2019 (11) TMI 1046 - AT - Income Tax

Disallowance to 10% of the total expenses on adhoc basis by the CIT(A) - Business connection - Earlier AO has disallowed these expenses on the ground that they do not have any business connection with the assessee - Held that - the CIT(A), inter alia, observed that such expenditures were incurred by the assessee in order to maintain cordial and harmonious industrial relations amongst the works for better and smooth running of business without direct benefit to any individual employee or any specific group of employees, the assessee company being located in remote area naxal affected area where are no recreational facilities in around the nearby locality; providing the officer and staff of the company in the form of tea, snacs, stitching of official uniform, subsidy given to canteen , puja expenses, etc. Hence, from the above findings of the CIT(A), we are of the view that the CIT(A) has not disputed the nature of expenses incurred by the assessee. - Entire expenditure allowed. Deduction u/s 80-IA - captive power plant - scope of the word derived from - reason/justification of valuation of power produced on the basis of JSEB rate - Held that - even at the time of framing of assessment order and making addition, the AO was not sure about the cost of production of power and he assumed the same at ₹ 2.5 per unit with a rider that same may be revised later if the assessee furnishes details of cost of production of power alongwith necessary evidence. - the CIT(A) was right in granting part relief to the assessee but was not correct in confirming part addition considering the factum of 2 paise per unit for working out eligible profits u/s. 80IA of the Act. - Claim of the assessee allowed. Disallowance of expenses related to exempted unit - AO has apportioned 45.68% of the claim of the assessee pertaining to Director sitting fees and business head office expenses pertaining to exempt unit - Held that - the Directors sitting fees of ₹ 1,60,000/- and head office expenses of ₹ 72,00,000/- need to be apportioned on the basis of turnover of the assessee and the authorities below has done on the same line. Regarding sales promotion expenses, no allocation of marketing expense is required to be made as no marketing efforts are required for sale of products of such captive units. Decided partly in favor of assessee. Claim of expenditure - whether unascertained liability and a provision - the assessee claimed that the claim is not a provision but crystallised liability. It was also submitted that the rebate and claim account has been debited for rate differences, shortage of material at customer end, loss to customer due to delay in supply of caustic, poor quality of the product for which deductions have been made by the customers. - Held that - CIT(A) after considering the remand report and the credit note issued by Hindalco, proving that the liability was ascertained in financial year 2005-06, deleted the addition. - order of CIT(A) sustained - Decided against the revenue. Additions u/s .40(a)(ia) - non deduction of TDS u/s 194J instead of 194C - Held that - if there was any difference of opinion between the assessee and the AO regarding relevant provisions of TDS, then also it cannot be said that the assessee has not complied with the provisions of TDS. - Decided against the revenue.

Summary

Issues Involved:
1. Deletion of addition under rebate & claim of ? 94,90,362/-
2. Deletion of addition on account of CSR expenses, community welfare expenses, etc. of ? 24,35,192/-
3. Deletion of addition on account of excess sale of power plant.
4. Deletion of addition on account of allocation of expenses between power plant unit and caustic plant.
5. Disallowance of various ad hoc expenses by the assessee.
6. Disallowance of deduction u/s 80IA.
7. Reallocation of expenses on account of director sitting fees and business head office expenses.
8. Deletion of addition made u/s 40(a)(ia) of the Act.
9. Deletion of addition of depreciation claimed on power plant.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Rebate & Claim of ? 94,90,362/-:
The Assessing Officer (AO) disallowed ? 94,90,362/- claimed as rebates and claims, considering it an unascertained liability. The CIT(A) deleted the addition, noting that the liability was ascertained and crystallized during the financial year 2005-06. The Tribunal upheld the CIT(A)'s decision, confirming that the liability was indeed ascertained.

2. Deletion of Addition on Account of CSR Expenses, Community Welfare Expenses, etc. of ? 24,35,192/-:
The AO disallowed ? 24,35,192/- claimed under various heads like CSR expenses and community welfare expenses, considering them as non-business expenses. The CIT(A) partly allowed the expenses, recognizing the necessity of such expenses in a naxal-affected area. The Tribunal upheld the CIT(A)'s decision, following precedents in the assessee's own case for previous years.

3. Deletion of Addition on Account of Excess Sale of Power Plant:
The AO disallowed the difference in sale value of power produced by the captive power plant, assuming a lower cost of production. The CIT(A) partly allowed the claim, adjusting the market price of electricity. The Tribunal upheld the CIT(A)'s decision, confirming that the market value should be based on the rate charged by the State Electricity Board.

4. Deletion of Addition on Account of Allocation of Expenses Between Power Plant Unit and Caustic Plant:
The AO apportioned expenses like director sitting fees and head office expenses to the power plant unit. The CIT(A) upheld the allocation, considering the proportionate turnover. The Tribunal confirmed the CIT(A)'s decision, agreeing that the allocation was justified.

5. Disallowance of Various Ad Hoc Expenses by the Assessee:
The AO disallowed various ad hoc expenses claimed by the assessee. The CIT(A) restricted the disallowance to 10% of the total expenses. The Tribunal deleted the disallowances, noting that the expenses were necessary for maintaining harmonious industrial relations and were not for personal use.

6. Disallowance of Deduction u/s 80IA:
The AO disallowed part of the deduction claimed u/s 80IA, considering a lower cost of production for the captive power plant. The CIT(A) partly allowed the claim, adjusting the market price of electricity. The Tribunal upheld the CIT(A)'s decision, confirming that the market value should be based on the rate charged by the State Electricity Board.

7. Reallocation of Expenses on Account of Director Sitting Fees and Business Head Office Expenses:
The AO apportioned director sitting fees and head office expenses to the power plant unit. The CIT(A) upheld the allocation, considering the proportionate turnover. The Tribunal confirmed the CIT(A)'s decision, agreeing that the allocation was justified.

8. Deletion of Addition Made u/s 40(a)(ia) of the Act:
The AO disallowed ? 55,95,993/- paid as consultancy charges, considering that TDS should have been deducted u/s 194J instead of 194C. The CIT(A) deleted the addition, noting that the expenditure was capitalized and not claimed as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, confirming that no disallowance can be made if there is a shortfall due to a difference of opinion on TDS provisions.

9. Deletion of Addition of Depreciation Claimed on Power Plant:
The AO disallowed depreciation on the power plant, considering it exempt u/s 80IA. The CIT(A) allowed the depreciation, noting that it was consistently allowed in previous years. The Tribunal upheld the CIT(A)'s decision, confirming that the rule of consistency should be respected.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions on most issues, confirming that the disallowances and additions made by the AO were not justified. The appeals of the assessee were partly allowed, and the appeals of the revenue were dismissed. The cross objections of the assessee were dismissed as infructuous.