2016 (9) TMI 55 - AT - Income Tax

Disallowance under Section 40(a)(ia) in the absence of details - Held that - From going through the submissions of ld. AR we understand that the only reason for which ld. Assessing Officer has not allowed the deduction that there is no record about the type of expenditure of ₹ 14.40 lacs as the same has been mentioned as miscellaneous expenses and if an expenditure on which TDS is not required to be deducted then such expenses cannot be allowed in this year as they pertained to earlier years.We are, therefore, of the view that this issue needs to be set aside to the file of Assessing Officer before whom necessary details will be supplied by the assessee showing the type of expenditure, year of incurring such expenditure and provisions of TDS applicable on this expenditure was incurred. Eligibility of depreciation - Held that - The assessee has proved beyond doubt that the impugned assets consisting of 5 trucks purchased for ₹ 67,34,004/- satisfy all the conditions as provided u/s 32 of the Act and, therefore, are eligible for depreciation Disallowance on depreciation on the assets treating them capital working in progress - Held that - On the examination of the detailed annexure-3 at page 188 of the paper book there appears details of assets costing ₹ 27,83,223/- which were transferred from capital work in progress to fixed assets a/c. under plant & machinery head and were put to use on 3rd May, 2008. Similarly, on page 195 of this paper book shows that assets of ₹ 3,15,984/- under electrical installation head were put to use on 22nd May, 2008. Auditors remark which both the lower authorities are referring to is appearing at remarked-3 of Annexure-3 on depreciation details for FY 2008-09 in form 3CD report is just referring that the addition during the year includes the capital work in progress which means that the addition includes some assets which have been purchased during the year and some assets which were forming of capital work in progress upto previous year were now shifted under the block of assets for the purpose of claiming depreciation. We are of the view that remark of statutory auditors has to be seen in totality that Annexure-3A of the same assets duly certified by the same auditor giving bifurcation of each and every assets to the date of its being put to use and above all the depreciation for the year claimed by the assessee is also duly certified by the same auditor. Therefore, we are of the view that no disallowance was called for on depreciation of ₹ 4,64,850/- on the assets of ₹ 30,99,207/- treating them capital working in progress upto FY 2007-08 and FU 2008-09 i.e. the Asst. Year under consideration, We allow this ground of assessee. Addition u/s 14A - Held that - No disallowance is called for u/s 14A as assessee has not claimed any exempt income in the year under appeal. Disallowance being the provision for diminution in assets - Held that - Respectfully following the judgment of Hon. Jurisdictional High Court in the case of CIT vs. Abdul Razak & Co. (1981 (2) TMI 27 - GUJARAT High Court), we are of the considered opinion that sundry debit balance written off for ₹ 56,000/- should be allowed as a revenue expenditure. This ground of assessee is allowed Deduction u/s 40(a)(ia) - Held that - As in the given circumstances when there is no dispute to the genuineness of the expenditure which proves that these expenses of ₹ 36.3 lacs were actually incurred in earlier years but could not have been claimed for some reason or other. Even if these expenditure had been claimed, they certainly would have been disallowed u/s 40(a)(ia) of the Act as no tax was deducted and deposited. This exercise of deducting and depositing TDS was carried out in the year under appeal which fulfills all the conditions of section 40(a)(ia) of the Act which allows to claim deduction of such expenditure in the year in which due taxes (TDS) are deposited. By claiming this expenditure of ₹ 36.3 in this year there is no impact to the Revenue in terms of tax liability. We are, therefore, of the view that assessee should be allowed deduction u/s 40(a)(ia) of the Act for ₹ 36.3 lacs and therefore, no interference is called for in the order of ld. CIT(A) with respect to this ground. Accordingly this ground of Revenue is dismissed. TDS u/s 192 or 194H - Whether commission or brokerage paid to Chairman/whole time Director is part of salary