2010 (4) TMI 858 - HC - Income Tax

Court upholds Revenue on rent addition, disallowance of expenses; allows deductions for profit-making units

The court held in favor of the Revenue regarding the deletion of addition on account of rent paid by the assessee. The court upheld the Tribunal's ... Disallowance of expenses - Printing of balance-sheet and on printing and despatch of dividend warrant – Held that:- expenses incurred on printing of balance-sheet and on printing and despatch of dividend warrant were incurred by the assessee for the compliance with the statutory requirement as prescribed under the Companies Act and are revenue in nature - order of the Tribunal is, accordingly, upheld. Deduction under sections 80HH and 80-I of the Act - profits in two units and the loss of the third unit – Held that:- under section 80-I(6) of the Act for the purposes of calculating the deduction, the loss sustained in one of the units, cannot be taken into account because sub-section (6) of the Act contemplates that only the profits shall be taken into account as if it was the only source of income - for the purposes of computation of gross total income the losses of other units are to be taken into account but for the purposes of calculating the deduction of industrial undertaking, the loss sustained in another unit cannot be taken into account and only the profit shall be taken into account as if it was the only source of income of that unit - no error in the order of the Tribunal - Payment of customs duty in the earlier year and not in the year under consideration - customs duty was paid the same was not debited to the profit and loss account – Held that:- No customs duty has been paid in the year under consideration in respect of such transaction and, therefore, in view of section 43B of the Act the customs duty, which was not paid during the year under consideration, cannot be allowed as a deduction – Order of Tribunal set aside Whether the payment made by the assessee towards the membership of the club is an allowable deduction, we find that the expenditure was incurred in order to procure business - as the amount was spent towards advancement of business. It is a business expenditure and, therefore, has rightly been allowed as it is not specifically covered by any statutory provision wherein it has to be disallowed - In favour of the assessee Finance charges and lease charges – Held that:- money had not passed from the lessor/purchaser to the assessee-company and that the assessee-company had utilised the same in its business - Finance charges and lease charges partly allowed Bad debts - deduction for bad debts with reference to section 36(1)(vii) of the Act – Held that:- assessee has complied with both the requirements, namely, that the amount has been considered for computation of income in the earlier years and the debt has been written off in the books of account – deduction is allowed Custom duty under section 43B – Held that:- entire amount of excise duty/cus- cutoms duty paid by the assessee in a particular accounting year is allowable under section 43B of the Income-tax Act, 1961, as a deduction in respect of that year, irrespective of the amount of excise duty/customs duty included in the valuation of the assessee's closing stock at the end of the accounting year as relating thereto - In favour of the assessee Addition under section 40A(2)(b) - excessive and unreasonable - M/s. MRL allowed the assessee to use the flats taken by it on lease for the purpose of its business against reimbursement of rent paid by M/s. MRL to the landlord – Held that:- Assessing Officer has failed to prove by any comparable case or comparison by market rate that the amount paid by the assessee was excessive or unreasonable - premise was in occupation and use of the assessee and the claim of the rent was not false - assessee has paid the actual rent and reimbursed the actual expenditure incurred by M/s. MRL – Addition deleted order of the Tribunal, in this regard, is liable to be upheld. Issues Involved:1. Deletion of addition on account of rent paid for hiring premises.2. Deletion of addition under section 40A(2)(b) of the Income-tax Act.3. Environmental expenses and their coverage under section 43B.4. Disallowance of expenses on printing of the balance-sheet and dividend warrants.5. Deletion of addition on account of club membership subscription.6. Allowance of lease charges.7. Deletion of addition on account of bad debts.8. Allowance of customs duty under section 43B.9. Deduction under sections 80HH and 80-I for profit-making units.Detailed Analysis:Issue 1: Deletion of Addition on Account of Rent PaidThe court held that the Tribunal was not justified in allowing the claim of deduction on account of the rent paid by the assessee to M/s. Modipur Hotels (P) Ltd. and transit house as it contravened the provisions of section 37(4) read with section 37(5) of the Income-tax Act. The question was answered in favor of the Revenue and against the assessee.Issue 2: Deletion of Addition under Section 40A(2)(b)The Tribunal found that the Assessing Officer failed to prove that the amount paid by the assessee to M/s. Modi Rubber Ltd. was excessive or unreasonable. The reimbursement was based on actual expenses incurred, and there was no element of profit in the transaction. The Tribunal's finding was upheld as it was based on material facts and was not perverse.Issue 3: Environmental Expenses and Section 43BThe Tribunal allowed the deduction of customs duty under the head 'Environmental test expenses,' which was paid in an earlier year but debited in the year under consideration. The court held that the customs duty not paid during the year under consideration cannot be allowed as a deduction under section 43B. The Tribunal's view was set aside, and the direction given by the Commissioner of Income-tax (Appeals) to allow only the customs duty actually paid during the year was restored.Issue 4: Disallowance of Expenses on Printing of Balance-Sheet and Dividend WarrantsThe Tribunal concluded that the expenses incurred on printing the balance-sheet and dispatching dividend warrants were for compliance with statutory requirements under the Companies Act and were revenue in nature. The Tribunal's order was upheld.Issue 5: Deletion of Addition on Account of Club Membership SubscriptionThe court held that the expenditure on club membership was incurred to procure business and was a business expenditure. The Tribunal's decision to allow this deduction was upheld.Issue 6: Allowance of Lease ChargesThe Tribunal justified allowing the assessee's claim partly towards finance and lease charges, noting that the money had passed from the lessor/purchaser to the assessee-company and was utilized in its business. The Tribunal's decision was affirmed.Issue 7: Deletion of Addition on Account of Bad DebtsFollowing the Supreme Court's decision in T. R. F. Ltd. v. CIT, the court held that it is sufficient if the bad debt is written off as irrecoverable in the accounts of the assessee. The Tribunal's finding that the assessee complied with the requirements was upheld.Issue 8: Allowance of Customs Duty under Section 43BThe court noted that the issue was covered by the Supreme Court's decision in Berger Paints India Ltd. v. CIT, which held that the entire amount of excise duty/customs duty paid in a particular accounting year is allowable under section 43B. The Tribunal's order was upheld.Issue 9: Deduction under Sections 80HH and 80-I for Profit-Making UnitsThe court held that the deduction under sections 80HH and 80-I should be determined with reference to the profits derived from each eligible industrial undertaking independently, not by considering the losses of other units. The Tribunal's decision to allow deductions on unit-wise profits was upheld, aligning with the Supreme Court's rulings and the Delhi High Court's decision in CIT v. Sona Koyo Steering Systems Ltd.Conclusion:The appeal was allowed in part, with specific issues decided in favor of either the Revenue or the assessee based on the legal and factual findings.