2023 (7) TMI 1157 - AT - Income Tax

Nature of expenses - Infrastructure development expenses - revenue or capital expenditure - assessee has taken the property on the lease of 99 years, which was as good as ownership and expenses incurred on the development of this property should be capitalized by AO - CIT(A) deleted addition - HELD THAT - We find that AO has erred in taking the property as ownership property of the assessee. CIT (A) has given a finding of fact that from the agreement of Infrastructure Development produced, assessee company entered into a separate infrastructure development agreement with Sri City Pvt. Ltd. to maintain common facilities and amenities outside the owned property of the assessee company, hence AO has clearly erred. CIT (A) placed reliance on the decision of LH SUGAR FACTORIES AND OIL MILLS PRIVATE LIMITED 1980 (8) TMI 1 - SUPREME COURT as observed that in a case where the advantage consists merely in facilitating the assessee's business operation or enabling management to conduct business in a more efficient manner, leaving the fixed capital untouched, then such expenditure would be on revenue account, even though the advantage may endure for an indefinite time - Decided against revenue. TDS u/s 195 - disallowance made u/s 40(a)(i) - non deduction of TDS on Foreign Remittance - HELD THAT - AO has not examined the applicability on TDS provisions based on the information available on record. He noted that the provisions of section 40(a)(i) of the Act requires to disallow the expenses on account of non-deduction of TDS on which tax is deductible at source under Chapter XVII-B. Ld. CIT (A) rightly observed that such provisions do not empower to disallow the expenses on non-availability of Form 15CA and CB. Accordingly, we find that CIT (A) has taken a correct view in the matter. Apex Court in the case of GE India Technology 2010 (9) TMI 7 - SUPREME COURT which also supports the case of the assessee. Accordingly, we uphold the order of the CIT (A) on this issue. Disallowance of loss on foreign currency fluctuation - HELD THAT - CIT (A) duly examined the issue and has found that the net impact of foreign exchange fluctuation was NIL under the profit and loss statement. This finding of ld. CIT (A) has not been disputed by the Revenue. Hence, we do not find any infirmity in the order of ld. CIT (A) and we uphold the same. Addition on account of other expenses particularly when the expenses are not fully verifiable - HELD THAT - AO has made ad hoc disallowance of 2% of the total expenses without mentioning any specific defects. Ld. CIT (A) has appreciated that there was very little discrepancies to such expenses. However, he also sustained addition of 1% of total expenses. We note that assessee is a corporate entity and ad hoc disallowance of expenditure without pointing out any specific defect is not permissible. Hence, we set aside the orders of the authorities below and decide the issue in favour of the assessee. Disallowance of legal expenses as related to plant (Capital Expenditure) - CIT (A) observed that the amount charged towards drafting agreements, resolutions and rendering legal consultancy services relating to plant which was purely professional services in nature - HELD THAT - CIT (A) has given a finding that the amount was charged towards drafting agreements, resolutions and rendering legal consultancy services relating to plant which is purely professional services in nature. CIT (A) has rightly applied the judgment of CIT vs. United Breweries Ltd 2010 (1) TMI 86 - KARNATAKA HIGH COURT - Hence, we find that the ld. CIT (A) has passed a reasonable order which does not require any interference on our part. Appeal of the assessee is allowed.

Issues Involved:
1. Disallowance of Infrastructure Development Expenses
2. Disallowance under Section 40(a)(i) of the Income Tax Act for Foreign Remittances
3. Disallowance of Loss on Foreign Currency Fluctuation
4. Reduction of Addition on Account of Other Expenses
5. Disallowance of Legal Expenses

Summary:

1. Disallowance of Infrastructure Development Expenses:
The Assessing Officer (AO) treated the infrastructure development expenses of Rs. 12,24,32,850/- as capital expenditure, asserting that the property was effectively owned by the assessee due to a 99-year lease. The Commissioner of Income Tax (Appeals) [CIT(A)] found that the expenses were for maintaining common facilities outside the assessee's property and should be considered revenue expenditure. The CIT(A) relied on the Supreme Court's decision in L.H. Sugar Factory and Oil Mills Pvt. Ltd., which states that expenses facilitating business operations without affecting fixed capital should be treated as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, noting that the AO erred in treating the property as owned by the assessee.

2. Disallowance under Section 40(a)(i) of the Income Tax Act for Foreign Remittances:
The AO disallowed Rs. 7,75,31,468/- for non-deduction of TDS on foreign remittances, citing the absence of Form 15CA and 15CB. The CIT(A) observed that the AO failed to examine the applicability of TDS provisions based on available information and that the non-availability of Form 15CA and 15CB does not justify disallowance under Section 40(a)(i). The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's ruling in GE India Technology vs. CIT, which supports the assessee's case.

3. Disallowance of Loss on Foreign Currency Fluctuation:
The AO disallowed Rs. 6,18,30,027/- from the loss on foreign currency fluctuation, alleging manipulation in categorizing the loss as revenue instead of capital expenditure. The CIT(A) found that the net impact of the foreign exchange fluctuation was nil in the profit and loss statement and that the assessee had already disallowed Rs. 5,95,19,000/- under Section 43A. The Tribunal upheld the CIT(A)'s decision, noting that the AO's disallowance exceeded the amount claimed by the assessee.

4. Reduction of Addition on Account of Other Expenses:
The AO disallowed 2% of other expenses (Rs. 21,68,000/-) due to unverifiable invoices. The CIT(A) reduced the disallowance to 1% (Rs. 10,84,000/-), finding minor discrepancies in the invoices. The Tribunal noted that ad hoc disallowances without specific defects are impermissible for corporate entities and set aside the disallowance entirely, favoring the assessee.

5. Disallowance of Legal Expenses:
The AO disallowed Rs. 11,56,765/- in legal expenses related to plant acquisition, treating it as capital expenditure. The CIT(A) found that the expenses were for professional services, such as drafting agreements and legal consultancy, and should be treated as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, citing the Karnataka High Court's ruling in CIT vs. United Breweries Ltd., which supports treating such expenses as revenue in nature.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal, upholding the CIT(A)'s decisions on all issues.

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