2015 (3) TMI 1393 - AT - Income Tax

Disallowance of miscellaneous income arising out of scrap sale as deduction from pre-production capital expenditure - HELD THAT - The interest income earned on the excess borrowed fund was assessed as income of the assessee. However in this case before us, the assessee has generated scrap while relocating and erecting its machinery. Obviously the revenue derived from the sale of such scrap will go to reduce the erection cost which is to be capitalized. It is pertinent to note that the scrap generated is not from the production activity of the assessee but from relocation and erection of the machinery belonging to the assessee. Therefore the miscellaneous income arising out of scrap sale from such activity should be reduced from the pre-production capital expenditure incurred by the assessee. Thus this ground raised by the assessee is allowed in its favour. Disallowance of prior period expenses - HELD THAT - In mercantile system of accounting, only the expenditure that has crystallized during the relevant assessment year is to be treated as allowable deduction. In this case, it is apparent that the payment made by the assessee had crystallized as expenditure during the relevant assessment year. Therefore, the assessee has rightly claimed the same as allowable deduction. In these circumstances, we hereby direct the AO to allow the claim of the assessee as allowable deduction. It is ordered accordingly. Disallowance of expenses towards prepayment premium and interest recompense - HELD THAT - As relying on GUJARAT STATE FERTILIZERS CHEMICALS LTD. 2013 (7) TMI 701 - GUJARAT HIGH COURT and GUJARAT GUARDIAN LIMITED 2009 (1) TMI 13 - HIGH COURT DELHI we hereby direct the Ld. Assessing Officer to delete the additions made on account of disallowance being the payment towards interest recompense on CDR scheme. Thus this issue is also held in assessee s favour.

Summary

Issues:
1. Disallowance of miscellaneous income arising from scrap sale as deduction from pre-production capital expenditure for A.Y. 2003-04.
2. Disallowance of prior period expenses for A.Y. 2007-08.
3. Disallowance of expenses towards prepayment premium and interest recompense for A.Y. 2007-08.

Issue 1: Disallowance of Miscellaneous Income for A.Y. 2003-04:
- The Assessing Officer disallowed miscellaneous income from scrap sale as deduction from pre-production capital expenditure.
- Assessee argued that the scrap was generated during relocation of assets, not from production activity, and should reduce machinery erection costs.
- Tribunal found the income derived from scrap sale reduced the erection cost and was not from production activity, allowing the appeal in favor of the assessee.

Issue 2: Disallowance of Prior Period Expenses for A.Y. 2007-08:
- AO disallowed prior period expenses including scientific study costs and denied subsidy claims as allowable expenditure.
- Assessee argued these expenses crystallized during the relevant assessment year and should be deductible.
- Tribunal agreed with the assessee, stating that crystallized expenses are allowable deductions, directing the AO to allow the claimed amount.

Issue 3: Disallowance of Expenses for Prepayment Premium and Interest Recompense for A.Y. 2007-08:
- AO disallowed expenses towards interest recompense, considering it capital expenditure due to enduring benefit.
- Assessee argued the payment was for restructuring loans and reducing interest rates, constituting revenue expenditure.
- Tribunal referred to relevant case laws and directed the AO to delete the disallowance, holding the issue in favor of the assessee.

In conclusion, the ITAT Chennai allowed the appeals of the assessee for A.Y. 2003-04 and 2007-08 concerning the disallowances of miscellaneous income, prior period expenses, and expenses for prepayment premium and interest recompense, respectively. The Tribunal analyzed each issue in detail, considering the nature of expenses and income involved, and directed the Assessing Officer to allow the deductions claimed by the assessee based on the merits of each case.