2016 (9) TMI 55 - AT - Income Tax

Assessee wins on depreciation, Section 40(a)(ia) deduction, and business advances; miscellaneous expenses remanded for TDS verification

N.K. Proteins Ltd. Versus Addl. CIT, Range-5, Ahmedabad and Vica-Versa

ITAT Ahmedabad partly allowed assessee's appeal and dismissed Revenue's appeal. Court remanded miscellaneous expenses of Rs. 14.40 lacs to AO for ... Disallowance under Section 40(a)(ia) in the absence of details - Held that:- From going through the submissions of ld. AR we understand that the only reason for which ld. Assessing Officer has not allowed the deduction that there is no record about the type of expenditure of ₹ 14.40 lacs as the same has been mentioned as miscellaneous expenses and if an expenditure on which TDS is not required to be deducted then such expenses cannot be allowed in this year as they pertained to earlier years.We are, therefore, of the view that this issue needs to be set aside to the file of Assessing Officer before whom necessary details will be supplied by the assessee showing the type of expenditure, year of incurring such expenditure and provisions of TDS applicable on this expenditure was incurred. Eligibility of depreciation - Held that:- The assessee has proved beyond doubt that the impugned assets consisting of 5 trucks purchased for ₹ 67,34,004/- satisfy all the conditions as provided u/s 32 of the Act and, therefore, are eligible for depreciation Disallowance on depreciation on the assets treating them capital working in progress - Held that:- On the examination of the detailed annexure-3 at page 188 of the paper book there appears details of assets costing ₹ 27,83,223/- which were transferred from capital work in progress to fixed assets a/c. under plant & machinery head and were put to use on 3rd May, 2008. Similarly, on page 195 of this paper book shows that assets of ₹ 3,15,984/- under electrical installation head were put to use on 22nd May, 2008. Auditors remark which both the lower authorities are referring to is appearing at remarked-3 of Annexure-3 on depreciation details for FY 2008-09 in form 3CD report is just referring that the addition during the year includes the capital work in progress which means that the addition includes some assets which have been purchased during the year and some assets which were forming of capital work in progress upto previous year were now shifted under the block of assets for the purpose of claiming depreciation. We are of the view that remark of statutory auditors has to be seen in totality that Annexure-3A of the same assets duly certified by the same auditor giving bifurcation of each and every assets to the date of its being put to use and above all the depreciation for the year claimed by the assessee is also duly certified by the same auditor. Therefore, we are of the view that no disallowance was called for on depreciation of ₹ 4,64,850/- on the assets of ₹ 30,99,207/- treating them capital working in progress upto FY 2007-08 and FU 2008-09 i.e. the Asst. Year under consideration, We allow this ground of assessee. Addition u/s 14A - Held that:- No disallowance is called for u/s 14A as assessee has not claimed any exempt income in the year under appeal. Disallowance being the provision for diminution in assets - Held that:- Respectfully following the judgment of Hon. Jurisdictional High Court in the case of CIT vs. Abdul Razak & Co. (1981 (2) TMI 27 - GUJARAT High Court), we are of the considered opinion that sundry debit balance written off for ₹ 56,000/- should be allowed as a revenue expenditure. This ground of assessee is allowed Deduction u/s 40(a)(ia) - Held that:- As in the given circumstances when there is no dispute to the genuineness of the expenditure which proves that these expenses of ₹ 36.3 lacs were actually incurred in earlier years but could not have been claimed for some reason or other. Even if these expenditure had been claimed, they certainly would have been disallowed u/s 40(a)(ia) of the Act as no tax was deducted and deposited. This exercise of deducting and depositing TDS was carried out in the year under appeal which fulfills all the conditions of section 40(a)(ia) of the Act which allows to claim deduction of such expenditure in the year in which due taxes (TDS) are deposited. By claiming this expenditure of ₹ 36.3 in this year there is no impact to the Revenue in terms of tax liability. We are, therefore, of the view that assessee should be allowed deduction u/s 40(a)(ia) of the Act for ₹ 36.3 lacs and therefore, no interference is called for in the order of ld. CIT(A) with respect to this ground. Accordingly this ground of Revenue is dismissed. TDS u/s 192 or 194H - Whether commission or brokerage paid to Chairman/whole time Director is part of salary on which TDS is deducted u/s 192 of the Act or it is to be treated as commission/brokerage on which TDS is deductible u/s 194H - addition u/s 40(a)(ia) - Held that:- Thus issue has been settled by the Co-ordinate Bench, Kolkata in the case of Jahangir Biri Factory (P) Ltd. v. Dy. CIT (2009 (3) TMI 215 - ITAT