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2014 (11) TMI 217 - AT - Income TaxManagement consultancy fees disallowed Admission of additional evidences - Held that - Assessee has made the payment to GMM, in pursuance of management service agreement dated 24.04.2003, in terms of which the GMM would be providing services like financial, human resources, information, legal services etc. to the assessee company - The invoices have also been raised which has been placed in the paper book - the assessee has filed additional evidences in support the services rendered raised by the GMM to the assessee - These evidences go to the root of the issue, therefore, they are admitted and the matter is remitted back to the AO for examination of the evidences Decided in favour of assessee. Loss on sale of assets disallowed Held that - In the statement showing computation of taxable income for AY 2003-04 filed along with return of income, the assessee had started the computation from net loss as per P&L account and thereafter has added the loss on sale of R&D assets twice - Thus the assessee has added back the loss amount at ₹ 72,60,952/-. Out of the said amount, the assessee has deducted only ₹ 36,30,476/-, which inter alia means that finally no deduction on account of loss on R&D assets have been made - the contention of the assessee appears to be prima facie correct that the assessee has not claimed any loss on sale of R&D assets in the computation of income - Hence there is no question of disallowance the AO is directed to verify the computation of income Decided partly in favour of assessee. Depreciation in plant and machinery Held that - The assessee had provided plant and machinery, equipment etc. to co-packers for the work of process/packing of flour and other food products - These plant and machineries belong to the assessee and were part of the block of assets of the assessee - Later on due to some dispute between assessee and co-packers, the business dealing was stopped and the agreement between the two parties stood terminated in the earlier year/s - the assessee had already used the asset for the purpose of its business and such asset were forming part of the block of assets - Once the plant and machinery has been used for the business purpose and is ready for use any time, then even if it has not been used for a particular period, it cannot lead to any inference that, there has been no user of plant and machinery - the assessee s claim for depreciation on plant and machinery lying with the packers is eligible for depreciation Decided in favour of assessee. Conversion charges disallowed Held that - The agreement was terminated in the month of May 2002. Before that the assessee had regular business dealing, with the said party - If the amount has been paid in pursuance of the earlier business dealing prior to the date of termination then even though payment has been made in this year, it cannot be held that same is not for the business purpose - when the payment has been made in accordance with the agreement between the parties existing earlier the same has to be allowed as business expenditure the order of the CIT(A) is set aside - Decided in favour of assessee. Provision for leave encashment disallowed Whether the assessee has given any actuarial valuation or not - Held that - The assessee has provided the basis for the provision in the notes to the financial accounts in the following manner, leave encashment benefits are provided for at 15 days salary for each employee, at current encashable basic salary - This aspect has not been examined or verified either by the AO or by the CIT(A) thus, the matter is to be remitted back to the AO to consider the basis for the provision made for the leave encashment as in such a situation it may not be necessary that actuarial valuation report for leave encashment has to be submitted, when the basis for leave encashment has been clearly given and there is no ambiguity about it Decided partly in favour of assessee.
Issues Involved:
1. Disallowance of management consultancy fees. 2. Disallowance of loss on sale of assets. 3. Disallowance of depreciation on plant and machinery. 4. Disallowance of conversion charges. 5. Disallowance of provision for leave encashment. Issue-wise Detailed Analysis: 1. Disallowance of Management Consultancy Fees: The assessee challenged the disallowance of Rs. 3,31,77,130/- paid to General Mills Marketing Inc. (GMM) under a "management service agreement" dated 24.04.2003. The assessing officer disallowed the amount, questioning the commercial expediency and the partial deduction of TDS. The Ld.CIT(A) upheld the disallowance, citing insufficient evidence of services rendered and the retrospective effect of the agreement. The Tribunal admitted additional evidence provided by the assessee and remanded the matter back to the assessing officer for a fresh examination. Thus, Ground No. 1 was allowed for statistical purposes. 2. Disallowance of Loss on Sale of Assets: The assessee contested the disallowance of Rs. 36,37,746/- as loss on sale of R&D assets. The assessing officer and Ld.CIT(A) disallowed the amount, noting it had been included in previous years. The assessee argued that no such claim was made in the computation of taxable income. The Tribunal found the assessee's contention correct, directing the assessing officer to verify the computation and provide appropriate relief. Hence, Ground No. 2 was allowed. 3. Disallowance of Depreciation on Plant and Machinery: The assessee disputed the disallowance of Rs. 49,27,407/- as depreciation on plant and machinery provided to co-packers. Despite the termination of agreements with the co-packers, the assessee argued that the machinery was ready for use and thus eligible for depreciation. The Tribunal agreed, citing precedents that assets ready for use qualify for depreciation, and deleted the disallowance. Ground No. 3 was allowed. 4. Disallowance of Conversion Charges: The assessee challenged the disallowance of Rs. 11,46,827/- paid to M/s. Sitashree Food Products Pvt. Ltd. for conversion charges. The assessing officer and Ld.CIT(A) disallowed the amount, arguing that the agreement with the co-packer had been terminated. The Tribunal held that payments made for services rendered before termination should be allowed as business expenses. Thus, Ground No. 4 was allowed. 5. Disallowance of Provision for Leave Encashment: The assessee contested the disallowance of Rs. 7,84,269/- for leave encashment provision, which was rejected due to the lack of an actuarial valuation report. The Tribunal noted that the provision was based on 15 days' salary per employee and remanded the matter back to the assessing officer for verification of this basis and the applicability of Section 43B. Ground No. 5 was partly allowed for statistical purposes. Conclusion: The appeal by the assessee was partly allowed for statistical purposes, with specific issues remanded back to the assessing officer for further examination and verification. The Tribunal emphasized the need for proper evidence and adherence to legal provisions in determining the allowability of expenses and provisions.
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