2016 (1) TMI 1488 - AT - Income Tax

Disallowance of 50% of Misc. Expenses including poojan expenses - HELD THAT - We find merit in the contentions of assessee, these expenditure being in the field of customary expenses, labour welfare having been allowed in past year should be allowed. Our view is fortified by Honble Delhi High Court and Madras High Court judgments in the cases of Mohan Meakin Ltd 2009 (10) TMI 894 - DELHI HIGH COURT and Aruna Sugars 1977 (1) TMI 8 - MADRAS HIGH COURT Disallowance of compensation paid to taparies for vacating the unauthorized construction / kacchi taparies - HELD THAT - Expenditure on compensation and payment to facilitators for removal of encroachment to ensure smooth mining activities related to business of the assessee are to be held as allowable expenditure. Our view is fortified by Hon ble Supreme Court judgments in the case of Dalmia Jain and Co. 1971 (7) TMI 2 - SUPREME COURT and Empire Jute Co 1980 (5) TMI 1 - SUPREME COURT and other judgments. This ground of the assessee is allowed. Disallowance of membership fee paid to rotary club on behalf of director - HELD THAT - Apropos meager amount incurred on club membership fee is allowable in view of various ITAT judgments including Sony India 2005 (5) TMI 557 - ITAT DELHI . As a result this ground of the assessee is allowed. Disallowance of professional charges paid to consultant for preparing project report to set up new power plant which did not materialize - HELD THAT - As it is not disputed that the opportunity of allotment of a coal mine along with establishment of 600 MW Coal based Power Plant in Raigarh District, Chhattisgarh was offered to assessee. Neither the genuineness of expenditure nor the shelving of the power plant project due to non allotment of coal block is doubted by authorities below. The expenditure has been disallowed only by holding it to be capital in nature. As in the case of CIT v. Expanded Metal Mfrs 1991 (2) TMI 99 - ALLAHABAD HIGH COURT held that - Where assessee firm, carrying on business of expenditure of iron metal by mechanical process and its supply, started a new business of manufacture of rubber products and for that purpose raised loan interest was allowable for relevant period even though during that period assessee's rubber factory did not work. The facts of the assessee case are similar and further supported by a catena of judgments as mentioned above. In these facts and circumstances respectfully following the se judgment we hold that assessee is eligible for claim of expenditure as revenue expenditure incurred for feasibility of new power project which could not commence. Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Disallowance of 50% of Miscellaneous Expenses including poojan expenses amounting to Rs. 24,271/-
2. Disallowance of compensation paid to taparies for vacating unauthorized construction/kacchi taparies amounting to Rs. 5,20,000/-
3. Disallowance of membership fee paid to Rotary Club on behalf of a director amounting to Rs. 3,000/-
4. Disallowance of professional charges paid to a consultant for preparing a project report to set up a new power plant which did not materialize amounting to Rs. 7,41,144/-

Detailed Analysis:

1. Disallowance of Miscellaneous Expenses (Poojan Expenses):
The assessee argued that the expenses towards poojan were related to the induction of new equipment and were part of labor welfare activities, including functions and decorations requested by workers. These expenses were claimed to be incidental to the business and supported by necessary vouchers. The lower authorities disallowed these expenses, considering them not incidental to the business. The assessee cited several judicial precedents where similar expenses were allowed as business expenditures. The Tribunal found merit in the assessee's contentions, observing that such customary expenses and labor welfare activities had been allowed in past years. The Tribunal allowed this ground, citing judgments from the Delhi High Court and Madras High Court.

2. Disallowance of Compensation for Removing Unauthorized Encroachment of Taparies:
The assessee, engaged in mining activities, paid compensation to individuals for vacating unauthorized structures on its mining lease area. This was argued to be a business necessity to ensure smooth mining operations and avoid complications. The lower authorities disallowed the expenditure on technical grounds, questioning the need for compensation without formal court settlements or notices. The assessee cited several judicial precedents supporting the claim that such expenses, incurred to protect business operations and assets, are allowable as revenue expenditure. The Tribunal agreed with the assessee, noting that the expenditure was necessary for business operations and supported by Supreme Court judgments. This ground was allowed.

3. Disallowance of Membership Fee for Rotary Club:
The assessee incurred Rs. 3,000/- for the Rotary Club membership of a director, as per the terms of his appointment. This expenditure was argued to be essential for business networking and meeting potential customers. The lower authorities disallowed the expenditure, considering it not for business purposes. The assessee cited several ITAT judgments where similar expenses were allowed. The Tribunal found the expenditure to be allowable, following the precedent set by various ITAT judgments, including Sony India. This ground was allowed.

4. Disallowance of Professional Charges for Feasibility Report for New Power Project:
The assessee engaged a consultant to prepare a Detailed Project Report (DPR) for a new power plant, which did not materialize due to the non-allotment of a coal block. The expenditure was claimed as revenue expenditure, but the lower authorities disallowed it, considering it capital in nature. The assessee argued that such expenses, incurred for exploring new business opportunities, should be allowed as revenue expenditure if the project does not commence. Several judicial precedents were cited to support this claim. The Tribunal agreed with the assessee, noting that the genuineness of the expenditure and the shelving of the project were not in dispute. The Tribunal allowed the expenditure as revenue expenditure, citing the judgment of the Allahabad High Court in CIT v. Expanded Metal Mfrs. and other similar cases.

Conclusion:
The Tribunal allowed the appeal of the assessee on all grounds, finding the expenditures to be allowable as revenue expenditures incurred wholly and exclusively for business purposes. The order was pronounced in the open court on 08/01/2016.