2021 (8) TMI 466 - AT - Income Tax

Nature of expenses - repair expenses - revenue or capital expenditure - assessee is engaged in the business of manufacture and sale of gold, silver and platinum jewellery and other precious metal and stones - HELD THAT - We notice that the assessee has incurred expenses for repairing the flooring, renovating the distributors and customers display area and waste mitigation and production process systems. Admittedly, these expenses have been incurred on the building taken on lease. Though these expenses can be considered as renovation expenses, yet we notice that it has not resulted in creation of any capital asset attracting Explanation 1 to section 32. See M/S. ANUSH SHARES AND SECURITIES PVT LTD. 2015 (7) TMI 1224 - MADRAS HIGH COURT - thus we set aside the order passed by Ld CIT(A) and direct the A.O. to delete the disallowance. Disallowance of donation made to All India Gems Jewellery Trade Federation - AO disallowed 50% of the donation paid by the assessee, impliedly allowing the deduction u/s 80G of the Act @ 50%, also confirmed by CIT-A - HELD THAT - The assessee has furnished copies of receipts given by the Association acknowledging receipt of ₹ 15.25 lakhs - All the receipts clearly show that the payment have been received by All India Gems Jewellery Trade Federation towards donation. The assessee has furnished a copy of application form for participating in the PMI programme - The payment was voluntary and not under compulsion. Even otherwise, as rightly pointed out by Ld. D.R., there is no material to show that the donation was made under compulsion. On the contrary, the above said extract taken from the application form show that the donation was given to the Federation recognising the value in its bringing not only to trade but also to education and well being of the community. Hence, it is clearly proved that the donation is a general donation made by the assessee to the association/federation. We confirm the order passed by Ld. CIT(A) on this issue. Appeal filed by the assessee is partly allowed.

Summary

Issues:
1. Disallowance of repair expenses amounting to ?21.30 lakhs.
2. Disallowance of donation paid to association amounting to ?7,62,500.

Issue 1: Disallowance of repair expenses
The dispute arose when the Assessing Officer (A.O.) treated the repair expenses claimed by the assessee as capital in nature, leading to a disallowance of ?26,73,520. The CIT(A) partially allowed the claim, confirming a disallowance of ?21,30,530. The key contention was whether the expenses incurred, such as flooring, renovation, and waste mitigation, resulted in the creation of a capital asset. The assessee argued that the expenses were for creating a better working environment and did not result in any capital asset creation. The AR relied on case laws to support this argument. The Tribunal, after considering the nature of expenses and relevant case laws, held in favor of the assessee. It was concluded that the expenses did not result in the creation of a capital asset, and thus, the disallowance was deleted.

Issue 2: Disallowance of donation
Regarding the disallowance of the donation made to an association, the A.O. disallowed 50% of the claim as the donation was eligible for deduction under section 80G of the Income Tax Act. The CIT(A) upheld this decision. The assessee contended that the donation was for business expediency and should be allowed as a deduction under section 37(1) of the Act. However, the Tribunal observed that the payment was towards the corpus of the association and not under compulsion. Despite the AR's arguments and reliance on a court case, it was held that there was no evidence to support the claim of business expediency. As the assessee had accepted the disallowance before the A.O., the Tribunal confirmed the CIT(A)'s order on this issue.

In conclusion, the appeal filed by the assessee was partly allowed, with the disallowance of repair expenses being deleted but the disallowance of the donation being upheld.