2018 (4) TMI 740 - AT - Income Tax

Disallowance of lease rent paid on leasehold land - deemed owner of the property - Period of holding of lease - Held that - Respectfully following the decision of Hon ble Supreme Court, in the case of CIT vs Sun Pharmaceuticals Industires Ltd (2009 (12) TMI 1001 - SUPREME COURT ), we are of the considered view that the lease rentals paid on leasehold land cannot be regarded as capital in nature merely for the reason that the period of lease agreement is more than 12 years. Therefore, we direct the AO to delete additions made towards lease rent paid on leasehold land. Disallowance of repairs and maintenance expenses paid to WIPRO for offshore services - addition on the ground that the assessee has made payment for services rendered outside India to the assesse s group companies - Held that - No merit in the arguments of the assessee for the reason that the AO has brought out clear facts to the effect that the payment made by the assessee to WIPRO is for services rendered to the parent company of the assessee in UK. Therefore, it is evident from the fact that such payment is not for the purpose of assessee s business, but for the business of assessee s parent company. Therefore, we are of the considered view that the AO was right in disallowing offshore payment made to WIPRO. - Decided against assessee Disallowance of foreign travel expenses - Held that - The assessee has failed to controvert the findings of lower authorities that foreign travel expenses have been incurred to meet the requirement of the entire shell group and such expense has no relevance to assessee s business in India. The AO, as well as the CIT(A) has brought out clear fact that the assessee has incurred foreign travel expenses on behalf of its employees to visit foreign countries where it has no business connection. Therefore, we are of the considered view that the AO was right in disallowing foreign travel expenses and such disallowance has rightly upheld by the Ld.CIT(A). - Decided against assessee Disallowance of repairs and maintenance expenses on plant and machinery - AO disallowed expenses incurred by the assessee for the year under consideration is comparatively higher than the expenditure incurred in the previous financial year - Held that - Expenditure incurred under the head repairs and maintenance to plant & machinery is in accordance with its business value as revenue from operation has increased substantially during the year. Such expenditure has been incurred in respect of day to day operations of the retail outlets. The AO has not brought out any instance of discrepancy in expenditure incurred under the head repairs and maintenance to plant & machinery before making adhoc disallowance of 25% of such expenses - AO has disallowed such expenditure only on the basis of increase in expenses without considering the increase in revenue from operations. Therefore, we are of the considered view that the AO was incorrect in making adhoc disallowance without recording any factual finding of incorrectness in claim of the assessee - Decided against revenue Disallowance of other repairs & maintenance expenses - revenue v/s capital expenditure - Held that - AO has brought out facts which states that the expenditure incurred by the assessee is in the nature of capital expenditure. The CIT(A) has brought out the facts which states that the expenditure is in the nature of annual maintenance contract. Therefore, we are of the considered view that the issue needs to be re-examined by the AO in the light of claim of the assessee that all expenditure incurred towards IT support services are in the nature of annual maintenance contract. If expenditure incurred by the assessee are in the nature of annual maintenance contracts, then such expenditure certainly are in the nature of revenue expenditure and the AO is directed to allow the same as claimed by the assessee - ground raised by the revenue is allowed for statistical purpose.

Issues Involved:
1. Disallowance of lease rent paid on leasehold land.
2. Disallowance of repairs and maintenance expenses paid to WIPRO for offshore services.
3. Disallowance of foreign travel expenses.
4. Adhoc disallowance of repairs and maintenance expenses on plant and machinery.
5. Disallowance of other repairs and maintenance expenses.

Issue-wise Detailed Analysis:

1. Disallowance of Lease Rent Paid on Leasehold Land:
The assessee, engaged in marketing motor spirit and hybrid diesel, entered into long-term lease agreements for land used for retail outlets. The AO disallowed the lease rent, treating it as capital expenditure since the lease periods ranged from 30 to 99 years, considering the assessee as the deemed owner under section 269UA. The assessee contended that the lease rent was periodic, not lump sum, and the land was to be surrendered after the lease term. The Tribunal found merit in the assessee's arguments, noting that the lease agreements were for limited periods with monthly payments, and the assessee was not the owner. Relying on the Gujarat High Court's decision in DCIT vs. Sun Pharmaceuticals Industries Ltd., the Tribunal directed the AO to delete the additions.

2. Disallowance of Repairs and Maintenance Expenses Paid to WIPRO for Offshore Services:
The AO disallowed ?16,26,383 paid to WIPRO for IT support services, claiming it was for the parent company's benefit in the UK, not the assessee's business. The assessee argued the payment was for revenue-related IT support services, with TDS deducted. The Tribunal upheld the AO's disallowance, agreeing that the payment was for the parent company's benefit, not the assessee's business.

3. Disallowance of Foreign Travel Expenses:
The AO disallowed foreign travel expenses, asserting they were unrelated to the assessee's business in India and were for the entire Shell group. The assessee argued the expenses were for employee training and meetings relevant to its business. The Tribunal found the assessee failed to counter the AO's findings and upheld the disallowance, noting the expenses were for the entire group, not specifically for the assessee's business in India.

4. Adhoc Disallowance of Repairs and Maintenance Expenses on Plant and Machinery:
The AO disallowed 25% of repairs and maintenance expenses, amounting to ?15,87,768, citing higher expenditure compared to the previous year. The assessee argued the expenses were justified due to business expansion and increased revenue. The Tribunal found the AO's disallowance unjustified as it was based on volume without specific discrepancies. The Tribunal upheld the CIT(A)'s decision to delete the addition, noting the expenses were in line with business growth.

5. Disallowance of Other Repairs and Maintenance Expenses:
The AO disallowed ?1,96,69,928 for computer maintenance, treating it as capital expenditure for software, licences, and patents. The assessee contended these were annual maintenance contracts for IT support services. The Tribunal noted conflicting findings between the AO and CIT(A). The Tribunal remanded the issue to the AO to re-examine if the expenses were indeed annual maintenance contracts (revenue expenditure) or for acquiring capital assets. The AO was directed to allow or disallow based on this re-examination.

Conclusion:
The appeal filed by the assessee was partly allowed, and the appeal filed by the revenue was partly allowed for statistical purposes. The Tribunal provided detailed directions for re-examination and appropriate treatment of disputed expenses. The order was pronounced on April 13, 2018.

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