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TMI Blog2014 (3) TMI 1101X X X X Extracts X X X X X X X X Extracts X X X X ..... to Thermal Station not before five years - Held that:- When the agreement is read as a whole, it becomes evident that the system was installed by the assessee to get the fly ash, which is an important component for manufacturing of cement on a regular basis. Thus, the system is installed by the assessee for the purpose of its business and not for acquiring the capital asset. Further, as per para 2.1 of the agreement, RRVUNL has allowed the assessee to install the system only for collection of fly ash free of cost, initially for a period of 5 years, and as per Para 2.12 of the Agreement, the system becomes the sole property of RRVUNL on the expiry/termination of the agreement. Thus, the entire arrangement has benefited the assessee only by way of free supply of fly ash by incurring the expenditure on installation of the system which become the property of RRVUNL. By allowing 20% of the expenditure, the authorities have accepted that the expenditure is revenue in nature and not a capital expenditure. There is no concept of deferment of expenditure in the I.T. Act. Thus we do not agree with the finding of the ld CIT(A) that the issue is to be approached from commonsense point of view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO. The AO has not specified any particular expenditure which is for personal use or for non business purpose. It is a case of a corporate entity where the contribution made to Gram Panchayat for various welfare measures at a place where the factory of assessee is located as a part of its social obligation is an allowable business expenditure as held in various cases referred in Ground No. 3 above. Further, we agree with the contention of the assessee that once FBT is paid, the expenditure cannot be subject matter of disallowance. The finding of ld CIT(A) that to the extent the expenditure is disallowed, FBT should not be charged is therefore not correct. - Decided in favour of assessee. - ITA No. 361/JP/2012, ITA No. 419/JP/2012 - - - Dated:- 11-3-2014 - N. K. Saini (Accountant Member) And Hari Om Maratha (Judicial Member) For the Assessee : P. C. Parwal For the Department : A. K. Khandelwal ORDER Hari Om Maratha (Judicial Member) These are the cross appeals filed by the assessee and the Revenue against the order of D. CIT(A), Kota dated 28.02.2012 for the A.Y. 2009-10. 2.0 The assessee has taken 5 grounds in its appeal whereas the Revenue has taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the financial statement as gain on discharge of deferred sales tax loan. In computation of total income, the said amount of ₹ 1330.82 lacs was reduced from the profit as per the profit loss account for the reason that it is a capital receipt . The AO has observed that the claim of the assessee is not genuine. It is not exempted as per the provisions of the Act,. Relying on the decision of Supreme Court rendered in the case of CCIT Vs. Kesaria Tea Company Ltd. 254 ITR 434 (S.C.), he has held that it is a case of remission of cessation of liability u/s 41(1) of the Act. Accordingly, he has made addition of ₹ 13,30,82,204/- to the total income of the assessee. Aggrieved, the assessee went in appeal before the ld CIT(A). 3.3 The assessee made a detailed submission before the ld. CIT(A) which is reproduced at Page 3-11 of his order. Thereafter, the ld. CIT(A) gave his findings at Page 17 to 31 of his order and upheld the addition made by the AO for the following reasons:- (i) The concept of time value of the money cannot be used in income tax proceedings or in the accountancy. (ii) The assessee has derived benefit of ₹ 13,30,82,204/- by making payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and subsequently during any previous year, (a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; Supreme Court in case of CCIT Vs. Kesaria Tea Company Ltd. 254 ITR 434 held as under:- In order to apply section 41(1), the following points are to be kept in view : (1) In the course of assessment for an earlier year, allowance or deduction has been made in respect of trading liability incurred by the assessee ; (2) Subsequently, a benefit is obtained in respect of such trading liability by way of remission or cessation thereof during the year in which such event occurred ; (3) in that situation the value of the benefit accruing to the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect that something has (ii) money provided by the government to people who need financial help because they are unemployed, ill or sick etc. (iii) an advantage that you get from a company in addition to the money that you earn Black s Dictionary (1) Advantage, privilege (2) Profit or gain, especially the consideration that moves to the promise; (3) Financial assistance that is received from an employer, insurance or a public program in time of sickness, disability or unemployment. P. Ramanatha Aiyar, Advanced Law Lexicon: - Advantage; profit; gain; interest; use; whatever contributes to promote prosperity or to add value to property. Bouvier s Law Dictionary: - Profit, fruit and advantage. In view of the above, the occurrence of an event would enure a benefit to a person only where the same confers an advantage, privilege or profit and gain. In other words, where as a result of the occurrence of an event, the person obtains no advantage or privilege and does not stand to gain or profit therefrom, no benefit would be said to have enured to such person. 