2016 (12) TMI 450 - AT - Income Tax

Disallowance of cost of replacement of old machinery - revenue v/s capital expenditure - Held that - The features of the machinery imported by the assessee from Italy has been captured by ld. Assessing Officer and these features have been reproduce by us at para 6 above. Though assessee states that these were replacement of old machines, it could not show which machinery were placed and what was the realization from scrap value of the replaced machinery, if any. Features of the machinery show that these were independent and could work on its own and were not something that would work only in adjunction with another machinery. In our opinion, lower authorities were justified in treating the purchase as a capital expenditure. We do not find any reason to interfere with the orders of the lower authorities. - Decided against assessee Depreciation on machinery disallowed - Held that - Assessee itself has stated that machine imported from M/s.Turnver was not according to its specification. As per assessee, the balance amount was withheld by it due to fault in the machine supplied. No doubt, legal ownership by itself is not a fundamental requirement for a claim of depreciation. However, the machine if not used should be atleast ready to use. In our opinion, assessee was not able to show that the machine was actually used by it or kept in readiness for use. Certificate from Shri. E.M. Ulaganathan, does not say that machine were ready for use. No record showing any trial run was produced by the assessee. In such circumstances, we are of the opinion that the claim was rightly disallowed by the lower authorities.- Decided against assessee TDS u/s 195 - Disallowance of commission paid to non-resident agent for non deduction of tds - Held that - For assessment year 2010-2011, also commission paid by the assessee to the foreign agents were through local agents. There is no case for the Revenue that assessee had failed to deduct tax on commission paid to local agents. Fact situation being same we are of the opinion that decision of the Tribunal for the assessment year 2010- 2011 would apply here also. Commission paid by the assessee could not have been disallowed for want of deduction of tax at source. We delete the disallowance - Decided against revenue Disallowance of interest paid to close relatives of the assessee - Held that - . Reason why ld. Assessing Officer disallowed the claim was that assessee was paying lower interest to bigger credit whereas higher interest for smaller credits. It is not disputed by the Revenue that interest paid by the assessee never exceeded 18%. Assessing Officer did not bring anything on record to show that Scheduled Banks were charging only 15% interest on loans given, without security. The old adage that risk and returns go together should apply to loans without security. It is natural for persons providing loans without security to demand higher rate of interest. We are therefore of the opinion that interest of 18% paid by the assessee could not considered as excessive. Application of Sec. 40A(2) of the Act was not warranted. - Decided against revenue Disallowance of interest u/s.36(1)(iii) - Held that - Revenue has not disputed the argument of the assessee that MBS Arabic College was situated in close proximity to the assessee s factory and children of assessee s employees were studying there. In so far as payment to SITDA is concerned, it was an association of tanners where assessee was a member. Loan to MBS Arabic College and SITDA were for periods less than six months. In our opinion, lower authorities ought not have sat in the chair of the assessee and decided on the commercial expediency of the loans given to these entities. The facts and circumstances did not call for any addition of national interest. - Decided against revenue TDS u/s 194C - Disallowance of travel expenditure for non deduction of tax at source - Held that - Assessee s claim that the payments were effected on behalf of its employees for their travel from Arcot to its Factory, could have been accepted if had deducted such transportation charges from the wages paid to them. Nothing has been produced to show any such deduction effected by the assessee. Obvious conclusion is that the transport charges were paid by assessee directly. In our opinion, Sec. 194 C of the Act will clearly apply. We are of the opinion, that ld. Assessing Officer was justified in applying provisions of Sec. 40(a)(ia) of the Act for want of deduction of tax at source. No interference is required. - Decided against assessee Disallowance of Municipal Taxes - Held that - Claim of the assessee is that property on which property tax was paid was owned by a partner of the assessee firm and was used by assessee firm. However, ld. Assessing Officer has given a clear finding that there were no branches or establishment for the assessee in Bangalore, after verifying its Audit report in form 3CD. We, are therefore of the opinion that assessee could not show its use of the property on which property tax was paid. In our opinion , the disallowance was correctly made. - Decided against assessee Disaalowance of expenses as Revenue outgo - Held that - In so far as expenditure incurred for Sony camera and one digital recorder are concerned, this expenditure cannot be treated as a non business outgo. Sony cameras and digital recorder having been given to its employees, could never form part of the assets of the assessee. Hence disallowance of the cost of Sony camera and digital recorded were not warranted. Borewell expenditure if there is no water in the borewell, then there is no question of fixing a motor. Thus, claim of the assessee that bore well expenditure was a business loss having derived no water is incorrect. In our opinion, cost of borewell was rightly considered as capital outgo. Effluent treatment plant, we find that earlier plant has become obsolete and it was a new plant erected. We are of the opinion that lower authorities had rightly treated the plant as capital outgo, since its was an independent machinery item. Road repair expenditure assessee could not produce the contract agreement entered with Shri. M. Shivaraj, who was entrusted with the above work to prove that the contract was only for repair of existing road and not laying of new road. Therefore, we are of the opinion that lower authorities were justified in treating the expenditure incurred on road as capital outgo. Conference hall expenditure, it is not disputed by the assessee that expenditure was incurred for changing the interiors of existing conference hall, including seating, painting and furniture. The outgo was clearly for renovation. We are of the opinion that renovation of existing conference would not create any new capital asset. The expenditure could only be considered as necessary for effectively continuing the functionality of the existing conference hall. Said expenditure in our opinion could not be treated as capital outgo. Machine replacement cost as many of the items could be considered as independent machinery whereas some of them like batteries, etc could be considered as spares and repair works. We are of the opinion that ld. Assessing Officer ought have made a detailed analysis of the bills and correctly demarcated the items. Disallowance ought have been confined only to those which could be considered as independent machinery. Thus this issue requires a fresh look by the ld. Assessing Officer.

