2016 (9) TMI 59 - HC - Income Tax

High Court upholds tax deductions, criticizes Revenue for unjustified disallowances

Principal Commissioner of Income-Tax Versus Rajasthan State Seed Corporation Ltd.

The High Court affirmed the decisions of lower authorities in a tax case, allowing prior period expenses due to crystallization in the relevant year, ... Allowability of prior period expenses - Held that:- A finding of fact has been recorded by the appellate authorities that approval for payment of the said expenditure was given during the year under appeal therefore the liability crystallised during the year and similar method was being regularly followed by the assessee consistently and when there is a finding recorded by the appellate authorities that the expenditure crystallised during the year, was written in the books this year and on year to year basis was claimed in the same manner and fashion was rightly claimed and allowed during the year, is a finding of fact. Allowability of expenditure incurred on State Renewal Fund - Held that:- The said expenditure also goes to show that the renewal fund was set up by the State Government and was created with the object of providing a safety net for the workers likely to be effected by restricting in the State Public Enterprise and that a finding of fact has been recorded that the contribution made to the State Renewal fund is solely for the purposes of the welfare and benefit of the employees. In our view, it is for the assessee to decide whether any expenditure should be incurred in the course of business and expenditure of this nature being for business expediency is certainly allowable deduction under section 37(1) of the Act. In our view any normal expenditure for the welfare and benefit of the employees is allowable expenditure under section 37(1), the Tribunal has come to a finding of fact that it was a legal obligation of the respondent-assessee towards contribution of the said amount to the State Renewal Fund and there being a legal obligation as well in our view the Tribunal has come to a correct conclusion. Issues:1. Disallowance of prior period expenses.2. Disallowance of contribution to the LIC Group Gratuity Scheme.3. Disallowance of contribution to the State Renewal Fund.Issue 1: Disallowance of prior period expensesThe Assessing Officer disallowed prior period expenses as they pertained to earlier assessment years. However, the Commissioner of Income-tax (Appeals) and the Tribunal allowed the expenses, stating that the liability crystallized during the relevant year. The High Court affirmed this decision, emphasizing that the expenses were regularly claimed and approved during the current year, following a consistent method. The court held that the finding of fact supported the allowance of prior period expenses.Issue 2: Disallowance of contribution to the LIC Group Gratuity SchemeThe Revenue contended that the Group Gratuity Scheme lacked approval from the Commissioner, rendering the deduction under section 36(1)(v) impermissible. The High Court noted that the assessee had applied for approval in 1981, but the Commissioner did not respond for over 25 years. The court held that the failure to approve the scheme did not justify disallowing the claim, as the assessee had taken necessary steps. The court criticized the Revenue for repetitively disallowing the claim without valid grounds, emphasizing that the assessee should not suffer due to the Revenue's inaction.Issue 3: Disallowance of contribution to the State Renewal FundRegarding the contribution to the State Renewal Fund, the court found that the expenditure was for the welfare of employees and business expediency. The Tribunal concluded that the contribution was a legal obligation and allowable under section 37(1). The High Court agreed, stating that any expenditure for employee welfare is deductible under section 37(1) and upheld the Tribunal's decision. The court emphasized that the deletion of disallowance was based on material evidence, and no legal questions arose for consideration.In conclusion, the High Court dismissed the appeal, finding no grounds for interference as the decisions of the lower authorities were based on factual findings and legal provisions. The judgment highlighted the importance of considering facts and evidence in determining the allowability of expenses and criticized repetitive disallowances without valid reasons.