2016 (9) TMI 1145 - AT - Income Tax

ITAT decision: Showroom expenses as revenue, late PF/ESIC payment not allowed

The ITAT upheld the CIT(A)'s decisions on treating showroom expenses, notional interest, and advertisement expenses as revenue expenditure, deleting the ... Revenue expenditure v. capital expenditure on renovations of leased premises - treatment of notional interest on interest free furniture/security deposits given for business use - application of section 40A(2)(b) to payments to related parties for advertising - allowability of employees' PF/ESIC contributions when deposited after statutory due date but before the due date of filing returnRevenue expenditure v. capital expenditure on renovations of leased premises - Allowability as revenue expenditure of renovation/repair costs incurred on rented show rooms - HELD THAT: - The Tribunal upheld the CIT(A)'s finding that the expenses related to making tenanted premises suitable for business and did not create a new asset or confer any permanent right in the premises. The CIT(A)'s conclusion recorded that the payments included replacement/repair of existing furniture and modifications to facilitate product display, and that prior decisions in the assessee's own case and coordinate bench authority supported treatment as revenue expenditure. Revenue did not produce material to displace those findings or show that the coordinate bench decision had been upset by a higher forum. On these facts, the addition was not sustained. [Paras 5]Addition disallowing show room renovation expenses was deleted and Revenue's ground dismissed.Treatment of notional interest on interest free furniture/security deposits given for business use - Validity of notional interest addition on furniture/security deposits given to related concerns/directors - HELD THAT: - The CIT(A) found the deposits to be longstanding, given for business purposes to enable use of existing furniture without paying rent, and therefore not a basis for a notional interest addition. The Tribunal noted that an identical issue in the assessee's own case for an earlier year was decided in assessee's favour by a coordinate bench and that Revenue produced no material to contradict the factual findings or to show reversal by a higher forum. Consequently the notional interest disallowance was held unjustified. [Paras 7, 8]Notional interest addition deleted and Revenue's ground dismissed.Application of section 40A(2)(b) to payments to related parties for advertising - Disallowance under section 40A(2)(b) in respect of payments for advertisement made to an associated concern - HELD THAT: - The CIT(A) applied the principle of consistency and observed that similar payments to the same party had been allowed in earlier scrutiny assessments (except an isolated year where a disallowance was deleted on appeal). The coordinate bench in the assessee's earlier year accepted the CIT(A)'s factual finding that no material had been produced to show that the payment was excessive compared to comparable work. Revenue produced no contrary material or higher forum reversal. On these facts the Tribunal declined to interfere with the deletion. [Paras 10]Addition under section 40A(2)(b) deleted and Revenue's ground dismissed.Allowability of employees' PF/ESIC contributions when deposited after statutory due date but before the due date of filing return - Deductibility of employees' ESIC contribution paid after statutory due date but before filing due date of return - HELD THAT: - The CIT(A) allowed the deduction relying on Supreme Court precedent and the retrospective operation of amendments, treating payment before the due date of filing as within the scope of allowance. The Tribunal, however, noted the binding decision of the Gujarat High Court which requires that the employees' contribution must be deposited on or before the due date under the relevant labour statute to qualify for deduction. On the undisputed facts that the contribution was not deposited by that statutory due date and in the absence of any contrary binding authority favouring the assessee, the Tribunal set aside the CIT(A)'s order and restored the Assessing Officer's disallowance. [Paras 12]CIT(A)'s deletion set aside; Assessing Officer's disallowance of delayed employees' contribution upheld and Revenue's ground allowed.Final Conclusion: Revenue's appeal is partly allowed: additions in respect of show room renovation, notional interest on furniture deposits and section 40A(2)(b) advertisement disallowance were deleted (Revenue's grounds dismissed), whereas the deletion of the disallowance for late payment of employees' ESIC contribution was set aside and the AO's disallowance restored; assessee's cross objection is dismissed. Issues Involved:1. Disallowance of showroom expenses as revenue expenditure.2. Deleting the notional addition of interest under Section 36(1)(iii).3. Deleting the addition of advertisement expenses under Section 40A(2)(b).4. Deleting the addition on account of late payment of employee’s contribution to PF and ESIC.Issue-wise Detailed Analysis:1. Disallowance of Showroom Expenses as Revenue Expenditure:The AO disallowed Rs. 25,75,940/- of showroom expenses, treating them as capital expenditure, but allowed 10% depreciation. The CIT(A) reversed this, treating the expenses as revenue expenditure, noting that the expenses were for repairs and renovations of rented premises, making them more suitable for business without creating a new asset. The ITAT upheld the CIT(A)’s decision, referencing a similar decision from AY 2008-09, where such expenses were also treated as revenue expenditure.2. Deleting the Notional Addition of Interest under Section 36(1)(iii):The AO added notional interest of Rs. 3,96,000/- on the grounds that the assessee gave interest-free deposits to directors, which was not justified. The CIT(A) deleted this addition, stating that the deposits were old and given for business purposes, allowing the use of furniture without rent. The ITAT upheld this decision, citing a similar case from AY 2008-09, where such notional interest was also deleted.3. Deleting the Addition of Advertisement Expenses under Section 40A(2)(b):The AO disallowed Rs. 18,29,568/- for advertisement expenses paid to a related party, Arts India, arguing that the 15% discount received by Arts India was not passed on to the assessee. The CIT(A) deleted the addition, noting that similar expenses were allowed in previous years and that no comparable cases were provided by the AO to justify the disallowance. The ITAT upheld this decision, referencing a similar case from AY 2008-09, where such disallowance was also deleted.4. Deleting the Addition on Account of Late Payment of Employee’s Contribution to PF and ESIC:The AO added Rs. 10,715/- for late payment of ESIC contributions, not paid within the due date. The CIT(A) deleted this addition, relying on the Supreme Court’s decision in Alom Extrusions Ltd., which allowed such deductions if paid before the due date of filing the return under Section 139(1). However, the ITAT reversed this decision, following the Gujarat High Court’s decision in CIT vs. Gujarat State Road Transport Corporation, which mandates that contributions must be paid within the due date prescribed under the respective Acts.Conclusion:The ITAT upheld the CIT(A)’s decisions on showroom expenses, notional interest, and advertisement expenses, but reversed the decision on the late payment of employee’s contributions to PF and ESIC, aligning with the Gujarat High Court’s ruling. The Revenue’s appeal was partly allowed, and the assessee’s cross-objection was dismissed.