2014 (10) TMI 468 - AT - Income Tax

Recovery of Guest House Expenses Held that - As decided in assessee s own case for the earlier assessment year, it has been held that the user of guest house facilities provided by the company to the employees of the company in connection with discharge of their official duties does not alter the basic character of the expenditure - such expenses are connected with the travelling by such employees and it should be treated accordingly, irrespective of the fact that such employees stayed in the guest house of the company the AO is directed to allow the deduction of amount received from parent departments as expenditure in the nature of travelling expenses ;and in accordance with Rule 6D of the IT Rules Decided in favour of assessee. Expenses on Business Meetings and conferences Held that - The expenditure incurred on the employees at a place other than office or factory requires to be treated as entertainment expenditure - The hotel or restaurant cannot be treated as any other place of their work - the sweep of the words entertainment expenditure found in Explanation is wide and broad to cover every expenditure on provision of hospitality of every kind to employees also, provided the expenditure is not incurred in office or factory or any other place of their work where an employee normally discharges his duties - the hotel cannot be equated with the other place of their work assessee did not place any evidence to establish the fact expenditure incurred on business meetings and conferences contained the rent paid for the halls in the hotels the matter is remitted back to the AO to examine and allow if the assessee is able to furnish the evidence of rent paid to the hotels or restaurants which was included in the business meetings and conferences expenditure Decided against assessee. Annual General Meeting Expenses Held that - As decided in assessee s own case for the earlier assessment year, it has been held that the expenditure incurred on serving tea, coffee and soft drinks is covered by the Explanation 2 to section 37(2A)/(37(2) - In the Explanation 2 it is stipulated that the expenditure on provision of hospitality of every kind by the assessee to any person whether by way of provision of food or beverages or in any other manner, whatsoever, would be entertainment expenditure - The sweep of the words entertainment expenditure found in the Explanation 2 to section 37(2A)is wide and broad to cover every expenditure on provision of hospitality of every kind to any person other than the employees at the place of their work - the Explanation 2 to subsection (2A) of section 37 was not there in the statute when the judgment in the case of Bangalore Turf Club was delivered relying upon Commissioner Of Income-Tax, Karnataka I Versus Mysore Paper Mills Limited 1976 (4) TMI 5 - KARNATAKA High Court - the expenditure incurred at the general body meeting is covered by the Explanation 2 to section 37(2A) - the expenditure incurred on serving tea, coffee & soft drinks to the shareholders at the Annual General Meeting is treated as entertainment expenditure Decided against assessee. Expenditure on Techno Feasibility Reports Held that - As decided in assessee s own case for the earlier assessment year, it has been held that expenditure was not a capital expenditure and allowed deduction of same as a revenue expenditure - the expenditure has to be allowed as a deduction being a revenue expenditure Decided in favour of assessee. Contribution made to Tata Steel Rural Development Society disallowed Held that - As decided in assessee s own case for the earlier assessment year, it has been held that with the increase in the number of people residing in Jamshedpur, the assessee found it difficult to cope with all the services of civic amenities and it has, therefore, encouraged senior officers of the company and other leading citizens in Jamshedpur to set up voluntary organisations registered under the Societies Act or other charitable institutions to undertake activities in the field of sports, education, medical relief, cultural promotions, etc.- AO rejected the assessee s claim that these contributions were made to discharge its obligations towards civic amenities and, therefore, it was an item of business expenditure incurred wholly and exclusively in the ordinary course of business - since the major beneficiaries of the expenditure were the company s employees, it was an item of labour welfare expenditure - the payments were made keeping in mind business expediency viz.,to have a motivated work force.In the light of the peculiar facts in assessee s case, the expenditure in question has to be allowed as a deduction u/s. 37(1)- The provisions of section 40A(9) would not apply because the payments were not made by the assessee in his capacity as an employer Decided in favour of assessee. Contribution to Tata Sports Club Held that - As decided in assessee s own case for the earlier assessment year, it has been held that the contributions were covered by section 40A(9) of the Act, that Section 40A(9) was enacted with a view to discouraging creation of certain irrevocable trusts ostensibly for the welfare of the employees and transfer to such trust substantial amounts by way of contribution - the contributions were given to Tata Sports Club in the capacity of an employer for the benefit of the employees as well as others - the annual contribution to Steel Plants Sports Board was an independent organisation managing the affairs of the board with its own budget - the purpose of creation of the association was to create and train athletes of national standard - the objective had no relevance in carrying on the business of the assessee - the contribution made by the it was an application of income Decided in favour of assessee. Contributions made to various institutions of Jamshedpur Held that - As decided in assessee s own case for the earlier assessment year, it has been held that significant contributions made by the were to Jamshedpur Notified area Committee,Merry Hospital, Jamshedpur, Trade Workers Union, Loyola School, All India Football Association, it was evident that the assessee had given a general and vague explanation about the issue before him, that it did not establish the direct nexus between the contributions and the business, that in the absence of such a nexus, it could not be presumed that the contributions were made for the purpose of the business, that the contributions made by the assessee were on the nature of application of income, that the contributions were hit by the provisions of section 40A (9) of the Act - the issue of payment of contributions to various Institutions at Jamshedpur in favour of the assessee Decided in favour of assessee. Contribution made to Institute for Miners & Metal Workers Education Held that - As decided in assessee s own case for the earlier assessment year, it has been held that the payment by the assessee was not towards any expenditure but same was by way of contribution - assessee did not avail any services in lieu of the payment during the year- there was no direct nexus between the expenditure incurred and the benefits derived by the assessee - payment was in the nature of contribution or donation and was not allowable as business expenditure. Delayed contribution to approved superannuation fund disallowed Held that - Following the decision in Commissioner of Income Tax Versus M/s. Alom Extrusions Limited 2009 (11) TMI 27 - SUPREME COURT - The omission of the second proviso to section 43B of the Income-tax Act, 1961, by the Finance Act,2003,operated, retrospectively, with effect from April 1,1988 and not prospectively from April 1, 2004 - as per the amended section if employer s contribution is deposited in the funds before the due date of filing of return,as envisaged by the provisions of section 139(1)of the Act the contribution to the fund was made before the due date of filing of return Decided in favour of assessee. Expenses on relining inner walls of blast furnace Held that - The expenditure was incurred by the assessee for relining furnaces - AO had disallowed the expenditure for the first time treating it as capital expenditure - principles of res judicata do not apply in income tax proceedings -But, rule of consistency demands that if same facts and circumstances exit then without bringing distinguishing features of a transaction, stand taken earlier should not be disturbed - AO has not discussed as how the facts for the year were different from the earlier year with regard to the relining of the furnaces - The nature of job done by the assessee did not bring in to existence any new asset and it was not capable of bringing any enduring benefit to the assessee - Relining was an expenditure of revenue nature the order of the FAA is upheld Decided against revenue.

