2023 (7) TMI 1556 - AT - Income Tax

Disallowance of damages and settlement expenses - settlement documents pertaining to sale of share is not plausible expenses by the assessee before the AO - HELD THAT - It is pertinent to note that the settlement arrived at by the assessee with the Ruparel Group was in compensatory nature and in respect of damages as well as civil suit and criminal proceedings also part of the settlement expenses. Therefore the observations made by the AO that the same is not of compensatory nature appear to be incorrect. Thus the CIT(A) was right in deleting the disallowance of damages and settlement expenses. Ground no.1 of Revenue s appeal is dismissed. Disallowance on account of surrender of rights in redemption of OCCPS - cessation of liability - DR submitted that the value of any benefit or perquisite whether convertible into money or not arising from business or the exercise of a profession is taxable income as per provisions of Section 28(iv) - HELD THAT - As per the submissions of the Ld. AR. the Assessing Officer s treatment of the same as cessation of liability is not justifiable as the same has been done pending the availability of funds for the redemption of capital by the assessee s advisory. The beneficial ownership of these OCCPS has been transferred in favour of a trust of which the Company is the beneficiary and when the accounting effect of such waiver only in respect of these OCCPS are made at that time when such shares will be redeemed. Therefore the AO s observations is not justifiable as the right of conversion on these OCCPS lapsed on 22nd August 2003. Thus ground no.2 of Revenue s appeal is dismissed. Addition of delayed completion of project as capital receipt as claimed by the assessee - DR submitted that if it is a capital receipt against the cost of power plant then the assessee would have to reduce this amount from the cost of Plant Machinery for the purpose of depreciation - HELD THAT - It is pertinent to note that the issue contested by the Revenue is already decided in favour of the assessee in assessee s own case by the Hon ble Apex Court 2010 (7) TMI 11 - SUPREME COURT From the perusal of records also the assessee has received compensation for the liquidated damages for delayed completion of project which is related to assets of the Company. Therefore the same is part of capital in nature. Thus ground no.3 of Revenue s appeal is dismissed. Addition being differential royalty on Basalt considering it as allowable deduction - DR submitted that the Company has unauthorisedly procured Basalt Powder from certain suppliers without payment of Royalty - HELD THAT - It is pertinent to note that the dispute centres around treating the recovery of differential royalty on Basalt by the Government of Gujarat as in the nature of Penalty. But the assessee s contention is that the same is not penalty but it is value of minerals consumed by the assessee in production process appears to be correct from the records. The amount recovered from the assessee was made in direct proportion of the quantum of the basalt consumed and therefore it was it was part of consumption cost of minerals in the hands of the assessee. The decision of Ahmedabad Cotton Manufacturing Company Limited 1993 (10) TMI 1 - SUPREME COURT is apt in assessee s case. Therefore ground no.4 of Revenue s appeal is dismissed. Disallowing additional depreciation claimed on new Plant Machinery - DR submitted that the assessee has claimed additional depreciation on power plant which is not a Plant Machinery eligible for additional deprecation because power is not an article or thing and therefore there is an excess claim being additional depreciation - HELD THAT - The assessee during the course of assessment proceedings as well as before CIT(A) submitted that additional depreciation provided on Power Plant was subsequently reversed which was also apparent in the details furnished by the assessee before the AO. Claim of additional depreciation was in respect of new Plant Machinery viz. Fly Ash Handling System Air Compressor 36KV Power Control Panels X-ray Spectrometer Analyser etc. which was allowable to the assessee. Thus the CIT(A) was right in deleting the same. Ground no.5 of Revenue s appeal is dismissed. Disallowance of Club Expenses - Treated as non-business and personal use - HELD THAT - As pertinent to note that this issue is covered in assessee s favour in assessee s own case for A.Y. 1996-97. Besides this the expenditure incurred at club as membership and other charges viz. entrance fee subscription cost of club service etc. were not disputed by the Assessing Officer as well as by the CIT(A). Therefore ground no.6 of Revenue s appeal is dismissed. Addition of license/registration fees - DR submitted that the company s business is of manufacture and sale of cement and clinkers membership fee paid to Indian Energy Exchange Limited for DRID connected client and for processing registration fee for approval of sale of power is not in consonance with the business of the assessee - HELD THAT - It is pertinent to note that from the perusal of records it appears that the said electricity line is solely used by the assessee and therefore the expenses incurred related to sale of power registration and membership is for the business purpose only. Thus the CIT(A) was right in deleting the said disallowance. Hence ground no.7 is dismissed. Disallowance u/s 40A(9) - DR submitted that the company is contributing every month almost uniform amount as its contribution and also for maintenance charges - HELD THAT - It is pertinent to note that this issue is covered in favour of the assessee in assessee s own case for A.Y. 1992-93. The expenditure incurred by the assessee on the welfare of assessee s employees and related association is in the nature of staff welfare and not in the nature of any contribution u/s 40A(9). The decision of Tribunal is relevant in assessee s case as the same is in assessee s own case decided for A.Y. 1992-93. The CIT(A) was thus right in deleting the said disallowance and hence there is no need to interfere with the findings of the CIT(A). Disallowance u/s 14A - HELD THAT - It is pertinent to note that the assessee has made disallowance in computation of income and there is no dispute by the Revenue Authorities that total exempt income as shown by the assessee is Rs. 5, 000/-. Thus the CIT(A) was right in restricting the disallowance of Rs. 6.66 Lakhs as against Rs. 88.35 lakhs under Section 14A of the Act. Thus ground no.9 is dismissed. Disallowance u/s 40(a)(ia) - liable for short deduction besides late payment interest - HELD THAT - The fact that the assessee was not given opportunity to file the details and from the perusal of records it appears to be correct that the assessee has already made disallowance. Therefore this tantamount to double disallowance. There is no need to interfere with the findings of the CIT(A). Ground no.10 of Revenue s appeal is dismissed. Disallowance being depreciation claim on electricity line - HELD THAT - It is pertinent to note that the ownership of the said electricity line is in the hands of PGVCL and therefore the alternate argument with submission made by the Ld. AR that entire cost should be allowed as revenue expenditure is more plausible. Thus the AO is directed accordingly to treat the same as revenue expenditure. Disallowance for contribution made towards PWD Road - HELD THAT - It is pertinent to note that the road made by the PWD was in fact for the smooth running of assessee s business and therefore assessee s contribution towards construction of 4 lane road in order to facilitate infrastructure requirement in the surrounding area should have been allowed. Thus grounds no.3 of assessee s appeal is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The judgment involves cross-appeals by the Revenue and the Assessee against the order of the CIT(A) for the Assessment Year 2010-11. The core legal issues considered are:

