2014 (11) TMI 12 - AT - Income Tax

Reversal of provision for revaluation of liability Held that - The assessee has revalued its liability to M/s. Ambalal Sarabhai Enterprises Ltd. (ASE Ltd.) and increased the same by ₹ 28,23,735 - in normal parlance such increase in liability is not an expense incurred wholly and exclusively for the purposes of business and is therefore not allowable as deduction to the assessee - on similar revaluation made during the year when a debit has arisen in the profit and loss account because of write back of the liability which was written down in earlier year, such debit amount in the profit and loss account to the extent to which it was assessed as taxable income in the AY 1996-97 ought to be allowed as deduction as business loss to the assessee - when no cessation or increase in real liability takes places then the taxable income of the assessee is not effected merely because of passing entry of revaluation of liability in the books of the assessee - when no cessation of liability took place in the AY 1996-97 when the assessee by a book entry reduced its liability on revaluating the amount of reduction was treated by the Department as taxable income of the assessee and therefore when to that extent when liability is again enhanced by the assessee in its books of account, the enhanced amount is to be allowed as deduction from taxable income on the very same analogy - ₹ 28,23,735/- enhanced as liability during the year being part of ₹ 82,47,082/- which was reduced as liability during the AY 1996- 97 and assessed as taxable income of the assessee for that AY thus, the order of the CIT(A) is modified Decided against revenue. Disallowance u/s 14A Held that - No material was brought on record by the assessee to show that the investments in shares of M/s. Paras Petrofills Ltd. were not made out of interest bearing funds of the assessee and that the assessee had sufficient interest free funds for making such investments in shares there was no reason to interfere with the order of CIT(A) Decided against assessee. Confirmation of adhoc disallowance out of staff welfare expenses Held that - CIT(A) confirmed the action of the AO - assessee contended that the disallowance was made without pointing out the items of the expenses in respect of which the assessee had not maintained the vouchers and therefore, the AO is not justified in making disallowance of expenses on ad-hoc basis - AO has not pointed out for which items of the expenditure the assessee has not maintained the vouchers Decided in favour of assessee. Payment made to employees contribution to the Provident Fund and ESI Held that - Following the decision in CIT v. Gujarat State Road Transport Corporation, 2014 (1) TMI 502 - GUJARAT HIGH COURT - if the assessee has not credit the employees contribution to the employees account in the relevant fund or funds on or before the due date mentioned in the Explanation to section 36(1)(va), the assessee shall not be entitled to deduction of such amount in computing the income referred to in section 28 thus, the order of the CIT(A) is set aside and the matter is remitted back to the AO Decided in favour of revenue. Disallowance out of vehicle expenses Held that - The tax is payable to the RTO for plying of vehicle on the road - Till immediately preceding year, the RTO was collecting tax every year and only in this year the RTO decided to levy life time tax on the vehicle of the assessee which was already used by the assessee and was not a case of acquisition of any new vehicle - By making this payment the assessee has not acquired any new asset - By making this payment to the RTO, the assessee is entitled to ply vehicle on road without which the assessee would not be able to ply the vehicle on road - the collection of road tax by RTO as one time payment was revenue expenditure the order of the CIT(A) is upheld Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition on account of reversal of provision for revaluation of liability.
2. Sustaining the disallowance on account of revaluation of liability.
3. Disallowance of interest expense under Section 14A.
4. Ad-hoc disallowance out of staff welfare expenses.
5. Deletion of disallowance on account of delay in payment of employees' contribution to Provident Fund and ESI.
6. Deletion of disallowance out of vehicle expenses.
7. Initiation of penalty proceedings under Section 271(1)(c).

Detailed Analysis:

1. Deletion of Addition on Account of Reversal of Provision for Revaluation of Liability:
The Revenue challenged the CIT(A)'s decision to delete the addition of Rs. 6,84,182/- for AY 2002-03 and Rs. 8,07,334/- for AY 2003-04. The Tribunal noted that the assessee had revalued its liability to Ambalal Sarabhai Enterprises Ltd. (ASE Ltd.) and increased it by Rs. 28,23,735/-. The Tribunal observed that in AY 1996-97, the Department had treated a similar revaluation as taxable income. Therefore, it was held that the Department could not take a contradictory stance. The Tribunal directed the Assessing Officer to allow the deduction of Rs. 28,23,735/- for AY 2002-03 and confirmed the CIT(A)'s order for AY 2003-04.

2. Sustaining the Disallowance on Account of Revaluation of Liability:
The assessee's appeal was directed against the CIT(A)'s decision to sustain the disallowance of Rs. 21,39,553/- on account of revaluation of liability. The Tribunal found that the assessee had revalued its liability and the Department had taxed a similar revaluation in AY 1996-97. Therefore, the Tribunal allowed the deduction of Rs. 28,23,735/- for AY 2002-03, modifying the CIT(A)'s order.

3. Disallowance of Interest Expense under Section 14A:
The Assessing Officer disallowed Rs. 8,317/- under Section 14A, observing that the assessee had made an investment in shares of M/s. Paras Petrofills Ltd. from interest-bearing funds. The CIT(A) confirmed this disallowance. The Tribunal found no material to show that the investments were not made out of interest-bearing funds and thus confirmed the CIT(A)'s order.

4. Ad-hoc Disallowance Out of Staff Welfare Expenses:
The Assessing Officer made ad-hoc disallowances of Rs. 40,000/- for AY 2002-03 and Rs. 43,458/- for AY 2003-04 out of staff welfare expenses due to unverifiable cash expenses. The CIT(A) confirmed these disallowances. The Tribunal, however, found that the Assessing Officer had not specified which expenses lacked vouchers and thus deleted the ad-hoc disallowances for both years.

5. Deletion of Disallowance on Account of Delay in Payment of Employees' Contribution to Provident Fund and ESI:
The CIT(A) deleted the disallowance of Rs. 3,98,212/- for AY 2002-03 and Rs. 3,07,493/- for AY 2003-04 on account of delayed payment of employees' contributions to Provident Fund and ESI. The Tribunal, following the Gujarat High Court's decision in CIT v. Gujarat State Road Transport Corporation, set aside the CIT(A)'s order and restored the Assessing Officer's disallowance.

6. Deletion of Disallowance Out of Vehicle Expenses:
The Assessing Officer disallowed Rs. 61,065/- paid as one-time RTO tax, treating it as a capital expenditure. The CIT(A) allowed it as revenue expenditure. The Tribunal confirmed the CIT(A)'s order, noting that the payment was for plying the vehicle on the road and did not result in acquiring a new asset or enduring benefit.

7. Initiation of Penalty Proceedings Under Section 271(1)(c):
The Tribunal dismissed the assessee's grounds against the initiation of penalty proceedings under Section 271(1)(c) as premature.

Conclusion:
The appeals of the Revenue and the assessee, as well as the Cross-objections filed by the assessee, were partly allowed. The Tribunal provided a detailed analysis of each issue, considering the facts and legal principles involved.