Summary

Issues Involved:
1. Ad hoc disallowance of travelling expenditure
2. Expenditure on maintenance of certain buildings
3. Recovery of Guest House Expenses
4. Expenses incurred on Darjeeling Home
5. Expenses incurred on Business Meetings and conferences
6. Annual General Meeting Expenses
7. Expenditure on Techno Feasibility Reports
8. Disallowance of contribution to Tata Steel Rural Development Society
9. Contribution to Tata Sports Club
10. Contributions to Institutions in Jamshedpur
11. Contribution to Institute for Miners & Metal Workers Education
12. Liability under Employee Separation Schemes
13. Contribution to approved Superannuation Fund
14. Disallowance deleted by the FAA in respect of expenditure incurred for relining inner walls of blast furnace

Issue-wise Detailed Analysis:

1. Ad hoc disallowance of travelling expenditure:
The learned CIT (A) erred in rejecting the claim of the appellant to reduce the disproportionate amount of ad hoc disallowance on travelling expenses incurred on outsiders considering the total disallowable expenses incurred during the year.

2. Expenditure on maintenance of certain buildings:
The learned CIT (A) erred in rejecting the claim of the appellant that certain buildings were maintained at far-flung places due to business expediency and as hotels were not available in these places, expenditure on the same is allowable as revenue expenditure. The CIT (A) further erred in not accepting the appellant's contention that expenses specifically allowable under sections 30 to 36 cannot be disallowed as per provisions of Section 37(4) and that Section 37(4) is limited to disallow maintenance expenses and not the running expenses.

