2022 (9) TMI 187 - AT - Income Tax

Expenses incurred by way of subscription/donation to various puja committees - Expenditure not allowable u/s 37(1) - HELD THAT - Expenditure may not be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits the assessee can claim the deductions u/s 10(2)(xv) of the Income Tax Act 1922( now section 37(1) of Act 1961) even though there was no compelling necessity to incur the expenses. The fact that somebody other than the assesse is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of deduction under the Act if it satisfies otherwise the tests laid down by law. Similarly the case of the assessee is also supported by the decision of Bata India Ltd. 1993 (3) TMI 89 - CALCUTTA HIGH COURT wherein it has been held that contributions/subscriptions towards community celebrations to keep youth in the neighborhood of the shop happy to ensure smooth conduct of the business, the expenditure can be said to be expenditure required to maintain the business as the same is incurred to keep good relation with the population in the close neighborhood and not to as sales promotion or to solicit new customers - we are inclined to set aside the order of ld CIT(A) on this issue and direct the AO to delete the disallowance. Ground no 1 is allowed. Interest on loan - Disallowance on the ground that the same pertains to pre-commencement period of the hotels - HELD THAT - Durgapur Hotel Project was completed and commissioned by the assessee on 16.05.2016 and the assessee has apportioned interest and other bank charges between two periods) relating to pre-commissioning period of 01.04.2016 to 16.05.2016 and ii) post commissioning from 16.05.2016 to 31.03.2017. We note that the interest expenses and other charges pertaining to period prior to the completion of project were capitalized under various heads of fixed assets as it is apparent from annual accounts and also the basis of capitalization interest on loan - In view of these facts, we are not in concurrence with the order of Ld. CIT(A) and accordingly we set aside the same and direct the AO to delete the addition - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of expenses towards subscription/donation to various puja committees.
2. Disallowance of interest on loan and bank charges pertaining to the pre-commencement period of the hotels.

Issue 1: Disallowance of Subscription/Donation Expenses:
The appeal challenges the addition of Rs. 42,085 by the Ld. CIT(A) for disallowing expenses incurred as subscription/donation to puja committees. The AO disallowed these expenses under section 37(1) of the Income Tax Act. The Ld. CIT(A) upheld the AO's decision, stating that these expenses were not wholly and exclusively incurred for business purposes. However, the ITAT Kolkata, after considering the facts and legal precedents, concluded that the expenses were essential for maintaining good relations in the business vicinity. Citing the decision in Sasson J. David & Co. Ltd. Vs CIT, the ITAT emphasized that the assessee has the discretion to decide on such expenses for business promotion, even if others benefit. Referring to CIT Vs. Bata India Ltd, the ITAT highlighted that expenses for community relations can be considered necessary for business maintenance. Consequently, the ITAT directed the AO to delete the disallowance, allowing the appeal on this ground.

Issue 2: Disallowance of Interest on Loan and Bank Charges:
The appeal contests the addition of Rs. 11,89,217 by the Ld. CIT(A) for disallowing interest on loan during the pre-commencement period of the hotels. The AO observed that the interest expenses were not capitalized correctly, leading to the disallowance. The Ld. CIT(A) supported the AO's decision based on the utilization of the bank loan for the Durgapur project. However, the ITAT found that the interest and charges were appropriately apportioned between pre and post-commissioning periods as per the annual accounts and capitalization basis. Disagreeing with the Ld. CIT(A)'s reasoning, the ITAT directed the AO to delete the addition, as the expenses were correctly accounted for. As a result, the appeal on this ground was allowed.

In conclusion, the ITAT Kolkata ruled in favor of the assessee, allowing the appeal and directing the AO to delete the disallowances made for subscription/donation expenses and interest on loan and bank charges related to the pre-commencement period of the hotels.