2016 (10) TMI 1115 - AT - Income Tax

Treating incentive received on pre-payment of deferred sales tax liability as income for A.Y. 2005-06 and not for A.Y. 2008-09 - Held that - For the year under consideration, as against the deferred sales tax liability of ₹ 90,692,932, the assessee has paid its NPV amounting to ₹ 65,810,057 resulting in difference of ₹ 24,882,876 which has been treated as capital receipt and not offered to tax. Further, it is noted that the pre-payment of deferred sales tax liability for the all the years together (including the impunged assessment year) has been made in the AY 2005-06 wherein the Coordinate Bench has deleted the addition of ₹ 12,06,33,254/- (which includes the amount of 24,882,876) as provisions of section 41(1) were held not applicable. By respectfully following the order of the Coordinate Bench in assessee s own case for the A.Y. 2005-06 and 2007-08, we uphold the order of the ld. CIT(A) for the impunged assessment year. Accordingly, this ground of the Revenue s appeal is dismissed. Club expenses paid by assessee for membership of its employees - Held that - In assessee s own case for the A.Y. 2005-06 held the assessee has given the name of the employees, date, amount, name of the club, nature of payment and period. The club membership has been paid in respect of 28 employees. It is noticed from the period mentioned in the chart that payments are annual subscription or subscription for part of the year. It is not a case where the assessee has paid corporate fee to the club. There is no payment for the period exceeding one year so that the benefit may be given to the employees for more than a year. The expenditure as club membership fee is an expenditure for the purpose of the business. Hence, the expenditure is allowable u/s 37 Holding the donation made by the assessee to DAV Trust was expenditure incurred wholly and exclusively for the purpose of business of the assessee - Held that - In assessee s own case for the A.Y. 2006-07 Voluntary payments made by an employer for the general welfare and benefit of the employees on grounds of commercial expediency are revenue expenditure, deductible under section 37 of the Income- tax Act. Such expenditure has nexus with the conduct of business and the expenditure incurred for maintaining industrial peace and cordial relations with the employees is an expenditure for the carrying on of the business. In this view of the matter, in the facts of this case, where there is no dispute about the bonafides in creation of the trusts or utilisation of the funds contributed by the assessee to the trusts, we have no hesitation in holding that the expenditure incurred by the assessee by way of contribution to the welfare trust of the employees was rightly held to be deductible under section 37 Depreciation disallowed on catalyst allowed Disallowance with regard to leave encashment, water cess, bonus, gratuity etc. on which deduction U/s 43B - Held that - CIT(A) has given a finding that he has gone through the details filed by assessee and it was seen that assessee has made provisions in earlier years which were not claimed as expenditure in view of section 43B. The same was claimed in the current year on payment basis and the details were given in tax audit report also. The assessee also filed reconciliation of the amount paid by the assessee. When the details were certified by Tax Auditor, the same should have been believed by A.O. The A.O. without pointing out any defect simply brushed aside the claim of assessee. It was seen that assessee did not claim these expenditure and made payment of part of the expenditure in the current year and also written back part of the expenditure as discussed in Ground No. 7. The said findings of the ld CIT(A) remain uncontroverted before us. The ld CIT(A) has carried out the necessary verification of the assessee s claim which is also certified by the Tax Auditor. We therefore do not find any infirmity in the order of ld CIT(A) and accordingly uphold the said order. Accordingly, this ground of the Revenue s appeal is dismissed Allowing rent paid for flat to a person specified U/s 40A(2)(b) - Held that - CIT(A) has given a finding that the employees of the assessee company stayed at the guest house in respect of which an amount of ₹ 10,80,000 has been paid as rent. Further, the Revenue has not brought on record any material evidence to suggest that the rent paid was excessive vis- -vis an accommodation of same size and facility in the same locality. We therefore confirm the order of the ld CIT(A) who has allowed the rent payment as incurred for the purposes of the assessee s business. Accordingly, this ground of the Revenue s appeal is dismissed. Deleting the expenses for payment made to Zuari Investment Ltd - Held that - For the purposes of invocation of section 35D, two conditions are prescribed. Firstly, the nature of expenditure should be as specified in section 35(2) and secondly, the expenditure should be incurred either before the commencement of the business, or where the business has been commenced, in connection with the extension of the undertaking or in connection with the set up of a new unit. Nothing has been brought on record to satisfy the above two conditions. Further, the Revenue has taken the ground that these expenses are with respect to the