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TMI Blog2019 (1) TMI 1062X X X X Extracts X X X X X X X X Extracts X X X X ..... ng period of time and thus capital in nature? 3. Whether on the facts and circumstances of the case & in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 26,12,024/- u/s 14A ignoring the fact that disallowance u/s 14A with rule 8D has to be made if assessee has made an investment whose income is exempt or not? 4. Whether on the facts and circumstances of the case & in law, the Ld. CIT (A) has erred in deleting the addition of Rs. 1,38,24,467/- u/s 36(1)(iii) ignoring the fact that the interest paid by assessee on loan taken for acquiring the asset has to be capitalize till the date, the asset is not put to use? 5. Whether on the facts and circumstances of the case & in law, the Ld.CIT(A) erred in deleting the addition of Rs. 2,83,782/- on account of prior period expense ignoring the fact that expenses incurred by assessee do not pertain to the year under consideration? 6. That the order of the Ld. CIT(A) is erroneous and is not tenable on facts and in law. 7. That the grounds of appeal are without prejudice to each other." From the aforesaid grounds of appeal, it emerges out that following issues are involved in this appeal : (i). Deletion of disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at assessee claimed repair and maintenance expenditure on lease hold property for flooring, interior work etc. to the tune of Rs. 72,94,797/- as per details submitted before the Assessing Officer. The AO treated it as capital in nature, as these expenditure were incurred for getting enduring benefit to the assessee. The AO, therefore, after allowing applicable depreciation as per the nature of block of assets amounting to Rs. 4,31,310/-, disallowed remaining expenditure amounting to Rs. 68,63,487/- as capital expenditure. 5. The AO further noticed that the assessee had made investment of Rs. 7,23,10,255/- as per schedule-D to the balance sheet. Out of this investment, a sum of Rs. 7,22,91,759/- was made in subsidiary company alone and this investment in subsidiary company was later on written off/provision made for diminution of value leaving Rs. 1/- in the balance sheet. He noticed that the provision made for diminution in the value of investment is just a book entry and notional provision. It cannot be said that funds of the business are not diverted. He concluded that the investments were made out of business funds in a common Kitty. The money received as share capital as term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly when the same were not fully verifiable. It was also contended that the assessee has incurred capital expenditure on lease hold premises as per his own requirements. The nature of expenditure incurred unequivocally warrants to be the expenditure in capital nature for fetching enduring benefit therefrom. These were not day-to-day running business expenditure. The ld. DR also submitted that therefore, the ld. AO was justified to rely on the decision of Punjab & Haryana High Court, which is squarely applicable to the present case for disallowance of expenditure u/s. 14A. The assessee had mixed funds and has paid interest on loan taken. Merely because the assessee wrote off the investment in subsidiary, it would not exonerate the assessee from disallowance u/s. 14A. He also submitted that the capital assets were put to use during year and huge interest was paid on loan, but the assessee himself did not disallow the proportionate interest upto the date when the assets were put to use. It was also submitted that the AO after considering the invoice has rightly disallowed the expenditure on repair and maintenance treating it to be the prior period expenditure which is not admissible i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust be adjudged in the light of accepted commercial practice and trading principles. The expenditure must be incidental to the business and must be necessitated or justified by commercial expediency. f) Expenditure incurred by the assessee have direct and intimate connection with his business and therefore, the same is allowable u/s 37(1) of the Act. Once it is established that the expenditure has been factually incurred by the assessee wholly and exclusively for the purpose of business and there is nexus between the expenditure and the business of the assessee, the Revenue cannot justifiably claim to put itself in the arm chair of the businessman and assume the roll to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. Kindly see Travencore Titanium Product Ltd. vs CIT (1966) 60 ITR 277 AT 282-83(SC) CIT vs Dalmia Cement (P) Ltd. (2002) 254 ITR 377 (Del) Bombay Steam Navigation Co. (1953) Pvt. Ltd. vs CIT (1965)56 ITR 52(SC) g) In the present case, all the expenses has been incurred by the assessee wholly and exclusively for the purposes of business. Even Assessing Officer has n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing expenses include a sum of Rs. 3,99,82,494/- spent on conveyance, employee transportation, petrol reimbursement and vehicle hire charges. It also include sum of Rs. 9,06,72,023/- incurred on traveling by the employees which included air tickets, boarding and lodging expenses. Assessee had hired various cabs at its various offices / factories to provide facility of transportation (pick-up and dropping) to its employees on daily basis. Details of domestic traveling furnished by the assessee includes month-wise details of traveling of the employees name-wise alongwith their designation, destination, fare, lodging, boarding and other expenses. Expenditure incurred by the assessee is wholly and exclusively for the purposes of business, it cannot have any element of personal user particularly when the assessee is a Pvt. Ltd. Company. Hence the expenditure is fully allowable u/s 37(1) of the Act. 3. Employees Welfare Disallowance of Rs. 2,09,990/-being 1/10th Of Rs. 20,99,898/- During the assessment proceeding, assessee had produced details of miscellaneous expenses of ^1,38,40,106/- out of which Assessing Officer picked-up two