2013 (3) TMI 269 - HC - Income Tax

High Court Upholds Tribunal Decision on Deductions & Expenditure Classification

The High Court upheld the Tribunal's decision in favor of the assessee on three key issues: entitlement to deduction for donations made to an approved ... Entitlement for deduction in respect of donations to the Chennai Mathematical Institute - AO pointed out that the donations were paid by the two companies viz., SCTPL and SIL to the CMI and the donee also issued the receipts in favour of those two companies only - Held that:- As it is seen that the assessee requested the other two companies to make the expenditure on their behalf by way of scientific research as it was not having sufficient funds at that time. This fact is not disputed by the Revenue or disproved by them. Therefore, the payment was made by the other two companies to the CMI. Even though they made the payment and obtained receipts in their name, the fact remains that they have not claimed any deduction nor shown those expenditure in their books of accounts . On the other hand, it is only the assessee who had shown expenditure in the journal entry and claimed deduction. It is also stated that the assessee had paid the money subsequently to those two companies in the subsequent year. Therefore, the fact remains that what was paid to the CMI by the other two companies was not actually paid by them and it was paid only on behalf of the assessee. When the payment, receipt and the status of the CMI as notified under Section 35(1)(ii) by the Government of India were not disputed, failure to understand as to how the assessee can be disallowed deduction under Section 35(1)(ii). Even the said expenditure was shown in the accounts placed before the IRDA in the second half of the assessment year. Thus the assessee is the actual payer to the CMI for its scientific research and consequently entitled to deduction under Section 35(1)(ii) - in favour of assessee. Excess provision claim under the heads consultancy charges and professional fees - Held that:- It is a provision for professional fees and consultancy charges. The payment liability of such charges or fees by the assessee was certain. Though the liability was certain, only the quantum was not certain at the time of filing the return, in view of the continuous negotiations with the parties. Therefore, the assessee was left with no other option to make provision based on the original claim made by the parties. When such being the factual position, the decision reported in Commissioner of Income Tax Vs. Forbes Campbell Finance Ltd.[2012 (7) TMI 662 - MADRAS HIGH COURT] is not helpful to the Revenue in this case. Thus, question of law answered in favour of assessee. Disallowance of expenditure on setting up of a new office at Mumbai - Held that:- Unable to appreciate the contention of the Revenue as to how Mangayarkarasi case [2009 (7) TMI 17 - SUPREME COURT] can be applied to the case on hand when the facts are totally different and distinguishable and the deduction sought to be made by the assessee is not the one under Section 31 and on the other hand, as rightly contended by the assessee, the deduction was sought in respect of the expenses made towards designing and lay out as well as other temporary partition and construction made for making the office functional . When that being the factual position the decisions of this Court reported in Commissioner of Income Tax Vs.Ayesha Hospitals P.Ltd.(2006 (10) TMI 117 - MADRAS HIGH COURT), Commissioner of Income Tax Vs Sanco Trans Ltd.(2006 (1) TMI 83 - MADRAS HIGH COURT) and Thiru Arooran Sugars Ltd., Vs. Deputy Commissioner of Income Tax (2013 (2) TMI 450 - Madras High Court) wherein similar expenses made by the respective assessees therein in the leased premises and found that such expenses made by the assessee was deductible as revenue expenditure - in favour of the assessee. Issues Involved:1. Deduction entitlement of Rs. 87.5 lakhs for donations to the Chennai Mathematical Institute.2. Allowability of excess provision under consultancy charges and professional fees.3. Classification of expenditure on setting up a new office in Mumbai as revenue or capital expenditure.Detailed Analysis:1. Deduction Entitlement for Donations:The primary issue was whether the assessee was entitled to a weighted deduction of Rs. 87.5 lakhs under Section 35(1)(ii) of the Income Tax Act for donations made to the Chennai Mathematical Institute (CMI). The Assessing Officer disallowed the claim, noting that the donations were initially made by two other companies (SCTPL and SIL), and the receipts were issued in their names. The assessee later made journal entries to credit these donations to its account, which the Assessing Officer found insufficient, citing the lack of a Board resolution and the non-revocability of donations.The Tribunal, however, accepted the assessee's contention that the donations were made on its behalf due to insufficient funds at the time. It was noted that the other companies did not claim deductions for these donations, and the receipts were subsequently issued in the name of the assessee. The Tribunal found that the assessee had incurred the expenditure and was entitled to the deduction.The High Court upheld the Tribunal's decision, emphasizing that the CMI was an approved institution under Section 35(1)(ii), and the factual findings supported the assessee's claim. The court noted that the payments were made on behalf of the assessee due to a temporary shortage of funds, and the subsequent reimbursement and journal entries were sufficient to substantiate the claim.2. Excess Provision for Consultancy Charges and Professional Fees:The second issue was whether the excess provision for consultancy charges and professional fees was allowable. The Assessing Officer disallowed the provision, arguing that it lacked correlation with actual expenses. The first appellate authority and the Tribunal found that the provisions were made based on ongoing negotiations with consultants and professionals, and the excess provision was reversed in the subsequent year, showing it as income.The High Court upheld this view, noting that the assessee had no option but to make provisions based on original claims due to ongoing negotiations. The court distinguished this case from others cited by the Revenue, where provisions were found to be contingent liabilities. Here, the liability was certain, and only the quantum was under negotiation.3. Classification of Expenditure on Setting Up a New Office:The third issue was whether the expenditure on setting up a new office in Mumbai was capital or revenue in nature. The Assessing Officer classified it as capital expenditure, while the first appellate authority and the Tribunal treated it as revenue expenditure, except for a specific amount spent on air conditioning, which was deemed capital.The High Court agreed with the Tribunal, noting that the expenditures were primarily for design, layout, and interior works necessary for functional utility and business ambiance. The court referenced several decisions, including those of the Madras High Court, which supported the classification of such expenses as revenue expenditure when incurred to make leased premises more useful.Conclusion:The High Court dismissed the Revenue's appeal, answering all questions of law in favor of the assessee. The court upheld the Tribunal's findings on all three issues, emphasizing the factual basis and legal precedents supporting the assessee's claims. No costs were awarded.