2019 (1) TMI 216 - AT - Income Tax

Deduction u/s. 35D - eligibility - Share Issue Expenditure - whether the expenditure incurred in increasing the Share capital is not deductible u/s 35D? - Held that - For its claim that there was substantial expansion of the industrial undertaking, assessee has relied on its audited accounts for the year ended 31st December, 2006. Assessee for its accounting purpose was following calendar year as its financial year - AR was unable to clarify whether the expansion claimed by the assessee had happened before 1st April, 2006 or after the said date. Once the assessee is claiming that there was an expansion of industrial undertaking, onus lies on the assessee to prove such claim. Assessee having failed to do so, we are of the opinion that lower authorities were justified in denying the claim u/s.35D - Decided against assessee Disallowance of excise duty element on warranty - Held that - It might be true that warranty goods manufactured by the assessee, on which it had claimed excise duty as allowable u/s.43B of the Act, remained with the assessee till the warranties were invoked by the customers. However, it is not disputed that warranty goods stood manufactured by the assessee. Assessee had also paid the excise duty thereon to the exchequer. Once the assessee had effected payment of the excise tax, in our opinion assessee could not have been denied the claim u/s.43B. Disallowance of Prior period Items - Held that - Assessee did not provide any details. Now the claim before us is that part of the expenditure was sales tax dues actually paid during the previous year relevant to the impugned assessment year. Considering the facts and circumstances, we are of the opinion that the issue can be verified afresh by the ld. Assessing Officer. We set aside the orders of the authorities on the issue of allowability of the claim of prior period expenditure of C3,92,473/- and remit it back to the file of AO for consideration afresh in accordance with law. Appeal of assessee is allowed for statistical purposes. Disallowance of expenditure towards gift - Held that - CIT(Appeals) has specifically noted that except for the list of the debit entries, assessee did not produce any evidence to show that the expenditure was incurred wholly and exclusively for the purpose of business. In other words assessee could not show the business expediency of the gifts, nor could identify the recipients. In such circumstances, the claim was rightly disallowed by the AO. - decided against assessee.

Summary

Issues:
1. Disallowance of Share Issue Expenditure
2. Disallowance of excise duty element on warranty
3. Disallowance of Prior period Items
4. Disallowance of expenditure towards gift

Issue 1: Disallowance of Share Issue Expenditure
The appellant contested the disallowance of Share Issue Expenditure under section 35D of the Income Tax Act, 1961. The appellant claimed the expenditure incurred in increasing Share capital was for extending an industrial unit and thus deductible under section 35D. The appellant argued that the expansion of the industrial undertaking made them eligible for the deduction. However, the authorities noted that the appellant failed to prove the timing of the expansion, leading to the denial of the claim under section 35D. The Tribunal upheld the lower authorities' decision, dismissing Ground No.2 raised by the appellant.

Issue 2: Disallowance of excise duty element on warranty
The appellant challenged the disallowance of excise duty element on warranty goods under section 43B of the Act. The appellant contended that excise duty paid on warranty goods should be allowed as an expenditure under section 43B. The Tribunal agreed with the appellant, stating that once excise duty was paid on manufactured warranty goods, it should be allowed as a deduction. The Tribunal set aside the lower authorities' orders and allowed the claim of excise tax paid on warranty goods.

Issue 3: Disallowance of Prior period Items
The appellant disputed the disallowance of prior period expenditure, including sales tax payment, under Section 43B. The appellant argued that the sales tax dues were paid during the relevant previous year and should be allowed as an expenditure. The Tribunal found that the issue required further verification and remitted it back to the Assessing Officer for reconsideration. Ground No.5 raised by the appellant was allowed for statistical purposes.

Issue 4: Disallowance of expenditure towards gift
The appellant contested the disallowance of expenditure towards gifts, claiming they were given for commercial expediency. However, the authorities found insufficient evidence to establish the business purpose of the gifts. The Tribunal upheld the lower authorities' decision, noting the lack of details and evidence regarding the nature and relevance of the gift expenses to the business. Ground No.6 raised by the appellant was dismissed.

In conclusion, the Tribunal partly allowed the appeal for statistical purposes, allowing the claim related to excise duty on warranty goods and remitting the issue of prior period expenditure back to the Assessing Officer for further examination. However, the claims regarding Share Issue Expenditure and expenditure towards gifts were dismissed based on insufficient evidence and lack of business justification.