2014 (10) TMI 661 - HC - Income Tax

Unclaimed credit balances excluded but included in part of book profits unilateral action by the assessee in writing back a liability - addition u/s 41(1) - Held that - The tribunal proceeded on the assumption the appellate commissioner has recorded a finding of fact after verification of the materials that these amounts were already included in sales turnover of respective years and suffered tax - The Assessing Authority asserts that no records were produced before it - No records were produced before the Appellate Authority also. Both the Appellate Authorities have not looked into the records - The Assessing Authority did not look into the records because the records were not produced before it - the findings recorded by the Appellate Authorities is based on no evidence and it cannot be sustained - matter remanded back for reconsideration. Payment made to perfect its title and the right to manufacture IMFL Capital or revenue in nature - Held that - This unit run by SDPL was running under loss - It was taken on lease by them from the sister concern of the assessee - Then the assessee granted the licence to manufacture the assessee s products - It is properly attributable to capital and capital expenditure - It is not a case where the advantage consists merely in facilitating the assessee s trading operations or enabling the management and conduct the assessee s business to be carried on more efficiently or more profitably - It is not the expenditure which is incurred to improve the business of the concern or spend for its expansion of its business or for substantial replacement of its equipment - This amount is paid to regain the profit making unit which had gone out of the hand of the assessee and the expenditure incurred in regaining this profit company unit is in the nature of a capital expenditure and not the revenue expenditure - the Appellate Authorities were not justified in recording a finding to the contrary solely based on the judgments referred by them when those judgments expressly stated in every case which should matter and only in that context the law has to be applied Decided in favour of revenue.

Summary

Issues Involved:

1. Taxability of unclaimed credit balances under Section 41(1) of the Income Tax Act.
2. Nature of payment for lease foreclosure compensation - whether it is capital or revenue expenditure.
3. Allowability of depreciation on unused aircrafts.

Detailed Analysis:

Issue 1: Taxability of Unclaimed Credit Balances

The assessee company included Rs. 445.75 lakhs as unclaimed credit balances in its book profits but later excluded this amount in the statement of income, claiming exemption under several judgments. The Assessing Authority disallowed this exclusion, asserting that the assessee failed to match invoice particulars to cheque receipt particulars, thus not proving that the amounts written back were already offered to tax in earlier years. The Appellate Authority and Tribunal, however, relied on the Supreme Court decision in Kesaria Tea Co. Ltd. (254 ITR 434), holding that a unilateral action by the assessee in writing back a liability does not amount to enjoying a benefit to be taxed under Section 41(1). The Tribunal upheld the CIT(A)'s finding that these amounts were already included in sales turnover of respective years and suffered tax.

Upon review, the High Court found that neither the Appellate Authority nor the Tribunal verified the records to substantiate the assessee's claim. Consequently, the High Court set aside the orders of all three authorities and remanded the matter back to the Assessing Authority, allowing the assessee to produce necessary records to prove their claim.

Issue 2: Nature of Lease Foreclosure Compensation

The assessee paid Rs. 5.31 crores as compensation to SDPL for regaining a distillery unit. The Assessing Authority treated this payment as capital expenditure, asserting that it was paid to perfect the title and regain business advantage. The Appellate Authority and Tribunal, however, classified it as revenue expenditure, reasoning that the payment was for earning profit and did not result in acquiring any capital asset.

The High Court referred to various judgments, including Bikaner Gypsums Limited (53 Taxman 279) and Empire Jute Company Limited (124 ITR 1), which emphasize that the nature of the expenditure - whether capital or revenue - depends on the facts and circumstances of each case. The Court observed that the compensation was paid to regain a profit-making unit, which had gone out of the assessee's control. This expenditure was for acquiring an asset and an advantage for enduring benefit, thus attributing it to capital expenditure. The High Court concluded that the Appellate Authorities erred in treating it as revenue expenditure and ruled in favor of the revenue.

Issue 3: Depreciation on Unused Aircrafts

The earlier orders regarding the depreciation on unused aircrafts were set aside, and the matter was remanded back to the Assessing Authority for fresh consideration. The High Court noted that the impugned order relied on decisions that were already set aside, necessitating a fresh evaluation in accordance with the law.

Conclusion:

The High Court remanded the issues of unclaimed credit balances and depreciation on unused aircrafts back to the Assessing Authority for fresh consideration, while ruling that the payment of Rs. 5.31 crores as lease foreclosure compensation is capital expenditure. The judgment underscores the importance of factual verification and adherence to established legal principles in determining the nature of expenditures for tax purposes.