on which TDS is deducted u/s 192 of the Act or it is to be treated as commission/brokerage on which TDS is deductible u/s 194H - addition u/s 40(a)(ia) - Held that - Thus issue has been settled by the Co-ordinate Bench, Kolkata in the case of Jahangir Biri Factory (P) Ltd. v. Dy. CIT (2009 (3) TMI 215 - ITAT CALCUTTA-C ) wherein it has been held that commission paid to the Directors as per their terms of employment for the work done in their capacity as whole time directors should have been treated as an incentive in addition to salary, bonus and other perquisites and they do not fall under the purview of sec.194H or 194J. It is true that tax is deductible on such commission at the rate prescribed u/s 192 of the Act, since such commission is nothing but part of salary and the appellant has failed to deduct such tax. However, provisions of sec.40(a)(ia) of the Act do not cover expenditure subject to tax deductible u/s 192 of the Act. We are therefore of the view that the impugned amount of commission/brokerage paid to directors is a part of salary and remuneration to the Chairman and Managing Directors and income-tax is required to be deducted at source u/s 192 of the Act. Where the assessee has deducted and deposited the part of TDS during the year and the remaining in the following year on the commission paid to whole time directors which is in the nature of salary is rightly subject to TDS u/s 192 of the Act and not u/s 194H of the Act and, therefore, no disallowance is called for u/s 40(a)(ia) of the Act Disallowance on account of interest on non interest bearing advance - Held that - We find that assessee company is dealing with edible oil and non-edible oil and the gross turnover of ₹ 1478.7 crores and profit before taxes at ₹ 13.49 crores. We further observe that reserve and surplus of ₹ 42.56 crores stood along with 6.47 crores as capital as on 31/3/2008. We also observe that total of share capital reserve and surplus at ₹ 49.03 crores is almost 3 times of loan funds of ₹ 15.36 crores. The reason for observing these financial datas are to analyse that assessee company is having huge turnover, heavy profits, sufficient capital basis and availability of interest-free funds. Further we find that there is no dispute to the basic finanancial results i.e. GP or NP of the company and audited books of account have been accepted by the Revenue. Now as far as M/s N. K. Industries is concerned, we find that assessee is regularly purchasing non-edible oil on exclusive basis and if we analyse the advances standing at the end of the month with the monthly sales of the assessee company, we find that the monthly sales of the company are approx. ₹ 120 crores and the closing balance of M/s N. K.Indus. is approx. ₹ 10 crores. These transactions are undoubtedly business transactions and there is no evidence on record to show that these are interest free advances. These are purely business advances and profit earning company in the regular course of business and for commercial expediency has to keep funds advanced to the supplier of raw material to have uninterrupted supply of quality goods. We are of the view that ld. Assessing Officer was not justified in making disallowance of ₹ 84 lacs on the advances to M/s N.K. Industries. As far as advances of ₹ 50 lacs to Vipul Industries is concerned which has been settled in the subsequent year seems to be a normal business advance looking to the over all financial volume of assessee company and do not call for any disallowance of interest. Similarly in the case of Guru Commodities and Pearl Energy calling debit balances of ₹ 25000/- and ₹ 646627/- are also old advances and revenue has also not brought on record any evidence to prove that these are non-business advances, we are of the view that in the given facts and circumstances of the case where assessee has sufficient interest free funds, liquid funds and profit earning business, these advances have been made in the regular course of business for commercial expediency. Accordingly, no disallowance was called for ₹ 91,07,595/- on account of interest expenditure u/s 36(1)(iii) of the Act as the advances were for business purposes, commercial expediency and no nexus being proved by the Revenue for actual diversion of interest bearing funds to non-interest bearing advances. No interference is called for in the order of ld. CIT(A). In the result, appeal of Revenue is dismissed.