figures (a) employees welfare expenses of ^1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Assessing Officer and the addition made by her be deleted in the interest of justice. Ground No. 2 Disallowance of repair and maintenance of Rs. 68,63,487/- Department has raised the following ground of appeal: Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of ^68,63,487/- on account of repair and maintenance ignoring the fact that addition to a fixed assets, endures benefit for a long period of time and thus capital in nature? a) During the assessment proceeding, assessee had furnished the details of repairs and maintenance of Rs. 4,93,74,261/- out of which Assessing Officer picked-up the details of expenditure of Rs. 72,94,797/- either from the bills or from the contract notes or from the journal vouchers and treated the same as capital expenditure as against the claim of the assessee as revenue expenditure. She allowed depreciation at 10% or 5% thereon and made addition of balance amount of Rs. 68,63.487/- to the Income of assessee. b) The details of Rs. 72,94,797/- annexed at Annexure-"H" reveals that the said expenditure is in the nature of repair, maintenance, replacement or renovation either ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ass Works (P) Ltd., 157 ITR 584 (Pat) h) As per concise oxford dictionary, "to repair" is to restore to good condition, renovate, mend by replacing or re-fix,ng parts or compensating loss or exhaustion. As per Laxicon Webster Dictionary, "to repair" is to restore to a sound or good state after decay, injury, dilapidation or partial destruction. i) Section 30(a)(ii) and section 31 (i) allow deduction in r/o current repairs. The idea of periodicity, recurrence and need is implicit in the expression "current repairs". Accumulated repairs can be understood as current repairs. The guidelines for inference of "current repair" has been set out by the Hon'ble Delhi High Court in CIT vs Volga Restaurant (2002) 253 ITR 405 (Del) after referring to judgement of Apex Court in Ballimal Nawal Kishore vs CIT (1937) 224 ITR 414 (SC) and of Bombay High Court in New Shorrock Spg and Manufacturing Co. Ltd. vs CIT (1956) 30 ITR 338 (Bom). Current repairs has also been discussed by the Bombay High Court in CIT vs Chowgule & Co. Pvt. Ltd. (1995) 214 ITR 523 (Bom) j) Repair implies renewal or replacement of a part. As held in CIT vs India United Mills Ltd., 141 ITR 399 (Bom) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition treating the amount of Rs. 72,94,797/- as revenue expenditure towards repairs and maintenance. Ground No 3 Addition of Rs. 26,12,024/- invoking the provisions of section 14A Department has raised a following ground of appeal Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of T26,12,024/- u/s 14A ignoring the fact that disallowance u/s 14A with rule 8D has to be made if assessee has made an investment whose income is exempt or not? a) During the assessment proceeding for AY 2011-12, Assessing Officer observed that the assessee had shown investment of Rs. 7,23,10,255/- in Schedule-D to the Balance Sheet out of which, a sum of Rs. 7,22,91,759/- had been invested in subsidiary company alone. He further observed that this entire amount of investment had been written off / provision made for diminution of value, leaving Rs. 1/- in the Balance Sheet. The Assessing Officer held that the provisions of section 14A were applicable as investment was made out of business fund which included borrowed fund as well on which assessee had paid interest. Accordingly he applied Rule 8D and computed interest disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Finance Act 2001 with retrospective effect from 01.04.1962. CIT(A) has considered the facts on record and had rightly held that the provision of section 14A are not all attracted as the same was applicable when the assessee had claimed deduction of expenditure which had been incurred in relation to exempted income against the taxable income, in the present case, assessee had not claimed any income as exempt. Expenditure incurred and claimed by the assessee is wholly and exclusively for the purposes of business, income of which has been shown as profit of the business and has offered for taxation. Therefore, expenditure incurred for earning such income has to be allowed as deduction. Diminution in value of investment is a capital loss and therefore, no expenditure can be disallowed invoking the provisions of section 14A of the Act. Accordingly, it is prayed to delete the addition of Rs. 26,12,024/- made by the Assessing Officer in the interest of justice. Ground No. 4 Disallowance of Rs. 1,38,24,3671- u/s 36(1 )(iii) Department has raised a following ground of appeal Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear and also the brought forward interest. Total expenses of Rs. 14,79,23,076/- has been allocated by the assessee to the fixed assets i.e. building, Plant & Machinery etc. d) Since the assessee had already allocated interest to the fixed assets, the action of the Assessing Officer in disallowing interest of Rs. 1,38,24,368/- invoking provisions of section 36(1 )(iii) amounted to double disallowance, once when the assessee transferred the amount from interest account to preoperative expenses being capital in nature and again by the Assessing Officer while making addition. Hence the addition be deleted in the interest of justice. e) The judgement of Punjab & Haryana High Court in the case of Abhishek Industries is also not applicable to the facts of present case as it pertains to allowability of interest on borrowed capital when the assessee had given interest free advances to sister concerns and subsidiaries. After considering the facts on record, CIT(A) has deleted this addition recording a finding of fact that the assessee had already capitalized interest of Rs. 2,48,87,306/- out of total interest paid during the year at Rs. 11,98,81,762/-. CIT(A) has also recorded a fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 321). It is not out of place to mention here that in AY 2011-12, Assessing Officer had made similar additions relying on the assessment order for the present year, however CIT(A) has deleted the additions. In view of above submissions, it is stated that the assessment has been framed by the Assessing Officer on surmises and conjectures. The Assessing Officer had arbitrarily disallowed the various expenditures and has framed the assessment at a very huge amount ignoring the material produced by the assessee. Accordingly, the additions have rightly been deleted by the CIT(A)." 