2014 (3) TMI 1101 - AT - Income Tax

Tribunal allows assessee's appeal, disputes AO's disallowances on various expenses

The Tribunal allowed the assessee's appeal, overturning the disallowances made by the AO and confirmed by the CIT(A) regarding waiver of Sales Tax Loan, ... Disallowance of claim of waiver of Sales Tax Loan claimed as a capital receipt by the assessee by holding it as taxable - Held that:- Mumbai Bench in case of M/s Grasim Industries Ltd.[2011 (3) TMI 1041 - ITAT, Mumbai] 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. Disallowance of the claim of expenditure incurred on fly ash handling system & expenses for common property work - addition holding that the assessee gets benefit of this facility only for the five consecutive years and the ownership of this property can get transferred 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 by ignoring the legal provisions of the Act. Therefore, the AO is directed to delete the disallowance made by him. Thus ground no. 2 of the assessee's appeal is allowed. Disallowance of contribution to District Administration towards construction of hospital at Ramganjmandi by holding that the same cannot be allowed as business expenditure - Held that:- Hon'ble Supreme Court in case of Sri Venkata Satyanarayana Rice Mill Contractors Co. Vs. CIT [1996 (10) TMI 2 - SUPREME Court] 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 section 37(1) of the Income-tax Act, 1961. Such a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister's Drought Relief Fund or a District Welfare Fund established by the District Collector or any other fund for the benefit of the public and with a view to secure benefit to the assessee's business, cannot be regarded as payment opposed to public policy. The mere fact that making of a donation for a charitable or public cause or in public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under section 37(1) of the Act when such payment had been made for the purpose of the assessee's business. In view of above, we have no hesitation in deleting the addition - Decided in favour of assessee. Disallowance of various expenses - AO has made the disallowance by making observation that assessee has failed to produce supporting evidence or expenditure - CIT-A directing the AO to recompute the FBT payable by the assessee on staff welfare expenditure, general expenses, social welfare expenses, gift expenses and sales promotion - Held that:- It is stated that all expenses are duly supported by evidence and therefore such adhoc disallowance is unjustified. It is also pleaded that once FBT is paid on the expenditure claimed, the same cannot be disallowed in the tax computation for which decision of the Co-ordinate Bench is relied upon. We agree with the arguments of the Ld. AR that no adhoc disallowance can be made. We note that assessee has filed the complete details of expenditure as required by the 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. Issues Involved:1. Disallowance of the claim of waiver of Sales Tax Loan.2. Disallowance of expenditure on fly ash handling system and common property work.3. Disallowance of contribution to District Administration for hospital construction.4. Disallowance of various expenses and recomputation of Fringe Benefit Tax (FBT).Detailed Analysis:1. Disallowance of the Claim of Waiver of Sales Tax Loan:The primary issue was whether the waiver of the Sales Tax Loan amounting to Rs. 13,30,82,204/- should be treated as a capital receipt or taxable under Section 41(1) of the Income-tax Act. The assessee argued that the deferred sales tax liability converted into a loan should be treated as a capital receipt. The AO added this amount to the total income, treating it as a remission of liability under Section 41(1). The CIT(A) upheld the AO's decision, citing the Supreme Court's decision in TV Sunderam Iyengar and others. However, the Tribunal referred to the Special Bench decision in Sulzer India Ltd., which held that such surplus arising from the discharge of loan liability at its net present value is a capital receipt not liable to tax under Section 41(1). The Tribunal allowed the assessee's appeal, deleting the addition of Rs. 13,30,82,204/-.2. Disallowance of Expenditure on Fly Ash Handling System and Common Property Work:The assessee claimed expenditure of Rs. 5,25,41,773/- on the installation of a dry fly ash handling system and common property work as revenue expenditure under Section 37(1). The AO treated this expenditure as capital in nature, allowing only 20% of the total expenditure. The CIT(A) confirmed this approach, spreading the cost over five years. The Tribunal, however, held that the expenditure was incurred for running the business more efficiently and profitably, and not for acquiring a capital asset, as the system was to become the property of RRVUNL/KSTPS. Citing the ITAT Chennai Bench decision in ACIT vs. Chettinad Cement Corporation Ltd., the Tribunal allowed the entire expenditure as revenue expenditure in the year incurred.3. Disallowance of Contribution to District Administration for Hospital Construction:The assessee contributed Rs. 40 lacs towards the construction of a hospital, claiming it as a business expenditure under Section 37(1). The AO disallowed this, treating it as a charitable donation. The CIT(A) upheld this disallowance, suggesting it could be claimed under Section 80G. The Tribunal, however, found that the contribution was made with a view to benefit the assessee's business by enhancing goodwill, brand image, and securing priority treatment for its employees. Citing the Supreme Court decision in Sri Venkata Satyanarayana Rice Mill Contractors Co. vs. CIT, the Tribunal allowed the expenditure as a business expense.4. Disallowance of Various Expenses and Recomputation of FBT:The AO made adhoc disallowances on various expenses, including staff welfare, general expenses, social welfare, gift expenses, and sales promotion, and directed the recomputation of FBT. The CIT(A) reduced the disallowance on staff welfare expenses from 50% to 20% and directed that disallowed expenses should be excluded from FBT computation. The Tribunal noted that the AO did not specify which expenses were unverifiable or not for business purposes and that the assessee had paid FBT on these expenses. Citing the ITAT Jaipur Bench decision in M/s Natural Slate & Sandstone Exports (P) Ltd., the Tribunal deleted the adhoc disallowances, stating that once FBT is paid, the expenditure cannot be disallowed under Section 37.Conclusion:The Tribunal allowed the assessee's appeal on all grounds, deleting the additions and disallowances made by the AO and confirmed by the CIT(A). The Revenue's appeal was dismissed.