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2025 (4) TMI 386 - AT - Income TaxDisallowance of Interest on Bonds Issued During Amalgamation - HELD THAT - As noted that in previous assessment years the assessee s similar claims for interest on bonds issued during amalgamation were disallowed by the AO. These disallowances were subsequently upheld by the CIT(A) and the co-ordinate bench thereby establishing a consistent judicial stance on this matter. In the assessment years under consideration the CIT(A) has adhered to the same position disallowing the claim for interest on bonds as not allowable under the provisions of the Act. We observe that there has been no material change in the facts or any new legal argument presented that would warrant a departure from this established position. In light of the principle of judicial consistency and considering the treatment of similar claims in prior years we find no reason to take a different view. We therefore uphold the disallowances as made by the AO and confirmed by the CIT(A). Disallowance u/s 43B(b) - Employer s Contribution to PF - assessee failed to make the contributions within the stipulated time frames - HELD THAT - Following the principle of judicial consistency in the present case the issue should be set aside to the AO for verification to determine whether the contributions were paid on or before the due date for filing the return of income. If the payments were made within the allowable time frame as per Section 43B(b) then the disallowance should be allowed accordingly. Disallowance u/s 43B on account of employees contribution of PF - The decision in case of CIT -II Vs. Gujarat State Road Transport Corporation 2014 (1) TMI 502 - GUJARAT HIGH COURT is against the assessee on this issue and the AR has conceded the same before us. Hence the ground of the assessee is dismissed. Disallowance of PF Damages u/s 14B of the PF Act - HELD THAT - It is an established position based on the decision in the case of Swadeshi Cotton Mills Co. Ltd. 1997 (5) TMI 5 - SUPREME COURT that where a composite levy includes both compensatory and penal elements the compensatory portion can be allowed as a deductible business expenditure under Section 37(1). In the assessee s own case for A.Y. 2001-02 2022 (5) TMI 1673 - ITAT AHMEDABAD the Co- ordinate Bench had upheld the CIT(A) s decision to allow 40% of the damages u/s 14B of the Act as compensatory while treating the balance 60% as penal in nature and disallowing the same. Accordingly 40% of the damages of are allowed as compensatory and deductible u/s 37(1) of the Act while the balance 60% is disallowed as penal in nature. AO is directed to verify the computation and ensure that the disallowance is limited to 60% of the damages. The appeal on this ground is partly allowed. Disallowance of Salary and Wages of Packart Press Unit - AO and the CIT(A) disallowed on the grounds that the unit was closed and not operational - HELD THAT - We noted the Co-ordinate Bench s decision in earlier years which did not conclusively establish the allowability of the expenses but only remanded the matter for further verification. However it was observed by the co- ordinate bench that the Packart Press Unit was not a distinct line of business but functioned as part of the assessee s overall operations supporting other units. It was also observed that the allowability of salary and wage expenses depended on whether the liability had accrued during the relevant year based on contractual obligations and whether it was substantiated by evidence. Considering the identical facts and the Co-ordinate Bench s decisions in earlier years the issue is remanded back to the AO for verification of the facts whether the liability for salaries wages and related expenses accrued during the relevant year and whether the liability is supported by contractual obligations and substantiated by adequate evidence. Transfer of Marketing/Distribution Rights - addition made by the AO on account of additional consideration received for the transfer of marketing and distribution rights which the AO and CIT(A) have treated as revenue income - HELD THAT - We find that the Co-ordinate Bench in the assessee s own case for A. Y. 2001-02 2022 (5) TMI 1673 - ITAT AHMEDABAD has adjudicated the identical issue and upheld the treatment of these receipts as taxable revenue income. The findings of the Co-ordinate Bench are squarely applicable to the present case and the learned AR has also conceded the same. Other and Miscellaneous Expenses - disallowance of expenses include general administrative costs such as vehicle telephone business promotion conveyance and other minor expenses - AO disallowed a portion of the expenses claimed under the Profit and Loss account on the grounds that they were either non-business in nature or lacked sufficient evidence to establish that they were incurred wholly and exclusively for business purposes - HELD THAT - We note that the issue of disallowance of telephone and vehicle expenses as well as miscellaneous expenses has been adjudicated in the assessee s favour by the Co-ordinate Bench in 2019 (1) TMI 2065 - ITAT AHMEDABAD wherein as find AO adopted a global approach in the matter and brought about the instances where the assessee was unable to substantiate its claim of the relevant expenditure being incurred only and exclusively for business purposes. No presumption it is trite can hold and it is only on a determination of the discrepancies in the assessee s claim can be proceed to estimate the same by applying a percentage that he considers justified also delineating the reason for the same so that the appellate authority would while adjudicating on quantum i.e. where required to do so be aware of the same and consider it on merits. Prior Period Expenses - expenses claimed by the assessee that pertain to earlier years but were accounted for in the current year - CIT(A) deleted the disallowance made by