2014 (7) TMI 684 - AT - Income Tax

Unpaid leave encashment u/s 43B Held that - CIT(A) was rightly of the view that assessee did not pay leave encashment - by granting leave to employees, leave encashment provision cannot be claimed - disallowance can be made if payment is not made by the assessee till due date of filling return theses claims are allowable only on payment in the year in which payment is made, the same is not allowable since no payment was made during the - there was no infirmity in the order Decided against Assessee. Prior period expenses Held that - The entry for recording interest accrual based on debit note recorded in financial books on 30/4/2005, being the extended financial year under company law last year, the reversal of the said on 31/3/2006 was treated as prior period in the 11 months financial accounts under the company law for FY 05-06 - submissions of the assessee with regard to the reversal of entry is not decided by the CIT(A) - CIT(A) has allowed the claim of bad debt of the assessee thus, the matter is remitted back tot the CIT(A) for fresh consideration Decided in favour of Assessee. Expenses for scientific research u/s 35(2AB) Held that - The term in-house used in section 35(2AB) must be viewed in the context of which it has been used. If by utilizing the staff or resources of an organization, research is conducted within the organization rather than through utilization of external use of resources or staff, it can be stated to be an in-house research - The decision in CIT vs. Cadila Healthcare Ltd. 2013 (3) TMI 539 - GUJARAT HIGH COURT followed the AO is directed to allow the claim of assessee Decided in favour of Assessee. Claim of interest Interest considered as diverted for non-business purpose Held that - The addition on the basis that the advances given have been continuing for a long period of time - the decision in Commissioner of Income-tax Versus Raghuvir Synthetics Ltd. 2013 (7) TMI 806 - GUJARAT HIGH COURT followed - no businessman can be compelled to maximize its profit - The income-tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act it has to see that the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits Decided in favour of Assessee. Disallowance u/s 14A r.w Rule 8D Held that - AO has not given any finding with respect to the expenditure incurred on administrative head by the assessee - no disallowance with respect to administrative expenses can be made - The decision in Torrent Power Ltd. vs. DCIT 2012 (11) TMI 59 - ITAT, AHMEDABAD followed - the AO is directed to delete the addition made on account of disallowance of administrative expenses - the issue of disallowance of interest expenses is being restored back to the file of CIT(A) to give a clear finding as to how the provisions of section 14A of the Act would be applicable under the facts when the investments are vested unto the assessee-company by way of amalgamation and arrangement approved by the Hon ble Gujarat High Court Decided in favour of Assessee. Depreciation of building of plant and machinery Held that - The assessee has produced the evidence of electricity power consumption that goes to show that the Plant was running and this fact is not rebutted by placing any contrary evidence on record by the Revenue that the electricity so consumed for any other purpose the decision in ACIT vs. Ashima Syntex Ltd. 2000 (8) TMI 22 - GUJARAT High Court followed - the AO is directed to allow the depreciation as claimed by the assessee Decided in favour of Assessee. Calculation of adjusted book profit - Provision for doubtful debt and dimunition in the value of investment Held that - The provision of bad and doubtful debts has been reduced from the gross debtors and the net sundry debtors are shown as asset in the balance sheet - the provision for bad and doubtful debts cannot be termed as a provision for liability but is in the nature of diminution in the value of asset - the decision in ACIT vs. Vodafone Essar Gujarat Ltd. 2012 (6) TMI 415 - ITAT, Ahmedabad followed Decided in favour of Assessee. Reduction in Prior paid expenses Computation of taxable income u/s 115JA of the Act Held that - The amount was reduced by the assessee passed on after approval of the company in its AGM, which was also accepted by the auditors - the AO could not have made any further adjustment dehors the provisions of Section 115JA of the Act The decision in CIT vs. Meghmani Organics Ltd. 2014 (7) TMI 673 - GUJARAT HIGH COURT followed - decided in favour of Assessee. Short deduction of TDS u/s 40(a) Held that - Provision of section 40(a)(ia) of the Act has two limbs one is where, inter alia, assessee has to deduct tax and the second where after deducting tax, inter alia, the assessee has to pay into Government Account - The decision in CIT vs. M/s S.K.Tekriwal 2012 (12) TMI 873 - CALCUTTA HIGH COURT followed - with regard to the shortfall, it cannot be assumed that there is a default as the deduction is not as required by or under the Act, but the facts is that this expression, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction has not been paid on or before the due date specified in sub-section (1) of section 139 - it is not the case of non-deduction of tax or after deduction of the tax the same is not deposited in the Government Account, but it is a case where there is a shortfall in deduction of tax Decided against Revenue. Product registration expenses Capital expenses or not Held that - It cannot be gainsaid that the expenses for garden had nexus with business activity - It can well be treated for business purpose and can be claimed as revenue expenditure - the expenses for foreign country registration was for business purpose only, because the same helped the assessee in marketing its products in the foreign countries and promoting the sales - The decision in Commissioner of Income Tax vs. Torrent Pharmaceuticals Ltd. 2013 (4) TMI 570 - GUJARAT HIGH COURT - thus, the order of the CIT(A) is upheld Decided against Revenue.

