2014 (9) TMI 1230 - AT - Income Tax

Tribunal rules in favor of assessee, dismissing Revenue's appeal and allowing excess commission payment.

The Revenue's appeal was dismissed, and the assessee's appeal was allowed. The Tribunal upheld the deletion of disallowance of excess commission payment ... Appeal memo before the Ld. CIT(A) not verified by a competent person as defined u/s. 140 r.w.r. 45 of the Income Tax Rules - HELD THAT:- As carefully perused the contents of the affidavit. Undoubtedly under Rule 45(2), the form of appeal to Ld. CIT(A) is to be signed and verified by the person who is authorized to sign the return of income. However, u/s. 140(c) of the Act “ if for any unavoidable reason such Managing Director is not able to sign and verify the return, then the same can be signed any Director thereof”. As the Managing Director was travelling, the appeal memo was signed and verified by the Executive Director (Finance), the same is in accordance with law. We, therefore, do not find any merit in the additional ground taken by the Revenue and is dismissed accordingly. Disallowance u/s. 14A - HELD THAT:- It is the claim of the assessee that the assessee has received dividend from Union Bank of India. The dividend was directly credited to the bank account of the assessee without any effort on the part of t he assessee and therefore the assessee has incurred Nil expenses for earning this dividend income. We find that this issue has been decided by the Hon’ble Bombay High Court in the case of Reliance Industries Ltd. [2009 (4) TMI 516 - BOMBAY HIGH COURT]. Considering all we direct the AO to delete the addition-. Ground No. 3 is accordingly allowed. Disallowance on upgradation of application software - HELD THAT:- As carefully perused the orders of the authorities below. Hon’ble Madras High Court in the case of CIT Vs Sundaram Clayton Ltd. [2008 (6) TMI 327 - MADRAS HIGH COURT], following the decision in the case of Southern Roadways [2006 (10) TMI 82 - MADRAS HIGH COURT] has held that “upgradation of computers thereby enhancing the configuration of the computers for improving their efficiency, but without making any structural alterations is not change of an enduring nature. The expenditure incurred by the assessee had to be treated as revenue expenditure”. In the case in hand, it is the upgradation of software already installed for the smooth and efficient working therefore following the ratio laid down by the Hon’ble Madras High Court (supra), we direct the AO to delete the addition and allow the claim of upgradation of software as revenue expenditure. The AO is also directed to withdraw the depreciation allowed by him while treating the expenditure as capital expenditure. Ground No. 4 with its sub-grounds are accordingly allowed. Disallowance of interest being attributable to capital work-in-progress - HELD THAT:- AO has gone by the presumption that the assessee must have utilized some part of the borrowed capital towards capital work-in-progress. A perusal of the balance sheet of the assessee shows that the assessee has generated cash to the tune of ₹ 34.50 crores as is evident from the cash flow statement appearing on 43 of the Annual statement of account. The total expenditure incurred towards capital work-in-progress is only ₹ 6.45 crores. This clearly show that the assessee was having sufficient own funds. We, therefore, do not find any merit in attributing the interest towards capital work-in-progress. We, accordingly direct the AO to delete the addition. Nature of expenditure - Expenditure on on current repairs of buildings - revenue or capital expenditure - HELD THAT:- The object and purpose of every repair is to improve the bad condition of the building to prevent its further deterioration as far as possible and to keep it wind and water-tight. So long the repair does not bring into existence, an additional advantage or benefit of an enduring nature or change the nature, character or the identity of the building itself, the expenditure has to be considered as revenue expenditure. A perusal of the detail shows that no structural alteration was made to the building and the assessee carried out only repairs which were absolutely necessary to preserve and maintain the building and to prevent its further deterioration. The plastering process may have extended the life of the building, it has not extended the original life of the building nor the original condition of the building. The quantum of expenditure by itself cannot be a determining factor for finding out an expenditure as revenue or capital. Considering the facts in totality, in our considered opinion, the expenditure incurred by the assessee have to be allowed as revenue expenditure, we, accordingly, direct the AO. However, the AO is directed to withdraw depreciation which was allowed by him while treating the expenditure as capital in nature Deduction u/s. 10(B) - disallowance of Power and Fuel expenses - reallocating the expenditure and estimated the disallowance - HELD THAT:- We find that the assessee has filed complete details of unit-wise power consumption for every unit. The assessee has also filed complete month-wise consumption of power for every unit. This is also evident from the reply filed by the assessee during the course of the assessment proceedings which is exhibited hereinabove. The AO has not pointed out any defect in the independent records nor he has given any adverse findings in the details of the power consumption filed by the assessee. It is also not a case of the revenue that the assessee has shown exorbitant profit from the units which are eligible for deduction u/s. 10(B) of the Act. It is also not the case of the Revenue that there is a diversion of expenditure from exempt unit to taxable unit. The reallocation has been made purely on surmises and conjectures. The reallocation has been made on the basis of respective turnovers of eligible and non eligible units which, in our considered opinion, is unwarranted. We, accordingly set aside the findings of the Ld. CIT(A) and direct the AO to delete the addition Issues Involved:1. Disallowance of excess commission payment.2. Verification of appeal memo by a competent person.3. Disallowance under Section 14A.4. Disallowance of expenditure on software upgradation.5. Disallowance of interest attributable to capital work-in-progress.6. Disallowance of expenditure on current repairs of buildings.7. Estimated disallowance of power and fuel expenses.Detailed Analysis:1. Disallowance of Excess Commission PaymentThe Revenue's appeal contested the deletion of a disallowance of Rs. 10,10,312/- paid to M/s. Galaxy Chemicals Inc. USA. The Tribunal found that this issue had been previously decided in favor of the assessee in earlier years (A.Y. 2004-05 and 2005-06). The Tribunal noted that no new facts were presented, and thus, following the precedent, dismissed the Revenue's grievance.2. Verification of Appeal Memo by a Competent PersonThe Revenue raised an additional ground regarding the verification of the appeal memo. The assessee's Managing Director was traveling, and the memo was signed by the Executive Director (Finance). The Tribunal found this to be in accordance with Section 140(c) of the Income Tax Act, which allows a Director to sign in the absence of the Managing Director. Hence, this ground was dismissed.3. Disallowance under Section 14AThe assessee claimed that no expenses were incurred to earn dividend income, as it was directly credited to their bank account. The Tribunal referred to the Bombay High Court's decision in Reliance Industries Ltd. (339 ITR 632) and directed the AO to delete the addition of Rs. 4,166/-. This ground was allowed.4. Disallowance of Expenditure on Software UpgradationThe AO had capitalized Rs. 7,61,050/- of software expenses, allowing depreciation and disallowing the balance. The CIT(A) partially upheld this. The Tribunal, referring to the Madras High Court's decision in Sundaram Clayton Ltd. (321 ITR 69), held that the upgradation of existing software should be treated as revenue expenditure. The Tribunal directed the AO to delete the disallowance of Rs. 6,57,550/- and withdraw the corresponding depreciation. This ground was allowed.5. Disallowance of Interest Attributable to Capital Work-in-ProgressThe AO attributed Rs. 56 lakhs of interest to capital work-in-progress, assuming borrowed capital was used. The assessee argued that the expenditure was met from internal accruals. The Tribunal found that the assessee had sufficient own funds (Rs. 34.50 crores) to cover the capital work-in-progress (Rs. 6.45 crores). Thus, the Tribunal directed the AO to delete the addition. This ground was allowed.6. Disallowance of Expenditure on Current Repairs of BuildingsThe AO treated Rs. 1,61,57,002/- spent on building repairs as capital expenditure. The assessee argued that these were necessary repairs. The Tribunal, referencing the Calcutta High Court's decision in ICI (India) Pvt. Ltd. (113 ITR 105), held that the repairs did not result in any additional advantage or structural alteration. Therefore, the Tribunal directed the AO to treat the expenditure as revenue expenditure and withdraw the depreciation allowed. This ground was allowed.7. Estimated Disallowance of Power and Fuel ExpensesThe AO reallocated power and fuel expenses, disallowing Rs. 61,53,396/-. The assessee maintained separate books for EOU and non-EOU units, with no defects pointed out by the AO. The Tribunal found the reallocation to be based on surmises and conjectures, without any adverse findings. Therefore, the Tribunal directed the AO to delete the addition. This ground was allowed.ConclusionThe appeal filed by the Revenue was dismissed, and the appeal filed by the assessee was allowed. The Tribunal directed the AO to make necessary adjustments as per the findings. The order was pronounced in the open court on 03.09.2014.