2012 (10) TMI 288 - HC - Income Tax

Entertainment expenditure incurred on employees - ITAT allowed the claim - Held that - Order of the Tribunal shows that it has considered the claim of the assessee that 35% of the expenditure incurred on entertainment is attributable to the entertainment of the employees while they were entertaining the assessee s customers to be reasonable and therefore such portion of the expenditure has to be excluded at the threshold and the limits prescribed by Section 37(2) have to be applied only on the balance of expenditure. This is not an unreasonable view of the section. The question as to how much is to be attributed to the entertainment of the employees is a matter of esteem, therefore, answer the question in the affirmative - in favour of the assessee. Depreciation on increase in cost of fixed assets due to fluctuation in the foreign exchange rate - ITAT allowed the claim - Held that - As decided in CIT Versus M/s Woodward Governor India P. Ltd. & M/s Honda Siel Power Products Ltd. 2009 (4) TMI 4 - SUPREME COURT that the increase on account of fluctuations in the rate of foreign exchange prevailing on the last day of the financial year is not notional or contingent and has to be adjusted in the actual cost of assets in terms of Section 43A, in the year in which there is variation in the exchange rate, irrespective of the date on which it is paid - in favour of the assessee. Payment to the UP State Electricity Board for laying electric transmission lines in the premises - Revenue v/s Capital - Held that - As decided in CIT Vs. Saw Pipes Ltd. 2007 (1) TMI 101 - DELHI HIGH COURT that expenditure was incurred by the assessee for laying of electricity transmission lines, which did not become the property of the assessee. It was held that the expenditure did not bring in any enduring benefit and was deductible as revenue expenditure - in favour of the assessee. Addition towards value of the closing stock - CIT (Appeals) deleting the addition - Held that - The revenue has accepted similar claims in the assessment made for the assessment years 1996-97 and 1997-98. A consistent method of valuing the stock has been adopted by the assessee. It was also accepted by the revenue. It would, therefore, be improper to allow the revenue to change its position only for one year, which would upset the method of valuation of the stock for a particular year thereby resulting in a distorted version of the profits. The method of valuation of closing stock can be disturbed only if it is found that the method followed is such that true profits and gains cannot be deduced therefrom - in favour of assessee. Disallowance of the brand building and dealer loyalty expenditure - ITAT confirming the decision of the CIT(A) in deleting the addition - Held that - The finding of the Tribunal that a part of the advertisement expenditure is reimbursed by the parent company is not under challenge. This itself should settle the issue in favour of the assessee because even if it is assumed that a part of the expenditure inured for the benefit of the parent company, the assessee is getting compensated for it. The view that in any case, expenditure, the benefit of which inures partly to the assessee and partly to another person, cannot be allowed as a deduction, is not the correct view to take in law since it has been settled by a long line of cases that expenditure incurred by the assessee in the running of his business cannot be disallowed merely on the ground that a part of the expenditure results in some benefit to a third party - in favour of the assessee

Issues Involved:
1. Allowance for entertainment expenditure incurred on employees.
2. Depreciation on the increase in the cost of fixed assets due to foreign exchange rate fluctuations.
3. Classification of payment to UP State Electricity Board (UPSEB) as revenue or capital expenditure.
4. Deletion of addition towards the value of closing stock.
5. Deletion of disallowance of brand building and dealer loyalty expenditure.

Issue-wise Detailed Analysis:

1. Allowance for Entertainment Expenditure Incurred on Employees:
The primary issue in ITA 143/2010 was whether the assessee was entitled to an allowance for entertainment expenditure incurred on its employees. The assessee claimed Rs.4,85,305/- as entertainment expenditure, with 35% attributed to employees' food and beverage costs while entertaining customers. The Assessing Officer disallowed this, reworking the disallowance to Rs.2,37,653/-. However, the CIT (Appeals) and the Tribunal accepted the assessee's claim, considering the 35% allocation reasonable. The High Court upheld this view, stating that the Tribunal's interpretation was not unreasonable and answered the question in favor of the assessee.

2. Depreciation on Increase in Cost of Fixed Assets Due to Foreign Exchange Fluctuations:
In ITA 113/2010, the second issue concerned whether the assessee was entitled to depreciation on the increased cost of fixed assets due to foreign exchange rate fluctuations. The assessee claimed depreciation on an additional cost of Rs.35,699/- due to exchange rate changes. The Assessing Officer rejected this, arguing adjustments should be made only at actual payment. The CIT (Appeals) allowed the claim, and the Tribunal upheld this decision, referencing the High Court's judgment in CIT Vs. Woodward Governor India P. Ltd. The Supreme Court had affirmed this judgment, concluding that such increases must be adjusted in the actual cost of assets. The High Court thus answered this question in favor of the assessee.

3. Classification of Payment to UPSEB as Revenue or Capital Expenditure:
The third issue in ITA 113/2010 was whether the payment made to UPSEB for laying electric transmission lines was revenue or capital expenditure. The assessee paid Rs.26,67,106/- and claimed it as revenue expenditure. The CIT (Appeals) and the Tribunal held that since the transmission lines were not owned by the assessee and provided no enduring advantage, the expenditure was revenue in nature. The High Court agreed, referencing CIT Vs. Saw Pipes Ltd., and answered the question in favor of the assessee.

4. Deletion of Addition Towards Value of Closing Stock:
In ITA 98/2012, the first question was whether the Tribunal was right in deleting the addition of Rs.1,20,88,657/- towards the value of closing stock. The assessee had deducted this amount, citing provisions for defective stock. The Assessing Officer disallowed this, but the CIT (Appeals) and the Tribunal found the reduction justified based on actual defective or damaged stock. The High Court noted the consistent method of valuation accepted in previous years and upheld the Tribunal's decision, answering the question in favor of the assessee.

5. Deletion of Disallowance of Brand Building and Dealer Loyalty Expenditure:
The second question in ITA 98/2012 was whether the Tribunal was right in deleting the disallowance of Rs.6,93,81,635/- for brand building and dealer loyalty expenditure. The Assessing Officer disallowed this, claiming it benefited the parent company. The CIT (Appeals) allowed only 50% of the expenditure. The Tribunal, however, allowed the entire expenditure, noting the substantial increase in sales and the reimbursement from the parent company. The High Court agreed, stating that expenditure benefiting both the assessee and a third party cannot be disallowed if it is incurred for business purposes. The question was answered in favor of the assessee.

Conclusion:
All three appeals filed by the revenue were dismissed, with no order as to costs. The High Court consistently ruled in favor of the assessee on all issues, upholding the decisions of the CIT (Appeals) and the Tribunal.

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