2015 (8) TMI 377 - HC - Income Tax

Addition under Section 43 (B) on account of delayed contribution of superannuation fund - CIT(A) deleted addition affirmed by the ITAT - Held that - On account of the superannuation fund, the Court has been shown a copy of the Employees Superannuation Scheme of the Respondent-Assessee. Clause 6 of Section-II is titled Contributions and Annuities . Clause (a) envisages the payment of contribution by the employer and not by the employee. Clause (d) clearly states that the employer shall be liable to pay the total contributions under the Scheme and shall pay the entire contributions to the Trustees in one or more instalments as the case may be. The remaining clauses of Section-II also envisage payment of expenses of scheme by only the employer. In other words, there is no question of employee s contribution under the Scheme in question. Consequently, the Court finds that there was no occasion to apply Section 43B of the Act to disallow the delayed contribution by the Assessee to the superannuation fund for the months of February and March 2001. The order of the CIT (A), as affirmed by the ITAT, does not call for any interference. The Court declines to frame a question in that regard. Expenditure incurred on purchase of machinery from foreign countries - revenue v/s capital expenditure - Disallowance of the expenditure on the purchase of Banbury mixers as repair and maintenance - Held that - The said expenditure on the import of the two Banbury mixers is required to be treated as capital expenditure. It is further held that the ITAT and the CIT (A) were right in deleting the disallowance of the expenditure on the reduction gear forming part of the 3 Roll calendar to the extent of ₹ 41,23,890 as from the invoice produced by the Assessee, it is clear that the said imported item was part of the 3 roll calendar. Notional interest sought to be added by the AO on the ground that an interest free loan was given by the Assessee to its sister concern, Modi Stone Limited -ITAT deleted addition - Held that - The sum of ₹ 2 crores was advanced to Modi Stone Limited on account of commercial expediency as the said company was declared sick by the BIFR by its order dated 15th April 1998. The Court finds that the decision of the ITAT on the above aspect is turned purely on facts. The view taken by the ITAT on facts was a plausible one. Consequently, the Court finds that no substantial question of law arises for determination as far as the said issue is concerned.

Issues Involved:
1. Deletion of addition under Section 43(B) of the Income Tax Act for delayed contribution to ESI, PF, and superannuation fund.
2. Treatment of expenditure on machinery purchase as revenue or capital expenditure.
3. Deletion of notional interest addition on interest-free loan to a sister concern.

Issue-wise Detailed Analysis:

1. Deletion of Addition Under Section 43(B):

The Revenue challenged the deletion of additions made by the Assessing Officer (AO) for delayed contributions to ESI, PF, and the superannuation fund. The Court declined to frame a question regarding the deletion of Rs. 30,450 for ESI and PF as the sum was insubstantial. Regarding the Rs. 46,40,822 for the superannuation fund, the Court examined the Employees' Superannuation Scheme, which indicated that the contributions were solely the employer's responsibility. There was no employee contribution under the scheme. Consequently, Section 43B did not apply to disallow the delayed contributions for February and March 2001. The Court upheld the decisions of the Commissioner of Income Tax (Appeals) [CIT (A)] and the Income Tax Appellate Tribunal (ITAT), finding no occasion to interfere.

2. Treatment of Expenditure on Machinery Purchase:

The second issue concerned whether the expenditure on the purchase of machinery from foreign countries should be treated as revenue expenditure under "repair and maintenance." The Respondent-Assessee had filed its return declaring a loss, which was later revised. The AO disallowed 80% of the claimed expenditure as capital expenditure, but the CIT (A) disagreed, treating it as revenue expenditure due to the machinery's integral role in the production process and the lack of any new asset creation or capacity enhancement.

The ITAT upheld the CIT (A)'s decision, but the High Court required the Assessee to file detailed submissions. The Assessee justified the expenditure as necessary for maintaining machinery and replacing worn-out parts. However, the Court found that the Assessee failed to prove that only the body of the Banbury mixer was replaced, not the entire mixer. The Court referenced Supreme Court judgments (CIT v. Saravana Spg. Mills (P) Limited and Commissioner in Income Tax v. Sri Mangayarkarasi Mills (P) Ltd.), which held that replacing machinery parts integral to production processes constituted capital expenditure.

The Court concluded that the ITAT erred in deleting the disallowance for the Banbury mixers, treating the expenditure as capital in nature. However, the expenditure on the reduction gear box for the 3 Roll calendar was correctly treated as revenue expenditure, as it was part of the existing machinery.

3. Deletion of Notional Interest Addition:

The final issue involved the deletion of a notional interest addition of Rs. 24 lakhs for an interest-free loan of Rs. 2 crores given to a sister concern, Modi Stone Limited. The ITAT found that the loan was advanced due to commercial expediency, as Modi Stone was declared sick by the BIFR. The financial statements indicated a mixed pool of funds, making it impossible to establish a direct nexus between borrowed funds and the loan. The ITAT held that the loan came from the Assessee's own funds, setting aside the AO and CIT (A)'s orders.

The Court agreed with the ITAT's factual determination, finding no substantial question of law for consideration.

Conclusion:

The appeal was disposed of, with the Court upholding the CIT (A) and ITAT's decisions on the first and third issues, and partially agreeing with the Revenue on the second issue by treating the expenditure on Banbury mixers as capital expenditure. No orders as to costs were made.

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