2014 (2) TMI 799 - HC - Income Tax

Court rules in favor of assessee on key tax issues, exceptions noted

The court ruled in favor of the assessee on various issues, including disallowance under section 40 A(2)(b) and addition of bad debts under section 36(2). ... Addition made on Expenses u/s 37(4) of the Act - Maintenance of guest house – Held that:- The Assessing Officer while making addition of ₹ 15 lakhs as estimated expenses for guest house has not referred to any expenditure or any material for estimating expenditure of ₹ 15 lakhs – assessee contended that he has not incurred any expenditure apart from paying rent of ₹ 9 lakhs - ad-hoc disallowance on conjectures and surmises is entirely unsustainable in law and on facts - There is no material to indicate that any other expenses have been incurred by the assessee apart from paying the rent – the findings are the finding of fact - The Assessing Officer has also not referred to any kind of expenditure incurred by assessee other than paying rent of ₹ 9 lakhs -Thus, there was no error in the order of the Commissioner allowing the appeal – Decided against Revenue. Allowability of Deduction u/s 80HH of the Act – Whether the deduction is to be allowed on total income including the profit from sale of scrap being part of income of the Industrial Undertaking – Held that:- The Commissioner has clearly directed for including the income from the Scrap generated by specified units as - The Scrap generated from the above units has to be treated as Scrap derived from the industrial undertaking and any income from the sale of the said Scrap has to be included for the purpose of benefit of Section 80-HH –Relying upon Pandian Chemicals Ltd. Vs. Commissioner of Income Tax2003 (4) TMI 3 - SUPREME Court] - the word derived from under Section 80-HH has to be understood as something which has immediate nexus with the industrial undertaking - the scrap generated from the units has direct and immediate nexus with the industrial undertaking since the said scrap has been generated from the manufacturing process itself - the Commissioner as well as the Tribunal has committed no error in allowing the benefit of Section 80-HH to the assessee – Decided against Revenue. Issues Involved:1. Disallowance under section 40 A(2)(b)2. Rent paid for guest house under section 37(4)3. Disallowance on account of discount claims4. Addition on account of bad debts under section 36(2)5. Deduction under section 80-I for manufacturing office equipment6. Deduction under section 80-I for profit-making units7. Deduction under section 80 HH for profit-making units8. Club membership subscription under section 37(1)9. Lease rentals/charges10. Addition of expenses on maintenance of guest house11. Deduction under section 80 HH on income from sale of scrapDetailed Analysis:Issue 1: Disallowance under section 40 A(2)(b)The court referred to the judgment in Income Tax Appeal No. 30 of 2001, where it was held that the disallowance was not justified as the expenditure was for business purposes and commercially expedient. Therefore, the question was answered in favor of the assessee.Issue 2: Rent paid for guest house under section 37(4)The court cited the judgment in Income Tax Appeal No. 225 of 1999, which ruled against the assessee, stating that the rent paid for the guest house was not allowable under section 37(4). Hence, the question was answered in favor of the revenue.Issue 3: Disallowance on account of discount claimsThe court noted that a similar issue was restored to the Assessing Officer for verification in the case of Commissioner of Income Tax Vs. Modi Xerox Ltd. in Income Tax Appeal No. 42 of 2002. Accordingly, the issue was sent back to the Assessing Officer for verification.Issue 4: Addition on account of bad debts under section 36(2)The court referred to the judgment in Income Tax Appeal No. 31 of 2001, which ruled in favor of the assessee, stating that the bad debts were allowable under section 36(2). Hence, the question was answered in favor of the assessee.Issues 5, 6, and 7: Deduction under section 80-I and 80 HH for profit-making unitsThe court referred to the judgment in Income Tax Appeal No. 30 of 2001, which ruled in favor of the assessee, allowing deductions under sections 80-I and 80 HH for the profit-making units. Therefore, these questions were answered in favor of the assessee.Issue 8: Club membership subscription under section 37(1)The court cited the judgment in Income Tax Appeal No. 31 of 2001, which ruled in favor of the assessee, stating that the club membership subscription was commercially expedient and allowable under section 37(1). Hence, the question was answered in favor of the assessee.Issue 9: Lease rentals/chargesThe court referred to the judgment in Income Tax Appeal No. 31 of 2001, which ruled in favor of the assessee, allowing the lease rentals/charges. Therefore, the question was answered in favor of the assessee.Issue 10: Addition of expenses on maintenance of guest houseThe court noted that the Assessing Officer made an estimated addition of Rs. 15 lakhs for guest house expenses without any material evidence. The Commissioner (Appeals) and the Tribunal found no evidence of such expenditure apart from the rent of Rs. 9 lakhs. Therefore, the question was answered in favor of the assessee, stating that the addition was based on surmises and conjectures.Issue 11: Deduction under section 80 HH on income from sale of scrapThe court held that the income from the sale of scrap generated from the manufacturing process had a direct and immediate nexus with the industrial undertaking. Therefore, the income from the sale of scrap was to be included for the purpose of deduction under section 80 HH. The question was answered in favor of the assessee, directing the Assessing Officer to pass a consequential order.Conclusion:The appeals were disposed of with most questions answered in favor of the assessee, except for the issues related to rent paid for the guest house and the disallowance on account of discount claims, which were either ruled in favor of the revenue or sent back for verification.