2014 (7) TMI 423 - AT - Income Tax

Tribunal allows appeals, directs AO to allow disallowed expenditures based on precedent

The Tribunal partly allowed the appeals, directing the AO to allow certain disallowed expenditures based on previous decisions and Supreme Court rulings. ... Deductibility of provision for post-retirement medical benefits based on actuarial valuation - treatment of provision as contingent liability versus ascertained liability - allowance of expenditure for right to use technical know how under section 35AB as one sixth deduction - deductibility of expenditure on implementation of Government's 20 Point Programme as business expenditure - treatment of excise and customs duties included in closing inventory under section 43B - application of the special bar in section 37(4) to guest house expenses - treatment of entertainment expenses not pressed by the assessee - deduction under sections 80HH/80I/80IA for LPG bottling as production activity - deductibility of liabilities crystallised after destruction of records (write off) versus accrual in earlier yearDeductibility of provision for post-retirement medical benefits based on actuarial valuation - treatment of provision as contingent liability versus ascertained liability - Provision for post retirement medical benefits - allowed on verification of actuarial valuation for AY 1996 97; AO directed to allow claim on basis of actuarial report; similar direction issued for AY 1998 99. - HELD THAT: - The Tribunal noted its earlier decisions in the assessee's own cases holding that post retirement medical benefits are not contingent but constitute a liability arising from the terms of employment and may be allowed when supported by actuarial valuation. For AY 1996 97 the matter is remitted to the AO for calling for year wise actuarial valuation and allowing the claim accordingly. For AY 1998 99 the same approach is directed - allowance to be made on the basis of the actuarial report consistent with the Tribunal's earlier findings. [Paras 6, 19]For AY 1996 97 remitted to AO for verification of actuarial report and allowance; for AY 1998 99 AO directed to allow claim on basis of actuarial report.Allowance of expenditure for right to use technical know how under section 35AB as one sixth deduction - Expenditure for right to use technical know how - allowed to the extent of one sixth under section 35AB for both AY 1996 97 and AY 1998 99. - HELD THAT: - Relying on the Tribunal's earlier decisions in the assessee's own cases, the Bench applied the settled treatment that the claim for acquisition of right to use technical know how should be allowed by permitting the one sixth deduction under section 35AB in the relevant year(s). The AO is directed to give effect to that view for the assessment years under appeal. [Paras 8, 20]AO directed to allow the claim under section 35AB to the extent of one sixth for the years under appeal.Deductibility of expenditure on implementation of Government's 20 Point Programme as business expenditure - Expenditure on implementation of the 20 Point Programme - allowed for both AY 1996 97 and AY 1998 99 following consistency with Tribunal's earlier decisions. - HELD THAT: - The Tribunal followed the coordinate bench decisions in the assessee's own earlier years which consistently treated such welfare expenditure, undertaken at the instance of the administrative ministry and in discharge of social obligations, as allowable. No contrary precedent was shown to justify departing from that view; accordingly the amounts disallowed by the lower authorities were restored. [Paras 10, 21]Disallowance set aside and expenditure allowed in favour of the assessee for both years.Treatment of excise and customs duties included in closing inventory under section 43B - Excise/customs duties included in closing inventory - allowed for both AY 1996 97 and AY 1998 99 in line with the assessee's earlier year Tribunal rulings. - HELD THAT: - Relying on the Tribunal's prior decisions in the assessee's own cases (which applied relevant High Court and Supreme Court authority), the Bench held that the CIT(A) erred in confirming partial disallowance under section 43B. The AO was directed to allow the claim as per the directions given in earlier assessments. [Paras 12, 22]Disallowance set aside and AO directed to allow the claim for excise/customs duties for both years.Application of the special bar in section 37(4) to guest house expenses - Expenditure on maintenance, repairs, property taxes and telephones of guest house - disallowed under the special provision overriding general allowance. - HELD THAT: - The assessee admitted that the coordinate bench had applied the Supreme Court's decision in Britannia Industries Ltd. to disallow guest house related expenses under the special provision. The Tribunal followed that authority and the co ordinate bench precedent and dismissed the ground disallowing the expenditure. [Paras 14]Ground disallowed; guest house maintenance and related expenses not deductible.Treatment of entertainment expenses not pressed by the assessee - Claim for entertainment expenses relating to employees accompanying guests - not pressed and dismissed. - HELD THAT: - The assessee's authorised representative expressly did not press this ground at the hearing. The Tribunal accordingly treated the ground as not pressed and dismissed it. [Paras 15, 24]Ground dismissed as not pressed.Deduction under sections 80HH/80I/80IA for LPG bottling as production activity - Claim for deduction under sections 80HH/80I/80IA