2017 (9) TMI 1832 - AT - Income Tax

Disallowance out of aircraft expenses - 50% of the expenses were disallowed out of aircraft expenses for using the same for non-business purposes - HELD THAT - AR for the assessee fairly pointed out that the issue is decided against the assessee by the Tribunal in earlier years starting from assessment yea₹ 1995-96 to 1998-99. The Tribunal in assessment year 1998- 99 in 2011 (8) TMI 1220 - ITAT PUNE had upheld the disallowance at 15%. It is an admitted position that the issue is identical as in the earlier years and following the same parity of reasoning, we uphold the disallowance of 15% out of aircraft expenses. Disallowance of deduction on account of prior period expenses - HELD THAT - out of sum of ₹ 42,70,888/-, the assessee himself had withdrawn the claim in respect of ₹ 1,41,890/- on account of sales tax and TDS on contractual payment of ₹ 9 lakhs and hence, the same is added in the hands of assessee. The rest of expenditure being relatable to the business carried on by the assessee, though booked as prior period expenses, merits to be allowed in the hands of assessee. Accordingly, the ground of appeal No.3 is partly allowed. Addition under the head bad debts and irrecoverable balances written off - CIT(A) however, restores this issue back to the file of Assessing Officer to verify whether the amount has been written off - HELD THAT - Assessee fairly pointed out that the issue has been restored back to the file of Assessing Officer but the Assessing Officer till date has not allowed the appeal effect. We direct the Assessing Officer to allow the claim of assessee in case the said amount has been written off; then the assessee is entitled to claim the deduction under section 36(1)(vii) Debit balances written off - HELD THAT - The assessee had claimed the expenditure on account of sundry debit balances in the corporate division totaling ₹ 93,66,115/-. The said details included various debit balances written off by the assessee but in the absence of the assessee having established that the said amounts were shown as income in earlier years, the claim of assessee was not allowed. The assessee also made a plea under section 28 of the Act, which was also rejected. Now, before us, the learned Authorized Representative for the assessee has restricted its claim in respect of sales tax amount paid on 30.01.2000. Assessee pointed out that the said amount was paid in earlier years and the claim has been written off during the year and the same merits to be allowed. In view of the contention of assessee, where the claim is written off, we allow the deduction on account of ₹ 30 lakhs and the balance disallowance is confirmed in the hands of assessee. Disallowance of club expenses - nature of expenditure - authorities below had treated the entrance fees paid to the PYC Hindu Gymkhana as capital expenditure - HELD THAT - The said issue is covered in favour of assessee by the decision of Gujarat State Export Corporation Ltd. Vs. CIT 1993 (9) TMI 52 - GUJARAT HIGH COURT wherein entrance fees to the Gujarat Government Club was allowed as deduction in the said case. Following the same parity of reasoning, we hold that the payment of entrance fees for becoming the member of club, cannot be termed as capital expenditure and is to be allowed as revenue expenditure in the hands of assessee. The ground of appeal No.5 is thus, allowed. Disallowance of vehicle expenses, lease rent of cars and telephone expenses for non-business expenditure and personal use - HELD THAT - Disallowance out of vehicle expenses and telephone expenses has been deleted by the Tribunal and the lease rent on cars was in the same line, wherein leased cars were being used by the Executives and employees. We hold that there is no merit in the disallowance made on account of personal use out of vehicle expense and telephone expenses. Similarly, the leased vehicles which are being used by the Executives and other employees of the assessee company, then there is no merit in disallowing any part of the lease rent of cars for personal use in the hands of assessee company, which is a limited company. See KIRLOSKAR OIL ENGINES LTD VERSUS DEPUTY COMMISSIONER OF INCOME TAX 2012 (7) TMI 736 - ITAT, PUNE Disallowance out of repairs expenditure - HELD THAT - Renovation and interior decoration of various portions being carried out by the assessee including providing of furniture work in board room, video conference room, visitors room, etc. The assessee also provided automatic gates and security cabins. The nature of expenditure incurred by the assessee reflects the same to be in the nature of repairs and maintenance and merits to be allowed in the hands of assessee. The expenditure incurred on security cabins and also cabin for computer gate pass system are temporary in nature and are also to be allowed as revenue in nature. Accordingly, we direct the Assessing Officer to delete the addition Non-allowance of loss on forward contract cancellation - revenue or capital expenditure - HELD THAT - The issue stands squarely covered by the ratio laid down in CIT Vs. Woodward Governor India Pvt. Ltd. 2009 (4) TMI 4 - SUPREME COURT . In view of the ratio laid down by the Hon'ble Supreme Court, we allow the claim of assessee in entirety being revenue expenditure. The ground of appeal No.10 is thus, allowed. Disallowance of advertisement publicity expenses - AO disallowed 5% of total expenditure as not wholly and exclusively for the purpose of business - HELD THAT - We direct AO to verify the nature of expenses debited under the head product advertisement and publicity expenses and in case the said