2014 (2) TMI 363 - AT - Income Tax

Prior period expenses - Held that - The expenses of the preceding financial are not allowed as deduction - This year does not contain any expenses disallowed u/s 43B which are to be allowed on actual payment basis - The order of CIT(A) set aside - Decided in favour of Revenue. Repair expenses - Held that - Relying upon the decision in National Industrial Corporation Ltd. Versus Commissioner of Income-Tax 2002 (8) TMI 93 - DELHI High Court - Ad hoc disallowance cannot be resorted to in the absence of any specific discrepancy noted in the details submitted by the assessee - AO has failed to identify the expenses and amounts where there was any discrepancy - Decided against Revenue. Commission paid to Managing director - Held that - The payment has been made in accordance with Schedule-XIII of the Companies Act, 1956 and this payment has also been approved by the Board of Directors and shareholders of the company - It was unjustified to make an ad hoc disallowance from the total payment to the whole time Managing Director of the company - Decided against Revenue. Depreciation on machinery and wind electric generator - Held that - Relying upon the decision in Dy. Commissioner of Income-tax Versus M/s. Prakash Industries Ltd. 2014 (2) TMI 53 - ITAT DELHI - The physical examination shows that machinery do exist in the premises of assessee as a result of which production is also undertaken - The existence of machinery having been proved by the physical examination itself, it can not be said that no machinery is taken on lease for which lease rent is paid - The other corroborative evidence like lease agreement passing of money by banking channels, declaring lease income of recipients etc. are overwhelming evidence against the presumption that manufacturers do not have capacity to produce machineries - The existence of the machinery and its use has been established by assessee beyond any doubt. The wind electric generators were installed at the premises of TNEB which has been confirmed by the TNEB which is a Government Undertaking - The certificate submitted by the assessee from TNEB remains uncontroverted - Decided against Revenue. Depreciation on machinery transferred to another division - Held that - The AO has failed to establish that no assets have been purchased or installed and in that circumstances, he can resort to disallow the depreciation - No efforts have been made to establish that the details submitted by the assessee were not correct - Decided against Revenue. Lease management fees - Held that - The lease rent is being paid largely in respect of assets which have been in existence for the last 2-3 years - The assets were in existence as per the spot verification report dated 08.03.2001 of the chartered engineer appointed by the Income-tax Department - The lease rent paid is in respect of the assets purchased in the earlier years also deserve to be allowed in this year also - The existence of the machinery used and purchased from the five parties is established Decided against Revenue. Payment to bogus parties - Held that - The amount have been advanced through books of account to a particular party which have been received back during the year under consideration - The Assessing Officer has failed to discharge the onus in establishing the fact regarding the benami of the sources of the assessee - The Assessing Officer could have enquired regarding the person who has introduced the accounts from the account opening form and the necessary enquiries could have been made from the banks but nothing of such type has been done by the Assessing Officer - Merely stating that the cheques have been issued to the parties and received back during the year under consideration cannot be a basis for making such huge addition of Rs.20 crores Once the advance made to a party and the same amount was received back then there cannot be any addition for escapement of income - Decided against Revenue. Foreign travelling expenses - Held that - The assessee has not explained the details of the expenses satisfactorily to AO - Such disallowances are being made in past years - Decided in favour of Revenue. Advertisment expenses - Held that - Advertisement given in a souvenir can be allowed only after the proof of advertisement in the souvenir has been filed by the appellant - The assessee has failed to furnish proof - The action of the AO in disallowing ad-hoc amount is not justified - Decided against Revenue. Staff welfare and sales promotion expenses - Held that - The Assessing Officer has restricted the disallowance to 10% on account of staff welfare and sales promotion expenses - The assessee has not submitted complete details in respect of expenses - The disallowance of 10% was held to be justified - Decided in favour of Revenue.

Summary

Issues Involved:
1. Deleting the disallowance of Rs.17,08,029/- on account of prior period expenses.
2. Deleting the disallowance of Rs.25,00,000/- out of repair expenses.
3. Deleting the disallowance of Rs.2,00,000/- out of MD's commission.
4. Deleting the disallowance of Rs.50,000/- on account of professional expenses.
5. Deleting the disallowance of Rs.3,00,000/- on account of miscellaneous expenses.
6. Deleting the disallowance of Rs.10,00,000/- on account of commission expenses.
7. Deleting the disallowance of Rs.42,50,000/- on machinery and wind electric generator.
8. Deleting the disallowance of Rs.10,60,941/- on machinery transferred between divisions.
9. Deleting the disallowance of Rs.5,71,49,911/- on account of lease rent, lease management fee, and lease rent of building.
10. Deleting the disallowance of Rs.50,00,000/- out of interest claimed on account of utilization of borrowed funds for non-business purposes.
11. Deleting the lump-sum addition of Rs.1,00,00,000/-.
12. Deleting the disallowance of Rs.10,000/- on account of foreign traveling expenses.
13. Deleting the disallowance of Rs.50,000/- out of advertisement expenses.
14. Deleting the disallowance of Rs.5,00,000/- out of staff welfare expenses and sales promotion expenses.

