2011 (3) TMI 696 - AT - Income Tax

Tribunal Decision: Disallowances Modified, Expenditure Reclassified, Fresh Adjudication Ordered

The Tribunal partly allowed the appeal, upholding the disallowance under section 80-IB and section 40A(3), reclassifying the hydraulic motor expenditure ... Disallowance u/s 80IB - Assessing Officer noticed that the assessee company had claimed deduction under section 80-IB of the Act of Rs. 62,99,329, as per Form No. 10CCB - as per the revenue, assessee does not fulfil the condition prescribed in clause (iii) of sub-section (2) of section 80-IB and, therefore, the claim of deduction under section 80-IB is liable to be denied - Held that: the claim is sought to be denied on valid grounds and without disturbing the claim in the initial year because the circumstances in the initial year have not undergone any change - Decided against the assessee Disallowance u/s 40A(3) - assessee admitted that in some cases payment in cash exceeding Rs. 20,000 had been made as the concerned parties refused to accept payments by cheques and that the payments were made to transporters under exceptional circumstances - assessee has not been able to establish with evidence that the payments exceeding Rs. 20,000 were made under exceptional and unavoidable circumstances - Decided against the assessee Disallowance u/s 37(i) - Capital or revenue expenditure - company has been operating for the last many years and minor replacement of parts in various machines have to be made year after year - Held that: expenditure was in the manner of replacement of a part of a machine and was allowable as revenue expenditure - Decided in favour of the assessee Disallowance u/s 36(1)(iii) - Commissioner of Income-tax (Appeals) has adjudicated the alternative ground raised by the assessee by way of Ground No. 5.3 seeking directions to the Assessing Officer for the claim of depreciation in case capitalization of expenditure is upheld - Decided in favour of the assessee by way of remand Issues Involved:1. Disallowance of deduction under section 80-IB of the Income-tax Act.2. Disallowance under section 40A(3) for payments to transporters.3. Classification of expenditure on hydraulic motor as capital or revenue.4. Classification of expenditure on curtain rods and PVC carpet.5. Disallowance under section 40A(ia) for transport payments.6. Disallowance of interest under section 36(1)(iii).Detailed Analysis:1. Disallowance of Deduction under Section 80-IB:The primary issue was the disallowance of the assessee's claim of Rs. 62,99,329 under section 80-IB. The Assessing Officer (AO) observed that the assessee's plant and machinery exceeded the Rs. One crore limit, disqualifying it as a Small Scale Industrial Undertaking (SSI) under section 80-IB(14)(g). The AO concluded that the assessee did not meet the eligibility criteria for deduction under section 80-IB for the assessment year 2006-07. The Commissioner of Income-tax (Appeals) upheld this disallowance, stating that eligibility for deduction must be verified each year. The Tribunal agreed, noting that the conditions in section 80-IB(2)(iii) must be met each year. The Tribunal rejected the assessee's reliance on case law, including Saurashtra Cement & Chemical Industries Ltd., as it involved different factual circumstances.2. Disallowance under Section 40A(3) for Payments to Transporters:The AO disallowed Rs. 2,90,104 under section 40A(3) for cash payments exceeding Rs. 20,000 to transporters. The Commissioner of Income-tax (Appeals) confirmed this disallowance, as the assessee could not provide convincing reasons for the cash payments. The Tribunal upheld this decision, noting the lack of evidence for exceptional circumstances.3. Classification of Expenditure on Hydraulic Motor:The AO treated the expenditure of Rs. 61,079 on a hydraulic motor as capital expenditure, allowing depreciation at 15%. The Commissioner of Income-tax (Appeals) upheld this, as the assessee failed to prove that the expenditure was for maintaining original efficiency. The Tribunal, however, accepted the assessee's argument that the expenditure was for replacing a part of a machine, thus classifying it as revenue expenditure.4. Classification of Expenditure on Curtain Rods and PVC Carpet:The Tribunal did not adjudicate this issue, as it did not arise from the order of the Commissioner of Income-tax (Appeals).5. Disallowance under Section 40A(ia) for Transport Payments:The AO disallowed Rs. 73,500 for non-deduction of TDS on transport payments. The Commissioner of Income-tax (Appeals) restricted the disallowance to Rs. 28,500, aligning with section 194C. The Tribunal followed the precedent set by its co-ordinate Bench, directing the AO to delete the disallowance of Rs. 28,500.6. Disallowance of Interest under Section 36(1)(iii):The AO disallowed interest on advances for machinery purchase, treating it as capital expenditure. The Commissioner of Income-tax (Appeals) directed the AO to allow depreciation on the capitalized interest. The Tribunal remitted the issue back to the Commissioner of Income-tax (Appeals) for a fresh adjudication on the substantive grievance regarding the disallowance of interest.Conclusion:The appeal was partly allowed, with specific directions to the AO and Commissioner of Income-tax (Appeals) for further actions on certain issues. The Tribunal's detailed analysis upheld the disallowance under section 80-IB and section 40A(3), reclassified the hydraulic motor expenditure as revenue, and remitted the interest disallowance issue for fresh adjudication.