CALCUTTA-C ) wherein it has been held that commission paid to the Directors as per their terms of employment for the work done in their capacity as whole time directors should have been treated as an incentive in addition to salary, bonus and other perquisites and they do not fall under the purview of sec.194H or 194J. It is true that tax is deductible on such commission at the rate prescribed u/s 192 of the Act, since such commission is nothing but part of salary and the appellant has failed to deduct such tax. However, provisions of sec.40(a)(ia) of the Act do not cover expenditure subject to tax deductible u/s 192 of the Act. We are therefore of the view that the impugned amount of commission/brokerage paid to directors is a part of salary and remuneration to the Chairman and Managing Directors and income-tax is required to be deducted at source u/s 192 of the Act. Where the assessee has deducted and deposited the part of TDS during the year and the remaining in the following year on the commission paid to whole time directors which is in the nature of salary is rightly subject to TDS u/s 192 of the Act and not u/s 194H of the Act and, therefore, no disallowance is called for u/s 40(a)(ia) of the Act Disallowance on account of interest on non interest bearing advance - Held that:- We find that assessee company is dealing with edible oil and non-edible oil and the gross turnover of ₹ 1478.7 crores and profit before taxes at ₹ 13.49 crores. We further observe that reserve and surplus of ₹ 42.56 crores stood along with 6.47 crores as capital as on 31/3/2008. We also observe that total of share capital reserve and surplus at ₹ 49.03 crores is almost 3 times of loan funds of ₹ 15.36 crores. The reason for observing these financial datas are to analyse that assessee company is having huge turnover, heavy profits, sufficient capital basis and availability of interest-free funds. Further we find that there is no dispute to the basic finanancial results i.e. GP or NP of the company and audited books of account have been accepted by the Revenue. Now as far as M/s N. K. Industries is concerned, we find that assessee is regularly purchasing non-edible oil on exclusive basis and if we analyse the advances standing at the end of the month with the monthly sales of the assessee company, we find that the monthly sales of the company are approx. ₹ 120 crores and the closing balance of M/s N. K.Indus. is approx. ₹ 10 crores. These transactions are undoubtedly business transactions and there is no evidence on record to show that these are interest free advances. These are purely business advances and profit earning company in the regular course of business and for commercial expediency has to keep funds advanced to the supplier of raw material to have uninterrupted supply of quality goods. We are of the view that ld. Assessing Officer was not justified in making disallowance of ₹ 84 lacs on the advances to M/s N.K. Industries. As far as advances of ₹ 50 lacs to Vipul Industries is concerned which has been settled in the subsequent year seems to be a normal business advance looking to the over all financial volume of assessee company and do not call for any disallowance of interest. Similarly in the case of Guru Commodities and Pearl Energy calling debit balances of ₹ 25000/- and ₹ 646627/- are also old advances and revenue has also not brought on record any evidence to prove that these are non-business advances, we are of the view that in the given facts and circumstances of the case where assessee has sufficient interest free funds, liquid funds and profit earning business, these advances have been made in the regular course of business for commercial expediency. Accordingly, no disallowance was called for ₹ 91,07,595/- on account of interest expenditure u/s 36(1)(iii) of the Act as the advances were for business purposes, commercial expediency and no nexus being proved by the Revenue for actual diversion of interest bearing funds to non-interest bearing advances. No interference is called for in the order of ld. CIT(A). In the result, appeal of Revenue is dismissed. Issues Presented and Considered1. Whether the disallowance of Rs. 14,40,000 under Section 40(a)(ia) for miscellaneous expenses in the absence of specific details is justified.2. Whether depreciation of Rs. 16,83,501 on five tankers, allegedly not used for business, is allowable when the tankers were hired out to a related company and hire charges were voluntarily offered for taxation.3. Whether depreciation of Rs. 4,64,850 on plant & machinery and electrical installation is rightly disallowed on the ground that these assets were included in work-in-progress (WIP) as per auditor's report.4. Whether disallowance of Rs. 1,13,521 under Section 14A for expenditure related to investments is justified when investments were made out of interest-free funds and no expenditure was incurred on investments.5. Whether disallowance of Rs. 56,000 as provision for diminution of assets (sundry debit balances written off) is correct or whether it is allowable as revenue expenditure.6. Whether