2016 (9) TMI 108 - AT - Income Tax

Disallowance made out of stores and spare expenses - CIT(A) allowed claim - Held that - The assessee is following consistent accounting policy whereby insurance claim and recovery of cost towards accessories are accounted for on cash basis due to uncertainty of realization. The amount of insurance claimed received as per breakdown insurance policy taken for the D.G. set amounting to ₹ 32,76,485/- and realization from sale of scrap of damaged turbo charger amounting to ₹ 8 lacs has been received and offered to tax in the subsequent assessment year 1998-99. Hence we do not see that there is any loss which has been caused to the Revenue by not offering the said receipts in the year under consideration. It is not the case of the Revenue that any tax rates have changed in the subsequent year. In light of above, we do not see any justification in interfering with the order of ld. CIT(A). Hence we confirm the findings of the ld. CIT(A) and dismissed the ground of the Revenue. Disallowance of legal & professional charges treating the same as expenditure for getting a benefit of enduring nature - CIT(A) allowed claim - Held that - An amount of ₹ 4,40,000/- has been incurred by the assessee towards the environmental study which was undertaken for converting its existing mercury plant into a technological better membrane cell plant. There is nothing on record to confirm that the assessee has actually converted the existing plant into the new plant and whereby the said cost should go and be added to the cost of the new plant. The expenditure therefore is clearly in connection with conducting a study to make the plant technological better plant. In our view, the said expenditure towards carrying out only the consultancy study cannot be characterized as a capital expenditure. Further the decision in case of Majestic Auto Ltd. 2009 (1) TMI 57 - PUNJAB AND HARYANA HIGH COURT quoted by the ld. AR support the said position. In light of above, we do not see any necessity to interfere to the findings of the ld. CIT(A) Addition in respect of collection of benevolent fund u/s 2(24)(x) - CIT(A) allowed claim - Held that - The liability of the assessee towards its share of contribution to the benevolent fund for the welfare of the employees has not been disputed. Further the ld. CIT(A) has confirmed that the said contribution has been deposited before due date of filing the return of income, hence in light of the provisions of section 43B of the Act the said contribution has been rightly allowed by the CIT(A) Disallowance on account of entertainment expenses - CIT(A) allowed part claim - Held that - The amount of ₹ 2,19,682/- has been incurred on boarding and lodging of Engineers who have been called upon to carry out repair of faults in the appellant s plant. Further ₹ 75,000/- has been estimated by the AO towards entertainment expenditure which has been incurred on expenses of tea, coffee, cold drinks etc. for the visitors who have visited the office and factory premises of the assessee. In our view these are routine business expenditure which has been incurred to provide basic hospitality to the technicians and guests who have visited the office and factory premises. Disallowance in respect of guest house expenses - Held that - CIT(A) has given a finding of fact that as per tax audit report submitted before him, an amount of ₹ 8,55,975/- which includes ₹ 7,19,965/- towards the guest house expenses for Delhi office has already been considered by the auditor for disallowance of the guesthouse expenses. The said findings of the ld. CIT(A) remain uncontroverted. In light of that, we donot see any justification for estimation of expenses as done by the AO. We accordingly confirm the order of the ld. CIT(A) and the ground of the revenue is dismissed. Addition made on account of payment to clubs - Held that - The Hon ble Punjab & Haryana High Court in the case of CIT Vs. Groz Beckert Asia Ltd (2013 (2) TMI 375 - PUNJAB & HARYANA HIGH COURT ) has held that corporate membership does not bring in the existence an asset or an advantage for enduring benefit to the business. The corporate membership was obtained for running the business. Thus we confirm the order of the ld. CIT(A) who has rightly held that the expenditure incurred on payments to clubs is in the nature of business expenditure Addition of vehicle expenses - CIT(A) allowed part claim - Held that - . The vehicle expenses have been disallowed on two accounts. Firstly on a/c of non-business use of the expenses and secondly, on a/c of provisions of ₹ 1,20,000. It is a settled position in law that in case of corporate entities, no disallowance can be made for personal use as corporate entities are distinct from directors and any payments/expenditure incurred for Directors are governed by their terms of appointment. In the instant case, therefore no disallowance can be made holding that expenditure has been incurred for the personal purposes. Secondly, the liability for ₹ 1,20,000/- has crystallized during the year and following the mercantile system of accounting, the same cannot be disallowed. In the result, we delete the disallowance ₹ 1,20,000/- towards vehicle disallowance made by the AO. In the result, the ground of the revenue is dismissed and the ground of the assessee is allowed. Addition made of difference in MODVAT value available in valuation of closing stock of raw material - Held that - The appellant has submitted that as against Excise Duty of ₹ 3,64,438/- in respect of closing stock of raw material, the appellant