for profits of new LPG bottling plants - allowed following consistent Tribunal and High Court precedents. - HELD THAT: - The Tribunal followed its own coordinate bench decisions which treated LPG bottling as a production activity qualifying for the specified deductions; those views had been upheld by the Bombay High Court. No contrary authority was shown, and the disallowance was set aside accordingly for both assessment years. [Paras 17, 25]Deduction under the relevant incentive provisions allowed in favour of the assessee.Deductibility of liabilities crystallised after destruction of records (write off) versus accrual in earlier year - Repair expenditure/write offs arising after destruction of records in a fire - not deductible for AY 1998 99 because liabilities neither incurred nor accrued in the relevant year. - HELD THAT: - The Tribunal examined the claim that debits became known only after records were reconstructed following a refinery fire and that the write off in 1997 98 represented a crystallised liability. It concluded that the liabilities were neither incurred nor accrued in the relevant assessment year and therefore the claim for deduction was not allowable. [Paras 23]Ground disallowed; write off not deductible for the year under appeal.Treatment of stores and spares written off where the ground is not pressed - Stores and spares written off - ground not pressed and dismissed for AY 1998 99. - HELD THAT: - The assessee did not press the ground relating to stores and spares written off. The Tribunal therefore dismissed the ground being not pressed by the appellant. [Paras 24]Ground dismissed as not pressed.Final Conclusion: The appeals are partly allowed for statistical purposes: several disallowances (post retirement medical provisions subject to actuarial verification, one sixth allowance for technical know how, 20 Point Programme expenditure, excise/customs duties in inventory, and deductions under industrial incentives) are restored in favour of the assessee, while guest house expenses and certain write offs are disallowed; two grounds were dismissed as not pressed. Issues Involved:1. Disallowance of provision for post-retirement medical benefits.2. Disallowance of expenditure for acquiring right to use know-how.3. Disallowance of expenditure on welfare projects under the 20 Point Programme.4. Disallowance of excise and customs duties included in closing inventory under Section 43B.5. Disallowance of expenditure on maintenance and repairs, property taxes, and telephones of guest house.6. Disallowance of entertainment expenses.7. Disallowance of deduction under sections 80HH, 80I/80IA.8. Disallowance of repair expenditure due to destruction of records in fire.9. Disallowance of stores and spares written off.Issue-wise Detailed Analysis:1. Disallowance of provision for post-retirement medical benefits:The assessee's appeal against the disallowance of Rs. 4,59,90,540/- for post-retirement medical benefits was upheld based on previous Tribunal decisions. The Tribunal directed the AO to allow the claim based on actuarial valuation, referencing the Supreme Court decision in Bharat Earth Movers Ltd. vs. CIT, which held that such liabilities are not contingent but ascertained.2. Disallowance of expenditure for acquiring right to use know-how:The Tribunal followed its earlier decision, directing the AO to allow 1/6th of the expenditure under Section 35AB, dismissing the claim under Section 37(1) as not pressed. This was consistent with the Tribunal's decision for earlier assessment years.3. Disallowance of expenditure on welfare projects under the 20 Point Programme:The Tribunal allowed the appeal, following its consistent view in earlier years that such expenditures are allowable. The decision was based on the Tribunal's previous rulings and the Supreme Court decision in Shri Venkata Satyanarayana Rice Mills vs. CIT.4. Disallowance of excise and customs duties included in closing inventory under Section 43B:The Tribunal allowed the appeal, directing the AO to allow the claim, following the Gujarat High Court decision in Lakhanpal National Ltd. vs. ITO and the Supreme Court decision in Berger Paints India Limited vs. CIT.5. Disallowance of expenditure on maintenance and repairs, property taxes, and telephones of guest house:The Tribunal disallowed the appeal, referencing the Supreme Court decision in Britannia Industries Ltd. vs. CIT, which held that such expenditures are to be disallowed under Section 37(4) as they pertain to guest houses.6. Disallowance of entertainment expenses:The assessee did not press this ground, and thus, the Tribunal dismissed it.7. Disallowance of deduction under sections 80HH, 80I/80IA:The Tribunal allowed the appeal, following its consistent view that the process of bottling LPG Gas is a production activity eligible for deductions under these sections. This view was upheld by the Bombay High Court.8. Disallowance of repair expenditure due to destruction of records in fire:The Tribunal disallowed the appeal, agreeing with the lower authorities that the liabilities were neither incurred nor accrued during the relevant assessment year and thus not eligible for deduction.9. Disallowance of stores and spares written off:The assessee did not press this ground, and thus, the Tribunal dismissed it.Conclusion:The appeals were partly allowed for statistical purposes, with specific directions to the AO to follow the Tribunal's previous decisions and the Supreme Court rulings where applicable. The order was pronounced in the open court on 25.06.2014.