2004 (1) TMI 300 - AT - Income Tax

Disallowance of staff welfare expenses as capital expenses - expenses incurred on purchase of land -company is only a custodian and not the owner - Determine the year on acquiring the plot or in the year plot so acquired is transferred and to the extent transferred to the workers - Whether the expenditure on making available free of cost the plots to factory workers constitutes an admissible expenditure or not - HELD THAT - As the expenditure on giving plots of lands to the workers is admittedly incurred in pursuance to a union settlement bona fides of which have not been called into question at any stage by the revenue and giving the plots of land to the workers does not create any assets for the assessee-company the expenditure in question in principle constitutes admissible deduction u/s 37(1) of the Act. In our considered view there is no question of assessee being allowed the deduction in the year in which the plot of land is acquired by the assessee unless the plot is also transferred to the workers that very year for the simple reason that the deduction is on account of giving the plot to the workers free of cost and unless that act of giving away the plot takes place the cause of action for deduction is not complete. The assessee may acquire a plot of land with the intent of sub-dividing it amongst the workers but then there is nothing which prevents the assessee from putting it to any other use or may be just parting with the same. Until the time the plot is actually given to the workers it continues to be an asset of the assessee undisputedly a capital asset and at its unfettered ownership. Therefore merely because an assessee acquires the plot with an intent to sub-divide and transfer it to the workers the expenditure incurred by the assessee on acquiring the plot per se does not constitute an admissible deduction and the deduction can only be allowed in the year in which the plot of land is actually sub-divided and transferred to the workers. Thus we are of the considered view that while assessee s claim for deduction is allowable in principle it can only be allowed in the year in which the assessee actually transfers the plots to the workers. The case before us clearly fulfils this test because the only reason that the disallowance has been confirmed this year is that it is allowable in the year in which plots are finally transferred to the workers- which admittedly is not the year before us and for that reason allowability in the that year was the sole and proximate reason for disallowability in the current year. Therefore on the facts of the present case where the Tribunal has given a finding that the deduction on account of expenditure acquired on plot for use by workers is to be allowed in the year(s) in which the plots are finally transferred to the workers the Assessing Officer has the power and therefore the inherent corresponding duty u/s153(3) of the Act to recompute the income of that subsequent year to give effect to Tribunal s finding. It is open to the assessee to approach the Assessing Officer for that purpose or we may further add at the cost of stating the obvious to approach the Commissioner along with the requisite petition for condonation of delay for revision u/s 264 of the Act. Thus we uphold the disallowance in principle so far the year in appeal before us is concerned and decline to interfere in the matter. The issue raised in the appeal is whether the expenditure in question is deductible in the year before us or not; we hold it is not deductible in the year before us. In the result the appeal is party allowed in the terms indicated above.

Summary

Issues Involved:
1. Disallowance of staff welfare expenses as capital expenses.
2. Inclusion of excise duty and sales tax in 'total turnover' for computing deduction u/s 80HHC.
3. Disallowance of motor car expenses and personal use of phone by directors.

Summary:

1. Disallowance of Staff Welfare Expenses as Capital Expenses:
The assessee contested the CIT(A)'s confirmation of disallowance of Rs. 4,00,500 on account of staff welfare expenses, treating them as capital expenses. The expenses were incurred for purchasing land to be given to workers as per a union settlement. The Assessing Officer (AO) and CIT(A) held that the land remained a capital asset of the company until transferred to the workers, thus disallowing the expenditure as revenue deduction. The Tribunal concluded that while the expenditure is justified on grounds of commercial expediency and does not constitute a capital expenditure, the deduction is allowable only in the year the land is actually transferred to the workers. The Tribunal upheld the disallowance for the year in question but noted that the assessee could approach the AO or CIT for relief in the appropriate year.

2. Inclusion of Excise Duty and Sales Tax in 'Total Turnover' for Computing Deduction u/s 80HHC:
The assessee challenged the inclusion of excise duty and sales tax in the 'total turnover' for the purpose of computing deduction u/s 80HHC. The Tribunal found that this issue was covered in favor of the assessee by the jurisdictional High Court's decision in CIT v. Sudarshan Chemical Industries Ltd. [2000] 245 ITR 769. Consequently, the Tribunal directed the AO to exclude excise duty and sales tax from 'total turnover' for computing the deduction.

3. Disallowance of Motor Car Expenses and Personal Use of Phone by Directors:
The assessee contested the disallowance of 1/10th of motor car expenses and Rs. 15,000 for personal use of phone by directors. The Tribunal, following the precedent set by the Gujarat High Court in Sayaji Iron & Engg. Co. v. CIT [2002] 253 ITR 749, held that there cannot be any personal expenses for a company, as it is an artificial person. The Tribunal directed the AO to delete these disallowances.

Conclusion:
The appeal was partly allowed. The Tribunal upheld the disallowance of staff welfare expenses for the year in question but allowed the exclusion of excise duty and sales tax from 'total turnover' and directed the deletion of disallowances related to motor car expenses and personal use of phone by directors.