had a MODVAT credit available in its books of accounts amounting to ₹ 2,98,099/- and further the balance amount of the Excise duty has been paid before the due date of filing of the return. The AO is accordingly directed to verify the said claim of the assessee and where the same is found to be in order, allow necessary relief to the assessee. Hence this ground of the revenue is dismissed. Addition on account of valuation of closing stock - Held that - he ld. CIT(A) has given a finding of fact that the assessee is regularly following the consistent basis for the valuation of its closing stock and there is no deviation in the valuation method during the year. Further the ld. AR has submitted that for subsequent A.Y 1997-98 the AO has accepted the closing stock declared by the assessee for the year under consideration as opening stock for that year and also accepted the closing stock declared in that year. Further it is noted that there is no change in the rate of tax for the year under consideration and the subsequent assessment year, hence following the decision of Hon ble Supreme Court in the case of Excel Industries Ltd. 2013 (10) TMI 324 - SUPREME COURT we hereby delete the addition of ₹ 10 lacs on account of valuation of closing stock. Disallowance of amount paid to RSEB - Held that - The assessee has submitted that an amount has been paid to RSEB towards drawing excess power over and above the sanction capacity. It is therefore, a matter which falls within the realm of contractual relationship between the assessee and the RSEB and it is clearly in the nature of contractual payment rather than infringement of any law of the land. In light of that, we delete the disallowance of sum paid to RSEB. Disallowance on adhoc basis out of repairs and maintenance expenses - Held that - AO has highlighted specific expenses amounting to ₹ 2,11,997/- incurred towards repair and maintenance of the guest house at 15 Friends colony, New Delhi. It is also noted that the assessee has already disallowed an amount of ₹ 1,68,707/- u/s 37(4) while filing its return of income. In light of that, we do not see any justification in AO making an estimation and disallowance at ₹ 19,00,000/-. We accordingly direct the AO to restrict the disallowance to ₹ 2,11,997/-. Given that the assessee has already disallowed ₹ 1,68,707/-, the balance disallowance of ₹ 43,290/- should be made in the hands of the assessee Disallowance of foreign travel expenditure - Held that - The decision of Hon ble Bombay High Court in case of Bralco Metal Industries Pvt. Ltd.(1993 (9) TMI 318 - BOMBAY High Court ) was brought to the notice of Bench in support of the contention that the expenditure on foreign travel of Managing Director to examine the suitability of machinery for a running business is not capital in nature where no machinery was purchased. In light of above, we set-aside the matter to the file of the AO to examine where any new capital assets were purchased by the assesse pursuant to foreign visits made during the year under consideration. Whether it is found that no new capital assets have been purchased by the assessee, the AO is directed to allow the foreign travel expenditure as a revenue expenditure Addition of publicity expenses - Held that - It is not in dispute that the amount of ₹ 1 lacs has been paid to Equestrian Federation of India and other amounts have been paid to Shri Jawahar Jain education Institute and Puja Samiti and other trust to support their educational and social activities. The ld. AR has submitted its inability to submit the supporting documentation in view of the fact that the assessee has become a sick company and the matter is pretty old. Given that the genuineness of the expenditure has not been doubted and the payments has been made by cheque, we delete the disallowance of ₹ 2 lacs out of the publicity expenses. Disallowance of interest payment - Held that - In light of decision of Hon ble Supreme court in case of Hero cycles 2015 (11) TMI 1314 - SUPREME COURT OF INDIA the bank guarantee for ₹ 5 crores in favour of IDBI by depositing ₹ 5 crores with the bank as FD became imperative as a business expediency as part of the rehabilitation package of M/s Modi Cement which is one of the group companies. Similarly, the assessee has supported the other group companies which were also going through the financial and liquidity crunch in order to meet the statutory liabilities and dues towards salary of employees, workers and other expenses and has thus satisfied the test of commercial expediency in respect of other loan and advances as well. In light of that, we delete the disallowance of ₹ 21,96,755/-. In the result, ground of the assessee is allowed. Addition u/s 40A - Held that - Exceptions contained in Rule 6DD are not exhaustive and the said rule must be interpreted liberally and taking into consideration the business expediency of making cash payment, we hereby delete the disallowance in the hands of the assessee. Addition of prior period expenses - Held that - There is no dispute that the expenses have been incurred for the purposes of business and the genuineness of the expenses are not under question, we hereby delete the disallowance Addition on account of loss in transit - Held that - CIT(A) while confirming the disallowance has held that the assessee did not file any evidence and justification in support of the transit loss of ₹ 4,73,264/-. Hence we do not see any justification to interfere in the order of ld. CIT(A) hence same is confirmed and the ground taken by the assessee is dismissed.

