2015 (6) TMI 352 - AT - Income Tax

Deduction of business loss u/s.28 - CIT(A) rejected the claim - Held that - AO stated that the amount of ₹ 4,74,404/- consisted of advances given to various parties as well as deposits with the Government departments. Party-wise bifurcation is not available on record. In the absence of the same, it is not clear whether there was any deposit in the capital field. In our considered view, advances which were on revenue field, is allowable as revenue loss, whereas the deposits which were on capital field is not allowable being capital loss. We, therefore, set aside the orders of the lower authorities and remit the matter back to the file of the AO for adjudication afresh - Decided in favour of assesse for statistical purpose. Disallowance of penalty for infringement of law - the assessee had paid sales tax penalty - Held that - in the case of CIT Vs. Hoshiari Lal Kewal Krishnan (2006 (10) TMI 140 - PUNJAB AND HARYANA HIGH COURT) has held that where the payment was not in the nature of punishment, but was by way of compensation, then the amount was allowable as deduction to the assessee. The Hon ble High Court observed that case of Haji Aziz and Abdul Shakoor Brothers Vs. CIT, 1960 (11) TMI 15 - SUPREME Court has held that any amount paid, which was in the nature of penalty for breach of law, was not allowable as deduction while computing the income of the assessee, as the payment was not to compensate the loss on account of delay in making the payment, but was on account of penalty for breach of law. No material has been brought on record to show that the said amount was paid by the assessee by way of compensation for delay in making the payment of sales-tax. - Decided against assesse. Disallowance of export promotion and sales promotion expenses - Held that - We find that the apart from making a general submission that the turnover of the assessee has increased, no specific error in the order of the CIT(A) could be pointed out by the AR. The purpose of visit and the business connection of the above expenditure could not be established by the assessee by producing relevant material. In the absence of the same, we do not find any good reason to interfere with the order of the CIT(A), which is confirmed - Decided against assesse. Disallowance on account of repairing expenses - Held that - In the absence of any details of the expenditure, it is not possible on our part to adjudicate the issue completely. In our considered view, when a part of the machine is replaced, then the resultant expenditure is revenue in nature, but when the part replaced itself can be regarded as a separate and independent machine, then the expenditure is capital in nature. Thus restore the issue back to the file of the AO for adjudication afresh in the light of the observation made hereinabove after proper verification by passing a speaking order - Decided in favour of assesse for statistical purpose.

Summary

Issues:
1. Deduction of business loss under section 28 of the Act.
2. Disallowance of penalty for infringement of law under section 37 of the Act.
3. Disallowance of export promotion expenses and sales promotion expenses.
4. Disallowance of repairing expenses as capital expenditure.

Analysis:

Issue 1:
The appellant contested the rejection of a claim for deduction of business loss under section 28 of the Act by the CIT(A). The AO disallowed a portion of claimed bad debts as they represented small balances with various parties and deposits with Government departments. The CIT(A) upheld the disallowance, stating the amounts were advances, not trading debts, and lacked evidence of crystallized losses. However, the ITAT found that the advances were given during the course of business and were not on the capital field. Citing precedent, the ITAT allowed the claim as business loss, remanding the matter to the AO for verification of the nature of advances and deposits.

Issue 2:
The appeal challenged the disallowance of an amount as penalty for infringement of law under section 37 of the Act. The AO disallowed the penalty amount, considering it not compensatory but punitive. The CIT(A) affirmed this decision, deeming the penalty as an offence. The ITAT upheld the CIT(A)'s ruling, citing case law that penalties for breach of law are not deductible unless compensatory in nature, which was not established by the appellant.

Issue 3 and 4:
The appellant disputed the disallowance of export promotion and sales promotion expenses. The AO disallowed these expenses for lack of specific details and evidence of business purpose. The CIT(A) upheld the disallowance due to insufficient proof of business necessity. The ITAT affirmed the CIT(A)'s decision, noting the absence of material establishing the business connection of the expenses, leading to the dismissal of the appellant's grounds.

Issue 5:
The appellant contested the disallowance of repairing expenses as capital expenditure. The AO disallowed the expenses, considering them capital in nature for enduring benefit. The CIT(A) confirmed the disallowance, stating the expenses were not current repairs. The ITAT found insufficient details provided and remanded the issue to the AO for proper verification, emphasizing the distinction between revenue and capital expenditure in such cases.

In conclusion, the ITAT partially allowed the appeal for statistical purposes, remanding certain issues back to the AO for reevaluation with proper verification and opportunity for the appellant to present their case.