2013 (9) TMI 193 - AT - Income Tax

Tribunal allows appeals for various expenses, stresses adherence to judicial principles

Sonic Biochem Extractions (P) Versus Income Tax Officer 7(2)(4)Mumbai

The tribunal allowed the appeals, directing the Assessing Officer to allow the disputed amounts for provident fund, repairs and maintenance, unrecovered ... Disallowance of provident fund amount and of employees' State insurance corporation as these were paid belately i.e after due date of payment – Held that:- Seen from the chart prepared in the Assessing Officer's order, most of the payments were paid within the grace period itself or within the year itself - The amounts were paid before filing the return of income in any case – Relying upon the judicial principles established in the case of CIT v. Alom Extrusions Ltd. [2009 (11) TMI 27 - SUPREME COURT] for the proposition that since the amounts were paid within the financial year/before the filing of return itself, the amounts should be allowed the amount is allowed as deduction – Decided in favor of Assessee. Ad-hoc disallowance on the ground of non-verifiable internal vouchers - Assessing Officer disallowed 15 per cent. of the repairs and maintenance and 20 per cent. of the vehicle expenses on the reason that the supporting evidence furnished was not verifiable as they were self-serving vouchers – Held that:- There is no need for any disallowance of expenditure in repairs and maintenance or vehicle maintenance on ad hoc basis. If the Assessing Officer is not satisfied either about the maintenance of vouchers or verifiable nature of the vouchers, he should identify them and disallow the entire amount under section 37(1), rather than resorting to ad hoc disallowance. The reasons for disallowing are very general in nature without any specific mistakes being pointed out by the Assessing Officer. Considering that the assessee is an agro-based chemical company and also a public limited company the ad-hoc disallowance is not sustainable. Disallowance of loss due to fire attributable to building and machinery treating the same to be capital in nature - The company made its own assessment of damages requiring repairs/replacement expenses and lodged the claim and debited a sum to the insurance company of Rs. 1.51 crores. The insurance company appointed the surveyor who after detailed assessment restricted the claim to Rs. 1,26,35,274. After discussions, the assessee agreed for the claim at the reduced amount. Thereafter the insurance company further reduced the amount for various technical reasons and paid only an amount of Rs. 1,04,66,973 - Amount of difference between the agreed claim which was debited to the insurance company and received claim was treated as loss due to fire – Held that:- Loss is revenue in nature - Any expenditure of this nature was incurred and debited to profit and loss account and when reimbursed the same is credited to the profit and loss account in the year of receipt. Any short fall would not give rise to any loss separately. If it is only an entry passed against the insurance company and has short received this amount, whether the assessee has spent the amounts for repairs and maintenance needs to be examined. Whether there is any claim in the repairs and maintenance account separately or the assessee incurred the expenses in an earlier year and debited to insurer and part received the amount could not be verified as the details are not on record - If the amounts as claimed by the assessee are spent for the purpose of repairs and not claimed separately in profit and loss accounts but adjusted in the insurer's account, then short receipt from the insurance company gives rise to revenue loss – Decided in favor of Assessee. Valuation of closing stock - Claim for devaluation of closing stock to an extent of Rs. 14,25,705 - Assessee has devalued its closing stock to Re. 1 - The assessee furnished the details of various packing materials, quantity, rate and value as available in the books and submitted that most of the material pertains to packing material in which batch numbers, price, etc., were already printed and these could not be used in the assessee business after a lapse of time. Therefore, these packing materials have no value to the company – Assessee also explained that the company has brought forward certain slow and non-moving items in its inventory valued at Rs. 14,25,706 as on April 1, 2004 as the same remained unsold for the whole year – Held that:- Under the normal accounting principles, the closing stock has to be valued either at the cost price or at the market price, whichever is less - Assessing Officer and the Commissioner of Income-tax (Appeals) wrongly considered the issue in disallowing the amount. The assessee submits that the packing material cannot be utilised in the business. Therefore, they are downwardly valued. The learned Commissioner of Income-tax (Appeals) confirmed the Assessing Officer's action on the reason that the assessee did not furnish any details of utilisation/subsequent sales thereof. When the assessee submits that the packing material cannot be used, how all the details of the utilisation can be furnished is not explained by the Commissioner of Income-tax (Appeals). The only way for subsequent sales which can be in the circumstances is by disposing of the packing material at scrap value. In that case, the assessee would certainly account for scrap sale but the assessee cannot sell the packing material as such and so the subsequent sales also cannot be furnished in the absence of its utilisation as the packing material in the production of its