deletion of disallowance of Rs. 36,30,000 under Section 40(a)(ia) for prior period expenses where TDS was deducted and paid during the year is justified.7. Whether deletion of disallowance of Rs. 83,98,000 on account of non-compliance with Section 194H for commission paid to directors is justified given that TDS was deducted under Section 192 as part of salary.8. Whether deletion of disallowance of Rs. 91,07,505 on account of interest on non-interest bearing advances is justified where advances were made for business purposes and sufficient interest-free funds were available.Issue-wise Detailed Analysis1. Disallowance of Rs. 14,40,000 under Section 40(a)(ia) for Miscellaneous ExpensesLegal Framework and Precedents: Section 40(a)(ia) disallows expenses if tax is deductible at source but not deducted or paid timely. The proviso allows deduction if TDS is deducted and paid subsequently. The Assessing Officer (AO) disallowed Rs. 14.40 lacs claimed as prior period miscellaneous expenses due to lack of details and TDS applicability.Court's Reasoning and Findings: The Tribunal noted that the AO's disallowance was based on absence of details about the nature of expenses and applicability of TDS. The Tribunal held that the matter requires remand to AO for verification of details including the nature of expenditure, year of incurrence, and TDS applicability. The assessee must be given opportunity to furnish details and be heard.Conclusion: The issue is remanded for fresh adjudication after furnishing necessary details. The disallowance is not sustained at this stage.2. Depreciation of Rs. 16,83,501 on Five TankersLegal Framework and Precedents: Section 32 allows depreciation on assets used for business purposes. The key question is whether the tankers were 'used' in business during the year. The Tribunal relied on the jurisdictional High Court decision in ACIT vs. Asima Syntex, which held that use for business includes even partial or initial use and that mere installation or registration suffices if the asset is used for business.Court's Reasoning and Findings: The assessee produced external evidence including goods carriage permits, insurance, fitness certificates, RC books, pollution control certificates, and invoices for fuel supplied to the tankers, as well as a supplementary memorandum of understanding (MOU) with a related company (N.K. Roadways Pvt. Ltd.) hiring out the tankers. The Tribunal found that these external documents conclusively proved the tankers were put to use during the year. The CIT(A)'s reliance on internal evidence and suspicion about the genuineness of usage was rejected. The Tribunal held that the tankers were used for business and depreciation is allowable.Conclusion: Depreciation of Rs. 16,83,501 on the five tankers is allowable.3. Disallowance of Depreciation of Rs. 4,64,850 on Plant & Machinery and Electrical InstallationLegal Framework and Precedents: Depreciation is not allowed on assets classified as capital work-in-progress (WIP). Auditor's report and Form 3CD are relevant for determining classification. The issue was whether the assets were still WIP or put to use during the year.Court's Reasoning and Findings: The AO and CIT(A) relied on auditor's remarks in Form 3CD for FY 2008-09 stating that additions of Rs. 30.99 lacs were classified as capital WIP. However, the assessee produced detailed annexures and auditor certifications showing that these assets were put to use in May 2008 and depreciation was charged accordingly. The Tribunal observed that the auditor's remark referred to opening balances and was a typographical oversight. The detailed auditor annexures and depreciation chart supported the assessee's claim. The Tribunal held that the assets were in use and depreciation is allowable.Conclusion: Disallowance of depreciation of Rs. 4,64,850 is deleted; depreciation is allowable.4. Disallowance of Rs. 1,13,521 under Section 14ALegal Framework and Precedents: Section 14A disallows expenditure incurred to earn exempt income. Rule 8D prescribes a formula for disallowance. However, if no exempt income is earned, disallowance is not warranted. The jurisdictional High Court in CIT vs. Corrtech Energy P. Ltd. held that no disallowance is called for if no exempt income is claimed.Court's Reasoning and Findings: The assessee's only investment was purchase of shares worth Rs. 17.85 lacs, with no exempt income earned during the year. The Tribunal followed the High Court decision and held that disallowance under Section 14A is not applicable when no exempt income is earned or claimed.Conclusion: Disallowance of Rs. 1,13,521 under Section 14A is deleted.5. Disallowance of Rs. 56,000 Being Provision for Diminution in Assets (Sundry Debit Balances Written Off)Legal Framework and Precedents: Section 36(1)(vii) allows deduction for bad debts written off if certain conditions are met. The jurisdictional High Court in CIT vs. Abdul Razak & Co. held that irrecoverable advances in the ordinary course of business are allowable as revenue expenditure.Court's Reasoning and Findings: The sundry debit balances