2013 (8) TMI 480 - AT - Income Tax

Disallowance of preliminary expenditure - expansion of its existing line of business - CIT confirmed disallowance - Held that - business which was being set up by the assessee at Trivandrum was only an expansion of its existing line of business. - At both place, assessee was only developing software for educational purposes. Once expenditure was of revenue nature and was incurred for expanding existing line of business, in our view, it could have been allowed under Section 37 of the Act. No doubt, assessee s claim was only for one-third of total outgo. However, for this reason alone, a disallowance could not have been made - Decided in favour of assessee. Gratuity payment of M/s LIC - CIT disallowed the claim of the assessee - Held that - There is no dispute that premium towards Gratuity Fund was paid by the assessee to LIC and the Gratuity Fund created by LIC by virtue of such payments, was not having the approval of CIT/CCIT under Section 36(1)(v) of the Act. Nevertheless, it is also a fact that assessee had filed an application before CIT for such approval on 12.4.2002. - unless there was strict compliance to Section 40A(7), an assessee could not claim for relief any amount or payment of premium to M/s LIC for any Group Gratuity Scheme - conditions mentioned in Section 36(1)(v) was held to be satisfied since the funds ultimately came back to a Gratuity Fund had the approval of the Commissioner. Here, the fate of the application of the assessee for approval is not known - If the assessee is able to produce the approval for Gratuity scheme, no doubt, it can claim deduction under Section 36(1)(v) of the Act and will not be fettered by constraints placed under Section 40A(7) of the Act - Decided in favour of assessee. Deduction u/s 10B - CIT disallowed deduction - Held that - if the assessee is able to produce FIRC for whole of the receipts on account of export proceeds, it will be unfair to deny the claim made by it under Section 10B of the Act - Following decision of CIT v. Yokogawa India Ltd. 2011 (8) TMI 845 - Karnataka High Court - Decided in favour of assessee. Depreciation on fixed asset - Relevant bills not produced - Held that - assessee was unable to file any evidence in support of acquisition of fixed assets during previous years relevant to assessment years 2001-02 to 2004-05. Disallowance of claim of depreciation for the impugned assessment year has been done only with respect to the written down value of those assets on which assessee could not produce bills for acquisition in the earlier years - Decided against assessee.

Summary

Issues Involved:
1. Condonation of delay in filing the appeals.
2. Disallowance of preliminary expenditure.
3. Disallowance of Gratuity payment due to lack of approval.
4. Disallowance of deduction under Section 10B.
5. Disallowance of depreciation on fixed assets.

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing the Appeals:
The appeals were filed with a delay of 208 days. The assessee, a wholly-owned subsidiary of a UK company, attributed the delay to the mismanagement by employee Directors who provided false information regarding tax dues and persisted in dubious methods. The delay was discovered when a new management team took over in September 2012, and the appeals were filed immediately thereafter. The tribunal found sufficient evidence supporting the assessee's claims and condoned the delay, admitting the appeals.

2. Disallowance of Preliminary Expenditure:
The assessee's claim for preliminary expenditure of Rs. 34,40,902/- was disallowed by the Assessing Officer (A.O.) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The expenditure was related to the setting up and training of personnel for a new unit in Trivandrum. The A.O. disallowed the claim, stating that pre-operative expenditure could not be claimed as revenue outgo. However, the tribunal noted that the expenditure was for expanding the existing line of business and was of revenue nature, thus allowable under Section 37 of the Income-tax Act. The disallowance was deleted.

3. Disallowance of Gratuity Payment:
The assessee's payment of Rs. 2,56,659/- to LIC towards Group Gratuity Fund was disallowed as the fund was not approved by the CIT/CCIT. The CIT(A) upheld the disallowance. The tribunal noted that the assessee had applied for approval of the Gratuity scheme, which was still pending. The tribunal referred to the decision of the Hon'ble Apex Court in the case of Textool Co. Ltd., which emphasized the importance of the fund being approved. The matter was remitted back to the A.O. for reconsideration, allowing the assessee to produce the approval for the Gratuity scheme.

4. Disallowance of Deduction under Section 10B:
The assessee's claim for deduction under Section 10B for its Trivandrum unit was partially disallowed due to insufficient evidence of receipt of sale proceeds in convertible foreign exchange. The CIT(A) confirmed the eligibility for the claim to the extent of Rs. 4,04,75,670/-. The tribunal noted that the assessee had subsequently received Foreign Inward Remittance Certificates (FIRC) for the balance amount and remitted the issue back to the A.O. for fresh consideration, allowing the assessee to produce FIRCs for the entire export proceeds.

5. Disallowance of Depreciation on Fixed Assets:
For the assessment year 2005-06, the assessee's claim for depreciation on certain fixed assets was disallowed due to the inability to produce relevant bills. The CIT(A) upheld the disallowance. The tribunal noted that the disallowance was consistent with the previous years where the assessee failed to provide evidence of acquisition. The tribunal found no reason to interfere with the disallowance for the impugned assessment year.

Conclusion:
The appeal for the assessment year 2004-05 was allowed pro tanto, addressing the issues of preliminary expenditure, Gratuity payment, and deduction under Section 10B. The appeal for the assessment year 2005-06 was partly allowed, addressing the Gratuity payment issue similarly to the previous year, but upholding the disallowance of depreciation on fixed assets. The order was pronounced on June 13, 2013, at Chennai.