2013 (10) TMI 1581 - AT - Income Tax

Tax Tribunal Rules on Expense Claims, Upholds Some Disallowances, and Allows Partial Deductions for Business Expenses.

Larsen & Toubro Ltd. Versus Addl. CIT Spl. Rg. 3, Mumbai And (Vice-Vera)

The ITAT confirmed the disallowance of telephone expenses at the guest house and commission paid, while allowing the deletion of community welfare and ... - ISSUES PRESENTED AND CONSIDERED 1. Whether expenditure on telephone at guest house is deductible or liable to disallowance. 2. Whether expenditure on community welfare and rural development is deductible. 3. Whether commission paid is deductible or requires disallowance. 4. Whether contribution to Marine Navy Officers Welfare Fund is deductible. 5. Whether turnover for deduction under sections 80HHC/80HHE should include scrap sales and miscellaneous income; whether loss on export of trading goods may be set off against profit on export of manufactured goods; and the attribution of indirect costs to trading exports. 6. Whether conference expenditure constitutes entertainment expenditure and to what extent it is disallowable. 7. Whether interest under section 234B is payable (mandatory application) for assessment year concerned. 8. Whether club membership expenses are deductible. 9. Whether unutilised MODVAT credit should be added back to income. 10. Whether excise duty on finished goods in bonded warehouse is exigible for addition. 11. Whether expenditure on construction of jetty (cement plant) is disallowable. 12. Whether unforeseeable losses in computation of work-in-progress on construction account are to be added back. 13. Whether various expenses on cement plants, interest and commitment charges on project borrowings, and related plant expenditures (including Nasik Glass Works) are disallowable. 14. Whether expenditure incurred on mining lease/mining operations is disallowable. 15. Whether deductions claimed under sections 80HHC/80HHE (other aspects) should be allowed. 16. Whether deduction under section 80M for dividend income can be reduced by an estimated proportion of indirect expenses where no direct expenditure is shown. 17. Whether expenses incurred to earn exempt interest (tax-free bonds) are liable to disallowance under section 14A or other principles, and if so, quantum of disallowance. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Telephone expenditure at guest house Legal framework: General principles of business expenditure deduction under the Income Tax law. Precedent Treatment: Tribunal's earlier decision in the assessee's own case for earlier years addressed identical facts and disallowed/treated the expenditure accordingly. Interpretation and reasoning: The Tribunal followed its prior findings where facts were identical; absent distinguishing facts the Tribunal's earlier determinations were treated as binding for like facts. Ratio vs. Obiter: Ratio - identical factual matrix and application of law leads to confirmation of lower authority's disallowance. Conclusion: Disallowance confirmed; ground dismissed. Issue 2 - Community welfare and rural development expenditure Legal framework: Deductibility of welfare and development expenditures under relevant provisions. Precedent Treatment: Tribunal earlier permitted deletion of additions for identical expenditures in assessee's prior years. Interpretation and reasoning: On identical facts, the Tribunal followed its prior favorable findings and allowed deletion of the addition. Ratio vs. Obiter: Ratio - precedent for identical factual situation governs allowable deduction. Conclusion: Addition deleted; ground allowed. Issue 3 - Commission paid Legal framework: Deductibility of commission payments as business expenditure. Precedent Treatment: Tribunal's prior orders for the assessee in earlier years applied and were followed. Interpretation and reasoning: No distinguishing facts; earlier Tribunal findings confirmed the disallowance by the CIT(A); therefore the CIT(A)'s decision is sustained. Ratio vs. Obiter: Ratio - adherence to prior Tribunal rulings on identical facts. Conclusion: Findings of CIT(A) confirmed; ground dismissed. Issue 4 - Contribution to Marine Navy Officers Welfare Fund Legal framework: Deductibility of contributions to welfare funds. Precedent Treatment: Tribunal in earlier years considered identical issue and permitted relief. Interpretation and reasoning: Following earlier Tribunal decisions, the Assessing Officer was directed to delete the addition; CIT(A) had allowed partial relief previously and Tribunal's precedent supported full deletion. Ratio vs. Obiter: Ratio - application of prior consistent rulings to identical facts. Conclusion: Addition deleted; ground allowed. Issue 5 - Deductions under sections 80HHC/80HHE (turnover composition; set-off; indirect cost attribution) Legal framework: Computation rules for export profit deductions under sections 80HHC and 80HHE - treatment of turnover components, allowable set-offs, and cost attribution. Precedent Treatment: Tribunal's earlier orders for the assessee (and its prior years) were followed on (a) inclusion of scrap and miscellaneous