2016 (6) TMI 1421 - AT - Income Tax

Disallowance of expenditure on loose toolls etc. - AO made addition on the ground that the assessee-company has not brought any evidence that these tools were used in the production - HELD THAT - As decided in own case for assessment year 2008-09 we find that the Revenue has not disputed the incurring of expenditure by the assessee in purchase of the tools. The only reason for the disallowance is that it is not revenue in nature but is of capital in nature. It is also not disputed that the assessee is following the said method of accounting for the past 14 years and no disallowance has been made in the previous years. As rightly pointed out by the learned counsel for the assessee, the Revenue effect would be very minimal whether the expenditure is treated as revenue in nature or treated as capital in nature and depreciation allowed thereon. Therefore, taking the totality of the facts into consideration, we hold that revenue ought to have allowed the revenue expenditure claimed by the assessee. Disallowance of interest - interest-free loan was granted to sister concerns - CIT(A) deleted the addition following the order of the Tribunal in the assessee s own case for assessment year 2008-09 wherein it was held that in absence of nexus between interest-bearing funds and advance-free advance, no disallowance was called for - HELD THAT - No finding by the AO that there is nexus between the interest bearing funds of the assessee and the interest-free advances of the sister concerns. The only reason for the disallowance is that the assessee is paying interest on the loans taken by it, while it has given interest free advances to sister concerns, when there is no nexus between the interest bearing funds and the interest free advances, the presumption to be drawn is that the advances are out of the non interest bearing funds of the assessee as held by the Hon'ble supreme Court in the case of Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT therefore, it has to be presumed that the interest free advances are out of the own funds of the assessee and, therefore, no disallowance of interest is called for. The assessee's contention of the commercial expediency of advancing the loans is not accepted for the reason that the sister concerns have not carried out any activities during the relevant previous year and the assessee also has not established the commercial expediency for the said advances. This ground of appeal is accordingly allowed. Disallowance of salary expenses of R D activity - AO disallowed the same holding them to be capital in nature and allowed depreciation - CIT(A) after considering details of salary expenses found to be revenue in nature allowed the same - revenue had not brought any evidence controverting the findings of the CIT(A) - HELD THAT - The reasoning of the AO that on account of negative balance in work-in-progress, the addition of double of negative balance has to be made cannot be accepted. Therefore, the finding of the CIT(A) restricting to 50% of the addition is hereby upheld. In the circumstances, ground of appeal raised by the revenue is dismissed. Addition on account of work-in-progress - HELD THAT - The reasoning of the AO that on account of negative balance in work-in-progress, the addition of double of negative balance has to be made cannot be accepted. Therefore, the finding of the CIT(A) restricting to 50% of the addition is hereby upheld. In the circumstances, ground of appeal raised by the revenue is dismissed. Disallowance of provision for erection charges - HELD THAT - As the provisions are allowable as deduction while computing income under profits and gains of business provided the liability can be estimated with reasonable accuracy and the liability has accrued even though payment of the liability is postponed to a future date. But in the present case, the assessee had failed to demonstrate either before the lower authorities or before us that the liability has accrued during the year and the fact that the substantial provision was reversed in subsequent years goes to prove that the liability was not estimated with reasonable accuracy.

Issues Involved:
1. Disallowance of expenditure on loose tools.
2. Disallowance of interest on interest-free loans to sister concerns.
3. Disallowance of salary expenses for R&D activities.
4. Addition on account of negative work-in-progress.
5. Disallowance of provision for erection and commissioning charges.

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure on Loose Tools:
The Assessing Officer (AO) disallowed ?3,17,10,684 on the grounds that the assessee did not provide evidence that the tools were used in production. The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the deduction by following the Tribunal's decision for the assessment year (AY) 2008-09, where it was held that the expenditure should be treated as revenue in nature. The Tribunal upheld the CIT(A)'s decision, emphasizing the principle of consistency since the Revenue did not dispute the incurring of expenditure and had not reversed the decision in subsequent years.

2. Disallowance of Interest on Interest-free Loans to Sister Concerns:
The AO disallowed ?13,45,687 due to interest-free loans given to sister concerns. The CIT(A) deleted the addition, referring to the Tribunal’s decision for AY 2008-09, which stated that in the absence of a nexus between interest-bearing funds and interest-free advances, no disallowance is warranted. The Tribunal upheld this decision, noting that the CIT(A) had followed the Tribunal's prior ruling and that the Revenue had not demonstrated that the decision was overturned by a higher court.

3. Disallowance of Salary Expenses for R&D Activities:
The AO categorized ?1,37,34,846 as capital expenditure, allowing only depreciation. The CIT(A) found the salary expenses to be revenue in nature and allowed them. The Tribunal upheld the CIT(A)'s decision, as the Revenue failed to provide evidence to counter the CIT(A)'s findings.

4. Addition on Account of Negative Work-in-progress:
The AO added ?34,57,802 due to negative balances in work-in-progress accounts. The CIT(A) reduced the addition to ?17,28,941, reasoning that some human error could lead to negative work-in-progress. The Tribunal upheld the CIT(A)'s decision, rejecting the AO's logic of doubling the negative balance for addition.

5. Disallowance of Provision for Erection and Commissioning Charges:
The assessee's appeal focused on the disallowance of ?28,10,905 for provision for erection and commissioning charges. The CIT(A) upheld the disallowance, stating that the provision was contingent and not estimated with reasonable accuracy. The Tribunal dismissed the assessee's appeal, noting that the assessee failed to demonstrate that the liability had accrued during the year and that substantial reversal of the provision in subsequent years indicated inaccurate estimation.

Conclusion:
The Tribunal dismissed the appeals filed by both the Revenue and the assessee, thereby upholding the CIT(A)'s decisions on all issues. The judgments emphasized the principles of consistency, accurate estimation of liabilities, and the distinction between revenue and capital expenditures.

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