Summary

Issues Involved:
1. Disallowance of donation under section 80G.
2. Disallowance towards late payment of ESI & PF.
3. Disallowance of unpaid leave encashment under section 43B.
4. Disallowance of prior period expenses.
5. Disallowance of expenses for scientific research under section 35(2AB).
6. Disallowance of interest claimed as diverted for non-business purposes.
7. Disallowance under section 14A.
8. Disallowance of depreciation on building and plant and machinery.
9. Addition in calculation of adjusted book profit for MAT.
10. Addition of prior period expenses in book profit for MAT.
11. Disallowance under section 14A in calculation of adjusted book profit for MAT.
12. Deletion of addition due to short deduction of TDS.
13. Deletion of disallowance of product registration expenses treated as capital expenditure.
14. Restriction of disallowance of interest to average cost of fund.

Detailed Analysis:

1. Disallowance of Donation under Section 80G:
The assessee's appeal regarding the disallowance of Rs. 1,02,575 towards donation under section 80G was rejected as no evidence was provided to support the donation.

2. Disallowance towards Late Payment of ESI & PF:
The issue was restored to the AO for verification to determine if the payment was made within the grace period, referencing the judgment in CIT vs. Amoli Organics (P.) Ltd.

3. Disallowance of Unpaid Leave Encashment under Section 43B:
The disallowance of Rs. 2,04,973 was upheld as the expenditure was not incurred during the year and leave encashment is covered under section 43B.

4. Disallowance of Prior Period Expenses:
The issue was restored to the CIT(A) for fresh decision after verifying the claim that the book entry was reversed. The CIT(A) had not given a finding on the assessee's submission regarding the reversal of entry.

5. Disallowance of Expenses for Scientific Research under Section 35(2AB):
The disallowance of Rs. 3,59,500 was deleted following the judgment in CIT vs. Cadila Healthcare Ltd., which allowed weighted deduction for expenses incurred outside the approved R&D facility.

6. Disallowance of Interest Claimed as Diverted for Non-Business Purposes:
The disallowance of Rs. 17,06,566 was deleted, referencing the judgment in CIT vs. Raghuvir Synthetics Ltd., which held that advances made for business purposes should not be disallowed.

7. Disallowance under Section 14A:
The application of Rule 8D was found unjustified for AY 2006-07 as it is applicable from AY 2008-09. The issue was restored to the CIT(A) for a fresh decision regarding the investments vested by amalgamation. The disallowance of administrative expenses was deleted.

8. Disallowance of Depreciation on Building and Plant and Machinery:
The disallowance of Rs. 28,77,600 was deleted, following the judgment in ACIT vs. Ashima Syntex Ltd., which held that commencement of production entitles the assessee to depreciation.

9. Addition in Calculation of Adjusted Book Profit for MAT:
The addition of Rs. 52,59,803 was deleted, following the judgment in ACIT vs. Vodafone Essar Gujarat Ltd., which held that provision for bad and doubtful debts is in the nature of diminution in the value of asset.

10. Addition of Prior Period Expenses in Book Profit for MAT:
The addition of Rs. 23,27,520 was deleted, following the judgment in CIT vs. Meghmani Organics Ltd., which held that the AO could not vary the profit and loss account duly audited and prepared in terms of the Companies Act.

11. Disallowance under Section 14A in Calculation of Adjusted Book Profit for MAT:
The disallowance of Rs. 64,13,532 was deleted, following the judgment in Commissioner of Income Tax vs. Gujarat State Fertilizers & Chemicals Ltd., which held that the AO could not make adjustments to the audited profit and loss account.

12. Deletion of Addition Due to Short Deduction of TDS:
The deletion of Rs. 6,74,282 due to short deduction of TDS was upheld, following the judgment in CIT vs. S.K. Tekriwal, which held that shortfall in deduction does not warrant disallowance under section 40(a)(ia).

13. Deletion of Disallowance of Product Registration Expenses Treated as Capital Expenditure:
The deletion of Rs. 1,43,79,597 was upheld, following the judgment in Commissioner of Income Tax vs. Torrent Pharmaceuticals Ltd., which treated such expenses as revenue expenses.

14. Restriction of Disallowance of Interest to Average Cost of Fund:
The restriction of disallowance to 4% of the average cost of fund was upheld, as the issue was decided in favor of the assessee in the appeal.

Conclusion:
The appeal of the assessee was partly allowed for statistical purposes, whereas the appeal of the Revenue was dismissed.