2015 (5) TMI 724 - AT - Income Tax

Disallowance of Prior period expenditure - Held that - Ld. Counsel refers to page 20A wherein Cochin Customs receipt for miscellaneous charges is contained which is dated 30.01.2006 acknowledging the payment of ₹ 84,728/-. In this receipt, the bill of entry number is mentioned as 170028 dated 30.11.2005 from 16.11.2005 to 31.01.2006. This suggests that the demand note was received during the year under consideration and, therefore, this cannot be treated as prior period expenditure. Similarly, the details of interest for ₹ 7,04,233/- at page 20B of the paper book also clearly suggests that the liability is crystallized during the year under consideration and, therefore, this also cannot be treated as prior period expenditure. Further, both the impugned amounts are primarily compensatory in nature being on account of delayed payment of Custom Duty. Therefore, both the amounts are to be allowed being incurred wholly and exclusively for business purposes. However, in view of the submissions of the ld. DR, we restore this issue to the file of the Assessing Officer to verify when the demand was raised and if it was raised during the previous year under consideration then it is to be allowed - Decided in favour of assesse for statistical purposes. Disallowance of legal fee payment - denied on the ground of being relatable to prior period expenses - Held that - keeping in view the smallness of amount and there being no dispute about genuineness of the expenditure and further the fee being relatable for the month of March, 2005, we are of the opinion that the claim should not be denied particularly when the bill has been received in the current assessment year and the payment has also been made in the current assessment year - Decided in favour of assesse. Disallowance of medi-claim policy of the Director of the company - Held that - admittedly the mediclaim policy was for the benefit of director only and no benefit was derived by the assessee company from the said insurance policy in the name of director. This claim in no way was for the benefit of business interest of assessee company.,The assessee has not brought on record any evidence to infer that it was in any way under obligation to meet the expenditure on medi-claim policy in terms of service conditions. - Decided against assesse. Disallowance of interest not charged on capital expenditure booked as work in progress on behalf of plant owner FOSCL - Held that - A bare perusal of the arrangement clearly shows that the whole arrangement has been made on account of commercial expediency because both the parties were benefited by the technical knowledge and know-how of each other. FOSCL was also the holder of intellectual property rights concerning the products and any other future added products and was entitled to these rights, therefore, it was in the interest of assessee to get benefit out of the same. We, therefore, considering the commercial expediency involved and terms of the agreement between the parties, did not find any reason to confirm the disallowance made by the lower revenue authorities on account of interest element on the amounts advanced to FOSCL being reflected as work-in-progress in the fixed assets. This ground is allowed - Decided in favour of assesse. Disallowance of Plant expenses - Held that - the expenditure claimed is on the same footing as claimed by the assessee in ground no.5. Accordingly, we allow this ground of the assessee for the same reasons as recorded vide dealing ground no.5 above.- Decided in favour of assesse. Addition being interest not charged on business advances - Held that - It is well settled law that no addition can be made on account of notional interest to be earned by assessee. This is against the very concept of real income theory. Be that as it may, the assessee had sufficiently owned funds to advance a sum of ₹ 18,96,035/-. We, therefore, do not find any basis for confirming the additions made by lower revenue authorities. - Decided in favour of assesse. Disallowing the expenditure for personal use under the head of Telephone, Vehicle Running & Maintenance - Held that - It is not in dispute that assessee has paid fringe benefit tax on telephone and vehicle running expenses, therefore, no further disallowance on estimate basis is called for- Decided in favour of assesse. Addition on account of under valuation of closing stock - held that - We are not convinced with the submission of ld. Counsel for the assessee that since, in earlier years, no such apportionment was made, therefore, the consistent method of valuation should be followed. The assessee s approach is contrary to fundamental principle of accounting which require the matching of expenses with the revenue. If the revenue is to be realized by sale of stock in subsequent year then all the direct expenses attributable to the said stock can also be realized only when the stock is sold. Therefore, the direct expenses are to be allocated to the closing stock irrespective of the fact whether the same are debited to profit and loss account or trading account. We, therefore, set aside the order of the CIT (A) and restore that of the Assessing Officer. However, we are in agreement with the ld. Counsel for the assessee that if the closing stock of the current year is to be increased then simultaneously opening stock of subsequent year has also to be increased - Decided in favour of assesse for statistical purposes. Overdue interest charges - disallowed being prior period expenses and penal in nature - Held that - we restore this matter to the file of the Assessing Officer for verification of assessee s claim with regard to the details given by M/s. PEC Limited which is contained at page 48 of the paper book because the Assessing Officer has observed that assessee had not substantiated its claim whereas assessee s contention is that the details were before the Assessing Officer - Decided in favour of assesse for statistical purposes.

