2017 (12) TMI 1817 - AT - Income Tax

Disallowance of claim u/s 35(1)(ii) on payment of brand equity subscription, building repair and commission expenses - CIT(A) directing the AO to allow expenditure by holding that the only requirement for claiming expenses is that it should be incurred on research related activities and should be revenue in nature - HELD THAT - CIT(A) while dealing with the above ground has considered the facts and submissions and has categorically mentioned that during the course of appellate proceedings, the assessee has furnished necessary documents, which were furnished before the AO and after appreciating the documents had concluded that the expenses incurred by the assessee were on the improvement of the designs of the existing machinery. - No new facts or contrary judgments have been brought on record before us in order to controvert or rebut the findings so recorded by Ld CIT (A) - no reasons for us to interfere into or deviate from the findings recorded by the LCIT (A). Hence, we are of the considered view that the findings so recorded by the Ld. CIT (A) are judicious and are well reasoned. - Decided against revenue. Disallowance for repairs to leased building by disregarding provisions of section 30/37 - Assessee submitted that the assessee has incurred expenses towards repairs on leased premises - revenue authorities disallowed the same by holding that only current repairs are allowable as deduction u/s 30 - HELD THAT - As per the facts of the present case, the assessee entered into lease agreement of Tata Motors wherein the plot of land along with building was leased out to the assessee for a period of 60 months. Those expenses incurred by the assessee pertain to the current year i.e. during the substances of agreement. The assessee has already placed on record the details of expenses incurred on repairs. In this respect, we wish to place reliance on the following judicial precedents in the case of CIT Vrs. HEDE Consultancy Ltd. 2002 (6) TMI 19 - BOMBAY HIGH COURT wherein it was held that expenditure incurred by the assessee on repairs and renovation of premises taken on lease was revenue expenditure and allowable u/s 30 - we set aside the order of Ld. CIT(A) and hold that the expenditure for the current repair incurred by the assessee are allowable u/s 30 - Decided in favour of assessee. Disallowance of commission expenses paid - As per the provisions of section 37(1) it is mandate of law that deduction under these provisions can be claimed if the same is laid out or expended wholly and exclusively for the purpose of business. As per the facts of the present case, the assessee has paid the commission based on the order being received through such commission agent. It was also submitted that the commission was paid in accordance with the agreement entered into with the parties, which is binding on the company. The Ld. AR also drawn our attention to the paper book which contains agreement, sample invoice, bank statements, etc. Whereas on the contrary, no evidence has been brought on the record by the AO to rebut the same. It is also important to mention that the books of account of the assessee and the sales income of the assessee have not questioned /rejected by the AO. We have gone through the judgment cited Nikunj Exim Enterprises Ltd. 2013 (1) TMI 88 - BOMBAY HIGH COURT held that mere non-receipt of reply to the notice issued u/s 133(6) of the Act should not be a basis for making disallowance. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of Research and Development expenditure.
2. Disallowance of expenses incurred on repairs to the building.
3. Disallowance of commission paid.
4. Levy of interest under sections 234B and 234C of the Income Tax Act.

Detailed Analysis:

Issue 1: Disallowance of Research and Development Expenditure
The revenue appealed against the CIT(A)'s decision to allow the expenditure of ?52,17,597 on research and development activities. The CIT(A) held that the expenses were incurred on improving the designs of existing machinery and were revenue in nature, thus allowable under section 35(1)(i) of the Income Tax Act. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had provided necessary documents during appellate proceedings, which were also furnished before the AO. The Tribunal found no defect in the documents and concluded that the CIT(A)'s findings were judicious and well-reasoned. Consequently, the revenue's appeal was dismissed.

Issue 2: Disallowance of Expenses Incurred on Repairs to the Building
The assessee appealed against the CIT(A)'s decision to treat the repairs to the leased building as capital in nature. The Tribunal noted that the expenses were incurred on normal repairs to enable the assessee to use the leased premises for business purposes. The Tribunal referenced section 30 of the Act, which allows repair expenses incurred by a tenant as a deduction, regardless of whether they are 'current repairs'. The Tribunal relied on the Bombay High Court's decision in CIT v. HEDE Consultancy Ltd., which held that repair and renovation expenses on leased premises are revenue expenditures. Thus, the Tribunal set aside the CIT(A)'s order and allowed the expenditure under section 30, resulting in this ground being allowed.

Issue 3: Disallowance of Commission Paid
The assessee appealed against the CIT(A)'s decision to uphold the AO's disallowance of ?18,48,636 in commission expenses. The CIT(A) had disallowed the commission because the parties to whom the commission was paid did not respond to notices issued under section 133(6). The Tribunal held that non-furnishing of information by third parties cannot be the sole basis for disallowance when the assessee has provided evidence of the expenses incurred in the normal course of business. The Tribunal noted that the commission was paid in accordance with agreements, and all payments were made through banks with applicable withholding tax deducted. The Tribunal referenced the Bombay High Court's decision in CIT v. Nikunj Exim Enterprises Ltd., which held that non-receipt of replies to section 133(6) notices should not be a basis for disallowance. Therefore, the Tribunal allowed the commission expenses under section 37(1), resulting in this ground being allowed.

Issue 4: Levy of Interest under Sections 234B and 234C
The assessee's appeal included grounds challenging the levy of interest under sections 234B and 234C. These grounds were deemed general in nature and did not require specific adjudication by the Tribunal.

Conclusion:
The Tribunal dismissed the revenue's appeal (ITA No. 3847/Mum/2014) and partly allowed the assessee's appeal (ITA No. 4083/Mum/2014), providing relief on the issues of repair expenses and commission paid, while upholding the CIT(A)'s decision on research and development expenditure. The order was pronounced in the open court on December 28, 2017.