income, (b) set-off of trading losses against manufactured export profits, and (c) computation of indirect costs. Interpretation and reasoning: (a) Scrap sales and miscellaneous income excluded from turnover for 80HHC/80HHE relief following Tribunal precedent. (b) Set-off of trading loss against manufactured export profit was rejected, following prior Tribunal findings. (c) Attribution of indirect costs issue was not pressed and therefore dismissed. Ratio vs. Obiter: (a) & (b) Ratio - binding application of earlier Tribunal rulings; (c) Procedural/foreclosure as not pressed (treated as dismissed). Conclusion: Part (a) relief granted; part (b) dismissed; part (c) dismissed as not pressed. Grounds partly allowed. Issue 6 - Conference expenditure treated as entertainment expenditure Legal framework: Distinction between legitimate conference expenses and entertainment expenditure for purposes of deduction. Precedent Treatment: Tribunal earlier reduced similar disallowance by 50% in the assessee's prior case. Interpretation and reasoning: Identical facts warranted application of the earlier Tribunal direction to reduce the disallowance by 50%. Ratio vs. Obiter: Ratio - application of prior Tribunal quantification to identical factual situation. Conclusion: Disallowance reduced by 50%; ground partly allowed. Issue 7 - Interest under section 234B Legal framework: Interest under section 234B is mandatory where conditions are met. Interpretation and reasoning: The Tribunal held that interest as per law is to be charged while giving effect to the order. Ratio vs. Obiter: Ratio - mandatory application of statutory interest provision. Conclusion: Assessing Officer directed to charge interest as per law. Issues 8-15 - Club membership, MODVAT credit, excise duty in bonded warehouse, jetty construction expenditure, work-in-progress losses, plant expenses, project borrowing interest/commitment charges, Nasik Glass Works expenses, mining lease/mining expenditures, and other related grounds Legal framework: Various statutory and accounting principles governing capital and revenue expenditure, excise duties, MODVAT, and project-related costs. Precedent Treatment: The Tribunal repeatedly followed its own prior decisions in the assessee's earlier years and applied those findings to the identical factual matrices presented. Interpretation and reasoning: For each ground, because facts and legal issues were identical to earlier Tribunal decisions for the assessee, the Tribunal respectfully followed those precedents and confirmed the findings of the CIT(A) as appropriate. Ratio vs. Obiter: Ratio - consistent application of earlier Tribunal rulings to identical factual situations; no new law laid down. Conclusion: Grounds dismissed (i.e., findings of CIT(A) confirmed) across these issues. Issue 16 - Deduction under section 80M for dividend income (ad-hoc disallowance of indirect expenses) Legal framework: Deductions under Chapter VIA (section 80M) are allowable only where the income is included in gross total income and deductions are based on actual expenditures; general tax principle that only actual expenditure is deductible. Precedent Treatment: Reliance on jurisdictional High Court authority holding that estimated/proportionate expenses are not deductible where no actual expenditure is shown. Interpretation and reasoning: No specific or direct expenditure was shown in relation to earning dividend income; the Assessing Officer made an ad-hoc 5% disallowance. Following the jurisdictional High Court decision, the Tribunal held that only actual expenditure is deductible and estimated proportionate expenses cannot be disallowed in the manner attempted by the Assessing Officer. Therefore CIT(A)'s deletion of the ad-hoc disallowance was confirmed. Ratio vs. Obiter: Ratio - estimated/proportionate deduction/disallowance cannot substitute for proof of actual expense; cited High Court precedent governs. Conclusion: Addition/disallowance dismissed; ground dismissed. Issue 17 - Expenses to earn exempt interest (tax-free bonds) and section 14A Legal framework: Section 14A and related principles permit disallowance of expenditure incurred in relation to exempt income; the quantum of reasonable disallowance is a matter of fact and law. Precedent Treatment: Lower authorities had applied an ad-hoc 5% disallowance; CIT(A) deleted the disallowance. The Revenue contended for adjustment under section 14A; parties cited authorities. Interpretation and reasoning: Tribunal agreed that some reasonable disallowance is warranted for earning exempt interest. On the facts, and in the exercise of judicial discretion to meet the ends of justice, the Tribunal reduced the ad-hoc disallowance from 5% to 2% and directed recomputation accordingly. Ratio vs. Obiter: Ratio - where exempt income is earned, a reasonable disallowance under section 14A may be justified even in absence of directly apportioned expenses; quantum may be judicially fixed on facts. This decision establishes application to these facts; not laying a general formula beyond the case. Conclusion: Disallowance restricted to 2%; ground partly allowed.