2018 (11) TMI 994 - AT - Income Tax

Expenditure in respect of roadwork at Khudiramnagar under the head repair and maintenance - nature of expenditure - revenue or capital expenditure - Held that - A.O. has not disputed this facts mentioned herein in his assessment order. The A.O. held that the expenditure is a capital expenditure and not allowable as a deduction. He also held that the township is owned and maintained by Haldia Riverside Estate Limited, a subsidiary of the assessee (herein after referred to as HREL) and not by the assessee and as HREL is responsible for providing housing facility and maintaining the township, the expenditure incurred towards construction of approach road in Khudiramnagar from the township to the assessee s factory should have been borne by HREL. Aggrieved the assessee carried in appeal before the ld. First Appellate Authority. CIT(A) allowed this ground of the assessee by relying on the judgment of the Hon ble Apex Court in the case of LH Sugar Factory & Oil Mills Pvt. Ltd. vs. CIT (1980 (8) TMI 1 - SUPREME COURT) wherein such expenditure was held to be categorized as revenue expenditure. Disallowance of loss on account of Exchange Rate Fluctuations - Held that - We reject the submission of the Appellant in these appeals that the increase in liability on account of the fluctuation in the rate of foreign exchange remaining on the last day of the financial year is notional or contingent and, therefore, cannot be allowed as a deduction. Disallowance paid to United Bank of India - Held that - CIT(A) allowed this expenditure on the ground that this annual payment is towards trusteeship fees to the trustees of debenture holder i.e. United Bank of India and is not an expense on issue of debentures and also for the reason that this payment has been allowed in both the earlier and later Assessment Years as well. D/R, could not controvert this factual finding of the ld. CIT(A). Under these circumstances, we uphold this finding of the ld. CIT(A) and dismiss this ground of the revenue. Disallowance of land development charge - Held that - CIT-A correctly deleted this disallowance on the ground that this expenditure is for the green belt being maintained by the assessee and has been allowed by Assessing Officer in earlier an later Assessment Years. Disallowance being freight charges - Held that - The question of disallowance of freight expenses in connection with the stock transfer does not arise. This freight expense has direct connection with the business of the assessee. For other freight expenses, the reason given by the AO for the disallowance is not tenable as the AO has not pointed out any reasonable reasons for the same. There is no doubt that the assessee had made short recovery from the customers but the reasons for the same were duly explained by the assessee. Accordingly the Ld. CIT(A) has given the relief to the assessee and on this point of view Ld. DR has not brought anything on record contrary to the findings of the Ld CIT(A). In view of above, we find no infirmity in the order of Ld CIT(A) and we uphold the same. Hence, this ground of Revenue s appeal is dismissed

Issues Involved:
1. Allowance of expenses incurred on road maintenance not owned by the assessee.
2. Allowance of expenses incurred on road maintenance despite the existence of a separate company for such work.
3. Allowance of amortization of expenses.
4. Allowance of loss arising out of exchange rate fluctuation.
5. Allowance of expenses of ?36,60,000/-.
6. Allowance of expenses of ?14,60,000/-.
7. Allowance of expenses of ?13,05,20,000/-.
8. Allowance of expenses incurred on the purchase of software systems.

Detailed Analysis:

1. Allowance of Expenses Incurred on Road Maintenance Not Owned by the Assessee:
The assessee incurred an expenditure of ?25,00,000/- for roadwork at Khudiramnagar. The road was not owned by the assessee but by Haldia Development Authority (HDA). The expenditure was for the benefit of the assessee's employees. The AO disallowed this, treating it as a capital expenditure. The CIT(A) allowed the deduction, relying on the Supreme Court judgment in LH Sugar Factory & Oil Mills Pvt. Ltd. vs. CIT. The tribunal upheld the CIT(A)'s decision, finding no infirmity.

2. Allowance of Expenses Incurred on Road Maintenance Despite the Existence of a Separate Company for Such Work:
The AO argued that the expenditure should have been borne by Haldia Riverside Estate Limited (HREL), a subsidiary responsible for maintaining the township. The CIT(A) allowed the deduction, and the tribunal upheld this decision, dismissing the revenue's grounds.

3. Allowance of Amortization of Expenses:
The assessee claimed amortization expenses of ?15.46 Crores, which were disallowed by the AO. The CIT(A) allowed the claim, and the tribunal noted that this issue was covered in favor of the assessee by a previous tribunal decision for the Assessment Year 2005-06. The tribunal upheld the CIT(A)'s decision, dismissing the revenue's ground.

4. Allowance of Loss Arising Out of Exchange Rate Fluctuation:
The AO disallowed the loss on account of exchange rate fluctuations, treating it as notional. The CIT(A) allowed the deduction, and the tribunal noted that this issue was covered in favor of the assessee by a previous tribunal decision for the Assessment Year 2005-06. The tribunal upheld the CIT(A)'s decision, dismissing the revenue's grounds.

5. Allowance of Expenses of ?36,60,000/-:
The AO disallowed the expenses of ?36,60,000/- paid to United Bank of India, treating it as debenture issue expenses. The CIT(A) allowed the deduction, noting it was trusteeship fees, not debenture issue expenses, and had been allowed in earlier and later years. The tribunal upheld the CIT(A)'s decision, dismissing the revenue's grounds.

6. Allowance of Expenses of ?14,60,000/-:
The AO disallowed the expenses of ?14.6 Lakhs debited as land development charge. The CIT(A) allowed the deduction, noting it was for maintaining a green belt and had been allowed in earlier and later years. The tribunal upheld the CIT(A)'s decision, dismissing the revenue's grounds.

7. Allowance of Expenses of ?13,05,20,000/-:
The AO disallowed the freight charges of ?13.05 Crores. The CIT(A) allowed the deduction, noting the expenses were incurred for business purposes and had been allowed in earlier years. The tribunal noted that this issue was covered in favor of the assessee by a previous tribunal decision for the Assessment Year 2005-06. The tribunal upheld the CIT(A)'s decision, dismissing the revenue's grounds.

8. Allowance of Expenses Incurred on the Purchase of Software Systems:
The AO disallowed the expenses towards software services, treating them as capital expenditure. The CIT(A) allowed the deduction, noting it was an annual payment for SAP services and had been allowed in subsequent years. The tribunal upheld the CIT(A)'s decision, dismissing the revenue's grounds.

Conclusion:
The appeal of the revenue was dismissed in its entirety, with the tribunal upholding the CIT(A)'s decisions on all grounds. The tribunal found no violation of Rule 46A of the Income Tax Rules in the CIT(A)'s order.

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