Summary

Issues Involved:
1. Disallowance of ROC fees.
2. Disallowance of interest on late payment of custom duty.
3. Disallowance of legal fees as prior period expenses.
4. Disallowance of Medi-claim policy for the Director.
5. Disallowance of interest not charged on capital expenditure.
6. Disallowance of plant expenses.
7. Disallowance of notional interest on business advances.
8. Disallowance of telephone and vehicle expenses.
9. Deletion of addition on account of prior period expenses and undervaluation of closing stock.
10. Deletion of addition on account of prior period interest expenditure.

Detailed Analysis:

1. Disallowance of ROC Fees:
The assessee's ground regarding the disallowance of ROC fees was not pressed during the hearing, and thus, it was dismissed as not pressed.

2. Disallowance of Interest on Late Payment of Custom Duty:
The assessee claimed that the interest paid on delayed custom duty was compensatory and not penal. The tribunal found that the demand for interest was raised during the relevant financial year and thus, it was not a prior period expense. The issue was remanded to the Assessing Officer (AO) to verify the timing of the demand. If the demand was raised during the relevant year, the interest should be allowed as a business expense.

3. Disallowance of Legal Fees as Prior Period Expenses:
The tribunal allowed the assessee's claim for legal fees related to March 2005, noting that the bill was received and paid in the current assessment year. The smallness of the amount and the genuineness of the expenditure were considered.

4. Disallowance of Medi-claim Policy for the Director:
The tribunal upheld the disallowance of the Medi-claim policy for the Director, reasoning that the expense was personal in nature and not for the benefit of the assessee company. The company was not under any obligation to incur such expenditure as part of the director's service conditions.

5. Disallowance of Interest Not Charged on Capital Expenditure:
The tribunal found that the interest-free advances made to FOSCL were part of a commercial arrangement benefiting both parties. As such, the disallowance of interest on these advances was not justified. The ground was allowed.

6. Disallowance of Plant Expenses:
The tribunal allowed the claim for plant expenses incurred on behalf of FOSCL, as these were on the same footing as the interest disallowance and were part of the commercial arrangement.

7. Disallowance of Notional Interest on Business Advances:
The tribunal ruled that no addition could be made on account of notional interest, as it goes against the real income theory. The assessee had sufficient owned funds to advance the sum, and thus, the disallowance was not justified.

8. Disallowance of Telephone and Vehicle Expenses:
The tribunal noted that the assessee had paid fringe benefit tax on telephone and vehicle expenses. Therefore, no further disallowance on an estimated basis was warranted. The ground was allowed.

9. Deletion of Addition on Account of Prior Period Expenses and Undervaluation of Closing Stock:
The tribunal agreed with the AO that direct costs incurred for import should be allocated to the closing stock. However, it directed that if the closing stock of the current year is increased, the opening stock of the subsequent year should also be increased. The ground was allowed with these observations.

10. Deletion of Addition on Account of Prior Period Interest Expenditure:
The tribunal remanded the issue to the AO for verification of the details provided by the assessee regarding the interest charged by M/s. PEC Limited. The AO was to verify if the interest pertained to the relevant financial year.

Conclusion:
The appeals were partly allowed, with specific issues remanded to the AO for further verification. The tribunal provided detailed reasoning for each disallowance and addition, ensuring that the principles of commercial expediency and real income theory were upheld.