the AO holding that the liability crystallized during the year due to the resolution of disputes with parties and the receipt of bills/ debit notes during the current financial year - HELD THAT - AO failed to substantiate why the liability for these expenses did not crystallize during the year under appeal. Further the AO did not identify any year to which the liability pertained nor did the AO dispute the factual assertion that the liability arose out of the settlement of disputes during the current year. CIT(A) has rightly relied on the principles laid down in the case of Saurashtra Cement Chemical Industries 1994 (10) TMI 30 - GUJARAT HIGH COURT and earlier appellate orders to delete the disallowance. The DR failed to point out any distinguishing facts or legal arguments to differentiate the present case from the co-ordinate bench s decisions in earlier years. The principle of consistency therefore squarely applies. We uphold the order of the CIT(A) in deleting the disallowance of prior period expenses. Foreign Travel Expenses - Expenses undertaken by directors and executives which the assessee claims were for business purposes such as attending conferences meeting clients or exploring new business opportunities - HELD THAT - We find that the AO s disallowance of 50% of the expenses was ad hoc and arbitrary made without bringing any material on record to justify the presumption of non-business use. The CIT(A) erred in upholding the disallowance by relying solely on the lack of further evidence from the assessee despite there being sufficient documentation supporting the business purpose of the travel. Disallowance of Other Penalties (Contractual Obligation) - HELD THAT - It is observed that the CIT(A) for both years noted that the assessee had suo-moto added back these amounts while filing the return of income. However there is insufficient evidence on record to establish whether these amounts are compensatory or penal in nature. The determination of the nature of these amounts is critical for deciding their allowability. The matters are remanded back to the AO with the direction to verify the exact nature of the amounts claimed as liquidated damages and sales tax-related damages based on supporting documentary evidence allow the amounts if they are found to be compensatory and incurred for business purposes aligning with Section 37(1) and disallow the amounts if they are found to be penal in nature arising from statutory infractions or non- compliance with laws. Disallowance u/s 14A - AO asserted that earning exempt income involves incidental expenses like administrative and management costs - HELD THAT - As it is evident that the investments in SPPL were made in earlier years as a strategic decision not primarily for earning dividend income. No additional expenditure was incurred during the year under appeal for managing these investments or earning the dividend income. The disallowance sustained by the CIT(A) is based on arbitrary assumptions without any factual support. Accordingly the disallowance under Section 14A sustained by the CIT(A) is deleted in its entirety. Disallowance of Bad Debts - assessee has also raised an alternate claim for treating the write-off as a business loss u/s 28 - HELD THAT - Mumbai bench of the tribunal in Jackie Shroff 2019 (1) TMI 400 - ITAT MUMBAI held that irrecoverable advances made for business expediency may be allowable under Section 28 as business loss. The CIT(A) s conclusion that the conditions under Section 36(1)(vii) of the Act were not met is factually and legally incorrect. The details and evidence provided by the assessee were not given due consideration despite being placed on record. The rejection of the alternate claim under Section 28 on grounds of lack of evidence is also unsustainable as the nature of the transactions clearly demonstrates their nexus to the business. Assessee s ground of appeal relating to the disallowance as bad debts under Section 36(1)(vii) of the Act to the extent applicable is allowed and in case of remaining amount the alternate claim u/s 28 is allowed. The AO is directed to allow the total deduction. The appeal of the assessee is allowed in toto. Disallowance of bad debt - addition made on insufficient evidence and non-fulfilment of conditions u/s 36(1)(vii) for bad debt deduction - HELD THAT - We find that the assessee has fulfilled the conditions laid down under Section 36(1)(vii) r.w.s. 36(2) as the amounts written off are reflected as irrecoverable in the books of accounts and pertain to business transactions. The necessity to prove that the debts became bad no longer applies as clarified in T.R.F. Ltd. 2010 (2) TMI 211 - SUPREME COURT Thus we conclude that the disallowance is unwarranted. The assessee s claim u/s 36(1)(vii) for the bad debts written off is allowed. Write Off of Bad Debts - HELD THAT - CIT(A) has observed that the assessee furnished complete details regarding the bad debts including invoice numbers party names and other relevant details before the AO during the assessment proceedings. CIT(A) further noted that the assessee had complied with the requirement of writing off the bad debts in its books of account. Additionally there is no evidence to suggest that the debts written off were not considered in the computation of the assessee s total income in earlier years. Revenue s contention that the assessee failed to establish the fulfilment of conditions u/s 36(1)(vii) is devoid of merit as the CIT(A) has categorically addressed this issue by relying on the submissions and supporting evidence placed on record. CIT(A) s decision is therefore in consonance with the principles laid down in T.R.F. Ltd. 2010 (2) TMI 211 - SUPREME COURT and we find no infirmity in the same. Disallowance of Sundry Balances written off - HELD THAT - Amount relating to sales of goods is allowable as a business loss u/s 28 as it pertains to irrecoverable amounts taxed in earlier years. The balance