11. We have heard the rival submissions and have gone through the entire material available on record including the impugned order and various decisions relied by both the parties and we find no justification to interfere with the impugned order. For the sake of ready reference, the findings reached by the ld.CIT(A) in each of the above issues are as under : Deletion of disallowance of expenses of Rs. 2,19,48,179/- I have considered the submissions oral and written made by the appellant as well as the assessment order. Assessing Officer has made the addition out rightly at 10% of these expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shed by the assessee, telephone / communication expenses of '2,80,08,325/- includes cellular phone expenses, courier, fax charges, IT charges (data card, email), mobile expense reimbursement, expenses on telephones installed at various offices of the company, telephone expenses reimbursement, video conference etc. Assessee has maintained details running into 200 pages giving each and every detail against each item of expenditure. Even giving name of the employee / person on whose behalf expenditure is incurred. Month-wise details on each of the category of expenses has been shown. In fact, all these details had been verified by the Assessing Officer during assessment proceeding while examining books of accounts. It appears that she has ignored this material and in the enthusiasm has disallowed 10% of the expenditure. She has ignored that the assessee has corporate office at Delhi, registered office at Gurgaon, warehouse at Faridabad, factory at Bawal and Alwar, foundry at Ahmedabad and other service stations at various places. Moreover, 550 employees are on the payroll of the assessee company. Therefore, looking to the setup of the appellant company, expenditure incurred by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility) to its employees on daily basis. Assessee has produced the vouchers showing payment to the travel agencies to whom the payment is made after deducting tax at source. Looking to the details furnished by the assessee, it cannot be said that the expenses incurred by the assessee have any personal element or that the expenditure incurred by the assessee is not verifiable. Assessee had produced the vouchers during the assessment proceeding as well as during the appellate proceeding. Assessing Officer has made the addition ignoring the material furnished by the assessee. In fact, expenditure incurred by the assessee has direct nexus with the business activities carried on by him, hence I am deleting the addition of 1,49,06,592/- made by the Assessing Officer. In for as addition of Rs. 2,09,990/- in respect of employees welfare expenses are concerned, Assessing Officer has disallowed the same merely on the ground of personal user. Total expenditure of Rs. 20,99,898/- has been determined by the Assessing Officer taking into consideration sales tax penalty of Rs. 6,09,116/- as stated by the appellant. Sales tax penalty cannot be treated as employee welfare expenses and therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merely on the ground of personal user. Findings on disallowance of repairs and maintenance expenses: I have considered the assessment order passed by the Assessing Officer, long submissions and short synopsis filed by the appellant and the case law relied upon by him. Appellant has produced the details of Rs. 72,94,797/- at Annexure-"H" and also the Lease Deed entered into with Bright Industries Pvt. Ltd. for taking the premises on lease at Faridabad and with M/s DLF Cyber City Developers Ltd. for taking the premises on lease at Gurgaon. Initial term for both the leases was 03 years and the same could be extended for 02 more terms of 03 years. Substantial repair work has been carried out by the appellant in these two premises. Day- today repairs has been taken over by the appellant under the lease deed and the assessee was even under an obligation to keep the premises in good tenantable condition. The details furnished by the assessee reveals that the repair is in the nature of current repair, maintenance or replacement of a part or reconstruction or renovation which is allowable as revenue expenditure either u/s 30 or section 31 or section 37. In CIT vs Hiline Pens Pvt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clusively for the purposes of business, income of which has been shown as profit of the business and has offered for taxation. Therefore, expenditure incurred for earning such income has to be allowed as deduction. Diminution in value of investment is a capital loss, it has no effect on the Profit & Loss A/c of the assessee and therefore, no expenditure can be disallowed invoking the provisions of section 14A of the Income Tax Act. Hence, disallowance of Rs. 26,12,024/- made by the Assessing Officer is hereby deleted. Finding on disallowance u/s. 36(1)(iii): I have considered the assessment order as well as the details furnished by the appellant alongwith the submissions. The details filed by the appellant reveals that the assessee has already capitalized interest of '2,48,87,306/- out of total interest paid during the year at Rs. 11,98,81,762/-. Assessee had also brought forward interest of Rs. 83,57,260/- in its pre-operative expenses account pending allocation. Thus total interest of Rs. 3,32,44,566/- (Rs 2,48,87,306 + Rs. 83,57,260) has been transferred by the assessee to preoperative expenses and total preoperative expenses of Rs. 14,79,23,076/- has been allocated to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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