Summary

Issues Involved:
1. Deletion of addition/disallowance of ?40,76,485/- made out of stores and spare expenses.
2. Deletion of disallowance of ?4,40,000/- made out of legal and professional charges.
3. Deletion of addition of ?90,400/- made in respect of collection of benevolent fund.
4. Restriction of entertainment expenditure to ?37,500/- out of total disallowance of ?1,47,341/-.
5. Deletion of addition/disallowance of ?3,41,550/- made in respect of guest house expenses.
6. Deletion of addition of ?2,35,000/- made on account of payment to clubs.
7. Restriction of vehicle expenses to ?1,20,000/- out of total disallowance of ?2,00,000/-.
8. Direction to allow the payment of excise duty of ?60,00,000/- and confirming the addition of ?5,33,24,729/- on account of premium receipt on sale of liquid chlorine.
9. Direction to allow the claim of assessee after verifying the amount from the record in respect of addition made of difference of ?1,01,901/- in MODVAT value.
10. Restriction of expenses made on account of repair of vehicle to ?3,02,000/- out of total disallowance of ?6,02,000/-.
11. Deletion of addition of ?10,00,000/- made out of manufacturing expenses on account of valuation of closing stock.
12. Confirmation of disallowance of ?3,01,832/- out of power and fuel expenses.
13. Confirmation of disallowance of ?19,00,000/- on adhoc basis out of repairs and maintenance expenses.
14. Confirmation of disallowance of ?12,38,418/- out of foreign travelling expenses.
15. Confirmation of disallowance of ?1,04,108/- out of legal expenses.
16. Confirmation of disallowance of ?2,00,000/- out of publicity expenses.
17. Confirmation of disallowance of ?21,96,755/- out of interest payment.
18. Confirmation of disallowance of ?3,45,600/- out of interest expenses.
19. Confirmation of addition of ?82,67,790/- u/s 40A(3).
20. Confirmation of disallowance of ?1,50,000/- out of telephone expenses.
21. Non-allowance of claim of prior period expenses of ?9,60,175/-.
22. Confirmation of addition of ?4,73,264/- on account of loss in transit.

Detailed Analysis:

1. Deletion of Addition/Disallowance of ?40,76,485/- Made Out of Stores and Spare Expenses:
The Tribunal upheld the CIT(A)'s decision to delete the disallowance, noting that the assessee followed a consistent accounting policy and the insurance claim and sale of scrap were accounted for in the subsequent year. There was no loss to the Revenue as the amounts were offered to tax in the next assessment year.

2. Deletion of Disallowance of ?4,40,000/- Made Out of Legal and Professional Charges:
The Tribunal confirmed the CIT(A)'s decision, stating that the expenditure on environmental study was revenue in nature and not for enduring benefit. The consultancy charges were part of the profit-earning process.

3. Deletion of Addition of ?90,400/- Made in Respect of Collection of Benevolent Fund:
The Tribunal upheld the CIT(A)'s deletion, agreeing that the contribution was paid before the due date of filing the return, making it allowable under section 43B.

4. Restriction of Entertainment Expenditure to ?37,500/- Out of Total Disallowance of ?1,47,341/-:
The Tribunal deleted the entire disallowance, noting that the expenditures were routine business expenses for hospitality and supported by decisions of the Rajasthan High Court.

5. Deletion of Addition/Disallowance of ?3,41,550/- Made in Respect of Guest House Expenses:
The Tribunal upheld the CIT(A)'s decision, finding that the audit report already considered the guest house expenses, and there was no justification for the AO's estimation.