6. The term Net Present Value refers to the sum of money which will, if kept inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he differential amount remained invested in the business which earned income suffered the tax. In such circumstances, by pre-paying the loan liability at the net present value, no benefit has arisen to the assessee consequently the same is not chargeable to tax under the provisions of the Act. 8. Reliance in this connection is placed on the following cases:- Sulzer India Ltd. Vs. JCIT 6 ITR (Trib.) 604/47 DTR 329 (Mum.) (SB) dt. 10.11.2010 . The assessee company obtained incentive by way of sales tax deferral scheme under the incentives scheme of 1983 and the incentives scheme of 1988 notified by the Government of Maharashtra. Under the 1983 Scheme the assessee's unit at Kondhapuri, a notified backward area was entitled to defer the payment of sales tax collected during the period November 1, 1989 to October 31, 1996 (7 years) up to a maximum of ₹ 666.94 lacs being 85% of the fixed capital investment of ₹ 784.64 lacs. The assessee collected as sales tax in 7 years ₹ 3,29,93,863 which was to be repaid after 12 years in 6 equal annual installments. Under the 1988 Scheme the amount of tax actually deferred was ₹ 4,22,07,515. Thus the ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llments was repaid at net present value as prescribed by the State Government and no refund was received by the assessee. Therefore, the assessee did not get any benefit in respect of such trading liability by way of remission or cessation thereof. (ii) to invoke the provisions of section 41(1) of the Act, the first requirement is that in the assessment of the assessee, an allowance or deduction had been made in respect of loss, expenditure or the trading liability incurred by the assessee. The Central Board of Direct Taxes Circular No. 496 dated September 25, 1987, in terms of which the assessee had obtained the benefit of deduction of sales tax liability under section 43B of the Act clearly stated that the statutory liability shall be treated to have been discharged for the purposes of section 43B. Thus, the benefit of deduction was allowed for the purpose of section 43B of the Act only and not under any other provisions of the Act. Thus, the first requirement of section 41(1) was not fulfilled. The other requirement of section 41(1) is that the assessee must have subsequently (i) obtained any amount in respect of such loss and expenditure or (ii)obtained any benefit in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t net present value which was due later on and even the formula for collecting the net present value was given by the SICOM and the amounts had been paid according to that for-mula. Therefore, such payment of net present value of the future liability was not a remission or cessation of the liability so as to attract the provisions of section 41(1)(a) of the Income-tax Act, 1961. Grindwell Norton Ltd. Vs. DCIT 2011-TIOL-254-ITAT-Mum. dt. 07.03.2011 Assessee credited the deferred tax liability being the difference between the payment of net present value against the future liability under the capital reserve account and treated as capital receipt and claimed that it could not be termed as remission/cessation of liability and, consequently, no benefit would arise to the assessee in terms of section 41(1)(a). AO treated the surplus as revenue receipt. CIT (A) dismissed the appeal of the assessee. Assessee contended before the ITAT, that the issue was covered by the decision of the Special Bench in the case of Sulzer India Ltd Vs JCIT. Revenue contended in appeal that the said case was not applicable to the assessee as the Special Bench delivered its order in view of pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee availing the benefit under the scheme to repay the loan liability even before the stipulated repayment date. Pursuant to the government offer, the assessee company opted to make repayment of loan liability of ₹ 106.47 Crores. During the previous year, relevant to the Asst. Year 2005-06, the assessee-company paid an amount of ₹ 72.12 Crores to the State Government in discharging of total liability of ₹ 106.47 Crores resulted in extinguishment of loan liability of ₹ 34.35 Crores being the excess of loan liability over the amount paid. The surplus arising out of payment of loan amounting to ₹ 34.35 Crores was credited to the profit and loss account and the assessee has filed all the details in respect of the above and credited the amount to the profit and loss account. The Assessing Officer has allowed the claim of the assessee on the ground that the surplus on payment of sales tax loan being a capital receipt in nature; (ii) Special Bench of ITAT in the case of M/s. Suzler India Limited in similar set of facts has held that section 41(1) has no application; 9. This issue is also covered by the decision of Hon ble ITAT, Jaipur B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ambal Fertilizers Chemicals Ltd. where this issue has been decided in favour of the assessee after relying on the decision of Special Bench (supra). We have noted that Mumbai Bench in case of Grindwell Norton Ltd.