2006 (4) TMI 355 - AT - Income Tax

Tribunal allows deduction for catalyst expenses, directs AO to allow P&L deduction. Fresh examination ordered for lease rental expenses.

The Tribunal allowed the deduction for expenses incurred on catalysts and heat transfer medium, directing the AO to allow deduction for the amount debited ... Business expenditure, Method of accounting Issues Involved:1. Deletion of Rs. 86,77,374 on account of expenses incurred on catalyst heat transfer medium.2. Deletion of Rs. 59,83,993 on account of payment of lease rental to ICICI Ltd.Issue-wise Detailed Analysis:1. Deletion of Rs. 86,77,374 on Account of Expenses Incurred on Catalyst Heat Transfer MediumFacts of the Case: The assessee debited Rs. 31,65,678 to the Profit & Loss Account as expenses written off out of total expenses of Rs. 1,57,90,736 incurred on catalysts and heat transfer medium. The assessee added back this amount to the profit and claimed deduction for the entire amount. The Assessing Officer (AO) disallowed the entire expenditure, treating it as capital expenditure, but allowed depreciation.CIT(A) Decision: The CIT(A) held that the entire expenditure was revenue in nature and thus eligible for deduction, stating that catalysts and heat transfer medium were consumables with limited life and not capital assets.Tribunal's Analysis:- The Tribunal noted that catalysts and heat transfer medium are consumables with limited life, requiring replacement over time.- The assessee's method of writing off the expenditure over the life of the catalysts was in line with sound accounting principles, matching costs with revenue.- The Tribunal emphasized the importance of matching expenditure with the revenue of the corresponding period to avoid distorted profits.- The Tribunal referred to judicial authorities, including the Hon'ble Supreme Court in Madras Industrial Investment Corpn. Ltd. v. CIT, supporting the concept of deferred revenue expenditure.- The Tribunal concluded that the accounting treatment given by the assessee was in conformity with sound accounting principles, statutory provisions, and judicial decisions.Decision: The Tribunal modified the CIT(A)'s order, directing the AO to allow deduction for Rs. 31,65,678 actually debited to the Profit & Loss Account. Depreciation allowed, if any, should be withdrawn. Ground No. 1 was partly allowed.2. Deletion of Rs. 59,83,993 on Account of Payment of Lease Rental to ICICI Ltd.Facts of the Case: The assessee debited Rs. 33,20,178 to the Profit & Loss Account as lease rental expenses but claimed deduction of Rs. 93,04,171 in the computation sheet. The AO disallowed the entire amount, citing inconsistency in the accounting method.CIT(A) Decision: The CIT(A) allowed the deduction for the entire lease rental, stating that the entries in the books of account were not decisive.Tribunal's Analysis:- The Tribunal emphasized that entries in the books of account should not be lightly discarded unless proven incorrect on facts or in law.- The Tribunal noted the lack of indication in the CIT(A)'s order regarding the basis for the entries made by the assessee.- The Tribunal highlighted the need to examine the lease agreement to determine the correctness of the accounting treatment.Decision: The Tribunal set aside the CIT(A)'s order and restored the issue to the CIT(A) for fresh examination and decision after giving a reasonable opportunity of hearing to both parties. Ground No. 2 was allowed for statistical purposes.Final Decision: The appeal filed by the Department was partly allowed.