2018 (2) TMI 1277 - AT - Income Tax

Claim of depreciation in respect of vehicles which were registered in the name of directors of the assessee company - Held that - The assessee is entitled to claim of depreciation on cars which are registered in the name of directors where the funds for purchase of the said vehicles has been paid by the assessee company and the same have been shown as asset of the assessee company and also the vehicles were used by the assessee company. In view thereof we allow the claim of depreciation in the hands of assessee. Disallowance of remuneration paid to the directors - whether no commission is to be paid on the sales made by the assessee to its sister concern namely K.K. Cans 2, 91, 362/-. The assessee has explained that the cash expenditure made on behalf of customers has been recovered from the customers through sale invoices etc. Accordingly where the assessee had not claimed the aforesaid expenditure made in cash as deduction in the Profit and Loss Account then the same is not hit by provisions of section 40A(3) of the Act. - Decided against revenue Diversion of profits - addition u/s 40A - items which were sold by assessee to its sister concern were in turn sold to third party and hence the assessee had diverted profits to its sister concern - Held that - The provisions of section 40A(2)(a) of the Act are attracted where the assessee incurs expenditure in respect of which payment has been made to a person referred to in clause (b). The assessee in the present case has not incurred any expenditure nor claimed the same but has shown sale of its products to its sister concern. Hence the order of Assessing Officer in invoking provisions of section 40A(2)(a) of the Act is misplaced; even though the assessee had sale transactions with its sister concern - Decided against revenue

Issues Involved:
1. Classification of professional fees related to factory repairs as capital or revenue expenditure.
2. Classification of expenditure on factory repairs as capital or revenue expenditure.
3. Disallowance of foreign travel expenditure.
4. Disallowance of depreciation on vehicles registered in the name of directors.
5. Disallowance of remuneration paid to directors.
6. Disallowance of interest on loans taken from directors.
7. Disallowance under section 40A(3) of the Income Tax Act.
8. Deletion of disallowance of professional charges claimed by the assessee.
9. Deletion of disallowance of depreciation on the building of Chincholi Plant.
10. Deletion of disallowance of service and commission charges.
11. Deletion of disallowance of foreign trip expenses towards a tour to China.
12. Deletion of disallowance under section 40A(3) of the Income Tax Act.
13. Deletion of addition on account of benefit given to a sister concern.

Detailed Analysis:

1. Classification of Professional Fees Related to Factory Repairs as Capital or Revenue Expenditure:
The assessee argued that the professional fees paid for factory repairs should be treated as revenue expenditure. However, the CIT(A) held that these fees were capital expenses, leading to their disallowance as revenue expenditure. The Tribunal upheld the CIT(A)’s decision, emphasizing that the fees were related to capital repairs.

2. Classification of Expenditure on Factory Repairs as Capital or Revenue Expenditure:
The assessee contended that the factory repairs did not result in the acquisition of any new asset and should be treated as revenue expenditure. The CIT(A) and the Tribunal, however, classified the expenditure as capital in nature, disallowing it as a revenue deduction.

3. Disallowance of Foreign Travel Expenditure:
The assessee claimed foreign travel expenses for a business trip to Hong Kong and Thailand. The CIT(A) disallowed these expenses, deeming them personal. The Tribunal upheld this decision, noting a lack of evidence proving the business purpose of the trip.

4. Disallowance of Depreciation on Vehicles Registered in the Name of Directors:
The assessee claimed depreciation on vehicles registered in the names of its directors but used for business purposes. The CIT(A) disallowed this claim, but the Tribunal reversed this decision, citing precedents that allowed depreciation if the vehicles were used for business and funded by the company.

5. Disallowance of Remuneration Paid to Directors:
The assessee paid commission to directors based on sales, which the CIT(A) partially disallowed, particularly for sales to a sister concern. The Tribunal found the remuneration reasonable and allowable, emphasizing that the directors were taxed at the highest rates, thus negating any revenue loss.

6. Disallowance of Interest on Loans Taken from Directors:
The CIT(A) disallowed interest paid at 18% on loans from directors, considering it excessive. The Tribunal upheld this disallowance, agreeing with the CIT(A)’s assessment of the interest rate as unreasonable.

7. Disallowance under Section 40A(3) of the Income Tax Act:
The CIT(A) confirmed the disallowance of ?46,000 under section 40A(3), which pertains to cash payments exceeding the specified limit. The Tribunal upheld this disallowance, agreeing with the CIT(A)’s application of the provision.

8. Deletion of Disallowance of Professional Charges Claimed by the Assessee:
The Revenue argued that professional charges were paid for work done for another concern, not the assessee. The CIT(A) deleted the disallowance, and the Tribunal upheld this decision, finding the charges related to the assessee’s business.

9. Deletion of Disallowance of Depreciation on the Building of Chincholi Plant:
The Revenue contended that the building belonged to the directors, not the assessee. The CIT(A) allowed depreciation, but the Tribunal reversed this, noting that the asset was not owned by the assessee and was not put to use during the year.

10. Deletion of Disallowance of Service and Commission Charges:
The CIT(A) deleted the disallowance of service and commission charges, which the Revenue contested. The Tribunal upheld the CIT(A)’s decision, finding that the services were rendered and the commission was justified.

11. Deletion of Disallowance of Foreign Trip Expenses Towards a Tour to China:
The CIT(A) allowed the foreign trip expenses related to a business trip to China. The Revenue appealed, but the Tribunal upheld the CIT(A)’s decision, recognizing the business purpose of the trip.

12. Deletion of Disallowance under Section 40A(3) of the Income Tax Act:
The CIT(A) restricted the disallowance under section 40A(3) to ?46,000, which the Revenue contested. The Tribunal upheld the CIT(A)’s decision, noting that the remaining cash payments were recovered from customers and not claimed as expenses.

13. Deletion of Addition on Account of Benefit Given to a Sister Concern:
The Assessing Officer alleged profit diversion to a sister concern, invoking section 40A(2)(b). The CIT(A) deleted the addition, and the Tribunal upheld this, noting that no expenditure was incurred and the provisions were not applicable.

Conclusion:
The Tribunal's detailed analysis led to the partial allowance of the assessee's appeal and the dismissal of the Revenue's appeal. The Tribunal emphasized adherence to judicial precedents and factual correctness in its decisions.

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