2015 (3) TMI 268 - AT - Income Tax

Addition on account of interest and penalty - CIT(A) noted that out of ₹ 88,453/-, ₹ 8,594/- was penal in nature and, therefore, he allowed a relief of ₹ 79,859/- and restricted the addition at ₹ 1,25,846/- - Held that - No infirmity in the order of ld. CIT(A), because only those payments, which were penal in nature, could be disallowed. - Decided against revenue. Work out of short term capital gain - AO invoking the provisions of section 50 - CIT(A) held that AO erroneously took the figure of sales proceeds of the assets at ₹ 70,36,357/- which included MODVAT, excise duty etc. as against the actual sale consideration of ₹ 47,50,5001-. The Ld. AO also missed out the fact that the entire block was not sold out and there was an addition of ₹ 29,5001- to the same during the year - Held that - Respectfully following the decision of CIT Vs. Eastman Industries Ltd. 2008 (9) TMI 17 - HIGH COURT DELHI in the event the block of assets i.e., a class of asset(s) bearing same rate of depreciation exist(s) was with the assessee at the end of the previous year, then the provision of Section 50 (2) would not apply. The Section creates a deeming fiction. It cannot be extended beyond the purpose for which it has been enacted. - Decided against revenue. Depreciation claim rejected - After Sales, assessee was only left with 30% of the plant and machinery therefore, the assessee s claim of depreciation of ₹ 3,11,660/- disallowed by AO - CIT(A) allowed the claim - Held that - No reason to interfere with the order of CIT(A). Firstly, because the block of plant and machinery continued to exist and the manufacturing activities had temporarily been suspended and the business was not closed down. Secondly, the machinery was kept ready for future use and, therefore, the assessee s claim was rightly allowed by ld. CIT(A). See Capital Bus Service (P) Ltd. v. CIT 1980 (2) TMI 69 - DELHI High Court - - Decided against revenue. Sales service charges disallowed - CIT(A) sustained the part addition - Held that - reason to interfere with the order of ld. CIT(A) because the AO has not disputed the rendering of after sales service by assessee. His only objection was that assessee was not bearing the entire cost of rendering after sales service and same ought to have been met partly by other distributors. We find that ld. CIT(A) has rightly restricted the disallowance only relating to non-franchise. We accordingly, confirm the order of ld. CIT(A) on the issue in question. - Decided against revenue. Sales service charges - Non apportionment of transactions of the assessee with its sister concerns - Held that - Findings of ld. CIT(A) regarding allocable expenses to sister concerns have not been controverted by the department. Therefore, we confirm the order of ld. CIT(A) in restricting the addition on account of administrative expenses to ₹ 98,123/- - Decided against revenue.

Summary

Issues Involved:
1. Disallowance under Section 37(1) for Sales Tax Interest & Penalty.
2. Disallowance under Section 32(1) for Assets not used for business.
3. Disallowance of Sales Service Charges.
4. Disallowance under Section 37(1) for Administrative Expenses.
5. Short-term Capital Gain on Sale of Assets.

Issue-wise Detailed Analysis:

1. Disallowance under Section 37(1) for Sales Tax Interest & Penalty:
The assessee claimed a sum of Rs. 3,71,060 on account of "additional sales tax - penalty appeal." The tax audit report revealed that Rs. 2,05,705 was borne by the assessee as sales tax penalty and interest, which the AO disallowed. The CIT(A) noted that Rs. 88,453 out of the total disallowance was compensatory in nature and not penal. Consequently, the CIT(A) allowed a relief of Rs. 79,859 and restricted the addition to Rs. 1,25,846. The Tribunal upheld the CIT(A)'s order, stating that only penal payments could be disallowed.

2. Disallowance under Section 32(1) for Assets not used for business:
The AO disallowed depreciation of Rs. 3,11,660 on plant and machinery, asserting that the assessee was no longer involved in manufacturing activities. However, the CIT(A) allowed the claim, noting that the assets were kept ready for use and that manufacturing activities had only temporarily ceased. The Tribunal upheld this decision, referencing several judicial precedents that support the allowance of depreciation if assets are kept ready for use.

3. Disallowance of Sales Service Charges:
The AO disallowed Rs. 31,89,625 out of Rs. 74,04,151 claimed by the assessee for sales service charges, arguing that the expenses were excessive. The CIT(A) reduced this disallowance to Rs. 4,26,887, noting that this amount was attributable to non-franchise services. The Tribunal upheld the CIT(A)'s decision, confirming that the AO had not disputed the rendering of after-sales service by the assessee.

4. Disallowance under Section 37(1) for Administrative Expenses:
The AO disallowed Rs. 22,43,445 out of Rs. 26,92,133 claimed for administrative expenses, arguing that the expenses should be apportioned among the assessee and its sister concerns sharing the same address. The CIT(A) restricted the disallowance to Rs. 98,123 after verifying the detailed bifurcation of expenses provided by the assessee. The Tribunal upheld the CIT(A)'s decision, noting that the findings regarding allocable expenses to sister concerns were not controverted by the department.

5. Short-term Capital Gain on Sale of Assets:
The AO computed short-term capital gains of Rs. 2,22,865 under Section 50, based on the sale of machinery. The CIT(A) found that the AO erroneously included MODVAT, excise duty, etc., in the sale proceeds, and noted that the entire block of assets was not sold. The Tribunal upheld the CIT(A)'s decision, referencing a Delhi High Court decision that Section 50(2) applies only if all assets in the block are transferred during the previous year.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions on all issues. The detailed analysis and judicial precedents cited by the CIT(A) were found to be correct and justified. The order was pronounced in open court on 20-02-2015.