3. Recovery of Guest House Expenses:
The learned CIT (A) erred in rejecting the appellant's claim that recoveries made in respect of Guest House expenses should apply under Rule 6D, and expenses should be proportionately disallowed and not the entire amount as 'Guest House Expenses.' The Tribunal found that the issue was covered in favor of the assessee by earlier Tribunal orders, allowing the deduction of amounts received from parent departments as traveling expenses.

4. Expenses incurred on Darjeeling Home:
The learned CIT (A) erred in treating Darjeeling Holiday Home as a Guest House and rejecting the appellant's contention that the same is covered by the second proviso to Section 37(4) and hence should not be treated as a Guest House.

5. Expenses incurred on Business Meetings and conferences:
The learned CIT (A) erred in holding 50% expenditure on an ad hoc basis on business meetings and conferences of employees as entertainment expenditure incurred under the provisions of Section 37(2A) of the Income-tax Act. The Tribunal upheld the disallowance, following earlier Tribunal decisions against the assessee.

6. Annual General Meeting Expenses:
The learned CIT (A) erred in treating expenditure at the AGM as entertainment expenditure, hence disallowing the same. The Tribunal upheld the disallowance, following earlier Tribunal decisions against the assessee.

7. Expenditure on Techno Feasibility Reports:
The learned CIT (A) erred in disallowing feasibility studies as capital expenditure, not related to the business of the appellant, when the same were undertaken for the purposes of business and to improve the quality and profitability of its operations. The Tribunal found that similar expenditure in earlier years was allowed and decided the issue in favor of the assessee.

8. Disallowance of contribution to Tata Steel Rural Development Society:
The learned CIT (A) failed to appreciate the circumstances in which expenditure through TSRDS was incurred and in treating the same as non-business expenditure. The Tribunal found that the issue was decided in favor of the assessee in earlier years and allowed the appeal.

9. Contribution to Tata Sports Club:
The learned CIT (A) erred in holding that contribution to Tata Sports Club is covered by the provisions of Section 40A(9). The Tribunal found that similar contributions were allowed in earlier years and decided the issue in favor of the assessee.

10. Contributions to Institutions in Jamshedpur:
The learned CIT (A) erred in disallowing contributions to institutions on the ground that such expenditure was not incurred for the purposes of the business, having failed to understand the scenario that establishes a nexus between the contributions made and the business of the appellant. The Tribunal found that similar contributions were allowed in earlier years and decided the issue in favor of the assessee.

11. Contribution to Institute for Miners & Metal Workers Education:
The learned CIT (A) erred in disallowing the said expenditure by treating it as a contribution and not incurred for the purposes of business. The Tribunal found that similar contributions were allowed in earlier years and decided the issue in favor of the assessee.

12. Liability under Employee Separation Schemes:
The learned CIT (A) erred in not concluding that the liability of ESS pensions crystallizes during the year the employee opts for the Scheme. The learned CIT (A) erred in treating ESS payments similar to contributions made to the Superannuation Fund where deduction is allowed on a payment basis under section 43B. The Tribunal dismissed the ground as infructuous.

13. Contribution to approved Superannuation Fund:
The learned CIT (A) erred in not condoning the delay in making the contribution as per the facts of the case. The Tribunal allowed the ground, following the Supreme Court decision in Alom Extrusion, which held that contributions made before the due date of filing the return should be allowed.

14. Disallowance deleted by the FAA in respect of expenditure incurred for relining inner walls of blast furnace:
The AO treated the expenditure as capital on the ground that the relining gave enduring benefit. The FAA held that the expenditure was of a revenue nature and allowed it. The Tribunal upheld the FAA's order, finding that the expenditure did not result in any new asset or enduring benefit and was consistent with earlier years' treatment.

Conclusion:
The Tribunal allowed the appeal filed by the assessee in part and dismissed the appeal filed by the AO. The issues of recovery of Guest House Expenses, Expenditure on Techno Feasibility Reports, Disallowance of contribution to Tata Steel Rural Development Society, Contribution to Tata Sports Club, Contributions to Institutions in Jamshedpur, Contribution to Institute for Miners & Metal Workers Education, and Contribution to approved Superannuation Fund were decided in favor of the assessee. The issues of Expenses incurred on Business Meetings and conferences and Annual General Meeting Expenses were decided against the assessee. The issue of Liability under Employee Separation Schemes was dismissed as infructuous. The disallowance of expenditure incurred for relining inner walls of blast furnace was upheld as revenue expenditure.