expenditure has been incurred for the purpose of business, then the same is to be allowed as business expenditure. The balance if any, which is capital in nature needs to be disallowed in the hands of assessee. In respect of 5% out of guest expenses, presentation expenses and general expenses, we find no merit in the plea of assessee and the same is dismissed. Accordingly, the disallowance is upheld to that extent. It may be pointed out that the margin of 5% is to be applied only to net general expenses only as referred by the CIT(A) in para 20.2.2 at page 67 of the appellate order. Disallowance of liquidated damages - Liquidated damages provided by the assessee in its books of account - HELD THAT - The major item of expenditure relates to damages of ₹ 1.56 crores claimed by and paid to M/s. Oil India Ltd. The assessee was duty bound to complete the said project within stipulated period and since the assessee could not fulfill the same, M/s. Oil India Ltd. vide letter dated 20.01.2001 demanded damages of ₹ 1.49 crores. In view of the understanding between the parties, the claim of ₹ 1.49 crores on account of liquidated damages being relatable to carrying on of business of assessee, is duly allowable as expenditure in the hands of assessee. Accordingly, upholding the order of CIT(A), we dismiss the ground of appeal No.7 raised by the Revenue. Balance expenditure which was the interest paid on mobilization advances - Clause (iii) of contract copy, which is placed at page 190 of the Paper Book and the evidence of having paid the said amount as per document we find that the said claim is also to be allowed in the hands of assessee. In view of the facts and circumstances and the evidences which are available on record, we find no merit in the order of CIT(A) in remitting the issue to the file of AO to call for relevant particulars. Accordingly, we reverse the findings of CIT(A) in this regard and delete the addition of ₹ 6,64,552/-. Balance liquidated damages for which the assessee had made the provision in its books of account - We find no merit in the orders of authorities below in allowing the liquidated damages only to the extent where the amount has been paid and in not allowing the balance. In any case, the said liquidated damages are relatable to the business undertaken by the assessee and are not for infraction of law. Hence, there is no merit in disallowing any part of expenditure. Reliance placed upon by the learned Departmental Representative for the Revenue on the decisions of Hon'ble Supreme Court are misplaced as in both the cases, damages were paid on account of infraction of law and hence, were held to be not allowable as expenditure in the hands of said assessee. In the present case, liquidated damages are paid by the assessee on account of violation of terms of contract entered into with the parties to whom the goods have been supplied by the assessee. There is no infraction of law in such cases and accordingly, we find no merit in the orders of authorities below in this regard. Reversing the order of CIT(A), we direct the Assessing Officer to allow the claim of assessee also on account of provision made Disallowance of sales and service charges - AO had disallowed the same to be on account of infraction of law - HELD THAT - Order of CIT(A), wherein the assessee has not established its case with regard to provisions made in the books of account on account of sales and service charges. The said liability arises from the terms of contract entered into but the onus is on the assessee to establish the factum of liability, which it claims it had to fulfill. The assessee had also not clarified as to when the said reimbursements were actually made and consequently, we uphold the order of CIT(A) in disallowing of ₹ 18,85,000/-. CIT(A) had not disallowed the amount on the account that these were penal in nature but on actual factum of liability arising on which account and whether any demand was made from the opposite party vis- -vis so-called penalty clauses and also when the reimbursement was made by the assessee against the provision made Disallowance of provision made for leave encashment - HELD THAT - The issue is squarely covered by the decision of Hon'ble Supreme Court in Bharat Earth Movers Vs. CIT 2000 (8) TMI 4 - SUPREME COURT wherein the proposition has been laid down in respect of provision for liability towards encashment of Earned Leave and it has been held that where the business liability had definitely arisen in the accounting year, then the deduction is allowable although the liability may have to be quantified and discharged at a future date - the liability incurred by the assessee under leave encashment scheme proportionate to the entitlement earned by its employees, subject to ceiling of accumulation was not a contingent liability. - Following the same parity of reasoning, we also direct the Assessing Officer that the provision made by the assessee company for meeting incremental liability of the year, under leave encashment scheme, proportionate with the entitlement earned by the employees of assessee company, subject to ceiling of accumulation as applicable on the relevant date, is entitled for deduction in the hands of assessee. The Assessing Officer shall accordingly, allow the same. MAT - Determination of book profits under section 115JB - HELD THAT - Hon ble High Court in assessee s own case in assessment year 1999-2000 which was also considering the said scheme of BIFR as before us, we hold that the order of BIFR is binding upon the Revenue authorities and effect of the same is to be allowed in the hands of assessee. Accordingly, the book