2012 (10) TMI 214 - AT - Income Tax

Appeals partly allowed for assessee: LPG plant activities recognized as manufacturing, deductions allowed under section 43B.

The Tribunal partly allowed the appeals filed by the assessee. Key decisions favored the assessee, including recognizing the LPG bottling plant's ... Manufacture/production - deduction under section 80HH/80I/80IA - manufacture of gas under the Gas Cylinder Rules - deduction under section 43B for excise/custom duty included in closing inventory - deductibility under section 37(1) for corporate social/welfare expenditure (20-Point Programme) - entertainment expenditure allocation under section 37(2) - allowance under section 35AB (1/6th) as alternate to claim under section 37(1) - dividend payment not allowable as business expenditureManufacture/production - deduction under section 80HH/80I/80IA - manufacture of gas under the Gas Cylinder Rules - Bottling (filling and associated processes) of LPG in the assessee's bottling plant amounts to manufacture/production and is eligible for deduction under sections 80HH/80I/80IA. - HELD THAT: - The Tribunal examined the technical and multi-stage processes carried out at the bottling plant (vacuuming, de-gassing, cleaning, automatic filling, testing, sealing and quality control) and held that these specialised operations convert bulk LPG into a marketable product for end-consumers. The Tribunal placed weight on the jurisdictional High Court's observations that the Gas Cylinder Rules define 'manufacture of gas' as filling a cylinder with compressed gas and on earlier High Court decisions treating bottling as manufacture. The Tribunal also noted that the term used in the relevant deduction provisions is 'manufacturing or production', and that 'production' has a wider scope than 'manufacture'; bringing a commercially distinct product into existence qualifies as production. Applying these principles to the material facts, the Tribunal concluded that the bottling activities constitute manufacture/production and therefore the claim for deduction under the specified provisions is allowable. [Paras 8]Bottling of LPG in the assessee's plant is manufacture/production; deduction under sections 80HH/80I/80IA allowed.Allowance under section 35AB (1/6th) as alternate to claim under section 37(1) - For AY 1993-94 the ground under section 37(1) is not pressed; the Assessing Officer is directed to allow the claim under section 35AB to the extent of 1/6th for AY 1993-94, 1994-95 and 1995-96 as allowed in the first year. - HELD THAT: - The assessee expressly did not press the ground seeking full allowance under section 37(1) for AY 1993-94. The Tribunal accordingly dismissed that ground as not pressed and directed that the 1/6th allowance under section 35AB be permitted for AY 1993-94, 1994-95 and 1995-96 consistent with the treatment in the initial year. [Paras 10]Ground under section 37(1) for AY 1993-94 dismissed as not pressed; allow 1/6th under section 35AB for the three years as directed.Deduction under section 43B for excise/custom duty included in closing inventory - Excise and customs duty paid during the year and included in the value of closing inventory is allowable under section 43B. - HELD THAT: - Following this Tribunal's earlier orders in the assessee's own case and the Supreme Court decision relied upon by the assessee, the Tribunal held that the entire amount of excise/custom duty paid by the assessee is deductible under section 43B notwithstanding its inclusion in the valuation of closing stock. The Tribunal applied precedent in favour of the assessee and directed the Assessing Officer to allow the deduction. [Paras 13, 14]Deduction under section 43B for excise/custom duty included in closing inventory allowed in full.Deductibility under section 37(1) for corporate social/welfare expenditure (20-Point Programme) - Expenditure incurred by the assessee on implementation of the 20-Point Programme is deductible under section 37(1). - HELD THAT: - Relying on earlier decisions of this Tribunal and higher courts, the Tribunal observed that expenditures incurred at the instance of the Government and those that constitute corporate social welfare can be business expenditures when they serve business considerations, create goodwill and facilitate carrying on the business. Given that the payments were made pursuant to Government directions and furthered the assessee's commercial interests as a corporate citizen, the Tribunal held the expenses to be allowable under section 37(1). [Paras 17]Expenditure on the 20-Point Programme held deductible under section 37(1).Entertainment expenditure allocation under section 37(2) - The lower authorities' allocation disallowing a portion of entertainment expenditure is affirmed; the Tribunal confirmed the disallowance (assessed allowance of 25% retained). - HELD THAT: - The assessee claimed 50% of entertainment expenditure as attributable to staff; the Assessing Officer reduced this to 25% owing to lack of supporting details on the number of staff and guests. The Tribunal found no material to justify disturbing the factual allocation made by the authorities and therefore upheld the disallowance. [Paras 21]Disallowance of entertainment expenditure upheld; allowance restricted as by lower authorities.Dividend payment not allowable as business expenditure - Dividend paid by the assessee is application of income and not an expenditure incurred wholly and exclusively for the purpose of business; it is not allowable as a business expense. - HELD THAT: - The Tribunal reiterated the settled principle that distribution of profits by way of dividend is an application of income rather than a revenue expenditure incurred