2015 (5) TMI 926 - AT - Income Tax

Disallowance of extra-ordinary items being loss due to cyclone flood fire etc. - assessee could not substantiate that it had incurred expenditure on repairing its assets damaged due to flood - CIT(A) deleted the addition - Held that - It is seen that the assessee had receivd finaicial assistance amounting to 16, 01, 00, 000/- for this purpose. This is evident from the Government of Gujarat Resolution NOs.GUV-1105-2724-K1 dated 4.7.2005 10.10.2005 and 13.10.2005 issued by the Principal Secretary Energy Petrochemicals Department. The assessee had incurred less expenditure than the subsidy received and the excess has been duly offered for taxation. Being an undertaking wholly owned by the Government of Gujarat the accounts are to be audited by the auditors appointed by C AG. As per the accounts furnished to C AG the expenses incurred on repair of flood damaged assets amounted to 1, 48, 54, 169/-. The C AG has certified the expenditure. No further evidence in this regard would ordinarily be necessary. If however it was felt that the expenses were over-stated an independent enquiry could have been made to ascertain the correct expenses. However this has not been done. Looking to the circumstances and also the fact that the excess subsidy received has been included in the taxable income it is held that the AO was not justified in making the addition of 1, 48, 54, 169/- which is directed to be deleted - Decided against revenue. Disallowance of claim of guarantee fees paid to Government of Gujarat - disallowance of claim of cost of raising finance for specialized job - CIT(A) deleted the addition - Held that - In the instant case the assessee did not acquire any right to exploit a commercial technology or process and neither was the benefit enduring since the payment of guarantee commission was an annual charge. The benefit derived from payment of such commission thus lasted for exactly one year only. Such shortlived benefit cannot be categorized as enduring . Hence inclined to the view that the payment of guarantee commission was a revenue expenditure. Further the jurisdictional Bench of ITAT had occasion to consider the allowability of guarantee commission paid to a Director of the company in respect of loans taken from the bank. In the case of CIT v. Metalising Equipment Co.Pvt.Ltd 2001 (2) TMI 21 - RAJASTHAN High Court that the payment of commission for guaranteeing repayment of loan was allowable as revenue expense. The addition is directed to be deleted. - Decided in favour of assesse. Disallowance of loss of material through pilferage shortage of material in transit shortage arising on physical verification etc. - CIT(A) deleted the addition - Held that - The amount written off consists of numerous items of small spares and consumable items. In a business of the size of the appellant keeping tract of small consumable stores and spares with perfect accuracy is not always possible. At the time of annual stock verification some items were found to be in excess or short of the number/quantity recorded in the stock register. Where the quantum was found in excess the value of stock has been enhanced by such excess and where some items were found short the value of shortage had been written off. The net effect during the year was shortage of the value of 3, 13, 53, 470/-. As compared to the turnover such loss is less than 1/20th of 1%. This is quite negligible. The assessee has accounted for both gains as well as losses in respect of consumable stores ad spares in a consistent manner. Accordingly it is held that the disallowance made was not justified - Decided in favour of assesse. Disallowance of claim under the head penalty expenses - CIT(A) deleted the addition - Held that - From the details furnished it is seen that the Savarkundla Transmission Division and Transmission Division Kodinar normally entered the expenditure incurred on rates and taxes under the accounting hear Penalties on Statutory Levies . From the supporting documents filed it is seen that the payments actually pertained to rates and taxes being in the nature of land revenue. Hence the discrepancy stands explained. There was no penal payment involved. Accordingly it is held that the AO was not justified in making the disallowance - Decided in favour of assesse. Recomputation of book profit u/s.115JB of the Act for the purpose of computing MAT by allowing claim of depreciation under item (ii) (a) as directed by CIT(A) - Held that - What is material for the purposes of section 115JB is not the profit loss account prepared in terms of the Income-tax Act but that prepared in terms of Schedule-VI of the Companies Act. the Department of Company Affairs has issued Circular dt. 7.3.2009 which allows depreciation to be claimed at higher rates on the basis of bona fide technological evaluation. It has been clearly stated therein that the rates prescribed in Schedule - XIV could be viewed as minimum rates. From Part B (wherein notes to the accounts have been disclosed) it is seen at item- 5(vii) relating to depreciation that the company provides depreciation as per the rates notified by CERC a regulatory commission by virtue of section 76 of Electricity Act 2003 which are different from the rates prescribed under the Companies Act 1956. During the year such rates were reduced which could not however be implemented by the assessee during the year due to the fact that the notification was received very late. The assessee has complied with the provisions of Schedule-VI of Companies Act while preparing its accounts. In the instant case from the facts as above the assessee has complied with the provisions contained in Schedule-VI to the Companies Act read with Schedule-XIY and Circular dt. 7.3.2009 of the Department of Company Affairs. Hence the AO s action in reducing the claim of depreciation under item (ii)(a) is held to be unjustified. The AO is directed to recompute the book profit for MAT by allowing the depreciation claimed - Decided against revenue. Disallowance of the expenditure being the provision made for employees cost for arrears - Held that - In the present case the ld.CIT(A) has recorded the fact that the Gujarat Government accepted the 6th Pay Commission in December- 2008. Therefore respectfully following the ratio laid down in the case of CIT vs. Kerala State Financial Enterprises Ltd.(2008 (2) TMI 383 - HIGH COURT OF KERALA) and CIT vs. Bharat Heavy Electrical Ltd.(2012 (9) TMI 515 - DELHI HIGH COURT) the disallowance made by the AO is hereby deleted. - Decided in favour of assessee.