profits under section 115JB of the Act cannot be taxed till unabsorbed losses of SWL are adjusted. In this regard, the assessee has filed the calculation sheet before us. However, for the limited purpose of verifying the stand of assessee, we remit this issue back to the file of Assessing Officer for limited purpose of determining the availability of losses and till the same are not fully adjusted, then the assessee cannot be taxed on book profits under section 115JB of the Act. The Assessing Officer is directed to allow reasonable opportunity of hearing to the assessee in this regard and pass the order within period of six months Addition of remuneration on tax free dividends - HELD THAT - No merit in the ground of appeal No.1 raised by the Revenue, where the CIT(A) has observed that the remuneration / commission in any case was less than 11% of the net taxable profits, after excluding the tax free dividends also. Accordingly, the ground of appeal No.1 raised by the Revenue is dismissed. Additionof administrative and managerial expenses for earning tax free dividends - HELD THAT - plea of assessee before the CIT(A) was that no part of expenditure was attributable to earning of dividend income and hence, no expenses merits to be allowed. CIT(A) relying on earlier years, made disallowance of ₹ 25,000/- and allowed relief to the assessee of ₹ 18,17,821/-. The Revenue is in appeal against the said relief granted by the CIT(A) and pointed out that disallowance at ₹ 25,000/- was very low. We find no merit in the plea of learned Departmental Representative for the Revenue in this regard, where the assessee has received only 20-21 dividends warrants during the relevant year. In the entirety of the above said facts and circumstances, we uphold the order of CIT(A) and dismiss the ground of appeal No.2 raised by the Revenue. Addition on account of penal interest - HELD THAT - The institutions invoked the penal interest clause in the agreement and held the assessee liable to pay 2% p.a. as penal interest for delay in creation of securities. However, later the said rate of interest was reduced to 1%, which was paid on 23.05.1994 and on redemption of debentures on 01.01.2000 when the assessee sought no objection letters from the institutions for satisfaction of the charges, UTI asked the assessee to pay further sum of ₹ 1,03,342/-. The said payment was made by the assessee to UTI. The assessee claimed that it was only compensatory in nature as it was not incurred for any offence prohibited by law. CIT(A) on perusal of the details filed, held the said payment to be compensatory in nature as it had nothing to do with any infringement of law. The learned Departmental Representative for the Revenue has failed to controvert findings of CIT(A). Addition of interest paid by the assessee - HELD THAT - The issue raised vide present ground of appeal is squarely stands covered by the ratio laid down in SA Builders Ltd. Vs. CIT(A) Anr. 2006 (12) TMI 82 - SUPREME COURT wherein it has been held that in case the assessee makes advances for business purposes, then no part of interest on interest bearing funds is to be disallowed. Following the same parity of reasoning, we hold that where the assessee had entered into specific agreements with M/s. Kirloskar Consultants Ltd. in order to explore new avenues to enhance its business and also to increase its market conditions and had made the said advances in line with the agreement, then the said advance having been made during the course of carrying on of its business and against such advances, no part of interest relatable to interest bearing funds merits to be disallowed. Accordingly, we uphold the order of CIT(A) in this regard and dismiss the ground of appeal No.4 raised by the Revenue. Addition on account of interest relatable to investments made in bonds and shares which are exempt under section 10(33) - HELD THAT - Nexus had to be established between the borrowings made by the assessee and interest free investments made by the assessee. In the absence of the same and in view of the fact that where the assessee has sufficient interest free funds available with it, then no disallowance out of interest expenditure is to be made under section 36(1)(iii) of the Act. The assessee has explained the investments made and claims that the Assessing Officer was incorrect in adopting the figure of ₹ 75 crores and working out the disallowance. We have verified the stand of assessee and find that the total increment in investments during the year was only ₹ 25 crores and not ₹ 75 crores as held by the Assessing Officer. Further, the borrowings made by the assessee from the perusal of Balance Sheet clearly show that the same have got down by ₹ 50 crores when compared to borrowings as on 31.03.2000. Accordingly, we find no merit in the ground of appeal raised by the Revenue Addition of liaison expenses - CIT(A) has allowed the same on account of licence fees - HELD THAT - As assessee pointed out that the said expenses were part of advertisement expenses and the Assessing Officer may verify the same. Accordingly, we direct the Assessing Officer to verify the nature of expenses and in case they are liaison expenses paid by the assessee, then the same merits to be disallowed in the hands of assessee. The ground of appeal No.6 raised by the Revenue is thus, allowed for statistical purposes. Addition of sum paid to Smt. Aarti Kirloskar for the work done of development of internet - HELD THAT - Where remuneration was being paid to Smt. Aarti Kirloskar for the past so many years and in view of the work allocated to her, there is no merit in allowing the said expenditure