2018 (1) TMI 758 - AT - Income Tax

Disallowance of staff welfare expenses u/s 40A(9) - Held that - It is not disputed by revenue that the expenditure on staff welfare has been allowed by AO himself in various earlier years while re-varying also in set aside fresh proceedings. From the record it emerges that no specific item of expenditure is pointed out to be not covered by sec. 40A(9), no such indication is given by auditors and ld. CIT(A) s finding on facts and law have not been dislodged by revenue. Adverting to the plea of set aside as raised by revenue, it can be acceded as no lawful justification exists to support it. In pat so many years even after re-verification AO himself has allowed such expenditure. - Decided in favour of assessee. Disallowance made on account of publicity and public relation expenses - Held that - As it is not disputed that it was incurred for sending Gujarat Earthquake relief in the form of a truckload of food items consequent to chittorgarh district Collectors Clarion Call. The amount being for social good and for discharge of corporate social responsibility is allowable as business expenditure u/s 37(1). Depreciation claimed in respect of intangible assets in the form of right in relation to power from APGPCL - Held that - We hold that to ascribe 2/3rd value of the APGPCL investment to intangible commercial rights of cost effective power supply rights an 1/3rd value to the tangible rights a share holder will be a reasonable estimate ascribable to these constituents. The AO will accordingly word out the eligible depreciation on intangible rights u/s 32(I)(ii) on 2/3rd value of APGPCL investment and 1/3rd to share holder rights and work out the block of asset of intangible rights for depreciation and 1/3rd to value of APGPCL shares. The allowances, claim of LTCG on sale of shares whenever sold will be worked out accordingly. Depreciation in respect of assets retired from active used - Held that - As decided in assessee s own case the expression used for the purposes of the business as found in section 32 when used with respect to discarded machinery would mean that the user in the business was not in the relevant financial year/ previous year but in the earlier financial years. The discarded machinery would not be actually used in the relevant previous year as long as it was used for the purposes of business in the earlier years. The Tribunal was correct in directing the assessing officer to recomputed depreciation after reducing the scrap value of the assets which had been discarded and written off in the books of account for the year under consideration from the written down value of the block of assets. Actual user of the machinery was not required with respect to discarded machinery ad the condition for eligibility for depreciation that the machinery being used for the purpose of the business would mean that the discarded machinery was used for the purpose of the business in the earlier years for which depreciation had been allowed. Addition on a/c of enabling assets written off - Held that - This claim allowed as relying on assesse s own case. Addition made on account of Mine Development Expenses - Held that - Assessee has been canvassing its claim for allow ability of expenditure by repeatedly emphasizing that undisputedly its mining activity had commenced prior to 1/4/1970, consequently this expenditure is legally not covered by sec. 35E but u/s 37(I). Ld. Counsels raises deep concern on the fact that despite such observations which are in conformity with the facts on record, the claim is being set aside unnecessarily which is not in conformity with judicial discipline and causing the assessee deemed harassment as proposition which requires due considerations. We find substance in the contentions of ld. Counsel for the assessee about judicial discipline. However, the issue of applicability of sec. 35E or 37(I) in earlier years has been restored back. Addition on a/c of undervaluation of closing stock of ore - Held that - Taking a consistent view, this issue is also restored to the file of the assessing officer for decision afresh for valuing the stock Claim u/s 80IA - Held that - Taking a consistent view, we restore this issue to the file of the Assessing Officer for re- computing the reduction of deduction u/s 80IA. The Assessing Officer would restrict the apportionment to the extent of Director s fee, charity and donations. The Ground is partly allowed as discussed hereinabove for statistical purpose. Donation given to Nandi Foundation as an expenditure u/s 37(1) OR 80G - Held that - We do not see any merit into the contention of the ld. Counsel for the assessee that the donation of Nandi foundation for providing mid- day-meal under the Government of Rajasthan Scheme, is allowable as business expenditure. Section 37(1) operates in a different field. In our view there has to be direct nexus between the amounts spent and the business of the assessee. In the present case, there is no evidence suggesting that the expenditure is laid out or expended wholly and exclusively for the purpose of business of the assessee. Therefore, this ground of the Revenue s appeal is allowed. The finding of the Ld. CIT(A) on this issue is set aside and that the Assessing Officer is restored. Addition on a/c of waiver of electricity duty - Held that - Essentially such waiver of electricity duty is related to setting up and expansion of industry hence capital in nature as per notification issued by the State Government. Under these undisputed facts, we do not see any reason to disturb the finding of the Ld. CIT (A), same is hereby affirmed. This ground of the revenue s appeal is dismissed. Disallowance as exchange rate difference on loan - Held that - We find merit into the contention of the Ld. Counsel for the assessee that after capitalization, the ECB had changed its nature and assumed character of circulating capital. Such treatment is in consonance with the accepting accounting principles and accounting standards. As such loss on account of exchange difference is a revenue charge and is allowable deduction under section 37(1) of the Act. In view of these un rebutted facts in our considered view, the ratio of the judgment of the Hon ble Apex Court rendered in the case of CIT vs. Woodward Governor (2009 (4) TMI 4 - SUPREME COURT ) is squarely applicable on the present case.

