2022 (3) TMI 21 - AT - Income Tax

Disallowance on account of expenses incurred on construction of road (owned by the State Government Authorities) - Allowable expenses u/s 37(1) - AO noted that the roads were not owned by the assessee; in view of which, he disallowed the expenses incurred on construction of the road - HELD THAT - We find that the identical issue has already been decided against Revenue and in favour of the assessee in the case of NTPC Ltd 2019 (5) TMI 95 - ITAT DELHI wherein held when the roads were constructed around the factory with an amount incurred by the assessee existing on the land owned by Government of UP, the assessee did not acquire any asset of an enduring nature. Assessee is having existing right to carry out the business, any expenditure made by it for smooth running of the business would not lead to acquisition of capital assets. Thus the expenditure incurred by the assessee on construction of road, water supply, rail connectivity and other infrastructure activities on the assets not owned by it but owned by various Government Departments are revenue expenditure. - Decided in favour of assessee. Addition of excess interest claimed - disallowance of community development and welfare expenses - AO was of the view that this expenditure was in the nature of Corporate Social Responsibility, and was not allowable - CIT-A deleted the addition - HELD THAT - No material have been brought for our consideration from either side, Revenue or the assessee, to persuade us to take a view different from view already taken by the Ld. CIT(A) in the impugned appellate order dated 15.06.2017 on these issues. Therefore, we decline to interfere with the impugned appellate order of the Ld. Ld. CIT(A); and dismiss grounds 2 and 3 of appeal. - Decided against revenue.

Summary

Issues Involved:
1. Disallowance of ?2,50,92,258/- on account of expenses incurred on construction of road.
2. Disallowance of ?69,80,737/- on account of excess interest claimed.
3. Disallowance of ?1,87,456/- on account of expenses incurred on Corporate Social Responsibility (CSR).

Issue-wise Detailed Analysis:

1. Disallowance of ?2,50,92,258/- on Account of Expenses Incurred on Construction of Road:
The first issue concerns the disallowance of ?2,50,92,258/- claimed by the assessee as a deduction for expenses incurred on the construction of a road owned by State Government Authorities. The Assessing Officer (AO) disallowed this claim on the grounds that the roads were not owned by the assessee. The assessee relied on various judicial decisions, including L.H. Sugar Factory & Oil Mills (Pvt.) Ltd. vs. CIT 125 ITR 293 (SC), arguing that the expenditure was for improving working conditions and promoting business. The CIT(A) deleted the addition, noting that the expenditure was for the smooth operation of the assessee's power plant and was thus allowable under section 37 of the I.T. Act based on commercial expediency. The ITAT upheld the CIT(A)'s decision, referencing a similar case involving NTPC Ltd. where such expenses were considered revenue in nature and allowable under section 37.

2. Disallowance of ?69,80,737/- on Account of Excess Interest Claimed:
The second issue pertains to the disallowance of ?69,80,737/- out of excess interest claimed by the assessee. The AO observed a discrepancy in the debt-equity ratio used by the assessee, leading to the disallowance. The CIT(A) deleted this addition, noting that the assessee had correctly charged interest to revenue based on cash expenditure considered by CERC for tariff fixation, and not on the total capitalized value. The ITAT agreed with the CIT(A), finding that the assessee had not claimed excess interest expense and thus upheld the deletion of the disallowance.

3. Disallowance of ?1,87,456/- on Account of Expenses Incurred on Corporate Social Responsibility (CSR):
The third issue involves the disallowance of ?1,87,456/- claimed as community development and welfare expenses. The AO disallowed this amount, considering it as CSR expenses not allowable under section 37(1) of the Act. The CIT(A) deleted the addition, stating that the expenses were not in the nature of CSR as the company had incurred a loss during the year and thus was not required to spend on CSR as per the Companies Act. The ITAT upheld the CIT(A)'s decision, noting that the expenses were incurred for business purposes and were allowable under section 37(1).

Conclusion:
The ITAT dismissed the Revenue's appeal, upholding the CIT(A)'s order on all three issues. The expenses for road construction were deemed allowable as they facilitated business operations. The disallowance of excess interest was deleted as the assessee had correctly accounted for interest based on cash expenditure. The CSR-related expenses were allowed as they were incurred for business purposes and not mandated by the Companies Act due to the company's loss during the year.