shipping division whose income was offered on the basis of Tonnage Scheme. However, there is nothing on record and which has been brought to our notice which suggest that these expenses are with respect to the Shipping Business subject to Tonnage tax scheme. In light of these, we are unable to accede to the position of the Revenue that the expenses are covered by the provisions of section 35D of the Act Addition on slump sale of Food Processing Unit U/s 50B in spite of the fact that the assessee has failed to prove the sale consideration while purchaser has intimated the sale consideration - Held that - We confirm the finding of ld CIT(A) that as per the provisions of section 50B deduction for all other assets has to be allowed as per book value and direct the AO to allow ₹ 10,44,19,543 as cost of acquisition while working out the capital gains in the hands of the assessee. Disallowance of amount claimed u/s 80IA in respect of Captive Power Plant Industrial Undertaking - Firstly, as regards the eligibility to claim of deduction under section 80IA in respect of the Captive Power plant, the same is covered in favour of the assessee by the earlier orders of the Coordinate Bench including that of AY 2007-08. What is relevant to determine is the treatment of steam worth ₹ 18,51,26,755/- and how the same has been accounted for while computing the deduction under section 80IA. Secondly, the assessee has identified both direct and indirect expenses which have been allocated to Captive power plant following certain allocation methodology which has been accepted by the Revenue. Following the same methodology, the expenses in relation to generation of steam needs to be identified and properly accounted for. The ld CIT(A) has not given any basis as to how he has determined 15% an appropriate basis. Similar is the case where the ld CIT(A) has held that the cost of gas consumption has been understated by ₹ 20,83,589/- In our view, the matter require a fresh examination and we accordingly set aside these two matters to the file of the AO. It is provided that the said amendment has been brought on the statue books with effect from 1st April, 2009 and will accordingly apply to all cases where the proceedings are pending before any authority on or after such date. Unlike other amendments such as amendment by way of insertion of section 80A(4) and section 80A(5) which has been made effective from the 1st April, 2003, and will accordingly apply in relation to assessment year 2003-04 and subsequent years, the amendment by way of insertion of sub-section 6 to section 80A has been made effective from 1st April, 2009 and it will apply to all cases where the proceedings are pending before any authority on or after such date. In the instant case, the return of income was originally filed on 30.09.2008, notice u/s 143(2) was issued on 3.9.2009, assessment order was thereafter passed on 31.12.2010 and subsequently, the order of the ld CIT(A) was passed on 30.03.2012. Accordingly, the proceedings for the impunged assessment year were pending before the Assessing officer and the provisions of section 80 A(6) will apply in the instant case. As we have stated above, the authorities below have not examined the matter after taking into consideration the provisions of section 80A(6) of the Act. In the interest of justice and fair play, we deem it appropriate to refer the matter back to the file of the AO to examine the matter a fresh taking into consideration the above discussions. Notional interest in respect of investment in subsidiary companies without providing any nexus between investments and loans - CIT(A) has given a finding that the assessee claimed that these investments were made out of surplus funds available with the assessee, however, no supporting evidence was furnished. The onus to establish that the investments are made out of surplus funds and not borrowed funds is on the assessee and the same has not been discharged in the instant case. We accordingly set-aside the matter to the file of the AO to examine the matter afresh. Accordingly, this ground of appeal of assessee is allowed for statistical purposes. Addition u/s 40(a)(ii) - not allowing the expenditure of education cess from income claimed by the appellant - Held that - The instances are amounts paid as wealth-tax, securities transaction tax and fringe benefit tax in section 40 of the IT Act. Had there been any intention of disallowing education cess, such provision would have been specifically been enacted which has not been done. We have given a careful consideration to the aforesaid contention of the ld AR but we are afraid we are unable to accede to the same. As we have already held above, the basis character of education cess as intended by the legislature is tax which is levied on the profits or gains of the business and given that such tax has already been provided in section 40(a)(ii) as not an allowable deduction, there was nothing more that was required or expected from the legislature. The levy of wealth tax, securities transaction tax and fringe benefit tax are not on the profits or gains of business or profession, hence, there was a necessity felt by the legislature and which was specifically provided for. CIT(A) has rightly disallowed the claim of education cess as an allowable deduction under section 40(a)(ii).