Summary

Issues Involved:
1. Disallowance of staff welfare expenses under section 40A(9) of the IT Act.
2. Disallowance of publicity and public relation expenses.
3. Disallowance of depreciation claimed on intangible assets related to power rights from APGPCL.
4. Disallowance of depreciation on assets retired from active use.
5. Addition on account of enabling assets written off.
6. Addition of mine development expenses.
7. Addition due to undervaluation of closing stock of ore.
8. Reduction in claim under section 80IA of the Act.
9. Allowance of donation to Nandi Foundation under section 37(1) of the Act.
10. Addition on account of waiver of electricity duty.
11. Addition due to exchange rate difference on loan.
12. Non-allowance of deductions for various charitable contributions.

Analysis of the Judgment:

1. Disallowance of Staff Welfare Expenses under Section 40A(9):
The Tribunal dismissed the Revenue's appeal, referencing its earlier decisions in the assessee's own cases for prior years. The Tribunal had consistently held that such expenses were for business purposes and allowable under relevant provisions.

2. Disallowance of Publicity and Public Relation Expenses:
The Tribunal dismissed the Revenue's appeal, following its earlier decisions where similar expenses were allowed as they were incurred for business promotion and were considered necessary for the business.

3. Disallowance of Depreciation on Intangible Assets (APGPCL):
The Tribunal dismissed the Revenue's appeal, referencing its prior decisions where it was held that 2/3rd of the value of investment in APGPCL shares should be attributed to intangible commercial rights and eligible for depreciation under Section 32(1)(ii).

4. Disallowance of Depreciation on Assets Retired from Active Use:
The Tribunal dismissed the Revenue's appeal, citing the decision in the assessee's own case where it was held that depreciation is allowable on assets retired from active use as long as they were used for business purposes in earlier years.

5. Addition on Account of Enabling Assets Written Off:
The Tribunal dismissed the Revenue's appeal, referencing its earlier decisions where such expenses were allowed as they were necessary for the business and did not create any new asset.

6. Addition of Mine Development Expenses:
The Tribunal restored the issue to the file of the CIT(A) for fresh consideration, following its earlier orders where the issue was set aside for re-examination.

7. Addition Due to Undervaluation of Closing Stock of Ore:
The Tribunal restored the issue to the Assessing Officer for fresh decision, directing an on-the-spot enquiry to verify the correct value of the stock of ore, as the assessee failed to demonstrate the basis for the notional value adopted.

8. Reduction in Claim under Section 80IA:
The Tribunal restored the issue to the Assessing Officer for re-computation, directing that only specific common expenses (Director’s fee, charity, and donations) should be apportioned and reduced from the eligible profits.

9. Allowance of Donation to Nandi Foundation:
The Tribunal allowed the Revenue's appeal, holding that the donation to Nandi Foundation did not have a direct nexus with the business of the assessee and thus was not allowable as a business expenditure under Section 37(1).

10. Addition on Account of Waiver of Electricity Duty:
The Tribunal dismissed the Revenue's appeal, holding that the waiver of electricity duty was linked to the capital investment made by the assessee and thus was of capital nature, following the decision of the Special Bench in the case of Reliance Industries Ltd.

11. Addition Due to Exchange Rate Difference on Loan:
The Tribunal dismissed the Revenue's appeal, holding that the exchange rate difference on loan was a revenue charge and allowable under Section 37(1), following the Supreme Court's decision in the case of Woodward Governor.

12. Non-Allowance of Deductions for Various Charitable Contributions:
The Tribunal dismissed the assessee's appeal, holding that the contributions to various charitable trusts were not allowable as business expenditure under Section 37(1) as there was no direct nexus with the business of the assessee.

Conclusion:
The Tribunal provided a detailed analysis and decisions on each issue, largely relying on precedents set in the assessee's own cases and relevant judicial pronouncements. The appeals were disposed of with some issues being dismissed and others restored for fresh consideration.