for earning income. Even where the company is wholly government-owned, it remains a separate legal entity; payment of dividend to shareholders cannot be treated as an allowable business outlay under the Act. Consequently, the claim to treat dividend payments as deductible business expenditure was rejected. [Paras 26]Claim to treat dividend payments as business expenditure rejected.Reopening of assessment - procedural ground not pressed - The assessee did not press the ground contesting validity of reopening of assessment under sections 147/148; that ground is dismissed. - HELD THAT: - The assessee withdrew its challenge to the validity of reassessment for the relevant years. The Tribunal accordingly dismissed the ground as not pressed and did not adjudicate the substantive question of reopening validity. [Paras 24]Ground challenging reopening of assessment dismissed as not pressed.Final Conclusion: The appeals are partly allowed: the Tribunal held that LPG bottling constitutes manufacture/production and allowed the related deductions under the specified provisions; directed allowance of 1/6th under section 35AB for the specified years where applicable; allowed deduction under section 43B for excise/custom duty included in closing inventory; upheld deductibility of 20-Point Programme expenditure; confirmed the disallowance in respect of entertainment allocation; dismissed the claim that dividend payments are business expenditure; and dismissed the reopening challenge as not pressed. Issues Involved:1. Deduction u/s 80HH/80I/80IA for LPG Bottling Plant.2. Disallowance of right to use technical know-how u/s 37(1) and allowance u/s 35AB.3. Deduction u/s 43B for excise/custom duty included in closing inventory.4. Disallowance of expenditure on 20-point programme u/s 37(1).5. Disallowance of entertainment expenses towards employees.6. Validity of reopening assessments u/s 147/148.7. Claim for dividend paid as allowable business expenditure.Issue-wise Detailed Analysis:1. Deduction u/s 80HH/80I/80IA for LPG Bottling Plant:The assessee claimed deductions under sections 80HH, 80I, and 80IA for its LPG bottling plant. The Assessing Officer disallowed the claim, arguing that the bottling plant did not involve manufacturing activities, citing the Gujarat High Court's decision in 'State of Gujarat vs Kosan Gas.' The CIT(A) upheld this disallowance. The assessee countered by explaining the detailed process of LPG bottling, referencing the jurisdictional High Court's decision in 'HPCL vs MSDCEL,' which recognized gas bottling as a manufacturing activity. The Tribunal agreed with the assessee, noting that LPG bottling involves various specialized processes, thus qualifying as manufacturing/production. The Tribunal decided this issue in favor of the assessee.2. Disallowance of Right to Use Technical Know-how u/s 37(1) and Allowance u/s 35AB:For the assessment year 1993-94, the assessee did not press the ground related to the disallowance of Rs. 1,40,87,339 towards the right to use technical know-how u/s 37(1), provided the claim for 1/6th under section 35AB was allowed. The Tribunal dismissed this ground as not pressed and directed the Assessing Officer to allow the claim under section 35AB for the relevant assessment years.3. Deduction u/s 43B for Excise/Custom Duty Included in Closing Inventory:The assessee claimed deduction under section 43B for excise and custom duty paid and included in closing inventory. The Assessing Officer disallowed this claim, which was upheld by the CIT(A). The Tribunal referred to its earlier decisions in the assessee's favor and the Supreme Court's judgment in 'Berger Paints India Ltd. v. CIT,' directing the Assessing Officer to allow the deduction for the entire amount of excise and custom duty paid.4. Disallowance of Expenditure on 20-point Programme u/s 37(1):The assessee incurred expenditure on the 20-point programme, which was disallowed by the Assessing Officer and upheld by the CIT(A). The Tribunal referred to its earlier decision and judgments from various High Courts, recognizing such expenditure as business expenditure under section 37(1). The Tribunal decided this issue in favor of the assessee.5. Disallowance of Entertainment Expenses Towards Employees:The assessee claimed 50% of entertainment expenses as attributable to its staff, which the Assessing Officer reduced to 25%. The CIT(A) upheld this reduction. The Tribunal, in the absence of detailed evidence, did not find any reason to interfere with the lower authorities' decision and confirmed the disallowance.6. Validity of Reopening Assessments u/s 147/148:The assessee raised additional grounds challenging the validity of reopening assessments for the years 1992-93 and 1993-94. However, during the hearing, the assessee did not press these grounds. The Tribunal dismissed these additional grounds.7. Claim for Dividend Paid as Allowable Business Expenditure:The assessee claimed that the dividend paid should be considered a business expenditure. The Tribunal rejected this claim, stating that the distribution and payment of dividends are applications of income and not expenditures incurred wholly and exclusively for business purposes. The Tribunal dismissed this additional ground.Conclusion:The appeals filed by the assessee were partly allowed, with the Tribunal deciding several key issues in favor of the assessee, particularly recognizing the LPG bottling plant's activities as manufacturing/production, allowing deductions for excise/custom duty under section 43B, and recognizing the expenditure on the 20-point programme as business expenditure. The disallowance of entertainment expenses and the claim for dividend paid as business expenditure were upheld.