• Whether the CIT(A) was correct in deleting various disallowances made by the Assessing Officer (AO) related to damages and settlement expenses, surrender of rights in redemption of OCCPS, delayed completion of projects, differential royalty on ballast, additional depreciation on new plant and machinery, club expenses, license/registration fees, and disallowance under sections 40A(9) and 40(a)(ia) of the Income Tax Act, 1961.
• Whether the CIT(A) was correct in restricting the disallowance under Section 14A of the Act.
• Whether the CIT(A) was correct in confirming certain disallowances made by the AO in the Assessee's appeal.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Disallowance of Damages and Settlement Expenses

• Legal Framework: The disallowance was made under Section 40(a)(ia) of the Income Tax Act, 1961. The Revenue argued that the expenses were not compensatory.
• Court's Interpretation: The Tribunal found the expenses to be compensatory in nature, related to civil suits and criminal proceedings, and thus allowable as business expenditure.
• Conclusion: The CIT(A)'s decision to delete the disallowance was upheld.

Issue 2: Surrender of Rights in Redemption of OCCPS

• Legal Framework: The Revenue contended that the surrender resulted in a cessation of liability, taxable under Section 28(iv) of the Act.
• Court's Interpretation: The Tribunal held that the surrender of rights was capital in nature and not taxable under Section 28(iv) or Section 41(1) of the Act.
• Conclusion: The CIT(A)'s deletion of the disallowance was upheld.

Issue 3: Delayed Completion of Project

• Legal Framework: The Revenue argued that the compensation received should be treated as a capital receipt and reduce the cost of assets.
• Court's Interpretation: The Tribunal noted that the issue was already decided in favor of the Assessee by the Supreme Court, treating the compensation as capital in nature.
• Conclusion: The CIT(A)'s deletion of the disallowance was upheld.

Issue 4: Differential Royalty on Basalt

• Legal Framework: The Revenue treated the recovery as a penalty, not deductible.
• Court's Interpretation: The Tribunal found the recovery to be part of the consumption cost, not a penalty.
• Conclusion: The CIT(A)'s deletion of the disallowance was upheld.

Issue 5: Additional Depreciation on New Plant and Machinery

• Legal Framework: The Revenue argued that the power plant was not eligible for additional depreciation.
• Court's Interpretation: The Tribunal found the additional depreciation claim valid for new plant and machinery.
• Conclusion: The CIT(A)'s deletion of the disallowance was upheld.

Issue 6: Club Expenses

• Legal Framework: The Revenue argued that the expenses were for non-business purposes.
• Court's Interpretation: The Tribunal noted that similar expenses were allowed in previous years.
• Conclusion: The CIT(A)'s deletion of the disallowance was upheld.

Issue 7: License/Registration Fees

• Legal Framework: The Revenue contended these were non-business or capital in nature.
• Court's Interpretation: The Tribunal found the fees related to business operations.
• Conclusion: The CIT(A)'s deletion of the disallowance was upheld.

Issue 8: Disallowance under Section 40A(9)

• Legal Framework: The Revenue argued the contributions were not allowable.
• Court's Interpretation: The Tribunal found the expenses were for employee welfare, not contributions under Section 40A(9).
• Conclusion: The CIT(A)'s deletion of the disallowance was upheld.

Issue 9: Disallowance under Section 14A

• Legal Framework: The Revenue argued for a higher disallowance.
• Court's Interpretation: The Tribunal found the CIT(A)'s restriction of disallowance to be reasonable.
• Conclusion: The CIT(A)'s decision was upheld.

Issue 10: Disallowance under Section 40(a)(ia)

• Legal Framework: The Revenue argued for disallowance due to short deduction.
• Court's Interpretation: The Tribunal found the disallowance to be a double disallowance.
• Conclusion: The CIT(A)'s deletion of the disallowance was upheld.

3. SIGNIFICANT HOLDINGS

• The Tribunal upheld the CIT(A)'s decision on most issues, finding the disallowances made by the AO to be unjustified.
• The Tribunal emphasized the importance of the nature of expenses, whether compensatory or capital, in determining their deductibility.
• The Tribunal reiterated the principle that disallowances should not exceed the exempt income in cases under Section 14A.
• In the Assessee's appeal, the Tribunal allowed certain claims, treating them as revenue expenditure or necessary for business operations.

In conclusion, the Tribunal dismissed the Revenue's appeal and partly allowed the Assessee's appeal, providing clarity on the treatment of various expenses and deductions under the Income Tax Act.