partly. The assessee has incurred the said expenditure during the year and hence, is entitled to claim as business expenditure in the year under appeal itself. The ground of appeal No.8 is thus, dismissed. Addition on account of debenture related expenses - HELD THAT - CIT(A) noted that rating fees was paid to M/s. Duff Phelps Credit Rating India Pvt. Ltd. M/s. Fitch Rating India Pvt. Ltd. The CIT(A) held that where the expenditure was incurred for getting credit rating, could not be disallowed as capital expenditure. We find merit in the order of CIT(A) holding that getting of credit rating was akin to ISO certification and was linked to business carried on by the assessee and hence, to be allowed as business expenditure. Accordingly, we hold so. Liquidated damages or late delivery charges - HELD THAT - Assessee has failed to furnish the details in respect of auto division totaling ₹ 1,90,975/-. Similar issue of liquidated damages arose vide ground of appeal No.12 in assessment year 2001-02 and following the same parity of reasoning, where the assessee is consistently following the practice, we hold that the said liquidated damages for which the provision is made or has been actually incurred to be allowed in the hands of assessee. Accordingly, we allow the claim to the extent of ₹ 30,39,000/-. However, in respect of auto division, the assessee has failed to furnish any details of ₹ 1,90,975/- and hence, the same is disallowed in the hands of assessee, in the absence of any details. Disallowance of repairs - HELD THAT - As assessee pointed out that the expenses were on fencing, wherein the cost of compound wall was capitalized in earlier assessment years and during the year, no new asset had come into existence. We find merit in the plea of assessee and expenditure is held to be revenue in nature incurred for the purpose of business and hence, is to be allowed in the hands of assessee Disallowance made out of miscellaneous expenses for non-business expenses - HELD THAT - CIT(A) had disallowed 5% of the said miscellaneous expenses for non-business purposes. We find no merit in the order of CIT(A), where the assessee is a limited company and no disallowance can be made for personal use. Accordingly, we reverse the order of CIT(A) and allow the claim of expenditure Addition on account of interest relatable to investment made in bonds and shares which were exempt under section 10(33) - HELD THAT - There was no outgo of money as the fresh investments were because of re-structuring. Further, the assessee had sold shares and made the investments under section 54EA of the Act. He stressed that fresh borrowings made during the year were also because of re-structuring although, the loan liability had reduced from ₹ 115 crores to ₹ 108 crores at the end of year. We find that similar issue arose before the Tribunal vide ground of appeal No.5 in assessment year 2001- 02 and following the same parity of reasoning and in view of the facts and circumstances being similar, we find no merit in the ground of appeal No.4 raised by the Revenue and the same is thus, dismissed. Disallowance on account of un-utilized CENVAT at the end of year - HELD THAT - In view of the proposition laid down by the Hon ble Bombay High Court and the issue being settled in CIT Vs. Indo Nippon Chemicals Ltd. 2003 (1) TMI 8 - SUPREME COURT we find no merit in the orders of authorities below, where the assessee is consistently following exclusive method of valuing its stock, which in turn, is not affecting its profit, then there is no merit in making any adjustment on account of un-utilized CENVAT credit at the end of year. Accordingly, we reverse the findings of CIT(A) in this regard and delete the addition Addition made on account of discount received on prepayment of liability under Sales Tax Deferral Scheme - HELD THAT - The payment at net present value of future liability cannot be treated as remission or cessation of liability under section 41(1) of the Act, at best it is premature payment of sales tax outstanding amount, which was treated as loan by the assessee. We find the issue raised in the present appeal is also covered by the order of Special Bench decision in the case of Sulzer India Ltd. 2014 (12) TMI 267 - BOMBAY HIGH COURT Following the same parity of reasoning, we find no merit in the ground of appeal No.1 raised by the Revenue and the same is dismissed. Addition on account of lease rental income - HELD THAT - Where the assessee has paid taxes in assessment year 2004-05 on the said lease rentals on receipt basis, we find no merit in the grounds of appeal No.2 and 3 raised by the Revenue and the same are dismissed. Reopening of assessment - addition made to the book profits of the assessee under section 115JB of the Act on account of lease equalization charges and lease rentals - HELD THAT - both these amounts do not arise as income in the hands of assessee in the year under consideration. Consequently, the said income is not to be included in the book profits of assessee as the income has not accrued to the assessee in the year under consideration. The Hon ble High Court of Delhi in CIT Vs. Sain Processing Weaving Mills (P) Ltd 2008 (12) TMI 20 - DELHI HIGH COURT has held that depreciation though not charged to the Profit and Loss Account, is to be considered as expenditure while determining the book profits though not claimed in normal computation. However, we have held in the paras hereinabove that income do not accrue to the assessee in the instant assessment year. Hence, there is no merit in the pleadings of learned Departmental Representative for the Revenue and the same are rejected.

