2014 (12) TMI 255 - AT - Income Tax

Tribunal upholds CIT(A)'s decisions on revenue expenditure, late payments, compensation, and depreciation

The Tribunal dismissed the Revenue's appeals, upholding the CIT(A)'s decisions on all issues. The premium paid on buyback of shares was treated as revenue ... Nature of expenses on premium paid for buy back of shares – Revenue expenses or not – Held that:- As decided in assessee’s own case for the earlier assessment year, it has been held that while accepting the compromise or settlement between the two warring groups, for a proceeding under ss. 397 and 398 of the Companies Act, 1956, the Court will keep in mind the prime interest of the company as well as public interest - the assessee has obtained any right or advantage which would affect its capital structure - The settlement was that as a result of the compromise the assessee acquired the shares and the share capital was reduced - merely represented the mode of settlement and it cannot be the test to be applied to determine the question whether the assessee derived any benefit on capital account - payment made to secure peace and harmony and smooth management of the company, the interest of business would serve and that is the whole purpose of such payment - Therefore, the amount paid for this purpose was on revenue account - by getting rid of the minority shareholders, the company could not be said to have acquired any enduring benefit – thus, there was no infirmity in the order of the CIT(A) allowing the premium paid on buy back of shares as a revenue expenditure – Decided against revenue. Disallowance on payment of PF and ESI made u/s 43B – Payments made after prescribed due dates – Held that:- It has been held in various decisions that PF & ESI dues, if paid before filing of the return prescribed u/s.139(1) is an allowable deduction - the assessee has paid/deposited the PF & ESI dues much prior to the due date of filing of the return, therefore, there was no infirmity in the order of the CIT(A) – Decided against revenue. Amount of compensation debited by assesse - The assessee had assigned the work of interior design of 106 rooms of the Hotel in the year 1997 to one M/s. Jay Arts - Due to certain disputes that arose between the said party and the assessee, a case was filed before the Civil Court who in its judgment dated 10-08-2007 had granted compensation to Jay Arts against the work done with respect to interior designing of the hotel in the year 1997 and some additional work - The assessee had debited compensation of ₹ 2 crores paid to Jay Arts in its profit and loss account for the A.Y. 2008-09 - CIT(A) allowed an amount of ₹ 32 lakhs out of the ₹ 1,82,00,000/- being revenue in nature for the AY and the balance amount of ₹ 1,50,00,000/- in the subsequent year on the ground that there is a court order directing the assessee to pay compensation and interest - the amount of ₹ 2,07,32,232/-, i.e. 48% of the total liability relates to the outstanding amounts and the balance amount is towards interest - Since the assessee has settled the claim of ₹ 3,50,00,000/-, therefore, on prorata basis, the capital expenditure comes to ₹ 1,68,00,000/- and the interest portion comes to ₹ 1,82,00,000/-. Accrual of liability to pay damages - Held that:- Accrual of liability to pay damages from the date on which the MOU is signed for full and final settlement, CIT(A) rightly relied upon Kaveri Engineering Industries Limited. Versus Deputy Commissioner Of Income-Tax [1992 (7) TMI 131 - ITAT MADRAS-B] - there is a difference between a statutory liability and a liability arising on account of a breach of contract or breach of faith - Statutory liability arises on the happening of the taxable event. Such liability arises by reason of the statute itself and merely because the assessee disputes the liability, its accrual does not get postponed. Treatment of interest expenses – Held that:- The CIT(A) rightly followed the decision in Bombay Steel Navigation Company (P) Ltd., Vs. CIT [1964 (10) TMI 12 - SUPREME Court] there was no infirmity in the order of CIT(A) in allowing an amount of ₹ 32,00,000/- out of the payment of ₹ 2,00,00,000/- to M/s. Jay Arts treating the same as revenue expenditure - the order of the CIT(A) in directing the AO to allow depreciation on the capital expenditure is concerned, there is no infirmity in the same - when certain amount is allocated towards capital assets of the assessee company, the assessee is entitled to claim depreciation on the same – Decided against revenue. Issues Involved:1. Nature of premium paid on buyback of shares: Revenue vs. Capital Expenditure.2. Disallowance under Section 43B for late payment of PF and ESI dues.3. Classification of compensation payment to M/s. Jay Arts: Capital vs. Revenue Expenditure.4. Allowability of interest paid on arrears as revenue expenditure.5. Depreciation on capital expenditure related to compensation payment.Issue-wise Detailed Analysis:1. Nature of Premium Paid on Buyback of Shares: Revenue vs. Capital ExpenditureThe Revenue contended that the premium paid on buyback of shares should be treated as capital expenditure, citing judicial precedents like Brook Bond India Ltd. vs. CIT. The assessee argued that the expenditure was to resolve disputes with shareholders, facilitating smooth business operations, and should be treated as revenue expenditure. The CIT(A) allowed the claim, referencing the decision in Echjay Industries Ltd. vs. DCIT, which was affirmed by the Bombay High Court. The Tribunal upheld the CIT(A)'s decision, noting that similar claims were allowed in previous years and the expenditure was incurred to ensure smooth business operations, not to increase capital base.2. Disallowance under Section 43B for Late Payment of PF and ESI DuesThe AO disallowed Rs. 10,27,230 under Section 43B for late payment of PF and ESI dues. The CIT(A) directed the AO to verify if payments were made before the due date of filing the return. The Tribunal upheld the CIT(A)'s direction, referencing judicial decisions that allow such deductions if payments are made before filing the return under Section 139(1).3. Classification of Compensation Payment to M/s. Jay Arts: Capital vs. Revenue ExpenditureThe AO treated the compensation payment of Rs. 2 crores to M/s. Jay Arts as capital expenditure, as it related to fixed assets created during the hotel setup. The CIT(A) partially allowed the claim, treating Rs. 1,68,00,000 as capital expenditure and Rs. 32,00,000 as interest for the relevant assessment year, based on a pro-rata allocation. The Tribunal upheld the CIT(A)'s decision, noting that the liability to pay compensation accrued when the court order was accepted, and the interest portion was a legitimate business expenditure.4. Allowability of Interest Paid on Arrears as Revenue ExpenditureThe CIT(A) allowed the interest paid on arrears as revenue expenditure, referencing the Supreme Court decision in Bombay Steel Navigation Co. (P) Ltd. vs. CIT, which held that interest paid for business purposes is deductible. The Tribunal upheld this decision, noting that the interest expenditure was incurred for the smooth running of the business and was not for acquiring a capital asset.5. Depreciation on Capital Expenditure Related to Compensation PaymentThe CIT(A) directed the AO to allow depreciation on the capital expenditure of Rs. 1,68,00,000 related to the compensation payment. The Tribunal upheld this direction, stating that when an amount is allocated towards capital assets, the assessee is entitled to claim depreciation.Conclusion:The Tribunal dismissed the Revenue's appeals, upholding the CIT(A)'s decisions on all issues. The premium paid on buyback of shares was treated as revenue expenditure, late payments of PF and ESI dues were allowed if paid before the return filing date, compensation payment to M/s. Jay Arts was partly treated as capital expenditure with the interest portion allowed as revenue expenditure, and depreciation on the capital expenditure was permitted.