were old balances in defunct bank accounts with no transactions for many years. The Tribunal found that these were business-related advances written off as revenue expenditure under Section 37. The High Court precedent supported allowability of such expenditure as business loss.Conclusion: Disallowance of Rs. 56,000 is deleted; the expenditure is allowable.6. Deletion of Disallowance of Rs. 36,30,000 under Section 40(a)(ia) for Prior Period ExpensesLegal Framework and Precedents: Section 40(a)(ia) disallows expenses where TDS is not deducted or paid timely. The proviso allows deduction in the year when TDS is paid. The Tribunal relied on a precedent ITAT decision in ABN Amro Bank vs JCIT which held that expenses can be claimed in the year TDS is paid even if not claimed earlier.Court's Reasoning and Findings: The assessee claimed prior period expenses of Rs. 50.70 lacs, out of which Rs. 36.3 lacs had TDS deducted and paid during the year. The AO disallowed the entire amount on the ground that expenses were not debited in earlier years. The CIT(A) allowed Rs. 36.3 lacs after considering that TDS was paid. The Tribunal upheld this deletion, holding that the expenses are allowable in the year of TDS payment and that this does not prejudice revenue.Conclusion: Deletion of disallowance of Rs. 36.3 lacs under Section 40(a)(ia) is upheld; disallowance of Rs. 14.4 lacs for miscellaneous expenses is confirmed (subject to remand as per Issue 1).7. Deletion of Disallowance of Rs. 83,98,000 on Account of Non-compliance of Section 194H for Commission Paid to DirectorsLegal Framework and Precedents: Section 194H requires TDS on commission or brokerage payments. Section 192 requires TDS on salary. The ITAT Kolkata in Jahangir Biri Factory held that commission paid to directors as per terms of employment is part of salary and subject to TDS under Section 192, not 194H. Section 40(a)(ia) does not apply to salary payments subject to TDS under Section 192.Court's Reasoning and Findings: The commission payments to directors were part of remuneration as per board resolution and were subjected to TDS under Section 192 at higher rates than Section 194H. The CIT(A) deleted the disallowance on this basis. The Tribunal agreed, holding that commission paid to directors as part of salary is not covered under Section 40(a)(ia) for non-deduction under Section 194H.Conclusion: Deletion of disallowance of Rs. 83,98,000 is upheld.8. Deletion of Disallowance of Rs. 91,07,505 on Account of Interest on Non-interest Bearing AdvancesLegal Framework and Precedents: Section 36(1)(iii) allows deduction of interest on borrowed capital used for business. Disallowance can be made if interest-bearing funds are diverted to interest-free advances. The burden is on Revenue to prove nexus. Mumbai Tribunal in Oceanic Investments Ltd. and other cases held that nexus must be established. Mumbai High Court in Reliance Utilities held that if sufficient interest-free funds are available, no disallowance is warranted.Court's Reasoning and Findings: The AO disallowed interest on advances given interest-free to four parties totaling Rs. 91 lacs, alleging diversion of interest-bearing funds. The assessee demonstrated that advances were business-related, with regular transactions especially with N.K. Industries, and that interest-free funds (capital and reserves) exceeded advances. The AO failed to establish nexus or diversion. The CIT(A) deleted the disallowance, and the Tribunal upheld this deletion, relying on the above precedents.Conclusion: Deletion of disallowance of Rs. 91,07,505 is upheld.Significant Holdings'We are of the view that as the assessee has proved beyond doubt that the impugned assets consisting of 5 trucks purchased for Rs. 67,34,004/- satisfy all the conditions as provided u/s 32 of the Act and, therefore, are eligible for depreciation.''The law does not require that there must be optimum production for granting the benefit. Law only requires that there must be use of plant and machinery for the purpose of business.' (Following ACIT vs. Asima Syntex)'The disallowance u/s 14A is mandatory in nature after the A.Y.2008-09. However, where no exempt income is earned or claimed, no disallowance is called for.' (Following CIT vs. Corrtech Energy P. Ltd.)'Sundry debit balance written off for Rs. 56,000/- should be allowed as a revenue expenditure.' (Following CIT vs Abdul Razak & Co.)'Expenses on which TDS is deducted and paid in the year under appeal are allowable even if not claimed in earlier years.' (Following ABN Amro Bank vs JCIT)'Commission paid to directors as per terms of employment is part of salary and subject to TDS under Section 192, not Section 194H; hence Section 40(a)(ia) does not apply.' (Following Jahangir Biri Factory case)'Non-charging of interest on interest-free advances cannot justify disallowance of interest; Revenue must establish nexus between interest-bearing funds and advances.' (Following Oceanic Investments Ltd. and Reliance Utilities)'Where assessee has sufficient interest-free funds, disallowance of interest is not warranted.'