2018 (6) TMI 509 - AT - Income Tax

Exclusion of Freight 14 lakhs falls short of the legal requirement of wholly and exclusiveness qua the business purpose of the assessee. It cannot be said that the said expenditure is for the company in its entirety. - CIT(A) is justified in upholding the addition. Expenditure incurred on laying of the water pipeline involving the land owned by Maharashtra Government - revenue or capital - Held that - Weight of other business considerations the test of enduring benefit might even break down. The said view has strength of the Supreme Court judgment in the case of Dalmia Jain and Company Ltd. Vs. CIT 1971 (7) TMI 2 - SUPREME COURT as well which is relevant for the proposition that certain litigation expenditure relating to the leasehold rights constitute Revenue expenditure. Therefore we are of the opinion that the expenditure incurred on laying of the water pipeline involving the land owned by Maharashtra Government constitutes Revenue expenditure. Addition of rent paid for the property - Held that - Considering the above decision of the Tribunal in assessee s own case we are of the opinion that the expenditure on account of rent paid on the house property is allowable in favour of the assessee. Allowability of depreciation of capital expenditure in connection with the said house property at 70 Koregaon Park - Held that - There is no clarity with reference to the capitalised items of assets credited to the Serum Institute of India Ltd. in the said house premises occupied by Mr. Z.S. Poonawalla applicable rate of depreciation and the use of the asset etc. As discussed in the open court we are of the opinion that this limb of the ground should be remanded to the file of AO for fresh adjudication after granting reasonable opportunity of being heard to the assessee in accordance with the set principles of natural justice. Allowability of deduction to the Wealth Tax paid by the assessee for the purpose of computing book profits u/s.115JB - AO denied the said payment of tax as not an allowable deduction - Held that - Wealth Tax paid constitutes an allowable deduction as held by the Tribunal in assessee s own case for the A.Y. 2008-09.

Issues Involved:
1. Exclusion of Freight & Insurance from Total Turnover for deduction u/s.10B.
2. Allowing Product Development Expenditure as Revenue expenditure.
3. Allowability of Donation paid as expenditure u/s.37(1).
4. Classification and depreciation of Plant & Machinery and Furniture & Fixtures.
5. Disallowance u/s.14A and application of Rule 8D.
6. Disallowance of Foreign Travel Expenses.
7. Classification of fixed assets as Plant and Machinery or Furniture and Fixtures.
8. Disallowance of Provision for Leave Encashment.
9. Disallowance of Demat Charges.
10. Treatment of expenditure on laying of water pipeline.
11. Allowability of rent paid for a bungalow and related depreciation.
12. Reduction of Wealth Tax paid for computing book profit u/s.115JB.
13. Treatment of certain purchases as Bogus Purchases.

Detailed Analysis:

1. Exclusion of Freight & Insurance from Total Turnover for deduction u/s.10B:
The Tribunal upheld the CIT(A)'s decision to exclude freight and insurance charges from both the total turnover and export turnover while allowing deduction u/s.10B, relying on the Special Bench decision in Sak Soft Ltd. and the jurisdictional High Court judgment in Gem Plus Jewellery India Ltd. The Revenue's grounds were dismissed, following the precedent set in the assessee's own case for A.Y. 2008-09.

2. Allowing Product Development Expenditure as Revenue expenditure:
The Tribunal confirmed the CIT(A)'s decision to treat product development expenditure as revenue in nature, despite being capitalized in the books. This was based on the principle that the true nature of the transaction, not the book entries, determines the expenditure's classification, as supported by Supreme Court rulings in Sutlej Cotton Mills and Smifs Securities Ltd.

3. Allowability of Donation paid as expenditure u/s.37(1):
The Tribunal upheld the CIT(A)'s decision to disallow the donation to Aslaji Agiary Trust as it was not wholly and exclusively for business purposes. The donation was seen as enhancing the social status of the MD rather than serving the company's business interests.

4. Classification and depreciation of Plant & Machinery and Furniture & Fixtures:
The Tribunal followed the functional test to determine the classification of assets. Items used for production were classified as Plant & Machinery, eligible for 15% depreciation, while others were classified as Furniture & Fixtures, eligible for 10% depreciation. This approach was consistent with previous Tribunal decisions in the assessee's own case.

5. Disallowance u/s.14A and application of Rule 8D:
The Tribunal found the AO's satisfaction for invoking Rule 8D insufficient, as it was based on suspicion without proper examination of the assessee's books. Consequently, the disallowance u/s.14A was deemed unsustainable. The Tribunal did not address the merits of the disallowance due to the technical failure in recording satisfaction.

6. Disallowance of Foreign Travel Expenses:
The Tribunal remanded the issue back to the AO to verify the nature of foreign travel expenses, distinguishing between those related to machinery acquisition (capital expenditure) and other business purposes (revenue expenditure).

7. Classification of fixed assets as Plant and Machinery or Furniture and Fixtures:
The Tribunal followed the functional test, consistent with previous decisions, to classify assets based on their use in production, allowing appropriate depreciation rates.

8. Disallowance of Provision for Leave Encashment:
The Tribunal upheld the disallowance of provision for leave encashment, following its earlier decision and relying on judgments in Exide Industries Ltd. and Universal Medicare Private Limited.

9. Disallowance of Demat Charges:
The Tribunal allowed the deduction of demat charges u/s.48, following its decision in KRA Holding and Trading Pvt. Ltd., where such charges were deemed allowable against capital gains.

10. Treatment of expenditure on laying of water pipeline:
The Tribunal treated the expenditure on laying the water pipeline as revenue expenditure, following the jurisdictional High Court's decision in Chowgule Chemicals Pvt. Ltd., which emphasized the business necessity and non-ownership of the land through which the pipeline was laid.

11. Allowability of rent paid for a bungalow and related depreciation:
The Tribunal allowed the rent paid for the bungalow as a business expenditure, consistent with its earlier decisions. However, the issue of depreciation on capitalized expenditure related to the bungalow was remanded to the AO for verification.

12. Reduction of Wealth Tax paid for computing book profit u/s.115JB:
The Tribunal allowed the deduction of Wealth Tax paid for computing book profit, following its decision in the assessee's own case for A.Y. 2008-09, where Wealth Tax was deemed an ascertained liability.

13. Treatment of certain purchases as Bogus Purchases:
The Tribunal did not explicitly address this issue in the provided text, suggesting it may not have been a primary focus in the appeals discussed.

Conclusion:
The Tribunal's decisions largely favored the assessee, providing relief on several grounds while remanding certain issues for further verification. The judgments emphasized the importance of proper classification of expenditures and assets, adherence to legal standards for disallowances, and the necessity of recording adequate satisfaction by the AO.

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