2014 (2) TMI 935 - AT - Income Tax

Disallowance out of interest expenditure - Held that - Some business exigency was involved for the interest expenditure claimed - As observed by the A.O. certain manipulation by the assessee to reduce its taxable income cannot be ruled out - The disallowance at the rate of 25% made by the A.O. was excessive - To justify, the disallowance made out of interest expenditure has been restricted to the extent of 10% of the total interest expenditure claimed by the assessee - Partly allowed in favour of assessee. Electricity expenses of the offices - Held that - The burden is on the assessee to establish that the expenses claimed were wholly and exclusively for the purpose of business - The facts of the case require verification - The issue has been restored for fresh adjudication. Disallownace u/s 43B - Held that - The service tax in question was payable by the assessee for the financial year 2007-08 and as per the relevant Service Tax Rules, the same was payable after recovery from the receiver of the service - He submitted that such recovery was made by the assessee during the year under consideration and the service tax payable for financial year 2007-08 was duly paid on such recovery within the stipulated period - No such verification has been made either by the A.O. or by the ld. CIT(A), the matter should be restored to the file of the A.O. for such verification The issue has been restored for fresh adjudication. Expenditure incurred for protecting the ownership of hoardings Held that - The displaying of hoardings being the business of the assessee, the expenditure incurred for right to display is thus business right of the assessee If the expenditure incurred for protection of business rights, is revenue in nature If the expenditure is incurred for acquisition of right to display will fall in the definition of capital expenditure Relying upon the decision in the case of Dalmia Jain & Co. 1971 (7) TMI 2 - SUPREME Court - In deciding whether a particular expenditure is capital or revenue in nature, what the courts have to see is whether the expenditure in question was incurred to create any new asset or was incurred for maintaining the business of the company - If it is the former it is the capital expenditure; if it is the latter, it is the revenue expenditure - Distinction is to be made as to whether the expenditure is for creating, curing or completing the assessee s title to capital or for protecting the business The issue has been restored to the file of A.O. to make a distinction as to which of the expenditure was incurred by the assessee for protection of its right to display over a prominent or particular site and which of the expenses were incurred for acquisition of right to display on such sites.

Summary

Issues Involved:
1. Disallowance of interest expenditure.
2. Disallowance of electricity expenses.
3. Disallowance under Section 43B on account of service tax payable.
4. Treatment of expenditure for protecting the ownership of hoardings as capital expenditure.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenditure:
The first issue pertains to the addition of Rs. 162,243/- made by the A.O. and confirmed by the CIT(A) on account of disallowance out of interest expenditure. The assessee, a partnership firm engaged in exhibiting cinema slides and outdoor publicity, declared a loss of Rs. 70,432/- and claimed an interest expenditure of Rs. 6,48,973/-. The A.O. found that the assessee's major activities were with its group concerns, with substantial amounts receivable outstanding for a long period. The A.O. disallowed 25% of the interest expenditure, citing no business expediency in providing substantial credits to group concerns while operating on borrowed funds. The CIT(A) confirmed this disallowance based on a similar decision for A.Y. 2007-08. The Tribunal, following the decision for A.Y. 2007-08, restricted the disallowance to 10% of the total interest expenditure, emphasizing the rule of consistency and judicial discipline.

2. Disallowance of Electricity Expenses:
The second issue involves the disallowance of Rs. 2,61,467/- made by the A.O. and confirmed by the CIT(A) being 75% of the electricity expenses of the offices claimed to be used by the assessee firm for business activities. The Tribunal noted that a similar issue for A.Y. 2007-08 was restored to the A.O. for verification. Following this precedent, the Tribunal restored the issue to the A.O. for fresh consideration, directing the A.O. to verify the facts and decide the issue afresh as per the directions given for A.Y. 2007-08.

3. Disallowance under Section 43B on Account of Service Tax Payable:
The third issue relates to the disallowance of Rs. 5,87,582/- made by the A.O. and confirmed by the CIT(A) under Section 43B of the Income Tax Act on account of unpaid service tax. The A.O. noted that the opening balance of service tax payable was not paid by the assessee. The CIT(A) confirmed the disallowance, stating that the assessee failed to demonstrate which amounts were received and whether the amounts were routed through its P&L account. The Tribunal, acknowledging the assessee's contention that the service tax was payable after recovery from the receiver of the service, restored the issue to the A.O. for verification of the relevant details and fresh decision.

4. Treatment of Expenditure for Protecting the Ownership of Hoardings as Capital Expenditure:
The fourth issue involves the deletion by the CIT(A) of the addition of Rs. 75,79,500/- made by the A.O. treating the expenditure incurred for protecting the ownership of hoardings as capital expenditure. The Tribunal, referencing its decision for A.Y. 2007-08, distinguished between expenditure incurred for protecting business rights (revenue in nature) and acquiring new rights (capital in nature). The Tribunal restored the issue to the A.O. to differentiate between protection and acquisition expenses, treating the former as revenue expenditure and the latter as capital expenditure. The A.O. was directed to give the assessee an opportunity to present its case and submit necessary documents.

Conclusion:
Both the appeals of the assessee and the Revenue are treated as allowed for statistical purposes, with specific issues restored to the A.O. for fresh consideration and verification as per the directions provided. The Tribunal emphasized consistency, judicial discipline, and the necessity of proper verification in deciding these issues.