2019 (8) TMI 109 - HC - Income Tax

Disallowance of expenses on consumption and replacement of stores and spares treating the same as revenue expenditure instead of capital expenditure - addition on account of loss on sale of fertilizer bonds treating it as business loss instead of capital loss - disallowance u/s 40(a)(ia) in respect of commission payment to dealers by invoking the provisions of Explanation (I) to section 194(H) of the Act - HELD THAT - We take notice that the very same substantial questions of law, as proposed by the revenue in the present Tax Appeal fell for the consideration of this Court in 2019 (4) TMI 1723 - GUJARAT HIGH COURT . This Court while answering the first question as regards the disallowance of the expenses on consumption and replacement of stores and spares treating the same as revenue expenditure instead of capital expenditure. So far as the second and third questions are concerned, they are with respect to the deletion of loss on sale of fertilizer bond it was held that same is allowable as business loss. So far as the fourth question as regards the disallowence under section 40(a)(ia) is concerned, while answering the same it was hold that there is no service provided by the dealer to the assessee in the course of buying or selling goods, inasmuch as, the assessee directly sells goods to the dealer and the dealer makes the payment after collecting it from the consumers and, therefore, it is a transaction on principal to principal basis and, therefore, the payment made by the dealer is not liable for any deduction of tax by the assessee company. In view of the aforesaid, none of the proposed questions of law are res-integra. In the result, this Tax Appeal fails and is hereby dismissed.

Summary

Issues:
1. Disallowance of expenses on consumption and replacement of stores and spares
2. Deletion of addition on account of loss on sale of fertilizer bonds
3. Disallowance u/s.40(a)(ia) in respect of commission payment to dealers

Analysis:

Issue 1: Disallowance of expenses on consumption and replacement of stores and spares
The Court examined whether the expenses on consumption and replacement of stores and spares amounting to a significant sum should be treated as revenue expenditure or capital expenditure. The Court considered the nature of the manufacturing facility, the replacement of components in machinery, and the historical context of similar claims. It was concluded that the expenditure claimed as revenue expenditure was justified, as the replaced components were integral to the machinery's efficient functioning and did not result in capacity addition or creation of new assets. The Court found no error in the Tribunal's decision and deemed it a question of fact without any legal issue arising.

Issue 2: Deletion of addition on account of loss on sale of fertilizer bonds
The Court analyzed whether the loss on the sale of fertilizer bonds should be treated as a business loss or capital loss. It was established that the bonds were received in lieu of subsidy and were considered part of the sale price. The Court determined that the bonds were not acquired as investments but as debt, and therefore, the loss incurred on their sale was deemed a business loss under relevant sections of the Income Tax Act. Previous decisions and the nature of the bonds supported this conclusion, leading to the dismissal of the appeal on the grounds of business loss.

Issue 3: Disallowance u/s.40(a)(ia) in respect of commission payment to dealers
The Court examined whether the disallowance under section 40(a)(ia) concerning commission payment to dealers was justified. It was clarified that the transaction between the company and the dealers was on a principal-to-principal basis, with the dealers making payments to the company for supplies. As per the provisions of section 194H, the Court determined that the dealers were not acting as commission agents but as buyers of goods. Therefore, the Court held that the provisions of section 40(a)(ia) could not be applied in this scenario, and the appeal was dismissed based on the factual and legal analysis provided.

In conclusion, the Tax Appeal was dismissed as none of the proposed questions of law presented were novel or without precedent, with the Court finding no legal basis to overturn the Tribunal's decisions on the issues raised.