Issue-Wise Detailed Analysis:

1. Prior Period Expenses:
The revenue challenged the deletion of Rs.17,08,029/- on account of prior period expenses. The assessee followed the mercantile system of accounting, and the prior period expenses were not allowable in the year under consideration. The Tribunal referenced its previous decision in ITA No.3036/Del/2010 for the assessment year 1996-97, where it was concluded that the Assessing Officer (AO) made a mistake by adding both prior period expenses and income. The Tribunal found that the expenses were genuine and incurred for business purposes. However, in the absence of details, the Tribunal allowed the revenue's appeal for disallowance of Rs.17,08,029/-.

2. Repair Expenses:
The revenue contested the deletion of Rs.25,00,000/- out of repair expenses. The AO disallowed the amount apprehending the inclusion of capital expenditure. The Tribunal, referencing its decision in ITA No.3036/Del/2010 for the assessment year 1996-97, found no merits in the revenue's appeal, emphasizing that ad hoc disallowance without specific discrepancies was unjustified.

3. MD's Commission:
The revenue challenged the deletion of Rs.2,00,000/- out of MD's commission. The Tribunal, following its previous decision, found that the AO made an ad hoc disallowance without appreciating the facts, such as the increase in turnover and profit. The payment was made in accordance with the Companies Act and was approved by the Board of Directors and shareholders. The Tribunal dismissed the revenue's appeal.

4. Professional Expenses:
The revenue contested the deletion of Rs.50,000/- on account of professional expenses. The Tribunal, referencing its decision in ITA No.3036/Del/2010, found no substance in making ad hoc disallowance without specific findings and dismissed the revenue's appeal.

5. Miscellaneous Expenses:
The revenue challenged the deletion of Rs.3,00,000/- on account of miscellaneous expenses. The Tribunal, referencing its previous decision, found that the AO did not pinpoint specific defects and dismissed the revenue's appeal.

6. Commission Expenses:
The revenue contested the deletion of Rs.10,00,000/- on account of commission expenses. The Tribunal, following its previous decision, found that the AO made an ad hoc disallowance without seeking specific information or examining commission agents. The Tribunal dismissed the revenue's appeal.

7. Depreciation on Machinery and Wind Electric Generator:
The revenue challenged the deletion of Rs.42,50,000/- claimed on machinery and wind electric generator. The Tribunal upheld the CIT(A)'s decision, emphasizing that the existence of the machinery was confirmed by the Tamil Nadu Electricity Board (TNEB) and the transactions were genuine. The Tribunal dismissed the revenue's appeal.

8. Depreciation on Machinery Transfer:
The revenue contested the deletion of Rs.10,60,941/- on machinery transferred between divisions. The Tribunal, referencing its previous decision, found no basis for the ad hoc disallowance and dismissed the revenue's appeal.

9. Lease Rent and Management Fees:
The revenue challenged the deletion of Rs.5,71,49,911/- on account of lease rent, lease management fee, and lease rent of building. The Tribunal upheld the CIT(A)'s decision, referencing its previous decision where the existence of the assets was established, and the lease rent was found allowable. The Tribunal dismissed the revenue's appeal.

10. Interest on Borrowed Funds:
The revenue contested the deletion of Rs.50,00,000/- out of interest claimed on account of utilization of borrowed funds for non-business purposes. The Tribunal, referencing its previous decision, found no justification for the ad hoc disallowance and dismissed the revenue's appeal.

11. Lump-Sum Addition:
The revenue challenged the deletion of the lump-sum addition of Rs.1,00,00,000/-. The Tribunal found that the AO failed to establish the benami nature of the transactions and that the addition was primarily based on presumptions. The Tribunal dismissed the revenue's appeal.

12. Foreign Traveling Expenses:
The revenue contested the deletion of Rs.10,000/- on account of foreign traveling expenses. The Tribunal, referencing its previous decision, sustained the addition and allowed the revenue's appeal.

13. Advertisement Expenses:
The revenue challenged the deletion of Rs.50,000/- out of advertisement expenses. The Tribunal found that the AO made an ad hoc disallowance without specific findings and dismissed the revenue's appeal.

14. Staff Welfare and Sales Promotion Expenses:
The revenue contested the deletion of Rs.5,00,000/- out of staff welfare expenses and sales promotion expenses. The Tribunal, referencing its previous decision, sustained the addition and allowed the revenue's appeal.

Conclusion:
The Tribunal partly allowed the revenue's appeal, sustaining the additions related to prior period expenses, foreign traveling expenses, and staff welfare and sales promotion expenses, while dismissing the other grounds of appeal. The order was pronounced in open court on January 15, 2014.