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2014 (11) TMI 11 - AT - Income TaxDepreciation on assets disallowed Assets put to use during the year for business purpose or not Held that - As it has been held in COMMISSIONER OF INCOME TAX-IV, NEW DELHI Versus INSILCO LIMITED 2009 (2) TMI 31 - DELHI HIGH COURT the assessee has followed the prescribed accounting standards - the expression used for the purposes of business appearing in Section 32 of the Act also takes into account emergency spares which even though ready for use are not as a matter of fact consumed or used during the relevant period, as these are spares specific to a fixed asset and will in all probability be useless once the asset is discarded - the expression used for the purpose of business appearing in section 32 of the Act also takes into account emergency spares which even though ready for use are not as a matter of fact are not as a matter of fact consumed or used during the relevant period as these are spares specific to a fixed assets and will in all probability be useless once the asset is discarded - first the nature of the spare has to be established and then the case law has to be applied - Since the nature of spares has not been established nor the same were examined, the matter is to be remitted back to the AO fresh examination Decided in favour of assessee. Set off of interest expenses disallowed Held that - As decided in assessee s own case for the earlier assessment year, it has been held that the interest expenditure incurred by the assessee cannot be adjusted against interest income earned by the assessee upto the date of commencement of business - interest expenditure incurred by the assessee during the pre-operative period upto the date of the commencement of the business cannot be adjusted against the interest income earned. Provision of network and repair expenses Held that - The authorities below have totally erred in treating the provision of expenses not allowable - It is only those provisions which are contingent liability which are not allowable - the provision was made for the repairs in this regard as the relevant bills were not received and payment thereof was not made upto the close of the assessment year - in accordance with accrual system of accounting, the provision in this regard was created - Hence, the provision for network repair and maintenance expenses cannot be said to be a provision made for contingent expenses - There is no contingency in the expenditure to be incurred in this regard - The expenditure has to be incurred though the exact amount was not ascertained thus, the order of the CIT(A) is set aside Decided in favour of assessee. Rent expenses disallowed - Held that - AO had made the disallowance in this regard, as some of the details were not available before the AO - assessee also agreed that the matter may be remitted to the file of the AO thus, the matter is remitted back to the AO for examination of the details as furnished by the assessee in this regard Decided in favour of assessee. Disallowance of expenses Held that - The provisions made by the assessee cannot be treated as contingent liability when nothing has been brought by the Revenue on record that expenditure in this regard was contingent in nature - The provision was made as the payment in this regard could not be made upto the close of the year as the bills in this regard were received late - Hence, there is no contingency in the expenditure to be incurred - Only the exact amount has not been ascertained - following the mercantile system of accounting such provision cannot be disallowed - thus, the order of the CIT(A) is set aside Decided in favour of assessee. Disallowance out of brand launch expenses Held that - The assessee has incurred expenditure which are in the nature of brand launch expenses - the expenditure incurred upto the pre- operative period has been capitalised and expenditure incurred after the operation has started have been debited to revenue - there is no concept of deferred revenue expenditure in taxation laws - The amount has actually been incurred by the assessee as such the same is allowable in the entirely thus, the order of the CIT(A) is set aside Decided in favour of assessee. Allowability of set off of interest expenses against interest income Held that - Assessee s business had not commenced during the previous year - It commenced only in the subsequent year in June, 2002 - In December, 2001 assessee has taken loan from the bank and assessee gave the same to its holding company - Assessee has adjusted the interest expenditure incurred in this regard with the interest income earned and offered the balance for taxation under the head income from other sources - The interest expenditure incurred by the assessee are liable to be considered under the head income from other business - The interest income earned is liable to be assessed under the income from other sources - assessee s claim that interest expenditure incurred should be netted off against the interest income is not sustainable. Following the decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT 1997 (7) TMI 4 - SUPREME Court - any income from non-business sources could not be set off against the liability to pay interest on funds borrowed for the purpose of plant and machinery, etc. even before the commencement of the business of the assessee thus, the interest expenditure incurred for setting up of the business before the commencement of the business are to be computed under the preoperative expenses and are to be considered under income from business - Hence, the interest income earned, which is from the nonbusiness source cannot be adjusted against the liability to pay interest on funds borrowed of setting up of its business for purchase of plant and machinery etc. before the commencement of the business of the assessee the order of the CIT(A) is upheld Decided against assessee.
Issues Involved:
1. Disallowance of depreciation of Rs. 1,46,14,147/- on spares. 2. Set-off of interest expenses against interest income. 3. Deduction for 'Provision for Network and Repair Expenses'. 4. Deduction for 'Rent Expenses'. 5. Deduction for various provisions (credit verification cost, consultancy charges, car hiring charges). 6. Deduction for 'Brand Launch Expenses'. Detailed Analysis: 1. Disallowance of Depreciation on Spares: The Revenue challenged the deletion of disallowance of depreciation on spares amounting to Rs. 1,46,14,147/-. The Assessing Officer (AO) had disallowed this depreciation, arguing that the spares were not used in the current assessment year and should have been treated as inventory or consumables. The CIT(A) deleted the disallowance, stating that the assessee followed Accounting Standards AS-2 and AS-10, and referenced the jurisdictional High Court decision in CIT vs. Insilco Ltd. The Tribunal noted that the nature of the spares (whether capital or consumables) was not examined and remitted the issue back to the AO for fresh examination in light of the High Court decision. 2. Set-off of Interest Expenses Against Interest Income: The AO disallowed the set-off of interest expenses incurred by the assessee against interest income, citing the Supreme Court decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT. The CIT(A) upheld the AO's decision, stating there was no nexus between the expenses incurred and the income earned. The Tribunal affirmed this view, stating that the interest expenditure incurred during the pre-operative period cannot be adjusted against the interest income earned. 3. Deduction for 'Provision for Network and Repair Expenses': The AO disallowed the provision for network and repair expenses, treating it as contingent liability. The CIT(A) upheld this disallowance. However, the Tribunal reversed this decision, stating that the provision was made in accordance with the accrual system of accounting and was not a contingent liability. The provision was for expenses to be incurred, though the exact amount was not ascertained, and thus, the disallowance was deleted. 4. Deduction for 'Rent Expenses': The AO disallowed rent expenses amounting to Rs. 4,24,50,057/- due to insufficient details provided by the assessee. The CIT(A) upheld this disallowance. The Tribunal remitted the issue back to the AO for fresh examination, directing the AO to consider the detailed information provided by the assessee and decide accordingly. 5. Deduction for Various Provisions: The AO disallowed provisions for credit verification cost, consultancy charges, and car hiring charges, treating them as contingent liabilities. The CIT(A) upheld the disallowance. The Tribunal reversed this decision, stating that the provisions were made as per the accrual system of accounting and were not contingent liabilities. The disallowance was deleted. 6. Deduction for 'Brand Launch Expenses': The AO treated the brand launch expenses as deferred revenue expenditure and allowed only 20% of the claimed amount, spreading the balance over the next four years. The CIT(A) upheld this decision. The Tribunal reversed this decision, stating that there is no concept of deferred revenue expenditure in taxation laws. The expenditure was either capital or revenue in nature. Since the expenditure was revenue in nature and incurred wholly and exclusively for business purposes, it was allowable in full. The Tribunal set aside the orders of the authorities below and allowed the deduction. Conclusion: The Tribunal allowed the Revenue's appeal for statistical purposes, partly allowed the assessee's appeal for the assessment year 2003-04, and dismissed the assessee's appeal for the assessment year 2002-03. The issues were remitted back to the AO for fresh examination where necessary, and the Tribunal provided detailed reasoning for its decisions on each issue.
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