2003 (7) TMI 279 - AT - Income Tax

Carry forward of the loss - Deduction on account of net refund of excise duty - Depreciation on pro rata basis for a period of 15 months. HELD THAT - As the assessee found that its audit will not be completed by 31st July, 1988, it applied for extension of time upto 31st Aug., 1988, which was granted by the AO. But as the audit could not be still completed, it made an application for extension of time for filing the return of income upto 30th Sept., 1988. The request in Form No. 6 were made accordingly. The request for extension of time for filing the return of income upto 30th Sept., 1988, therefore, was quite reasonable and the AO was not justified in rejecting the same. As there was a reasonable cause in filing the return late and the return of income has been filed within time for which the extension of time was sought, we direct the AO to carry forward to determine loss of the year under consideration to the subsequent years. This ground of appeal is accordingly allowed. Deduction on account of net refund of excise duty - It is admitted position that the assessee s bank guarantee was revoked due to order of the Collector (Appeals), Central Excise. But the Central Excise Department, did not accept this order and preferred the appeal before the CEGAT. The CEGAT vide its order pronounced on 8th May, 1990, reversed the findings of the Collector (Appeals), Central Excise. Thus, when the Collector(Appeals), Central Excise passed the order, it cannot be said that the issue has reached its finality. No absolute right, therefore, vested in the assessee to claim the refund. It is settled law that the assessee could not be penalized for wrong entries made in the books of account. The tax cannot be levied on hypothetical income. It will not be out of place to mention that subsequently the CEGAT has reversed the order of the Collector (Appeals), Central Excise on this issue. Though the CEGAT had denied the claim of the assessee, the assessee had challenged the same before the Hon ble Supreme Court, the same was still pending. During the pendency of the appeal before the Hon ble Supreme Court, the assessee thought it fit to offer the same for taxation and ultimately the same was also offered for taxation under KVSS. A copy of the order issued by the Collector, Central Excise is also on record. Thus, we hold that as there was no cessation of liability, the provisions of s. 41(1) of the Act were not applicable. We also hold that sustaining any addition in the year under consideration, will amount to double taxation as the same has already been taxed by the Department in the asst. yr. 1998-99. Thus, the addition sustained by the CIT(A) is not justified and the same is deleted. This ground of appeal is allowed. Depreciation on pro rata basis for a period of 15 months - Even assuming that while allowing change of the previous year, the AO has inter alia, put a condition that the depreciation will be allowable on pro rata basis for 15 months, but if such direction was against the provisions of law, the same could not be binding on the AO. We find that prior to 2nd April, 1987, there was a proviso under r. 5(1) of the IT Rules, 1962. This proviso provided that the depreciation will be allowed on pro rata basis. However, such proviso was omitted w.e.f. 2nd April, 1987. Consequently, in the year under consideration, no such pro rata depreciation was allowable to the assessee. As regards, learned counsel s observations to the effect that the insertion of Schedule was only procedural, does not find force, the law maker did not provide any such concession on or after 2nd April, 1987. Thus, we hold that the CIT(A) has rightly upheld the findings of the AO to the effect that depreciation for the period of 12 months, only was allowable to the assessee. This ground of appeal raised by the assessee is, therefore, dismissed. The depreciation @ 50 per cent in respect of moulds has been provided in the IT Rules. In the earlier years, such rate of depreciation was 40 per cent which was allowed by the AO. There does not appear to be any apparent reason for not allowing depreciation @ 50 per cent. As the depreciation @ 50 per cent has been provided in the IT Rules, we direct the AO to allow depreciation @ 50 per cent on moulds. This ground of appeals is accordingly, allowed. We find that the assessee was already manufacturing and dealing with the same product for which Shri Arun Brar has visited abroad. During his visit, he explored the possibility of technical collaboration for manufacturing of similar items. Any expenditure for modernization or upgradation of the technology of the existing product cannot be said to be capital expenditure. It is settled law that where an expenditure is incurred for setting up of a new factory or a new line of business, such expenditure will be capital expenditure. But where the expenditure is incurred for keeping oneself abreast of the latest technique of his business or for foreign collaboration it has to be held as revenue expenditure. We, therefore, hold that the CIT(A) has correctly appreciated the facts in deleting the addition. While upholding his findings, we dismiss the ground of appeal raised by the Revenue. In the net result, the appeal filed by the assessee is partly allowed and that of the Revenue is dismissed.

Summary

Issues Involved:
1. Delay in finalizing assessment and carry forward of loss.
2. Deduction on account of net refund of excise duty.
3. Depreciation on pro rata basis for a period of 15 months.
4. Depreciation rate on moulds.
5. Disallowance out of entertainment expenses.
6. Disallowance on account of advertisement expenses.
7. Disallowance under section 43B of the Act.
8. Disallowance out of motor car expenses.
9. Disallowance out of miscellaneous expenses.
10. Disallowance of earlier years' expenses.
11. Allowability of interest under section 35(1)(iv) of the Act.
12. Disallowance out of conference expenses.
13. Deletion of addition on account of excise duty refund credited to P&L account on accrual basis.
14. Relief allowed under the head "entertainment expenses."
15. Decision of addition made under section 40(c) of the Act.
16. Decision of addition made under section 36(1)(iii) for not charging interest on advance.
17. Deletion of addition on account of unexplained cash credits.
18. Deletion of addition out of foreign traveling expenses.
19. Deletion of addition out of staff welfare expenses.