(supra) has held that the special Bench decision is a binding judicial precedent for the division benches and therefore is to be followed. Again the Mumbai Bench in case of M/s Grasim Industries Ltd. with reference to the scheme of the Rajasthan Government has held that the surplus arising out of the pre payment of loan which was credited to the P L a/c is a capital receipt not liable to tax. In view of these binding precedents of the Special Bench as well as the co-ordinate Bench where this issue has been elaborately dealt with, we hold that the surplus of ₹ 13,30,82,204/- arising on the extinguishment of loan of ₹ 31,74,68,000/- by making pre- payment of the same at ₹ 18,43,85,796/- is a capital receipt on which sec. 41(1) is not applicable. Therefore, we order to delete this addition. Thus, ground no. 1 of the assessee is allowed. 4.1 Ground No. 2 of the assessee's appeal is regarding confirmation of disallowance of ₹ 4,20,33,418/- out o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, not accepted this claim of the assessee in its entirety but has allowed 20% of the total expenditure which comes to . ₹ 1,05,08,355/- , in the year under consideration, resulting into addition of ₹ 4,20,33,418/-. 4.3 The Ld. CIT(A) has confirmed this disallowance by stating that this issue should be considered by way of commonsense to arrive at the realistic profits of the enterprise. In this case, the facility created was to be transferred to the Thermal Power Station, not before five years and in lieu of this, the assessee becomes entitled to lift fly ash free of cost for five years or more. If the entire amount is allowed as expenditure in the first year, the profits of first year will be abnormally reduced because entire cost of fly ash collection system will be attributed to the cost of fly ash in the first year itself, whereas, the profits of next four years will be abnormally high as in these years assessee will get fly ash free of cost. Accordingly, as the assessee gets benefit of this facility for five years and the ownership of this property can be transferred to Thermal Station not before five years, it would be fair and reasonable if the cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard to the findings given by the Ld. CIT(A), that if the entire amount is allowed as expenditure in 1 st year, the profits of 1 st year will be abnormally reduced whereas the profits of next 4 years will be abnormally high, it was stated that it is only based on the magnitude of expenditure involved which in no manner can change the nature of expenditure, being a revenue in nature. In these circumstances, part of the expenditure cannot be disallowed by holding it as deferred revenue expenditure. Hence, according to ld. AR the entire expenditure needs to be allowed u/s 37(1), in the year under consideration only. For this purpose, reliance has been placed on the following cases:- ACIT Vs. Chettinand Cement Corporation Ltd. 58 DTR 225 (2011) (Chennai) Amway India Enterprises Vs. DCIT (Del.) (SB) (2008) 111 ITD 112/4 DTR (Trib.) 1 CIT Vs. Madras Auto Service (P.) Ltd. 233 ITR 468 (SC) CIT Vs. Associated Cement Co. Ltd. 172 ITR 257 (SC) CIT Vs. Saw Pipes Ltd. 300 ITR 35 (Del.) (HC) CIT Vs. Dart Manufacturing India (P) Ltd. 175 Taxman 6 (Del.) (HC) CIT Vs. Hindustan Zinc Ltd. 322 ITR 478 (Raj.) (HC) CIT Vs. Raj Spinning and Weaving Mills Ltd. 272 ITR 487 (Ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the fly ash had made a construction in a property not owned by it on a condition agreed with TNEB, that the construction and the equipment would become latter s property. If that be so, we wonder how it could be considered as capital asset of the assessee. Just because it facilitated the smooth procurement of an essential raw material, it could not be said that any enduring benefit had come to the assessee. Especially so, when the equipment became the property of another company. No doubt, Hon ble apex Court in the case of Mysore Minerals Ltd. (supra) and in other cases relied on by the Revenue, has clearly laid down that test of enduring benefit is one of the criteria to be considered when deciding the nature of expenses, as to whether it was capital or revenue. To say that this is the sole criteria which is to be adopted is not correct. In our opinion, the CIT(A) had correctly relied on the decision of the apex Court in the case of Madras Auto Services (P) Ltd. (supra) where their lordships held that when an asset was created but it belonged to somebody else, even if it resulted in any enduring benefit, it should be still looked upon as a revenue expenditure. Explanation 1 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made contribution of ₹ 30 lacs. The contribution so made in both the years was claimed as deduction u/s 37(1) of the Act under the head social welfare expenses (PB 117). The AO at