6. Deletion of Addition of ?2,35,000/- Made on Account of Payment to Clubs:
The Tribunal confirmed the CIT(A)'s decision, citing various High Court decisions that corporate membership fees are allowable business expenditures.

7. Restriction of Vehicle Expenses to ?1,20,000/- Out of Total Disallowance of ?2,00,000/-:
The Tribunal deleted the disallowance, noting that in corporate entities, personal use disallowances are not applicable, and the liability for ?1,20,000/- had crystallized during the year.

8. Direction to Allow the Payment of Excise Duty of ?60,00,000/- and Confirming the Addition of ?5,33,24,729/- on Account of Premium Receipt on Sale of Liquid Chlorine:
The Tribunal set aside the matter to the AO to decide afresh after considering the CESTAT's decision. The Tribunal also upheld the CIT(A)'s direction to allow the excise duty payment subject to verification.

9. Direction to Allow the Claim of Assessee After Verifying the Amount from the Record in Respect of Addition Made of Difference of ?1,01,901/- in MODVAT Value:
The Tribunal directed the AO to verify the assessee's claim regarding the payment of excise duty and allow necessary relief.

10. Restriction of Expenses Made on Account of Repair of Vehicle to ?3,02,000/- Out of Total Disallowance of ?6,02,000/-:
The Tribunal deleted the disallowance, noting that the AO did not challenge the veracity of the claim or the incurrence of the expenditure for business purposes.

11. Deletion of Addition of ?10,00,000/- Made Out of Manufacturing Expenses on Account of Valuation of Closing Stock:
The Tribunal upheld the CIT(A)'s decision, noting that the assessee followed a consistent valuation method and there was no change in tax rates, making the addition unsustainable.

12. Confirmation of Disallowance of ?3,01,832/- Out of Power and Fuel Expenses:
The Tribunal deleted the disallowance, stating that the payment to RSEB was a contractual payment and not a penalty for infringement of law.

13. Confirmation of Disallowance of ?19,00,000/- on Adhoc Basis Out of Repairs and Maintenance Expenses:
The Tribunal directed the AO to restrict the disallowance to ?2,11,997/- as per the specific expenses highlighted, and noted that the assessee had already disallowed ?1,68,707/-.

14. Confirmation of Disallowance of ?12,38,418/- Out of Foreign Travelling Expenses:
The Tribunal set aside the matter to the AO to verify whether any new capital assets were purchased pursuant to the foreign visits. If none were purchased, the AO was directed to allow the expenditure as revenue expenditure.

15. Confirmation of Disallowance of ?1,04,108/- Out of Legal Expenses:
The Tribunal deleted the disallowance, citing the principle that there was no loss to the Revenue due to the consistent tax rate and the expenditure being based on an invoice raised during the year.

16. Confirmation of Disallowance of ?2,00,000/- Out of Publicity Expenses:
The Tribunal deleted the disallowance, noting that the payments were genuine and made by cheque, and the inability to produce supporting documents was due to the assessee's status as a sick company.

17. Confirmation of Disallowance of ?21,96,755/- Out of Interest Payment:
The Tribunal deleted the disallowance, holding that the advances to group companies were made out of commercial expediency, satisfying the test laid down by the Supreme Court in Hero Cycles Pvt. Ltd.

18. Confirmation of Disallowance of ?3,45,600/- Out of Interest Expenses:
The Tribunal confirmed the disallowance, noting that the assessee failed to demonstrate commercial expediency for the advances to GM Modi Hospital and Research Centre and Modi ARE Limited.

19. Confirmation of Addition of ?82,67,790/- u/s 40A(3):
The Tribunal deleted the disallowance, applying the pre-amended Rule 6DD(j) and noting the business expediency and genuineness of the transactions.

20. Confirmation of Disallowance of ?1,50,000/- Out of Telephone Expenses:
The Tribunal deleted the adhoc disallowance, noting that the assessee had already disallowed ?1,91,953/- and the AO's disallowance was purely on an estimate basis.

21. Non-Allowance of Claim of Prior Period Expenses of ?9,60,175/-:
The Tribunal deleted the disallowance, citing the principle that the rate of tax was consistent, and the expenses were incurred for business purposes.

22. Confirmation of Addition of ?4,73,264/- on Account of Loss in Transit:
The Tribunal confirmed the disallowance, noting that the assessee failed to provide evidence and justification for the transit loss.