products – Reliance has also been placed upon the judgment in the case of Emersons Process Management India (P.) Ltd. vs. Additional Commissioner of Income-tax, Range 3(1), Mumbai,[ 2011 (8) TMI 427 - ITAT MUMBAI] - Since the assessee has not used the above packing material and has to be discarded off by way of destruction or sale as scraps, the assessee has rightly reduced the value – Decided in favor of Assessee. Disallowance of depreciation on software purchase - On the reason that purchase of software is essentially purchase of copyright which attracts TDS provisions under section 194J, the Assessing Officer invoked provisions of section 40(a)(ia) and disallowed the depreciation claimed – Held that:- Mere purchase of software, a copyrighted article, for utilisation of computers cannot be considered as purchase of copyright and royalty. The assessee has purchased a sort of asset and capitalised it to the computers account and claimed depreciation. The assessee has not purchased any copyright or royalty nor claimed any depreciation on royalty as intangible asset. The assessee does not acquire any rights for making copies, selling or acquiring which are generally meant to be considered within the definition of 'royalty'. The Explanation 2 of section 9(1)(vi) cannot be applied to purchase of a copyrighted software, which does not involve any commercial exploitation of the same - In this case the assessee simply purchased software delivered along with computer hardware for utilisation in the day-to-day business. There is no intangible asset involved in this and the assessee's claim of depreciation cannot be disallowed under section 40(a)(ia) – Decided in favor of Assessee. Issues Involved:1. Disallowance of Provident Fund and Employees' State Insurance Corporation payments.2. Disallowance of repairs and maintenance expenses and vehicle maintenance expenses.3. Write-off of unrecovered amounts.4. Disallowance of depreciation on refinery.5. Disallowance of loss due to fire.6. Devaluation of closing stock.7. Disallowance of telephone and vehicle expenses.8. Disallowance of software purchase as capital expenditure.Issue-wise Detailed Analysis:1. Disallowance of Provident Fund and Employees' State Insurance Corporation Payments:The Assessing Officer disallowed Rs. 4,69,300 of provident fund and Rs. 45,994 of employees' State insurance corporation due to late payment. The assessee contended that the payments were made within the grace period or before filing the return. The tribunal agreed with the assessee, citing the Supreme Court judgment in CIT v. Alom Extrusions Ltd. and directed the Assessing Officer to allow the amounts as claimed.2. Disallowance of Repairs and Maintenance Expenses and Vehicle Maintenance Expenses:The Assessing Officer disallowed 15% of repairs and maintenance expenses and 20% of vehicle expenses due to unverifiable self-serving vouchers. The tribunal found the disallowance unnecessary as the assessee is a public limited company with audited accounts. The tribunal directed the full allowance of these expenses, rejecting ad hoc disallowances.3. Write-off of Unrecovered Amounts:The Assessing Officer disallowed Rs. 1,62,646 as unrecovered amounts due to lack of supporting evidence. The assessee provided details and relied on the Supreme Court judgment in TRF Ltd vs. CIT. The tribunal directed the Assessing Officer to allow the write-off, recognizing the amounts as written off in the books of account.4. Disallowance of Depreciation on Refinery:The Assessing Officer disallowed Rs. 16,96,774 of depreciation on the refinery, stating it was not used for business purposes. The tribunal noted that under block asset concept, depreciation is allowable if some assets in the block are used. The tribunal directed the allowance of depreciation as claimed, citing the case of Boskalis Dredging India (P.) Ltd.5. Disallowance of Loss Due to Fire:The Assessing Officer treated the loss due to fire as capital expenditure. The tribunal agreed with the assessee that the expenditure was for repairs, allowable under sections 30 and 31. However, the tribunal remanded the issue to the Assessing Officer for verification of actual amounts spent on repairs.6. Devaluation of Closing Stock:The Assessing Officer disallowed the devaluation of closing stock to Re. 1, citing non-compliance with section 145A and accounting standards. The tribunal found the assessee's valuation reasonable, considering the inventory as obsolete and unusable. The tribunal directed the allowance of the devalued amount.7. Disallowance of Telephone and Vehicle Expenses:The Assessing Officer disallowed portions of telephone and vehicle expenses due to potential personal use. The tribunal rejected the disallowance, stating that personal use does not arise in a public limited company. The tribunal directed the full allowance of these expenses.8. Disallowance of Software Purchase as Capital Expenditure:The Assessing Officer disallowed depreciation on software purchase, treating it as royalty under section 40(a)(ia). The tribunal disagreed, stating that the purchase of software for business use does not constitute the acquisition of copyright or royalty. The tribunal directed the allowance of depreciation as claimed.Conclusion:The tribunal allowed the appeals, directing the Assessing Officer to allow the disputed amounts for provident fund, repairs and maintenance, unrecovered amounts, depreciation on refinery, loss due to fire, devaluation of closing stock, telephone and vehicle expenses, and software purchase. The tribunal emphasized adherence to judicial principles and proper verification of facts.