Summary

Issues Involved:

1. Disallowance of expenses under section 14A.
2. Disallowance out of aircraft expenses.
3. Disallowance of prior period expenses.
4. Disallowance of bad debts and irrecoverable balances written off.
5. Disallowance out of club expenses.
6. Disallowance out of vehicle expenses.
7. Disallowance out of lease rent on cars.
8. Disallowance out of telephone expenses.
9. Disallowance out of repairs expenditure.
10. Disallowance of loss on forward contract cancellation.
11. Disallowance out of advertisement and publicity expenses.
12. Disallowance of liquidated damages.
13. Disallowance out of sales and service charges.
14. Disallowance out of legal and professional fees.
15. Disallowance of provision for leave encashment.
16. Computation of book profits under section 115JB.
17. Disallowance of remuneration/commission paid to Directors.
18. Disallowance of administrative and managerial expenses for earning tax-free dividends.
19. Disallowance of penal interest.
20. Disallowance of interest paid not for business purposes.
21. Disallowance of interest relatable to investment in bonds and shares.
22. Disallowance of liaison expenses.
23. Disallowance out of debenture related expenses.
24. Disallowance of CENVAT credit.
25. Deletion of addition on account of lease rental income.
26. Re-assessment proceedings under section 147.
27. Disallowance of club expenses.

Detailed Analysis:

1. Disallowance of Expenses under Section 14A:
The Tribunal upheld the disallowance of ?25,000/- under section 14A for the assessment year 2001-02, as the assessee did not press this ground. Similar disallowances were upheld for subsequent years with minor variations in amounts.

2. Disallowance out of Aircraft Expenses:
The Tribunal upheld a disallowance of 15% out of aircraft expenses for non-business use, following earlier years' decisions.

3. Disallowance of Prior Period Expenses:
For the assessment year 2001-02, the Tribunal allowed the deduction of ?42,70,888/- for prior period expenses, except for ?1,41,890/- on account of sales tax and ?9 lakhs on account of TDS. Similar principles were applied in subsequent years.

