2015 (11) TMI 1825 - AT - Income Tax

Disallowing the business advances written off and claimed as deduction u/s 37(1) - HELD THAT - As not been disputed by the department that the amount which was advanced was not for the purchase of raw material i.e., not for business purpose or the advance given has been received back by the assessee, rather their case is that the assessee is not in the business of giving advance, therefore such a bad debt of advance is not allowable. If the assessee has claimed that these advances have become bad i.e. neither the raw material has been supplied nor advance has been given back, then the same amounts to loss incurred during the ordinary course of business and same has to be allowed u/s 37(1) as business expenditure. No merit in the reasoning of the CIT(A) that such an advance can only be given when the assessee is in the business of financing or advancing money. The advance can be given to a supplier in the ordinary course of business and if such an advance has been turned out to be bad or irrecoverable, then it has to be allowed as loss. Disallowing foreign travel expenditure of the Directors - HELD THAT - Specific purpose for which the foreign tours were undertaken by the Directors are not available on records. No doubt if the Directors or the employees have undertaken to foreign travelling for exploring of prospective business, acquisition of latest machinery and for other business purpose then same has to be allowed. There has to be some prima facie evidence to substantiate such an explanation. For the AY 2008-09, the Tribunal has noted down the specific details of the tour undertaken by various persons and based on that, finding was given in favour of the assessee. In the interest of justice and for proper examination of this matter, we restore this issue to the file of the AO who shall consider the necessary explanation and evidences and decide the same afresh. Accordingly, the issue of foreign travelling expenses is set aside to the file of the AO to be decided afresh after giving due opportunity to the assessee. TDS u/s 195 - enhancement of disallowance by CIT(A) of market research expenditure u/s 40(a)(i) for making the payment to an AE - Non deduction of assessee - HELD THAT - TDS was required to be deducted on such a payment, because the said entity has a business connectin in India by virtue of having offices located at various places as noted by him and also had a help-desk etc. such an observation of Ld. CIT(A) for making the disallowance cannot be upheld, because if the payment made to M/s Mintel International Group Ltd. is a business income, then it has to be established as a matter of fact that the said entity does has a business connection in India or has a PE in terms of Article 5 of DTAA. Nowhere it has been brought on record that M/s Mintel International Group Ltd. had any kind of PE in India or any kind of business connection in India. Rather there is a letter on record, wherein, M/s Mintel International Group Ltd. has categorically stated and certified that it has no PE or business connection in India. Once that is so, then assessee was not required to deduct TDS on such a payment and, therefore, there is no violation of section 195 and consequently no disallowance u/s 40(a)(i) can be made in the hands of the assessee. Treatment of subsidy - Capital receipt or revenue receipt - HELD THAT - In PONNI SUGARS CHEMICALS LTD. 2008 (9) TMI 14 - SUPREME COURT has laid down a very important proposition that the test of character of the receipts in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. Hence, the purpose test has to be applied. The point of time at which subsidy is paid is not relevant, neither the source nor the form of subsidy is material - as held that if the subsidy has been given for setting up of new units or substantial expansion of the existing unit, then same is to be treated as capital account. If the object of the subsidy scheme is to enable the assessee to run the business more profitably then the receipts is on revenue account. Hence in this case if we see the Preface of the Madhya Pradesh Udyog Nivesh Samvardhan Yogna of Industrial Promotion Policy of 2004 of the Madhya Pradesh Government, it provides that the subsidy would be given for setting up of a new industrial units at various places for employment generation and to accelerate the pace of industrialization in Madhya Pradesh. From the reading of the entire scheme, it is absolutely clear that the subsidy provided is not for assisting the assessee for augmenting the profit or help in running of the business, albeit it is for setting up of new industrial unit, for promotion of employment, growth, infrastructure in the backward areas of Madhya Pradesh. Thus, such a subsidy though given in the form of refund of VAT or CST is on capital account. Accordingly, we hold that the subsidy received by the assessee cannot be taxed as revenue, as it is on capital account, hence capital receipt. Product development expenses - Revenue or capital expenditure - HELD THAT - As relying on assessee's own case A.Y. 2007-08 assessee has changed the design of the bottle the expenditure would generally be on the revenue account, even though the advantage may have an enduring benefit for a brief period and the colour of the cap as is a regular phenomenon to be carried out between one to two years which cannot be held to be for an enduring benefit or major change in the profit making apparatus. Such, expenditures are required for either augmenting the sale or to survive in the market the market under stiff competition. Therefore, such expenditure has to be treated as revenue expenditure and, accordingly, the disallowance as confirmed by the learned Commissioner (Appeals) under the head product development expenditure is allowed.

Summary

Issues Involved:
1. Disallowance of business advances written off.
2. Disallowance of foreign travel expenditure.
3. Enhancement of disallowance for market research expenditure under Section 195.
4. Treatment of capital subsidy as revenue receipt.
5. Disallowance of product development expenses.

Detailed Analysis:

1. Disallowance of Business Advances Written Off:
The assessee claimed business advances of Rs. 5,40,607/- as bad debts under Section 37(1) of the Income Tax Act, 1961. The AO disallowed the claim, stating it does not fall within the category of "bad debts." The CIT(A) upheld the AO's decision, reasoning that the assessee is not in the business of advancing money. However, the Tribunal found that the advances were given for the purchase and processing of mango pulp, which is a raw material for the assessee's business. Since these advances became irrecoverable, they should be allowed as business expenditure under Section 37(1). Thus, the addition of Rs. 5,40,607/- was deleted, and the assessee's ground was allowed.

2. Disallowance of Foreign Travel Expenditure:
The AO disallowed foreign travel expenditure of Rs. 6,04,421/- incurred by the Directors, stating it was not justified as business expenditure. The CIT(A) upheld the disallowance due to a lack of specific details. The Tribunal noted that specific details of the tour were not available on record and restored the issue to the AO for fresh examination, allowing the ground for statistical purposes.

3. Enhancement of Disallowance for Market Research Expenditure Under Section 195:
The AO disallowed market research expenditure of Rs. 12,25,938/- as capital expenditure. The CIT(A) treated it as revenue expenditure but disallowed it under Section 40(a)(i) for non-deduction of TDS under Section 195. The Tribunal found that M/s Mintel International Group Ltd., the recipient of the payment, did not have a Permanent Establishment (PE) or business connection in India. Therefore, the assessee was not required to deduct TDS, and the disallowance under Section 40(a)(i) was deleted.

4. Treatment of Capital Subsidy as Revenue Receipt:
The AO treated the subsidy of Rs. 1,16,48,027/- received under the "Madhya Pradesh Udyog Nivesh Samvardhan Yogna 2004" as revenue receipt, stating it was a refund of VAT/CST paid. The CIT(A) upheld this view. However, the Tribunal applied the "purpose test" from the Supreme Court's decision in CIT vs. Ponni Sugars & Chemicals Ltd., determining that the subsidy was for setting up an industrial unit in a backward area and should be treated as a capital receipt. Thus, the subsidy was not taxable as revenue.

5. Disallowance of Product Development Expenses:
The AO treated product development expenses of Rs. 18,13,946/- as capital expenditure. The CIT(A) deleted the disallowance, stating these expenses were for research and development necessary for the business. The Tribunal upheld the CIT(A)'s decision, noting that similar expenses had been allowed in previous years and were essential for the assessee's business operations.

Conclusion:
The assessee's appeal was allowed, and the revenue's appeal was dismissed. The Tribunal provided detailed reasons for each issue, ensuring that the decisions were based on established legal principles and factual findings.