Summary

Issues Involved:

1. Deletion of addition on account of disallowance of extra-ordinary items being loss due to cyclone, flood, fire, etc.
2. Deletion of addition on account of disallowance of claim of guarantee fees paid to Government of Gujarat.
3. Deletion of addition on account of disallowance of claim of cost of raising finance for specialized job.
4. Deletion of addition on account of disallowance of loss of material through pilferage, shortage of material in transit, shortage arising on physical verification, etc.
5. Deletion of addition on account of disallowance of claim under the head 'penalty' expenses.
6. Direction to the Assessing Officer to recompute book profit under section 115JB of the Income Tax Act for MAT by allowing claim of depreciation.
7. Confirmation of disallowance of expenditure being the provision made for employees cost for arrears payable.
8. Confirmation of enhancement of book profit computed under section 115JB of the Income Tax Act by provision for employees' cost pending the decision of Pay Commission.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Disallowance of Extra-ordinary Items:

The Assessing Officer (AO) disallowed Rs. 1,48,54,169 claimed by the assessee for losses due to flood, cyclone, and fire, citing lack of supporting evidence. The CIT(A) deleted this addition, noting that the assessee received a subsidy of Rs. 16,01,00,000 from the Government of Gujarat for flood damage and incurred actual expenses of Rs. 1,48,54,169, which were certified by the C&AG. The Tribunal upheld the CIT(A)'s decision, finding no contrary evidence from the Revenue.

2. Deletion of Addition on Account of Disallowance of Claim of Guarantee Fees:

The AO disallowed Rs. 8,39,04,550 paid as guarantee fees to the Government of Gujarat, treating it as capital expenditure. The CIT(A) deleted this addition, referencing the principle that guarantee commission is a revenue expenditure, not capital. The Tribunal upheld this decision, citing ITAT and Supreme Court precedents that support the classification of such expenses as revenue in nature.

3. Deletion of Addition on Account of Disallowance of Claim of Cost of Raising Finance:

The AO disallowed Rs. 45,24,582 claimed for raising finance, treating it as capital expenditure. The CIT(A) deleted this addition, noting that expenses for obtaining loans are revenue in nature, as supported by Supreme Court and ITAT precedents. The Tribunal upheld this decision, finding no distinguishing facts presented by the Revenue.

4. Deletion of Addition on Account of Disallowance of Loss of Material:

The AO disallowed Rs. 3,13,53,470 claimed for losses due to pilferage, shortage in transit, and physical verification discrepancies. The CIT(A) deleted this addition, noting that the losses were negligible compared to the turnover and consistently accounted for. The Tribunal upheld this decision, finding no contrary evidence from the Revenue.

5. Deletion of Addition on Account of Disallowance of Claim under the Head 'Penalty' Expenses:

The AO disallowed Rs. 6,29,000 claimed under 'penalty' expenses. The CIT(A) deleted this addition, noting that the expenses were actually for rates and taxes, not penalties. The Tribunal upheld this decision, finding no contrary evidence from the Revenue.

6. Direction to Recompute Book Profit under Section 115JB:

The AO reduced the depreciation claim by Rs. 14,32,02,331 while computing book profit under section 115JB. The CIT(A) directed the AO to allow the depreciation claim, citing compliance with Schedule VI of the Companies Act and relevant Supreme Court and High Court judgments. The Tribunal upheld this decision, finding no distinguishing facts presented by the Revenue.

7. Confirmation of Disallowance of Provision for Employees Cost for Arrears:

The AO disallowed Rs. 61,00,00,000 provision for employees cost pending the 6th Pay Commission decision, treating it as a contingent liability. The CIT(A) confirmed this disallowance. The Tribunal, however, deleted the disallowance, citing High Court judgments that such provisions are allowable if based on past experience and probable future obligations.

8. Confirmation of Enhancement of Book Profit under Section 115JB:

The AO enhanced book profit by Rs. 61,00,00,000, treating the provision for employees' cost as an unascertained liability. The CIT(A) confirmed this enhancement. The Tribunal, however, deleted the enhancement, directing the AO to recompute book profit in light of relevant High Court judgments.

Conclusion:

The Tribunal dismissed the Revenue's appeals for AYs 2006-07 and 2007-08 and allowed the Assessee's appeal for AY 2007-08, upholding the CIT(A)'s decisions on most issues and directing appropriate recomputations where necessary.