4. Disallowance of Bad Debts and Irrecoverable Balances Written Off:
The Tribunal directed the Assessing Officer to verify the write-off of ?19,02,884/- due from Mysore Kirloskar Ltd. and allowed the deduction of ?30 lakhs out of ?93,66,115/- claimed for debit balances written off, disallowing the rest.

5. Disallowance out of Club Expenses:
The Tribunal allowed the deduction of club entrance fees, treating it as revenue expenditure, following the Gujarat High Court's decision.

6. Disallowance out of Vehicle Expenses:
The Tribunal deleted the disallowance of 2% of vehicle expenses for non-business use, holding that incidental personal use by officers was treated as perquisites.

7. Disallowance out of Lease Rent on Cars:
The Tribunal deleted the disallowance of 2% of lease rent on cars, following the same reasoning as for vehicle expenses.

8. Disallowance out of Telephone Expenses:
The Tribunal deleted the disallowance of ?1 lakh out of telephone expenses, following the same reasoning as for vehicle expenses.

9. Disallowance out of Repairs Expenditure:
The Tribunal allowed the deduction of ?44,27,538/- for repairs and maintenance, treating it as revenue expenditure.

10. Disallowance of Loss on Forward Contract Cancellation:
The Tribunal allowed the deduction of ?46,583/- for loss on forward contract cancellation, treating it as revenue expenditure.

11. Disallowance out of Advertisement and Publicity Expenses:
The Tribunal remitted the issue back to the Assessing Officer to verify the nature of expenses and upheld a 5% disallowance out of guest expenses, presentation articles, and general expenses.

12. Disallowance of Liquidated Damages:
The Tribunal allowed the deduction of liquidated damages, holding that they were paid for breach of contract and not for any infraction of law.

13. Disallowance out of Sales and Service Charges:
The Tribunal upheld the disallowance of ?18,85,000/- for sales and service charges, as the assessee failed to establish the factum of liability.

14. Disallowance out of Legal and Professional Fees:
The Tribunal dismissed the ground as not pressed.

15. Disallowance of Provision for Leave Encashment:
The Tribunal allowed the deduction of ?2,11,90,000/- for leave encashment, following the Supreme Court's decision in Bharat Earth Movers.

16. Computation of Book Profits under Section 115JB:
The Tribunal held that the book profits under section 115JB could not be taxed till unabsorbed losses of the amalgamating company were adjusted, remitting the issue back to the Assessing Officer for verification.

17. Disallowance of Remuneration/Commission Paid to Directors:
The Tribunal upheld the CIT(A)'s deletion of the disallowance, noting that the remuneration/commission was within the limits prescribed under the Companies Act.

18. Disallowance of Administrative and Managerial Expenses for Earning Tax-Free Dividends:
The Tribunal upheld the CIT(A)'s decision to restrict the disallowance to ?25,000/-.

19. Disallowance of Penal Interest:
The Tribunal upheld the CIT(A)'s deletion of the disallowance, treating the penal interest as compensatory in nature.

20. Disallowance of Interest Paid Not for Business Purposes:
The Tribunal upheld the CIT(A)'s deletion of the disallowance, noting that the advances were made for business purposes.

21. Disallowance of Interest Relatable to Investment in Bonds and Shares:
The Tribunal upheld the CIT(A)'s deletion of the disallowance, noting that the borrowings had come down and there was no nexus established between borrowings and investments.

22. Disallowance of Liaison Expenses:
The Tribunal remitted the issue back to the Assessing Officer for verification.

23. Disallowance out of Debenture Related Expenses:
The Tribunal upheld the CIT(A)'s deletion of the disallowance, treating the expenses as revenue in nature.

24. Disallowance of CENVAT Credit:
The Tribunal deleted the disallowance of ?18,90,099/- for un-utilized CENVAT credit, following the Supreme Court's decision in Indo Nippon Chemicals.

25. Deletion of Addition on Account of Lease Rental Income:
The Tribunal upheld the CIT(A)'s deletion of the addition, noting that the income was offered in a subsequent year.

26. Re-Assessment Proceedings under Section 147:
The Tribunal upheld the CIT(A)'s deletion of the addition made in re-assessment proceedings, noting that the income did not accrue to the assessee in the year under consideration.

27. Disallowance of Club Expenses:
The Tribunal upheld the CIT(A)'s deletion of the disallowance, treating the expenses as revenue in nature.