Summary

Issues Involved:
1. Disallowance under Section 40(a)(ia) due to absence of details.
2. Disallowance of depreciation on five tankers.
3. Disallowance of depreciation on Plant & Machinery and electrical installation.
4. Disallowance under Section 14A.
5. Disallowance of provision for diminution in assets.
6. Disallowance under Section 40(a)(ia) for prior period expenses.
7. Disallowance due to non-compliance with Section 194H for commission to Directors.
8. Disallowance of interest on non-interest bearing advances.

Detailed Analysis:

1. Disallowance under Section 40(a)(ia) Due to Absence of Details:
The Assessing Officer (AO) disallowed ?14,40,000 as miscellaneous expenses under Section 40(a)(ia) due to lack of specific details. The CIT(A) upheld this disallowance. The Tribunal remanded the issue back to the AO for verification of the type of expenditure, the year of incurrence, and the applicability of TDS provisions. The AO was instructed to allow the expenditure if the TDS was paid, providing the assessee an opportunity to be heard.

2. Disallowance of Depreciation on Five Tankers:
The AO disallowed ?16,83,501 depreciation on five tankers, stating they were not used for business purposes. The CIT(A) upheld this disallowance, suggesting the evidence provided was insufficient. The Tribunal, however, found that the tankers were indeed put to use based on external evidence such as purchase bills, permits, and fitness certificates. The Tribunal allowed the depreciation, referencing the Gujarat High Court's decision in ACIT vs. Asima Syntex.

3. Disallowance of Depreciation on Plant & Machinery and Electrical Installation:
The AO disallowed ?4,64,850 depreciation on Plant & Machinery and electrical installation, citing these were included in work-in-progress as per the auditor's report. The CIT(A) upheld this disallowance. The Tribunal, however, found that the assets were transferred from work-in-progress to fixed assets and were put to use during the year. The Tribunal allowed the depreciation, noting the auditor's certification of the assets being put to use.

4. Disallowance under Section 14A:
The AO disallowed ?1,13,521 under Section 14A, which was upheld by the CIT(A). The Tribunal found that no exempt income was earned by the assessee during the year, referencing the Gujarat High Court's decision in CIT vs. Corrtech Energy P. Ltd. The Tribunal concluded that no disallowance under Section 14A was warranted and allowed the assessee's appeal.

5. Disallowance of Provision for Diminution in Assets:
The AO disallowed ?56,000 claimed as sundry debit balances written off, treating them as capital in nature. The CIT(A) upheld this disallowance. The Tribunal allowed the deduction, referencing the Gujarat High Court's decision in CIT vs. Abdul Razak & Co., which treated such write-offs as allowable revenue expenditure.

6. Disallowance under Section 40(a)(ia) for Prior Period Expenses:
The AO disallowed ?50,70,317 for prior period expenses, which was partially deleted by the CIT(A) for ?36.3 lacs as TDS was deducted and paid. The Tribunal upheld the CIT(A)'s decision to allow ?36.3 lacs, noting that the expenses were genuine and TDS was paid in the current year, fulfilling Section 40(a)(ia) requirements.

7. Disallowance Due to Non-Compliance with Section 194H for Commission to Directors:
The AO disallowed ?83,98,000 commission paid to directors, treating it under Section 194H. The CIT(A) deleted the disallowance, treating the commission as part of salary subject to TDS under Section 192. The Tribunal upheld this decision, referencing the ITAT Kolkata's decision in Jahangir Biri Factory (P) Ltd. and noting that Section 40(a)(ia) does not cover salary expenses.

8. Disallowance of Interest on Non-Interest Bearing Advances:
The AO disallowed ?91,07,595 interest on advances to four parties, treating them as non-business advances. The CIT(A) deleted this disallowance, noting the advances were for business purposes and the assessee had sufficient interest-free funds. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's decision in Hero Cycles P. Ltd. vs. CIT and Gujarat High Court's decision in CIT v. Raghuvir Synthetics Ltd.

Conclusion:
The Tribunal provided relief to the assessee on most grounds, allowing depreciation claims, disallowing Section 14A claims due to no exempt income, and treating certain write-offs and advances as business expenses. The Tribunal upheld the CIT(A)'s decisions where appropriate and remanded specific issues for further verification by the AO.