Page 5 Para 4 of the order observed that the expenditure is not incurred wholly exclusively for the purpose of business or profession. There is no commercial expediency the same has been incurred in order to win applause or public appreciation. Accordingly, he disallowed the claim of expenditure of ₹ 40 lacs. 5.3 The ld. CIT(A) confirmed the disallowance of ₹ 40 lacs by holding that the payment for construction of hospital is in the nature of charity/donation and the same can be claimed under the relevant provisions e.g. section 80G etc. The same cannot be allowed as business expenditure. As the assessee has claimed the same as business expenditure, the same was rightly disallowed by the AO. 5.4 The ld. AR submitted made detailed arguments and also filed the written submission which is reproduced as under:- 1. The issue which arises in the present case is whether the contribution made by assessee towards construction of hospital to Medicare Relief Society, Community Heal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be in revenue account, even though the advantage may endure for an indefinite future. Therefore, such contribution is a revenue expenditure not capital in nature as held by AO. 3. The Ld. CIT(A) at Page 40-44 of its order has only reproduced the judgments as it is relied by assessee without any discussion or distinguishment of same. Most of these judgments are directly in favour of assessee which were not considered by him. At Page 44 Para 4.32 of the order, the Ld. CIT(A) has held that the contribution towards hospital is in the nature of charity/donation the same can be claimed u/s 80G not as business expenditure. In this connection, it is to be noted that the basic requirements for invoking sections 37(1) and 80G are quite different, but nonetheless the two sections are not mutually exclusive. Even, if contribution made by an assessee is in the form of donations of the category specified u/s 80G or otherwise, it could still be termed as an expenditure of the category falling u/s 37(1), if such contribution is laid out or expended wholly and exclusively for the purpose of business . This has been so held by Hon ble Karnataka High Court in case of Mysore Kirloskar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioned by the Revenue authorities. The contribution is directly link to the anticipated additional irrigation facilities which would result in a more assured supply of sugarcane. The minutes of the meeting of the Board of Directors were before the AO and these minutes, clearly prove that the contribution was made only with the intention of getting water supply and to secure more assured supply of sugarcane. There is no assurance of cane supply from the ryots because of the contribution, but there is every likelihood of a more assured cane supply and so the contribution has been made only for facilitating the running of the business on more profitable lines. Therefore, payment of contribution was revenue expenditure. 4. Reliance is also placed on the following cases:- CIT Vs. Rupsa Rice Mill 104 ITR 249 (Orissa) (HC) M/s Ranbaxy Laboratories Ltd. Vs. DCIT 2009-TIOL-32-ITAT-DEL India United Mills Ltd. Vs. CIT 98 ITR 426 (HC) (Bom.) Sri Venkata Satyanarayana Rice Mill Contractors Co. Vs. CIT 223 ITR 101 (SC) ACIT Vs. Rajasthan Spinning Weaving Mills Ltd. 274 ITR 465 (Raj.) (HC) CIT Vs. Rajasthan Spinning Weaving Mills Ltd. 281 ITR 408 (Raj.) (HC) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the name of the Hospital shall be Government Mangalam Cement Hospital and certain beds have to be reserved for the treatment of the assessee s employees by giving them a priority for treatment. We have therefore no hesitation in holding that the expenditure incurred by giving such contribution is for the purpose of business. The companies, like that of the assessee have certain obligation towards the society at large where it is operating. In the present case, the name of the hospital is kept as Government Mangalam Cement Hospital. The name so given to the Hospital itself creates goodwill, brand image and relationship with district administration. Therefore, apart from the social obligation, such contribution, has also resulted into direct benefit to the assessee's business interest. The Hon'ble Supreme Court in case of Sri Venkata Satyanarayana Rice Mill Contractors Co. Vs. CIT 223 ITR 101 has held that any contribution made by an assessee to a public welfare fund which is directly connected or related to the carrying on of the assessee's business or which results in benefit to the assessee's business has to be regarded as an allowable deduction under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12,78,469/- 20% 2,55,693/- 3. Social welfare expenses 16,10,832/- 20% 3,22,166/- 4. Gift expenses 18,26,636/- 50% 9,13,318/- 5. Sales promotion expenses 1,70,49,362/- 20% 34,09,872/- 6.3 Before ld. CIT(A), assessee filed detailed explanation in respect of each of the disallowance as reproduced in the order. The ld CIT(A) reduced the disallowance in respect of staff welfare expenses from 50% to 20% and further directed that in respect of expenditure incurred, where FBT is paid, disallowance is to be confirmed but such disallowance should be excluded while computing the FBT payable on such expenses. 