under Sections 80HH and 80I for New Industrial Undertakings:

The Tribunal allowed deductions under Sections 80HH and 80I for the assessment years 1986-87 and 1987-88, assuming the establishment of a new industrial unit. However, the High Court reversed this, referencing its own judgment in ITA No.128/2007, which required specific evidence of new plant and machinery installation in the relevant assessment years. The assessee failed to provide such evidence, and the deductions were disallowed.

3. Allowability of Provision for Bad and Doubtful Debts:

The Tribunal allowed the deduction of Rs.28,166/- for bad debts, considering the debts written off in the books of accounts. The High Court upheld this, noting that the Tribunal's decision was based on the materials placed on record and the legal provisions applicable at the time.

4. Donations to Khandesh Education Society and Applicability of Section 40A(9):

The Tribunal allowed the deduction for donations made to Khandesh Education Society, viewing it as a welfare measure for employees. The High Court upheld this, finding that the donation was not covered under Section 40A(9) and was made for the welfare of employees, thus allowable as a business expenditure.

5. Revenue Expenditure vs. Capital Expenditure for Modification of Buildings, Office Repairs, and Purchase of Paintings:

The Tribunal treated the expenditure on paintings as revenue expenditure, enhancing the working environment. The High Court agreed, distinguishing this from capital expenditure and affirming that such aesthetic improvements were allowable as revenue expenditure.

6. Allocation of Goodwill to Fixed Assets for Depreciation Purposes:

The Tribunal allowed depreciation on goodwill by allocating it to other fixed assets. The High Court reversed this, noting that goodwill was not eligible for depreciation under Section 32 of the IT Act before the 1997 amendment. The Tribunal's apportionment of goodwill to other assets was deemed legally unsustainable.

7. Stock Transfers at Market Price vs. Cost Price for Deduction under Sections 80HH and 80I:

The High Court referred to its previous judgment, which ruled in favor of the assessee, allowing stock transfers to be valued at market price for deduction purposes. This was based on established legal precedents.

8. Inclusion of Excise Duty and Sales Tax in Total Turnover for Deduction under Section 80HHC:

The High Court followed the Supreme Court's judgment in Commissioner of Income Tax vs. Lakshmi Machine Works, ruling that excise duty and sales tax should not be included in the total turnover for computing deductions under Section 80HHC.

9. Allowability of Community Development Expenses as Business Expenditure:

The Tribunal allowed community development expenses, viewing them as incidental to business operations in a backward area. However, the High Court reversed this, finding that such expenses did not meet the criteria of commercial expediency under Section 37(1) and were more charitable in nature, thus not allowable as business expenditure.

Conclusion:

The High Court partly allowed the appeals, setting aside the Tribunal's findings on several issues and affirming the revenue's stance on others, particularly emphasizing the distinction between capital and revenue expenditures and the specific conditions for deductions under various sections of the IT Act.