2011 (9) TMI 106 - AT - Income Tax

Tribunal allows revenue's appeal on interest expenses, funds; upholds deletions on EPF, market survey expenses.

The Tribunal partly allowed the revenue's appeal by reversing the CIT(A)'s decisions on disallowing interest expenses and funds used for non-business ... Income u/s 2(24)(a) read with section 36(1)(va) - disallowance u/s 43B - The assessee filed its return of income, on 9.2.2007, declaring income at Rs. 21,57,43,610/-. The assessee is in the business of running hotel. The AO passed the assessment order u/s 143(3) of the Act, on 26.12.2008, assessing the income of the assessee at Rs. 21,65,07,307/-. The Revenue has taken the following grounds of appeal against the order of CIT(A): Deletion addition made by the AO by treating employees contribution towards EPF. - held that:- all the deposits of EPF have been made within the grace period allowed for deduction. Appeal decided in favour of Assessee. Deletion of addition of Rs. 15,55,616/- made by the AO by disallowance the interest paid. - Held that:- Interest paid before the asset was put to use is not eligible for deduction u/s 36(1)(iii) of the Act, being merely expansion of the existing business. decided against Assessee. Deletion addition of Rs. 1,60,277/- on account of disallowance of interest expenses debited to the profit and loss account for using the funds for non business purpose and also for the purpose advances for the purchase of fixed assets. - Held that:- Assessee was not entitled to claim deduction of the interest on the borrowings to the extent those were diverted to sister concerns or other persons without interest.Appeal of Revenue has been allowed. Deletion addition of Rs. 2,64,480/- by disallowing the expenses incurred on the market survey got conduct from MDRA. - Held that:- In the instant case, the appellant had conducted survey only to improve existing business. The expenditure is thus held to be revenue in nature. The addition of Rs. 264,480/- on this ground is deleted, allowing assessee's appeal. decided in favour of Assessee. Issues Involved:1. Deletion of addition made by AO by treating employees' contribution towards EPF as income.2. Deletion of addition of Rs. 15,55,616/- by disallowing interest paid.3. Deletion of addition of Rs. 1,60,277/- on account of disallowance of interest expenses for using funds for non-business purposes.4. Deletion of addition of Rs. 2,64,480/- by disallowing expenses incurred on market survey conducted by MDRA.Detailed Analysis:1. Deletion of Addition Made by AO by Treating Employees' Contribution Towards EPF as Income:The AO treated a sum of Rs. 1,45,547/- as income of the assessee for failing to deposit the said sum on or before the due date under section 2(24)(x) read with section 36(1)(va) of the Income-tax Act. The CIT(A) deleted the addition, relying on the decision of the Hon'ble Punjab & Haryana High Court in the case of CIT v. Nuchem Ltd., which followed the Apex Court's decision in CIT v. Alom Extrusions Ltd. The Tribunal upheld the CIT(A)'s decision, noting that the deposits were made within the grace period except for one instance of Rs. 30,828/-, which was covered by the Nuchem Ltd. case. Thus, the addition of Rs. 1,45,547/- was deleted, allowing the assessee's appeal.2. Deletion of Addition of Rs. 15,55,616/- by Disallowing Interest Paid:The AO disallowed interest expenditure of Rs. 1,55,616/- incurred on marine insurance and interest on new cars before they were put to use, treating it as capital expenditure. The CIT(A) deleted the addition, interpreting that the term 'extension of existing business' does not cover every asset addition but rather significant expansions like additional rooms or facilities. The Tribunal, however, reversed the CIT(A)'s decision, citing the proviso to section 36(1)(iii) and the Jurisdictional High Court's decision in Power Drugs Ltd. v. CIT, which mandates disallowance of interest for capital borrowed for acquiring new assets until they are put to use. Consequently, the revenue's appeal was allowed.3. Deletion of Addition of Rs. 1,60,277/- on Account of Disallowance of Interest Expenses for Using Funds for Non-Business Purposes:The AO disallowed interest expenses, citing that advances to Vipul Ltd. and Unitech Ltd. were made for non-business purposes and relied on the decision in CIT v. Abhishek Industries Ltd. The CIT(A) deleted the addition, but the Tribunal reversed this decision, emphasizing that the onus is on the assessee to prove that borrowed funds were used for business purposes. The Tribunal referred to the Jurisdictional High Court's decision in Abhishek Industries Ltd., which mandates disallowance of interest on borrowed funds diverted for non-business purposes. Thus, the revenue's appeal was allowed.4. Deletion of Addition of Rs. 2,64,480/- by Disallowing Expenses Incurred on Market Survey Conducted by MDRA:The AO disallowed the market survey expenses, arguing that the survey report was not produced. The CIT(A) allowed the expenses, reasoning that the survey aimed to improve the existing business, referencing the Supreme Court's decision in Alembic Chemical Works Co. Ltd. v. CIT and the Bombay High Court's decision in CIT v. Zenith Steel Pipes & Inds. Ltd. The Tribunal upheld the CIT(A)'s decision, finding no infirmity in the well-reasoned order that the expenses were revenue in nature. Therefore, the revenue's appeal on this ground was dismissed.Conclusion:The Tribunal partly allowed the revenue's appeal, reversing the CIT(A)'s decisions on the disallowance of interest expenses and the use of funds for non-business purposes, while upholding the deletions related to employees' EPF contributions and market survey expenses.