2014 (8) TMI 1158 - AT - Income Tax

Addition on account of prior period expenses - Held that - Normally prior period expenses cannot be allowed because the income has to be determined on yearly basis. However, in this case certain income relating to prior period was also offered to tax and even after adjusting the expenses of ₹ 238344/- net amount resulted in income because prior period income was ₹ 618088/-. In such situation we are of the opinion that expenditure has been rightly allowed by the LD. CIT(A). Accordingly we confirm the order of the CIT(A) Addition on account of notional interest on land purchases - CIT-A deleted the addition - Held that - CIT(A) rightly decided the issue because the Assessing Officer has not shown that any amount was borrowed for purchase of land. Further in case of land there is always gap between the payment and registration of the sale deed and such gap can not lead to the conclusion that the land has not been capitalized. In view of this we confirm the action of the CIT(A). Treating employees contribution towards EPF as income as per provisions of section 2(24)(x) - not allowing deduction of the same as per section 36(1)(va) - CIT-A deleted the addition - Held that - This issue is squarely covered against the Revenue and in favour of the assessee by the decision in case of CIT V Nuchem Ltd. 2010 (2) TMI 959 - PUNJAB AND HARYANA HIGH COURT wherein following decision of CIT V. Alom Extrusions Ltd. 2009 (11) TMI 27 - SUPREME COURT it was held that if the payments have been made before the due date of filing of return then such payments have to be allowed. Perusal of the assessment order clearly show that provident fund dues were paid before the due date of filing of return Addition on account of depreciation on electric installation - assessee had claimed depreciation @ 25% in respect of electrical equipments which was reduced to 10% by following earlier assessment year - CIT-A deleted the addition - Held that - Even on electrical installations depreciation is to be allowed @ 25%. In view of this order which have been followed by the CIT(A), we confirm her order. Addition u/s 40(a)(ia) - Held that - We are of the opinion that Section 40(a)(ia) would cover not only to the amounts which are payable as on 31st March of a particular year but also which are payable at any time during the year. Of course, as long as the other requirements of the said provision exist. In that context, in our opinion the decision of the Special Bench of the Tribunal in the case of M/s. Merilyn Shipping & Transports vs. ACIT (2012 (4) TMI 290 - ITAT VISAKHAPATNAM), does not lay down correct law. Addition excessive expenses on repair and maintenance by restricting the disallowance of repair and maintenance to 1% of the value of the building as directed by the Tribunal in some earlier year - Held that - We are not sure under what circumstances 1% repair and maintenance expenses was held to be reasonable by the Tribunal. Normally allowance on account of repair and maintenance is to be examined with reference to each item and the items which are not capital in nature have to be allowed. However, no detail is available in the assessment order with reference to repair and maintenance. There is some force in the submissions the assessee that 1% criteria cannot be followed in the latter year, therefore in the interest of the justice, we set aside the order of the Ld. CIT(A) and restrict he disallowance of repair and maintenance at ₹ 1,50,000/ We have already observed that since the details are not available and this is a small matter and therefore there is no purpose for remitting the same to the file of Assessing Officer and we have preferred to make reasonable disallowance.

Summary

Issues involved:
1. Deletion of addition on account of prior period expenses.
2. Deletion of addition on account of notional interest on land purchases.
3. Deletion of addition treating employees' contribution towards EPF as income.
4. Deletion of addition on account of depreciation on electric installation.
5. Disallowance of hire charges paid for vehicles under section 40(a)(ia).
6. Disallowance of part of repair and maintenance expenses on the building.

Detailed Analysis:

1. Deletion of addition on account of prior period expenses:
During assessment proceedings, the Assessing Officer (AO) noticed that the assessee showed prior period income of Rs. 618,088 but reduced prior period expenses of Rs. 238,344, resulting in net income credited to the profit and loss account. The AO disallowed the expenses due to lack of explanation on their allowability. On appeal, the CIT(A) deleted the addition by referring to decisions of the Hon'ble Gujarat High Court in Saurashtra Cement and Chemical Industries Ltd. v. CIT and the Hon'ble Bombay High Court in CIT v. Nagri Mills Co. Ltd. The Tribunal upheld the CIT(A)'s decision, noting that the net result after adjusting the expenses was still income, thus justifying the allowance of the expenditure.

2. Deletion of addition on account of notional interest on land purchases:
The AO observed a time gap between payment and registration of land purchased for business extension and disallowed proportionate interest under Sec. 36(1)(iii), assuming mixed funds usage. The CIT(A) found no loan was taken for the purchase, thus disallowance was unjustified. The Tribunal confirmed the CIT(A)'s decision, emphasizing that the AO failed to establish that borrowed funds were used for the land purchase and that a gap between payment and registration is common.

3. Deletion of addition treating employees' contribution towards EPF as income:
The AO disallowed Rs. 556,641 under Sec. 36(1)(va) for late payments towards Provident Fund. The CIT(A) deleted the addition, following the Hon'ble Punjab & Haryana High Court's decision in CIT v. Nuchem Ltd., which, based on the Hon'ble Supreme Court's ruling in CIT v. Alom Extrusions Ltd., allowed such payments if made before the due date of filing the return. The Tribunal upheld this decision, noting that the payments were indeed made before the due date.

4. Deletion of addition on account of depreciation on electric installation:
The AO reduced the depreciation rate on electrical equipment from 25% to 10%, based on the prior year's assessment. The CIT(A) deleted this addition, following the Tribunal's earlier decision in ACIT v. Rana Polycot Ltd. The Tribunal confirmed the CIT(A)'s order, reiterating that depreciation on electrical installations should be allowed at 25%.

5. Disallowance of hire charges paid for vehicles under section 40(a)(ia):
The AO added Rs. 498,949 to the income for non-deduction of tax on vehicle hire charges under Sec. 40(a)(ia). The CIT(A) confirmed this action. The assessee argued that the amounts were already paid, invoking the Hon'ble Allahabad High Court's decision in CIT v. Vector Shipping Services (P) Ltd., which was dismissed by the Hon'ble Supreme Court. However, the Tribunal preferred the Hon'ble Gujarat High Court's decision in CIT v. Sikandarkhan N. Tunvar, which held that Sec. 40(a)(ia) applies to amounts paid or payable. Thus, the Tribunal upheld the CIT(A)'s decision.

6. Disallowance of part of repair and maintenance expenses on the building:
The AO restricted repair and maintenance expenses to 1% of the building's value, disallowing Rs. 389,417, and after allowing depreciation, the net disallowance was Rs. 350,475. The CIT(A) confirmed this based on the Tribunal's earlier decision for the assessment year 2004-05. The Tribunal, acknowledging the building's aging and potential for increased repairs, set aside the CIT(A)'s order and restricted the disallowance to Rs. 150,000, considering the lack of detailed examination of expenses.

Conclusion:
The appeal of the revenue is dismissed, and the cross objections of the assessee are partly allowed. The Tribunal upheld the CIT(A)'s decisions on prior period expenses, notional interest, EPF contributions, and depreciation on electrical installations, while modifying the disallowance on repair and maintenance expenses.