Summary

Issues Involved:
1. Deduction under Section 80IA for Captive Power Plant.
2. Treatment of incentive on pre-payment of deferred sales tax liability.
3. Allowability of club expenses.
4. Deduction of donation to DAV Trust.
5. Depreciation on catalyst.
6. Deduction under Section 43B for statutory liabilities.
7. Rent paid for flat to a specified person under Section 40A(2)(b).
8. Deduction of expenses paid to Zuari Investment Ltd.
9. Deduction of expenses paid to ISG Novasoft Technology.
10. Computation of capital gains on slump sale under Section 50B.
11. Disallowance of notional interest on investments in subsidiary companies.
12. Deduction of education cess.

Issue-Wise Detailed Analysis:

1. Deduction under Section 80IA for Captive Power Plant:
The assessee claimed a deduction under Section 80IA for its Captive Power Plant, which was disallowed by the Assessing Officer (AO) on the grounds that the plant was not an independent industrial undertaking. The CIT(A) partially allowed the deduction but adjusted the claimed amount due to excess price of sale of power, understated cost of gas, and presumed expenses related to HRSG. The ITAT upheld the eligibility for deduction but remanded the matter back to the AO for fresh examination of the quantum of deduction, particularly the market value of electricity and the expenses related to HRSG.

2. Treatment of incentive on pre-payment of deferred sales tax liability:
The AO added the incentive received on pre-payment of deferred sales tax liability to the total income, treating it as a business receipt. The CIT(A) deleted this addition, stating that the benefit accrued in an earlier assessment year (AY 2005-06). The ITAT upheld the CIT(A)’s decision, referencing earlier decisions in the assessee's favor, confirming the incentive as a capital receipt not taxable as revenue.

3. Allowability of club expenses:
The AO disallowed club expenses incurred for employees' memberships, treating them as personal benefits. The CIT(A) allowed the expenses, following earlier ITAT decisions in the assessee's favor. The ITAT upheld the CIT(A)’s decision, confirming that the club expenses were allowable as business expenses.

4. Deduction of donation to DAV Trust:
The AO disallowed the donation to DAV Trust, not seeing a direct business nexus. The CIT(A) allowed the deduction, citing earlier ITAT decisions that considered such donations as business expenses. The ITAT upheld the CIT(A)’s decision, affirming the donation as an allowable business expense.

5. Depreciation on catalyst:
The AO disallowed depreciation on the catalyst, which was allowed by the CIT(A) based on earlier ITAT decisions. The ITAT upheld the CIT(A)’s decision, confirming the allowance of depreciation on the catalyst.

6. Deduction under Section 43B for statutory liabilities:
The AO disallowed the deduction for statutory liabilities under Section 43B due to lack of verification. The CIT(A) allowed the deduction, relying on the tax auditor's certification and the assessee’s reconciliation. The ITAT upheld the CIT(A)’s decision, finding no infirmity in the allowance of the deduction.

7. Rent paid for flat to a specified person under Section 40A(2)(b):
The AO disallowed the rent paid for a flat used as a guest house, suspecting it was not for business purposes. The CIT(A) allowed the deduction, confirming the flat was used for business purposes. The ITAT upheld the CIT(A)’s decision, finding the rent payment reasonable and for business purposes.

8. Deduction of expenses paid to Zuari Investment Ltd.:
The AO disallowed the expenses paid to Zuari Investment Ltd., treating them as deferred revenue under Section 35D. The CIT(A) allowed the deduction, stating the expenses were routine and not covered under Section 35D. The ITAT upheld the CIT(A)’s decision, confirming the expenses as allowable under Section 37.

9. Deduction of expenses paid to ISG Novasoft Technology:
The AO disallowed the expenses paid for software consultancy, treating them as deferred revenue under Section 35D. The CIT(A) allowed the deduction, stating the expenses were for software consultancy and not covered under Section 35D. The ITAT upheld the CIT(A)’s decision, confirming the expenses as allowable under Section 37.

10. Computation of capital gains on slump sale under Section 50B:
The AO added an amount to the capital gains on slump sale, not allowing the deduction for net current assets. The CIT(A) deleted the addition, allowing the deduction for net current assets. The ITAT remanded the matter back to the AO to verify the existence of the supplementary agreement and to allow the deduction for net current assets.

11. Disallowance of notional interest on investments in subsidiary companies:
The AO disallowed notional interest on investments in subsidiary companies, which was confirmed by the CIT(A) due to lack of evidence that investments were made from surplus funds. The ITAT remanded the matter back to the AO for fresh examination.

12. Deduction of education cess:
The AO disallowed the deduction of education cess, treating it as part of income tax. The CIT(A) confirmed the disallowance. The ITAT upheld the CIT(A)’s decision, stating that education cess is part of tax and not allowable as a deduction under Section 40(a)(ii).

Conclusion:
The ITAT provided a detailed analysis and upheld the CIT(A)’s decisions on most issues, remanding a few for fresh examination by the AO. The judgment emphasizes the importance of proper documentation and adherence to statutory provisions in tax assessments.