2005 (7) TMI 299 - AT - Income Tax

Valuation Of Closing Stock - disallowance of provision for non-moving stock - public sector undertakings - Power generating equipments and other heavy industrial items - maintain books of accounts - HELD THAT - On a careful consideration of the matter, we are of the view that having regard to the procedure followed by the assessee, the genuineness or the bona fides of the claim cannot be doubted. The note extracted above indicates that only when all the efforts to dispose of the material fails, the committee recommends the write off in the books of account. No defect in the procedure, adopted by the assessee has been pointed out. As rightly pointed out on behalf of the assessee, the accounts are subject to scrutiny not only by the statutory auditors but also by the C AG. In these circumstances, the bona fides of the procedure or genuineness of the claim cannot be doubted. Even on merits, when the stock of materials is actually found to be dead stock from which nothing can be realised because of the total absence of any demand therefor, its value falls drastically. This has been taken note of by the committee formed for recommending whether any item represents dead stock. We are, therefore, of the view that the assessee's claim requires to be accepted. Accordingly, we direct the AO to allow deduction in respect of provision of Rs. 211.24 lakhs. The disallowance of the balance of the claim is upheld and the ground is partly allowed. Expenditure on the clubs maintained by the company for the employees - We have no doubt in holding the expenditure in question is allowable u/s 37(1) of the IT Act. It seems to us that the expenditure has been rightly characterised as staff welfare expenses. Promoting sports and games in which the employees of the assessee-company exclusively participate is certainly in the interests of the assessee's business. It keeps the morale of the employees high. That in turn helps in the smooth functioning of the company and also improves the efficiency of the employees. All this is ultimately for the benefit of the assessee-company. It should also be kept in mind that such facilities are needed to be provided by the company also in view of the fact that the employees live in townships which are away from the main town/cities and if the employees are to engage themselves in such recreational activities, they may have to incur considerable expenditure and trouble in addition to time. All this is avoided. The expenditure in question, in our opinion, falls to be considered in the light of the judgment of the Supreme Court in CIT vs. Malayalam Plantations Ltd. 1964 (4) TMI 9 - SUPREME COURT . Accordingly, we direct the AO to allow the expenditure as deduction. The ground is allowed. Payment made to the Central Schools (Kendriya Vidyala) - There is no dispute about the fact that the expenditure was incurred by the assessee for the purpose of running the schools, established for the children of its employees. It is common ground that no fund as such has been created by the assessee into which the contributions are made on a regular basis. It is clear that the amount spent by the assessee on various schools were spent with the basic idea of subsiding the cost of education of the children of the employees of the assessee. The assessee was interested in the children of the employees getting proper education and training in standard schools. It is thus purely a staff welfare measure. The case before us, is however different. The assessee has no control over any fund. These are expenditure incurred in running the schools for the purpose of enabling them to provide educational facilities to the children of the employees at a subsided cost. We are, therefore, of the view that the payments do not fall within s. 40A(9) of the Act. The AO is directed to allow the amount as deduction u/s. 37(1) of the Act. Liability on account of exchange rate fluctuations - A perusal of the order of the CIT(A) shows that so far as the amount of Rs. 268.16 crores is concerned, there is reference in the assessment order, attached to the statement of taxable income that the loans were taken for the purpose of making payment for import of raw materials/components. Actually, out of the total liability of Rs. 274.29 crores, part of which was on account of devaluation of Indian rupee in July, 1991 and part on account of convertibility of the rupee w.e.f. February, 1992, a sum of Rs. 6.13 crores represented liability on account of capital items. The balance of Rs. 268.16 crores represents purchase of raw materials. With regard to the claim of Rs. 145.85 crores what we find from p. 28 of the assessment order is that only Rs. 126.06 crores represents purchase of raw material and components. Therefore, the assessee's claim is allowed only to the extent of Rs. 126.06 crores out of Rs. 145.85 crores. As regards Rs. 268.16 crores, the entire amount is allowable since it represents additional liability in respect of loans taken for purchase of raw material and components. The ground is thus allowed partly.

Summary

Issues Involved:

1. Disallowance of provision for non-moving stock.
2. Disallowance of entertainment expenditure.
3. Disallowance of interest paid to the IT Department.
4. Consideration of opening balance of scrap value.
5. Disallowance of expenditure on clubs maintained by the company.
6. Apportionment of expenditure against dividend income and tax-free interest income.
7. Disallowance under Section 40A(9) of the IT Act.
8. Disallowance of Rs. 396.52 lakhs to the value of stock.
9. Addition due to unaccounted price escalation.
10. Disallowance of deduction under Section 80G.
11. Directions regarding deduction under Section 80-I.
12. Disallowance of amount of loose tools charged off.
13. Disallowance of liability on account of exchange rate fluctuations.
14. Disallowance of prior period expenses.
15. Disallowance based on observations of the C&AG.
16. Computation of deduction under Section 80HHC.
17. Non-allowance of premium paid on redemption of debentures.
18. Interest under Sections 234A and 234B.
19. Disallowance of guest-house rent.