amount representing irrecoverable deposits and advances made during the course of business is also allowable as a business loss u/s 28 as it is incidental to the assessee s business operations. In view of the above we direct the AO to allow the entire claim as a business loss under Section 28 of the Act. The appeal filed by the assessee is allowed. Write-off of Loan Liabilities as Taxable under Section 28(iv) - HELD THAT - As it is evident that the loan waiver in the present case pertains to a capital liability and is not taxable under either Section 28(iv) or Section 41(1) of the Act. CIT(A) has rightly deleted the addition made by the AO. Disallowance of Repair and Maintenance - Building - Expenses claimed by the assessee pertain to waterproofing strengthening of beams and columns and final waterproofing work were incurred to maintain the rented premises in usable condition with no new asset or structural improvement being created. The CIT(A) s deletion of disallowance is upheld as these expenses qualify as current repairs under Section 30 of the Act necessary for the upkeep of rented premises. The AO failed to demonstrate how these repairs resulted in an enduring benefit or capital asset. Repair and maintenance claim relate to partition work. These partitions were installed in rented premises to make the space operationally suitable for business needs. The expenditure does not result in the creation of any capital asset owned by the assessee as the premises were rented. The expenses are routine and necessary for business use aligning with the decision of HEDE Consultancy (P.) Ltd. 2002 (6) TMI 19 - BOMBAY HIGH COURT where similar repairs to rented premises were allowed as revenue expenditure. Partition work carried out in the manufacturing facilities to improve operational efficiency and protect the quality of production - These expenses do not result in a new asset or structural improvement but are aimed at maintaining existing facilities. The AO failed to demonstrate how these expenses provide an enduring benefit. Relying on the decision of HEDE Consultancy (P.) Ltd. 2002 (6) TMI 19 - BOMBAY HIGH COURT and considering the CIT(A) s observations the expenses qualify as current repairs and are allowable u/s 30. Disallowance of Repair and Maintenance - Plant Machinery - HELD THAT - In case of CIT v. TVS Motors Ltd. 2019 (7) TMI 750 - MADRAS HIGH COURT decided that expenditure is considered as current repairs if its object is not to bring a new asset into existence or derive a new advantage. The repair work in this case aligns with this principle as it was undertaken to maintain operational efficiency rather than create a new asset. AO s contention that these expenses are capital in nature is without merit as no new asset was created nor was the nature or capacity of the existing assets altered. The repairs were necessitated by business exigencies and statutory requirements and qualify as revenue expenditure u/s 31 of the Act. The CIT(A) s decision to uphold the AO s disallowance is set aside. Thus this ground of assessee is allowed. Disallowance of 5% Selling Expenses - CIT(A) deleted the ad hoc disallowances observing that the AO failed to identify any specific portion of the selling expenses as disallowable - We also find that the decision of the co-ordinate bench in the assessee s own case for A.Y. 2001-02 applies squarely to the present appeals. As held in that case selling expenses incurred wholly and exclusively for the purposes of business are allowable under Section 37(1). We find no infirmity in the CIT(A) s order. These grounds of revenue are dismissed. MAT adjustment while arriving at book profit under section 115JB - Provisions relating to leave encashment and gratuity - HELD THAT - The provisions for gratuity and leave encashment are recognized liabilities determined scientifically for services rendered by employees during the relevant period. In the landmark judgment in case of Bharat Earth Movers 2000 (8) TMI 4 - SUPREME COURT held that a liability arising from an obligation that has already accrued though the payment may be deferred is not a contingent liability. Such liabilities if based on a scientific method like actuarial valuation qualify as ascertained liabilities and are deductible. Therefore the CIT(A) has rightfully deleted the addition relating to these provisions. Regarding the provision for doubtful debt s - provisions for doubtful debts if simultaneously reduced from the asset side of the balance sheet represent actual write-offs and cannot be treated as unascertained liabilities and therefore do not attract Explanation 1(c) to Section 115JB of the Act . The revenue s arguments fail to establish how these provisions could be classified as unascertained liabilities. Respectfully following the above judgments and in the absence of any material evidence presented by the revenue to contradict these positions we direct the AO to exclude these provisions from the computation of book profits under Section 115JB of the Act. Thus the ground of assessee is allowed and ground of revenue is dismissed.
1. ISSUES PRESENTED and CONSIDERED
The core legal issues considered in this judgment include:
2. ISSUE-WISE DETAILED ANALYSIS Disallowance of Interest on Bonds Issued During Amalgamation:
Disallowance under Section 43B(b) - Employer's Contribution to PF:
Disallowance of PF Damages under Section 14B of the PF Act:
Salaries and Wages of Packart Press Division:
Transfer of Marketing/Distribution Rights:
Adhoc Disallowance of Miscellaneous Expenses:
Prior Period Expenses:
Foreign Travel Expenses of Directors:
Other Penalties (Contractual Obligation):
Disallowance under Section 14A:
Bad Debts and Sundry Balances Written Off:
Write-off of Loan Liabilities as Taxable under Section 28(iv):
Repair and Maintenance Expenses:
Selling Expenses:
Adjustments to Book Profit under Section 115JB:
3. SIGNIFICANT HOLDINGS
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