2019 (12) TMI 1192 - AT - Income Tax

Disallowance of expenses incurred towards staff welfare, guest house expenses, club subscription expenses and cost of services - addition made as expenses were not incurred wholly and exclusively for the purposes of the business of the assessee - HELD THAT - Assessee could not provide complete details/evidences/invoices/bills etc. of these staff welfare expenses and cost of other services to prove that these expenses were incurred wholly and exclusively for the purposes of the business of the assessee and hence under these circumstances and keeping in view that it is an old litigation with a view to end litigation and being fair to both the rival parties, we allow 50% of staff welfare expenses and cost of other services claimed by the assessee as business expenses , while we affirm disallowance of balance 50% of staff welfare expenses and cost of other services claimed by assessee in return of income filed with Revenue. Club expenses disallowance - We hold this issue in favour of Revenue and hold that club expenses incurred by assessee shall not be allowed as business deduction. Disallowance u/s 35(2AB) - AO disallowed weighted deduction claimed by assessee u/s 35(2AB) of the R D expenditure incurred by assessee, while the learned CIT(A) allowed the claim of the assessee for weighted deduction of R D expenses - HELD THAT - As per facts emerging from records, the AO has given clear and positive finding that evidences in support of expenses incurred on in-house approved R D facility are not submitted by assessee during the course of assessment proceedings and there is no findings on this issue by learned CIT(A) but we have already held that no deduction u/s 35(2AB) of the 1961 Act can be allowed to assessee on this short ground of non entering into an agreement for cooperation with Secretary, DSIR and for audit of accounts of approved R D facility as held by us in this order and in case if at any stage our above decision is over-ruled by Hon ble Superior Courts on that count, then the matter shall be remitted back to the file of the AO for denovo adjudication for verifying the eligible expenditure spent by assessee on its approved inhouse R D facility for computing weighted deduction u/s 35(2AB) of the 1961 Act , after considering all the evidences/explanations which the assessee may like to rely in its defense and after giving proper and adequate opportunity of being heard to assessee in accordance with principles of natural justice in accordance with law . Disallowance of proportionate interest expenditure on interest free advances made by assessee to its group concerns - as stated by AO to be made out of interest bearing funds and the AO has disallowed proportionate interest expenses as the assessee has failed to prove commercial expediency in granting these interest free advances to group companies - HELD THAT - The assessee has issued Floating Rate Notes(FRN) to the tune of US 120 Million in the year 1996 which were due for repayment/maturity in 2003. These FRN s were denominated in Foreign currency carrying interest and the assessee had incurred interest expenses as well loss on foreign exchange fluctuations on these FRN s. It was also observed by tribunal that said FRN s were issued for financing the import into India of capital goods for its operations and projects in which the assessee is involved and for general corporate purposes permitted by Government of India, which is stated in the offer document issued by assessee. It is also observed that Chennai-tribunal in a decision rendered in assessee s own case 2016 (12) TMI 1800 - ITAT CHENNAI of which one of us being Hon ble Judicial Member was part of Division Bench who pronounced that order) has remitted the matter back to the AO for fresh adjudication as to allowability of proportionate interest expenses with interest free advances made to associated companies - we are of the considered view that the matter is required to be restored to the file of the AO for fresh adjudication de-novo

Summary

Issues Involved:
1. Disallowance of staff welfare expenses, guest house expenses, club subscriptions, and cost of other services.
2. Entitlement to weighted deduction under Section 35(2AB) of the Income-tax Act, 1961.
3. Disallowance of proportionate interest on interest-free advances made to group concerns.
4. Allowability of depreciation on the guest house.

Detailed Analysis:

1. Disallowance of Staff Welfare Expenses, Guest House Expenses, Club Subscriptions, and Cost of Other Services:
The AO disallowed ?30,00,000/- incurred towards staff welfare, guest house, club subscriptions, and other services, stating these were not wholly and exclusively for business purposes. The CIT(A) allowed these expenses, noting they were for employee benefits and business facilitation. However, the Tribunal partially upheld the AO's disallowance, allowing only 50% of the expenses as business deductions due to incomplete evidence provided by the assessee, stating:
> "We allow 50% of guest house expenses as business expenses while we affirm disallowance of balance 50% of the guest house expenses claimed by assessee."

2. Entitlement to Weighted Deduction Under Section 35(2AB):
The AO disallowed the weighted deduction of ?1,96,41,815/- under Section 35(2AB), citing lack of evidence for in-house R&D expenditure and absence of an agreement with the prescribed authority. The CIT(A) allowed the deduction, but the Tribunal reversed this decision, emphasizing strict compliance with statutory requirements:
> "The assessee will not be entitled for deduction u/s 35(2AB) of the 1961 Act on the short ground of non-entering into an agreement for cooperation with Secretary, DSIR and for audit of accounts of approved R&D facility."

3. Disallowance of Proportionate Interest on Interest-Free Advances:
The AO disallowed ?31,51,15,000/- of interest expenses, arguing that interest-free advances to group concerns were not for business purposes. The CIT(A) allowed the expenses, referencing earlier Tribunal decisions. The Tribunal, however, found the CIT(A)'s order unsatisfactory and remanded the issue to the AO for fresh adjudication, noting:
> "The matter is required to be restored to the file of the AO for fresh adjudication de-novo."

4. Allowability of Depreciation on the Guest House:
The AO disallowed depreciation of ?3,30,991/- on the guest house, which the CIT(A) allowed. The Tribunal, applying the same rationale as for guest house expenses, allowed 50% of the depreciation as a business deduction:
> "50% of the depreciation claimed by assessee on guest house shall be allowed as business deduction."

Conclusion:
The Tribunal provided a nuanced judgment, partially allowing and partially disallowing various expenses and deductions claimed by the assessee. It emphasized the need for strict compliance with statutory requirements and adequate evidence to substantiate business expenses and deductions. The matters concerning proportionate interest disallowance and weighted deduction under Section 35(2AB) were remanded for fresh adjudication, ensuring a fair and thorough examination of facts and compliance with legal provisions.