6.4 Before us, the Ld. AR made following submissions which is reproduced as under:- The explanation under each head is as under:- Staff Welfare Expenses Facts:- During the year under consideration, assessee company claimed staff welfare expenses of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench in case of M/s Natural Slate Sandstone Exports (P) Ltd. in ITA No 1090/JP/10 dt. 04.02.2011 (PB 86-89, Page 7-8 of the order, Para 3.4) held that since the assessee has paid FBT in respect of expenses included in the disallowance by the AO, there was no case of making disallowance u/s 37 of the Act. 4. AO has incorrectly applied section 10(10CC) section 40(a)(v). Section 10(10CC) provides that income in the nature of perquisite u/s 17(2) shall not be included in computing the total income of an employee if tax on such income is actually paid by his employer. Section 40(a)(v) does not allow deduction of the tax so paid by the employer. In the present case, the staff welfare expenses incurred by the assessee are not in the nature of perquisite as specified in section 17(2). The expenditure so incurred is also not an obligation which but for such payment would have been payable by the employee as specified clause 17(2)(iv). Hence, section 10(10CC) has been incorrectly applied by the AO for making the disallowance. Otherwise also, these expenditure incurred by the assessee is for the purpose of business. Hence, the disallowance confirmed by the CIT(A) is unjustified. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In view of above, adhoc disallowance of 20% confirmed by the CIT(A) without specifying any particular expenditure which is not allowable or unverifiable is uncalled for be deleted. Social Welfare Expenses Facts:- Assessee company claimed social welfare expenses of ₹ 56,10,862/-. Out of the same, ₹ 40 lacs is in respect of contribution made for construction of hospital at Ramganjmandi (PB 117) . The remaining expenditure of ₹ 16,10,832/- was in respect of contribution made to Gram Panchayat towards its welfare fund, repair/renovation of panchayat building/police station, India Tour of members of Panchayat Samiti etc. (PB 115-118). The details of same were furnished during the course of assessment proceedings vide letter dt. 15.02.2011 (PB 79-81). AO after examining the details observed that these expenses are either personal in nature or not for business purpose. Accordingly, he made adhoc disallowance of 20% of ₹ 16,10,832/- i.e. ₹ 3,22,166/-. CIT(A) confirmed the disallowance. Submission:- 1. The break up of ₹ 16,10,832/- the explanation of assessee in respect of same is tabulated as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f business and qualify for deduction u/s 37(1). Reliance in this connection is placed on various decisions given in Ground No. 3 supra. In view of above, adhoc disallowance of 20% confirmed by the CIT(A) without specifying any particular expenditure which is not allowable or unverifiable is uncalled for be deleted. Gift Expenses Facts Submission:- 1. During the year under consideration, assessee company claimed gift expenses of ₹ 18,26,636/- (PB 140-146). AO in the assessment order only specified expenditure of ₹ 2,48,810/- in the assessment order without any further discussion on the same. However, he made adhoc disallowance of 50% out of the total claimed expenses i.e. ₹ 9,13,318/- by observing that assessee company failed to file the complete details of the same. CIT(A) confirmed the disallowance. 2. It is to be noted that the complete details of the gift expenses were submitted during the course of assessment proceedings vide letter dt. 15.02.2011 (PB 7981). From the said details, it can be noted that the gifts have been distributed to dealers/gov. officials on festival/visit which is a common phenomenon. The expenses a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Reliance in this connection can be placed on the case of Seasons Catering Services (P) Ltd. Vs. DCIT 43 DTR 397 (Del) (Trib). In this case, assessee claimed business promotion expenses of ₹ 7,08,293/-, out of which an estimated sum of ₹ 1 lacs was disallowed by the AO confirmed by the CIT(A). It was held that without pointing out any specific item, the authorities below are unjustified in disallowing the part of total expenses incurred on account of business promotion expenses. The AO should have pointed out some of the instances in respect of which he was of the view that expenses were not incurred for the purpose of the business, but the AO has not done so, disallowed the amount purely on estimate. Thus, the adhoc disallowance is unjustified. Reliance is also placed on the following cases:- CIT Vs. Premier Vegetable Products Ltd. (2014) 97 DTR 230 (Raj.)(HC) ACIT Vs. Ganpati Enterprises Ltd. (2013) 142 ITD 118 (Delhi)(Trib.) CIT Vs. Oracle India (P) Ltd. 199 Taxman 181 (Del) (HC) (Mag.) [PB 215-217] Arthur Anderson Co. Vs. ACIT 2010-TIOL-416-ITAT-Mum. 6.5 Per contra, the Ld. CIT DR relied on the order of the authorities bel ..... X X X X Extracts X X X X X X X X Extracts X X X X
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