Summary

Issues Involved:
1. Disallowance of cost of replacement of old machinery.
2. Disallowance of depreciation on machinery costing ?27,52,404.
3. Disallowance of commission paid to non-resident agents.
4. Disallowance of interest paid to close relatives of the assessee.
5. Disallowance of depreciation on machinery purchased from M/s. Turner.
6. Disallowance of foreign travel expenditure.
7. Disallowance of interest u/s.36(1)(iii) of the Act.
8. Disallowance of travel expenditure for non-deduction of tax at source.
9. Disallowance of municipal taxes.
10. Disallowance of various expenses claimed as revenue outgo.

Detailed Analysis:

1. Disallowance of Cost of Replacement of Old Machinery:
The assessee, a manufacturer and exporter of leather products, claimed the cost of imported machinery as a revenue outgo under spares & maintenance. The Assessing Officer (AO) treated these as capital assets and disallowed the claim, allowing only depreciation. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, noting the machinery's independent functionality. The Tribunal agreed with the lower authorities, finding no reason to interfere with their orders. Thus, Ground Nos. 1 & 2 were dismissed.

2. Disallowance of Depreciation on Machinery Costing ?27,52,404:
The assessee imported a second-hand splitting machine but had not fully paid for it by the end of the relevant assessment year. The AO disallowed depreciation on the grounds that the machine was not owned by the assessee and had issues with its specifications. The CIT(A) confirmed this disallowance, noting the machine was not used as intended. The Tribunal upheld the lower authorities' decision, agreeing the machine was not ready for use. Grounds 3 to 5 were dismissed.

3. Disallowance of Commission Paid to Non-Resident Agents:
The AO disallowed ?99,79,376 paid to non-resident agents for non-deduction of tax at source, citing Explanation 4 to Sec. 9(1)(i) and Explanation 2 to Sec. 195(1). The CIT(A) upheld the disallowance. However, the Tribunal noted that similar payments in the previous year were not disallowed, as the non-resident agents had no business connection in India. Following the precedent, the Tribunal deleted the disallowance. Ground No. 1(a) was allowed.

4. Disallowance of Interest Paid to Close Relatives of the Assessee:
The AO restricted interest payments to 15%, disallowing ?4,80,000 paid at 18%. The CIT(A) upheld this decision. The Tribunal, however, found that higher interest rates were justified for unsecured loans and deleted the disallowance. Ground No. 1(b) was allowed.

5. Disallowance of Depreciation on Machinery Purchased from M/s. Turner:
This issue was similar to Ground Nos. 3 to 5 for the assessment year 2009-2010. The Tribunal upheld the lower authorities' decision, confirming the disallowance. Ground No. 1(d) was dismissed.

6. Disallowance of Foreign Travel Expenditure:
The assessee did not press this ground. Hence, Ground No. 1(c) was dismissed as not pressed.

7. Disallowance of Interest u/s.36(1)(iii) of the Act:
The AO disallowed ?1,20,000 as notional interest on loans given to MBS Arabic College and SITDA without charging interest. The CIT(A) confirmed this disallowance. The Tribunal found the loans were given for commercial expediency and deleted the addition. Ground No. 1(f) was allowed.

8. Disallowance of Travel Expenditure for Non-Deduction of Tax at Source:
The AO disallowed ?3,58,275 paid for van charges, applying Sec. 194C. The CIT(A) upheld this decision. The Tribunal agreed with the lower authorities, finding the payments were directly made by the assessee, and upheld the disallowance. Ground No. 1(g) was dismissed.

9. Disallowance of Municipal Taxes:
The AO disallowed ?90,882 claimed as property tax payments, as the assessee could not show the property's use for business. The CIT(A) confirmed this disallowance. The Tribunal upheld the lower authorities' decision, finding no evidence of business use. Ground No. 1(h) was dismissed.

10. Disallowance of Various Expenses Claimed as Revenue Outgo:
The AO disallowed several expenses, treating them as capital outgo, and allowed depreciation instead. The CIT(A) confirmed this disallowance. The Tribunal provided a detailed analysis, allowing some claims (Sony cameras, conference hall expenditure), upholding others (borewell, effluent treatment plant, road expenditure), and remanding the machinery expenditure for fresh consideration. Ground No. 1(i) was partly allowed.

Conclusion:
- The appeal for the assessment year 2009-2010 was dismissed.
- The appeal for the assessment year 2011-2012 was partly allowed.