Detailed Analysis:

1. Delay in Finalizing Assessment and Carry Forward of Loss:
The assessee challenged the CIT(A)'s decision that the AO was justified in refusing to allow the carry forward of the loss to subsequent years due to the late filing of the return of income. The Tribunal found that the delay in filing the return was due to the audit not being completed in time, which was a reasonable cause. The AO's rejection of the extension request was deemed unjustified. Consequently, the AO was directed to carry forward the determined loss to subsequent years.

2. Deduction on Account of Net Refund of Excise Duty:
The assessee argued that the refund of excise duty was not taxable as income because the order of the Collector (Appeals), Central Excise, was not accepted by the Central Excise Department, and the appeal was pending before CEGAT. The Tribunal held that there was no cessation of liability, and the provisions of section 41(1) of the Act were not applicable. The addition sustained by the CIT(A) was deleted.

3. Depreciation on Pro Rata Basis for a Period of 15 Months:
The assessee's accounting period was changed from the calendar year to the financial year, resulting in a 15-month period. The AO allowed depreciation only for 12 months, citing the omission of the proviso to rule 5(1) of the IT Rules, 1962. The Tribunal upheld the CIT(A)'s decision that depreciation for 12 months was allowable, dismissing the assessee's appeal.

4. Depreciation Rate on Moulds:
The assessee claimed depreciation at 50% on moulds used in the manufacture of items, which was previously allowed at 40%. The Tribunal directed the AO to allow depreciation at 50% as provided in the IT Rules, allowing the assessee's appeal.

5. Disallowance Out of Entertainment Expenses:
The AO disallowed a portion of entertainment expenses, including sales promotion expenses. The CIT(A) allowed a 25% deduction for employees' participation. The Tribunal directed a 35% deduction based on the Delhi High Court's decision in CIT vs. Expo Machinery Ltd., partly allowing the assessee's appeal.

6. Disallowance on Account of Advertisement Expenses:
The AO disallowed expenses related to crockery as entertainment expenditure. The Tribunal upheld the CIT(A)'s decision, noting that the issue was covered in favor of the Revenue by the Tribunal's decision in the assessee's earlier years.

7. Disallowance Under Section 43B of the Act:
The assessee argued that payments of CST/ST and gratuity were made within the prescribed time. The Tribunal directed the AO to verify the payments and allow deductions if made within the due date of filing the return of income, following the Supreme Court's decision in Allied Motors (P) Ltd. vs. CIT.

8. Disallowance Out of Motor Car Expenses:
The Tribunal held that there could be no disallowance for personal use of the car in the case of a company, deleting the disallowance sustained by the CIT(A).

9. Disallowance Out of Miscellaneous Expenses:
The AO's ad hoc disallowance of Rs. 50,000 was deleted by the Tribunal, concurring with its decisions in the assessee's earlier years.

10. Disallowance of Earlier Years' Expenses:
The Tribunal allowed the deduction of Rs. 3,376 for bills received in the current year, holding that the addition sustained by the CIT(A) was not justified.

11. Allowability of Interest Under Section 35(1)(iv) of the Act:
The Tribunal restored the issue of interest allowability on debentures to the AO for reconsideration in light of its order for the assessment year 1988-89.

12. Disallowance Out of Conference Expenses:
The Tribunal found the AO's disallowance of Rs. 1,50,000 out of Rs. 1,69,470 as unreasonable and restricted the disallowance to Rs. 50,000, giving partial relief to the assessee.

13. Deletion of Addition on Account of Excise Duty Refund Credited to P&L Account on Accrual Basis:
The Tribunal upheld the CIT(A)'s decision that the entry of hypothetical income in the books of account does not result in taxable income, dismissing the Revenue's appeal.

14. Relief Allowed Under the Head "Entertainment Expenses":
The Tribunal dismissed the Revenue's appeal, following its findings in the assessee's appeal.

15. Decision of Addition Made Under Section 40(c) of the Act:
The Tribunal dismissed the Revenue's appeal, noting that the issue was covered by the Tribunal's order in the assessee's earlier years.

16. Decision of Addition Made Under Section 36(1)(iii) for Not Charging Interest on Advance:
The Tribunal upheld the CIT(A)'s decision, noting that the Revenue failed to prove the nexus between borrowing funds on interest and advancing the same without interest.

17. Deletion of Addition on Account of Unexplained Cash Credits:
The Tribunal upheld the CIT(A)'s decision, noting that the credits related to earlier years and not the year under consideration.

18. Deletion of Addition Out of Foreign Traveling Expenses:
The Tribunal upheld the CIT(A)'s decision, noting that the expenditure for modernization or upgradation of existing products was revenue in nature.

19. Deletion of Addition Out of Staff Welfare Expenses:
The Tribunal upheld the CIT(A)'s decision, noting that the Revenue failed to provide evidence that the CIT(A)'s findings for the earlier year were reversed by the Tribunal.

Conclusion:
The appeal filed by the assessee was partly allowed, and the appeal filed by the Revenue was dismissed.