2016 (6) TMI 840 - AT - Income Tax

Allowability of freight expenses - whether business expenditure in reference to re-export of equipment? - Held that - Expenses had been incurred in reference to re-export of equipment used by the assessee in its business and hence these were in the nature of business expenditure. Nothing has been brought on record by the department to controvert these findings - Decided against revenue Nature of deductible expenses - whether the assessee was correct in not classifying this sum as work-in-progress for the reason that the assessee was not to recover anything from the client? - Held that - As the impugned amounts were clearly in the nature of business expenses. The AO had primarily disallowed these expenses because the assessee was not earning any receipt from the project. It is well settled law that it is not necessary that for allowability of expenses, there should be receipt also for justifying the assessee s claim regarding expenses. - Decided against revenue

Summary

Issues:
1. Allowability of freight expenses as business expenditure in reference to re-export of equipments.
2. Classification of certain expenses as work-in-progress for a project where no receipts were earned.

Analysis:

Issue 1: Allowability of freight expenses
The case involved an appeal by the revenue against the order of the ld. CIT(A) relating to AY 2005-06. The AO disallowed the claim of the assessee for freight expenses of ?1,42,21,882, pertaining to the re-export of assets, stating that the assessee should have also recovered the freight expenses. However, both the ld. CIT(A) and the ITAT upheld the claim of the assessee. The ld. CIT(A) observed that the freight expenses were incurred in reference to re-export of equipment used in the business, making them business expenditure. The tribunal concurred with this view, emphasizing that the expenses were in the nature of business expenditure as they were related to re-export of equipment used in the business. The department failed to provide any evidence to counter these findings, leading to the dismissal of the revenue's appeal.

Issue 2: Classification of expenses as work-in-progress
Regarding the expenses related to the IT-500 Kolar project, the AO disallowed certain expenses, stating that since the assessee was not earning any receipts from the project, the expenses should have been treated as work-in-progress. However, both the ld. CIT(A) and the ITAT disagreed with this assessment. The ld. CIT(A) noted that the expenses were in the nature of expenses and could not be recovered from the client, hence should not be classified as work-in-progress. The tribunal upheld this decision, emphasizing that the expenses were business expenses and did not require corresponding receipts to be justified. As a result, the order of the ld. CIT(A) was upheld, and the revenue's appeal was dismissed.

In conclusion, the ITAT upheld the decisions of the ld. CIT(A) on both issues, confirming the allowability of freight expenses as business expenditure and rejecting the classification of certain expenses as work-in-progress. The revenue's appeal was ultimately dismissed, affirming the decisions in favor of the assessee.