2022 (3) TMI 1311 - AT - Income Tax

Disallowance u/s. 14A - Sufficiency of own funds - HELD THAT - We notice that the own funds available with the assessee in both the years are in far excess of the value of investments. Accordingly, as per the decision rendered in the case of Micro Labs Ltd. 2016 (4) TMI 219 - KARNATAKA HIGH COURT no disallowance out of interest expenditure is called for. Accordingly, we set aside the order passed by Ld. CIT(A) on this issue in both the years under consideration and direct the A.O. to delete disallowance made u/s 14A of the Act in both the years under consideration. Disallowance of Cost of Club Services - HELD THAT - As decided in own case 2021 (7) TMI 1019 - ITAT BANGALORE when membership of a club is taken in the name of director, it is for the assessee-company to prove that membership was obtained solely for the purpose of business. New India Extrusions (P) Limited 2011 (2) TMI 529 - ITAT, MUMBAI . Further Entrance fees paid towards corporate membership of the club is an expenditure incurred wholly and exclusively for the purpose of business and not towards capital account as it only facilitates smooth and efficient running of a business enterprise and does not add to the profit earning apparatus of a business enterprises and accordingly CIT (A) was justified in deleting the disallowances of entrances fee made by the Assessing Officer. Expenses on the basis of purchase of packing material, loose tools etc., in the year of purchase - HELD THAT - As decided in own case 2021 (7) TMI 1019 - ITAT BANGALORE Assessee submitted before Assessing Officer that; (i) packing material shown as purchases as on 31-3-2005 was actually purchased in earlier months and such packing material was consumed during process; (ii) on account of some computer problem, bills were posted on 31-3-2005, and (iii) entire packing material left after end of year became obsolete and, therefore, it was not shown in closing stock. The Assessing Officer rejected account books of assessee and made certain addition to his income. The Tribunal held that - (i) it was not case of revenue that purchases as debited as on 31-3-2005 were not genuine, and (ii) assessee was following a consistent method of valuing closing stock by including packing material as consumed at time of purchase. Rejection of account books of assessee and addition to his income was held to be not justified. Deduction u/s. 10A - Telecommunication expenses being excluded from export turnover - HELD THAT - As decide in TATA ELXSI LTD. 2011 (8) TMI 782 - KARNATAKA HIGH COURT the grievance of the assessee projected in the additional ground would get redressed, if the AO is directed to reduce the telecommunication expenses from the export turnover as well as the total turnover, while computing deduction under section 10 A of the act. We hold and direct accordingly. Respectfully following the above view, we direct the Ld.AO to exclude the telecommunication expenses from the total turnover for the purpose of computing deduction under section 10 A.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Disallowance of expenditure towards cost of club services.
3. Disallowance of telecommunication expenses.
4. Deduction of expenses on the basis of purchase of packing materials, loose tools, and consumables.
5. Allowance of club subscription fees as revenue expenditure.
6. Deduction of liability for warranty expenses.
7. Deduction under Section 10A of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A:
The Tribunal referred to its previous decisions in the assessee's own case for the Assessment Years 2004-05, 2002-03, and 2003-04. It observed that the assessee had sufficient own funds far exceeding the value of investments, as per the decision of the Hon'ble Karnataka High Court in Micro Labs Ltd. Therefore, no disallowance out of interest expenditure was warranted. The Tribunal directed the Assessing Officer (AO) to delete the disallowance made under Section 14A of the Income Tax Act.

2. Disallowance of Expenditure towards Cost of Club Services:
The Tribunal cited its earlier rulings in the assessee's own cases for Assessment Years 2004-05, 2002-03, and 2003-04. It held that entrance fees and membership fees paid for employees' club memberships are allowable as business expenditure. The Tribunal noted that such fees facilitate the smooth and efficient running of a business enterprise and do not add to the profit-earning apparatus. Consequently, the Tribunal allowed this ground in favor of the assessee.

3. Disallowance of Telecommunication Expenses:
The assessee did not press this ground as the CIT(A) had already decided the issue in favor of the assessee. Therefore, this ground was not adjudicated further.

4. Deduction of Expenses on the Basis of Purchase of Packing Materials, Loose Tools, and Consumables:
The Tribunal referred to its previous decisions in the assessee's own cases for Assessment Years 2002-03, 2003-04, and 2004-05. It noted that the assessee consistently followed the method of writing off packing materials, loose tools, and consumables in the year of purchase, which had been accepted in the past. The Tribunal upheld the CIT(A)'s decision to delete the addition made by the AO, as there was no reason to disturb the consistent accounting method followed by the assessee.

5. Allowance of Club Subscription Fees as Revenue Expenditure:
This issue was already addressed while considering ground no. 2 of the assessee's appeal. The Tribunal allowed the ground in favor of the assessee, holding that club subscription fees are revenue expenditure.

6. Deduction of Liability for Warranty Expenses:
The Tribunal referred to its previous decisions in the assessee's own cases for Assessment Years 1996-97, 2005-06, and 2006-07. It observed that the provision for warranty expenses was made on the sales effected during the relevant year. The Tribunal upheld the CIT(A)'s decision to grant relief to the assessee, as the provision was made on a reasonable basis and was deductible.

7. Deduction under Section 10A:
The Tribunal referred to its previous decision for Assessment Year 2006-07. It held that telecommunication expenses should be excluded from both the export turnover and the total turnover while computing the deduction under Section 10A. The Tribunal directed the AO to exclude the telecommunication expenses from the total turnover for the purpose of computing the deduction under Section 10A.

Conclusion:
The Tribunal allowed the appeal filed by the assessee and dismissed the appeal filed by the revenue. The order was pronounced in the open court on 24th February 2022.