2019 (5) TMI 348 - HC - Income Tax

Addition u/s 40A - payments made to the Employees' Welfare Trust to meet the transportation expense - diversion of funds - HELD THAT - This issue was dealt in detail by this Court in the assessee's own case in respect of the assessment year 1994-95, in the appeal preferred by the Revenue 2019 (4) TMI 79 - KERALA HIGH COURT . This Court held that the view taken by the Tribunal, that the assessee had effected the said payment so as to meet the transportation expense of the employees and had the said task not been undertaken by the Employees' Welfare Trust, it would have been the liability of the assessee, by virtue of the service conditions, was correct and sustainable. We answer the position accordingly, in favour of the Assessee and against the Revenue. Dis-allowance of depreciation on the enhanced cost of equipments - foreign exchange rate fluctuations - mandate of Section 43A - increase in liability was artificial and did not represent any actual payment - HELD THAT - CIT(A) took a stand in favour of the assessee and held that the instance would clearly fall within the ambit of Section 43A and in turn, directed the Assessing Officer to grant the relief, which was sought to be challenged by the Revenue before the Tribunal. It was brought to the notice of this Court that the issue was squarely covered in favour of the assessee, by virtue of the rulings rendered by the Supreme court in Commissioner of Income Tax, Delhi vs. Woodward Governor India P.Ltd 2009 (4) TMI 4 - SUPREME COURT and Oil and Natural Gas Corporation Ltd, Dehradun, through Managing Director vs. Commissioner of Income Tax, Dehradun. 2010 (3) TMI 81 - SUPREME COURT . In the light of the dictum laid down by the Apex Court, we held that the challenge raised by the Revenue was devoid of any merit and no substantial question of law was involved. The said finding and reasoning will govern the field in this case as well. Disallowance of interest on borrowed funds - interest free advance to a subsidiary company - HELD THAT - As per the assessment order, the assessee was having a large extent of income and this being the position, the amount that was lent to the sister concern, being only ₹ 2.43 crores, it was not open for the Revenue to have contended that the amount advanced came from the borrowed funds of the assessee. The analysis done by the Tribunal order reveals that the finding was rendered on the basis of the relevant facts borne out from the materials on record. The said finding on fact does not lead to any question of law, much less any substantial question of law.

Summary

Issues Involved:
1. Applicability of Section 40A(9) regarding payments to Employees' Welfare Trust.
2. Disallowance of depreciation on enhanced cost of equipment under Section 43A.
3. Disallowance of interest-free advance to a subsidiary company.

Detailed Analysis:

1. Applicability of Section 40A(9) regarding payments to Employees' Welfare Trust:
The Revenue contended that the Tribunal's deletion of the addition under Section 40A(9) concerning payments made to the Employees' Welfare Trust was incorrect and unsustainable. The Court referenced its earlier decision in the assessee's own case for the assessment year 1994-95, where it was held that the payments were made to meet transportation expenses of employees, which would have been the assessee's liability under service conditions. The Court upheld this view, ruling in favor of the assessee and against the Revenue, stating that nothing further survives under this head.

2. Disallowance of depreciation on enhanced cost of equipment under Section 43A:
The second issue involved the deletion of disallowance of depreciation on the enhanced cost of equipment as per Section 43A. The Court noted that this issue was previously addressed in I.T.A.No.1347/2009 for the assessment year 1993-94, where the Commissioner of Income Tax (Appeals) had ruled in favor of the assessee. The Tribunal's decision was supported by Supreme Court rulings in Commissioner of Income Tax, Delhi vs. Woodward Governor India P.Ltd and Oil and Natural Gas Corporation Ltd vs. Commissioner of Income Tax. The Court held that the Revenue's challenge lacked merit and no substantial question of law was involved, thus governing the current case similarly.

3. Disallowance of interest-free advance to a subsidiary company:
The third issue concerned the disallowance of ?24,30,000 towards an interest-free advance to a subsidiary company. The Tribunal had relied on the Supreme Court's decision in S.A. Builders Ltd. Vs. Commissioner of Income-Tax (Appeals) & another, which established that once a nexus between expenditure and business purpose is proven, the Revenue cannot question the reasonableness of the expenditure. The Tribunal found that the assessee had sufficient funds to make the interest-free advance and that it was a prudent business decision to support the sick subsidiary company. The Court upheld the Tribunal's findings, noting that the Revenue failed to prove that the funds advanced were from borrowed money. The analysis was based on the materials on record, and the finding did not lead to any substantial question of law.

Conclusion:
The Court concluded that the Revenue failed to establish any substantial question of law to invoke the jurisdiction under Section 260A of the Income Tax Act. Consequently, the appeal was dismissed.