Detailed Analysis:

1. Disallowance of Provision for Non-Moving Stock:
The first ground involves the disallowance of provision for non-moving stock, specifically Rs. 211.24 lakhs. The assessee argued that the provision was made following a well-established procedure, where non-moving materials are identified and charged off after being deemed unusable. The Tribunal accepted the assessee's claim, noting the procedure's genuineness and the scrutiny by statutory auditors and the C&AG. The AO was directed to allow the deduction for Rs. 211.24 lakhs, while disallowing the balance.

2. Disallowance of Entertainment Expenditure:
The second ground concerns the disallowance of entertainment expenditure of Rs. 51.88 lakhs. The IT authorities allowed only 10% as attributable to staff, which the Tribunal found too low. It directed the AO to allow 30% of the entertainment expenditure as relatable to staff, thus allowing the ground.

3. Disallowance of Interest Paid to the IT Department:
The third ground pertains to the disallowance of interest paid to the IT Department. The Tribunal upheld the disallowance, stating that such interest does not constitute a lawful deduction in computing business income, thus dismissing the ground.

4. Consideration of Opening Balance of Scrap Value:
The fourth ground involves Rs. 43.66 lakhs being the opening balance of scrap value. The Tribunal noted that the CIT(A) had already given relief based on the order for the previous year, thus dismissing the ground.

5. Disallowance of Expenditure on Clubs Maintained by the Company:
The fifth ground relates to the disallowance of Rs. 14.87 lakhs spent on clubs for employees. The Tribunal found that the expenditure was for staff welfare, allowing the deduction under Section 37(1) of the IT Act, thus allowing the ground.

6. Apportionment of Expenditure Against Dividend Income and Tax-Free Interest Income:
The sixth and seventh grounds concern the apportionment of expenditure against dividend income and tax-free interest income. The Tribunal upheld the IT authorities' decision, stating that some expenditure must be apportioned as having been incurred to earn such income, thus dismissing the grounds.

7. Disallowance Under Section 40A(9) of the IT Act:
The eighth ground involves the disallowance of Rs. 4.76 crores under Section 40A(9). The Tribunal held that the provision was inapplicable as the expenditure was for running schools for employees' children, thus allowing the deduction under Section 37(1).

8. Disallowance of Rs. 396.52 Lakhs to the Value of Stock:
The ninth ground was dismissed as the disallowance had already been deleted by the CIT(A).

9. Addition Due to Unaccounted Price Escalation:
The tenth ground involves Rs. 67.8 lakhs for unaccounted price escalation. The Tribunal agreed with the assessee that income cannot accrue without the customer's acceptance of the escalated price, thus deleting the addition.

10. Disallowance of Deduction Under Section 80G:
The eleventh ground pertains to the disallowance of deduction under Section 80G due to lack of details in receipts. The Tribunal upheld the disallowance, thus dismissing the ground.

11. Directions Regarding Deduction Under Section 80-I:
The twelfth ground involves directions for deduction under Section 80-I. The Tribunal saw no reason to interfere with the CIT(A)'s directions, thus dismissing the ground.

12. Disallowance of Amount of Loose Tools Charged Off:
The thirteenth ground concerns the disallowance of Rs. 8.15 crores for loose tools. The Tribunal noted the consistent practice of charging off such tools and allowed the deduction, thus allowing the ground.

13. Disallowance of Liability on Account of Exchange Rate Fluctuations:
The fourteenth ground involves the disallowance of Rs. 145.85 crores and Rs. 268.16 crores due to exchange rate fluctuations. The Tribunal allowed Rs. 126.06 crores out of Rs. 145.85 crores and the entire Rs. 268.16 crores, noting that the liabilities were for raw material purchases, thus partly allowing the ground.

14. Disallowance of Prior Period Expenses:
The fifteenth ground concerns the disallowance of Rs. 47.73 lakhs for prior period expenses. The Tribunal upheld the disallowance, noting the lack of evidence that the disputes were settled in the relevant year, thus dismissing the ground.

15. Disallowance Based on Observations of the C&AG:
The sixteenth ground involves the disallowance of Rs. 33 lakhs based on C&AG observations. The Tribunal upheld the disallowance due to lack of details, thus dismissing the ground.

16. Computation of Deduction Under Section 80HHC:
The seventeenth ground concerns the computation of deduction under Section 80HHC. The Tribunal directed the exclusion of certain receipts from total turnover and upheld the CIT(A)'s decision on inward remittance, thus partly allowing the ground.

17. Non-Allowance of Premium Paid on Redemption of Debentures:
The eighteenth ground involves the non-allowance of Rs. 295.50 lakhs for premium on debenture redemption. The Tribunal dismissed the ground, noting conformity with the Supreme Court's judgment.

18. Interest Under Sections 234A and 234B:
The nineteenth ground on interest under Sections 234A and 234B was noted as consequential.

19. Disallowance of Guest-House Rent:
The twentieth ground on guest-house rent was dismissed due to lack of relevant facts.

Conclusion:
The appeal was partly allowed, with specific directions and disallowances upheld or modified based on detailed considerations of each ground.