2014 (12) TMI 226 - AT - Income Tax

Appeal allows surcharge and turnover tax as business expenses, but upholds disallowance of laboratory costs as capital.

The appeal regarding the disallowance of surcharge on sales tax and turnover tax was allowed, recognizing these as allowable business expenses under ... Surcharge on sales tax and turnover tax – Held that:- The State Government has made any amendment to the Act so as to write back the entire profit of the assessee to the State Government - the assessee quantified the liability - If it is paid within the due date, the payment of the same is to be allowed in terms of sec. 43B - assessee follows the mercantile system of accounting and is entitled to deduct sales tax from the profit and gains of the business which had accrued during the financial year relevant to the assessment year subject to the provisions of section 43B - while computing the profit and gains of the business, whether the assessee is entitled to a particular deduction or not will depend on the provisions of law relating thereto and not on the view which the assessee might take of its rights nor can the existence or absence of entries in its books of account be decisive or conclusive in the matter - Since the assessee is following the mercantile system of accounting, the assessee is fully justified in claiming deduction towards surcharge on sales tax and turnover tax which is payable in the financial year corresponding to the relevant AY – relying upon Kedarnath Jute Manufacturing Company Limited Versus Commissioner of Income-Tax (Central), Calcutta [1971 (8) TMI 10 - SUPREME Court] – Decided in favour of assessee. Laboratory expenses – Held that:- The assessee had incurred expenses for purchasing and handing over the equipment to the Government Chemical Examination Laboratory at Trivandrum, Ernakulam and Calicut - the contentions of the assessee cannot be accepted because the nexus of expenditure with the business cannot be a reason to allow the expenditure - The expenses incurred should be wholly and exclusively laid out or expended for the purpose of business - The expenditure incurred by the assessee shall be for carrying on the business of the assessee, i.e., to enable the assessee to earn profit in that business - It is not enough that the disbursements are made in the course of or arise out of or concerned with profits made out of the business. But it means also is to be for the purpose of earning profit from the business – a mere liability to satisfy the obligation by the assessee is not 'expenditure', it only when the assessee satisfies the obligation to incur expenses for the purpose of business, it is business expenditure - though the expenses were incurred by the assessee, it cannot be said that they were incurred for the purpose of business or earning goodwill – Decided against assessee. Issues Involved:1. Disallowance of surcharge on sales tax and turnover tax.2. Disallowance of laboratory expenses.Issue-Wise Detailed Analysis:1. Disallowance of Surcharge on Sales Tax and Turnover Tax:The first issue pertains to the disallowance of surcharge on sales tax and turnover tax paid by the assessee. The assessee, a wholesale trader of Indian Made Foreign Liquor and beer, argued that it is bound to pay these surcharges as per the provisions of 'The Kerala Surcharge on Taxes Act, 1957' and 'The Kerala General Sales Tax Act, 1963.' The Assessing Officer disallowed these payments, and the CIT(A) upheld this disallowance, reasoning that such taxes are collected from purchasers and should not be deducted from the assessee's profits. The CIT(A) referred to section 40(iib) of the Income Tax Act, which denies certain deductions, to support this stance.The assessee contended that these payments are statutory liabilities made wholly and exclusively for business purposes and should be allowable under section 37 of the Income Tax Act. The assessee cited several Supreme Court judgments (e.g., S Kodar vs. State of Kerala) to argue that the surcharge and turnover tax are not appropriations of profit but necessary business expenses.The Tribunal concluded that since the assessee follows the mercantile system of accounting, it is justified in claiming deductions for surcharge on sales tax and turnover tax payable in the financial year, subject to section 43B of the Income Tax Act. The Tribunal allowed the assessee's claim, referencing judgments like Kedarnath Jurte Mfg. Co. Ltd. vs. CIT and CIT vs. Kalinga Tubes Ltd.2. Disallowance of Laboratory Expenses:The second issue concerns the disallowance of laboratory expenses. The assessee had contributed to the Government Chemical Examiners Laboratories for modernizing their equipment to avoid delays in chemical analysis of liquor products, which affected its business. The Assessing Officer disallowed these expenses, categorizing them as capital in nature, and the CIT(A) upheld this decision, noting that the assets were not owned by the assessee.The assessee argued that these payments were made for business purposes and should be considered revenue expenses since the assessee did not own the equipment. The assessee cited the Delhi High Court judgment in CIT vs. D.T.T.D.C. Ltd., where similar expenses were allowed as revenue expenditure.The Tribunal, however, disagreed with the assessee, stating that the expenses must be wholly and exclusively for business purposes to be deductible. The Tribunal noted that the nexus of expenditure with business alone is insufficient; the expenses must directly contribute to earning profits. The Tribunal did not follow the Delhi High Court judgment due to a pending special leave petition in the Supreme Court and decided this issue against the assessee.Conclusion:The appeal regarding the disallowance of surcharge on sales tax and turnover tax (I.T.A. No. 65/Coch/2014) was allowed, recognizing these as allowable business expenses. However, the appeal concerning laboratory expenses (I.T.A. No. 66/Coch/2014) was partly allowed, upholding the disallowance of these expenses as capital in nature.