2019 (3) TMI 693 - AT - Income Tax

Tribunal upholds CIT(A)'s disallowance decision, reduces Section 14A disallowance, deletes various expenses

M/s Escorts Ltd. Versus ACIT And DCIT

The Tribunal upheld the CIT(A)'s decision to disallow prior period expenses due to lack of adequate documentation. Disallowance under Section 14A was ... Disallowance of prior period expenses - whether these are routine business expenses which are allowable? - no supporting evidences have been filed to substantiate that liability arose and crystallised during year under consideration - HELD THAT:- Before us assessee has not produced any copy of supporting documents in respect of balance payments to establish that expenses had crystallised during year under consideration. We draw support from the order of Coordinate Bench in assessee’s own case for A.Y. 2005-06 (supra) in holding that merely because expenditure has been debited in Profit and Loss account during year neither it becomes expenditure pertaining to this year nor it becomes an expenditure pertaining to prior years. It is the duty of assessee to show that this expenditure has crystallised during the year and therefore are incurred during the year. As adequate details have not been produced before Ld.AO as well as before Ld.CIT(A), we do not find any infirmity in the disallowance made by CIT(A) Disallowance u/s 14A - assessee had given interest-bearing loan to Escotel a subsidiary of assessee during Financial Year 1997-98 and interest as per agreed terms were charged on such loans - HELD THAT:- We reject the argument that no expenditure could be attributed to earning of exempt income as section 14 A is automatic and comes into operation without any exception as soon as exempt income is claimed by assessee. As observed that total exempt income claimed by assessee amounts to ₹ 19,26,10,503/-, against which disallowance restricted by CIT(A) is ₹ 34,32,239/-. It is observed that Ld.CIT(A) records that proportionate expenses being considered for disallowance, has been incurred mainly for employees of manufacturing unit which cannot be related to earning of exempt income. Under such circumstances allocation of personal expenses towards earning of exempt income should not have been made. We therefore grant further relief to assessee by excluding personal expenses amounting to ₹ 16,85,000/-, from disallowance computed under section 14 A. We thus direct Ld.AO to restrict the disallowance Disallowance being amount of inventory written off during the year - HELD THAT:- Ld.Counsel was unable to establish market value of stock to be at ‘nil’, and therefore we do not find any infirmity in the order of CIT (A) and the same is upheld. Addition on account of investments written off - loss on investment - assessee owning shares in Escorts Overseas Pvt. Ltd. and as these were doubtful of recovery, and hence provision was made - HELD THAT:- Assessee before us has not been able to establish how the company was dissolved, and manner in which its assets/liabilities have been dealt with. Before us, assessee has not been able to establish value of shares on or before date of dissolution of company. Even if it has to be considered as capital loss, assessee has not provided any relevant details regarding same. Under such circumstances we do not find any infirmity in order of Ld.CIT(A) and same is upheld. Disallowance on account of redemption of SPNs - HELD THAT:- As decided in assessee's own case [2018 (3) TMI 1641 - ITAT DELHI] liability to pay the premium amount over and above the face value of SPNs on redemption is a liability incurred by the assessee for the purposes of its business by generating funds which were utilised for the business activities. Thus, such an expenditure is an allowable expenditure. Now, with regard to year of allowability, it is evident that the payment of premium results in securing or benefit over a number of years. The benefit is spread over the entry period of 7 years. The expenditure is therefore allowable over the entire period of the SPNs the redemption having regard to the party. The assessee, therefore, correctly claimed deduction only in respect of the proportionate premium relatable to the year in question. Disallowance being upfront fee paid to banks - HELD THAT:- As decided in assessee's own case any expenditure incurred for obtaining loan is also allowable as revenue expenditure even if the loan is intended for acquiring a capital asset. The Tribunal accordingly allowed the claim of assessee. Disallowance on account of development of existing products and prototype products - claim allowable u/s 35 - R & D expenses of capital nature - HELD THAT:- As assessee maintains separate accounts for capital expenditure for R&D purposes, and that expenses on development and prototype is not part of R&D expenses. Thus it is clear that Assessing Officer is not disregarding genuineness of expenditure incurred by assessee. Therefore we do not find any infirmity in the observations of Ld. CIT (A) and the same is upheld. Addition of prior period expenses - CIT (A) deleted addition in part as assessee had provided certain bills which were relating to year in consideration and was of the opinion that payments crystallised during the year to that extent - HELD THAT:- No infirmity in the factual observations of Ld.CIT(A) which has been verified by Ld.CIT(A) having regards to documents/evidences/bills etc., filed by assessee. There is nothing contrary to these observations that Ld.Sr.DR has been able to place before us and therefore we do not find any infirmity in the observations of Ld. CIT (A) and the same is upheld. Addition on account of commission, discount and brokerage on sales made to government parties - allowable expenditure u/s 37 - HELD THAT:- AO while disallowing the expenditure has presumed that this commission has been paid to middlemen for procuring the orders from the Government while there is no proof or evidence in support of the same. Before coming to this conclusion, the AO has not given any opportunity or show cause to the appellant company why it should not be disallowed invoking Explanation to Section 37(1) of the Act. This commission and discount is being claimed by the appellant company regularly and has also been allowed by the AO himself and also at the appellate stage. In view of the above facts, as all the evidence has been filed by the appellant company and there is no proof that the expenditure is covered under Explanation to Section 37(1) of the Act, the disallowance made by the AO is deleted Disallowance on account of professional charges - HELD THAT:- Expenditure on professional charges paid in respect of day to day activities vis-a-vis the existing business the appellant company cannot be treated as of capital nature and have to allowed as revenue expense. Disallowance of 25% of royalty - allowable revenue expenditure - HELD THAT:- Royalty is not being paid for acquiring any technical knowledge which may give any enduring benefit. Rather in this case royalty is being paid only for the use of name “Escorts” which is owned by Harparshad and Company Pvt. Ltd. Therefore, it cannot be said that by making this payment any enduring benefit is being obtained. Thus, the facts are distinguishable and, therefore, the decision is not applicable. In my opinion, this is a clear cut case of revenue expenditure. Not only that, it has been allowed in earlier years also be the A.O. in full as revenue expenditure. Therefore, royalty payment is directed to be allowed in full. Issues Involved:1. Disallowance of prior period expenses.2. Disallowance under Section 14A.3. Disallowance of inventory written off.4. Disallowance of investments written off.5. Disallowance of premium on SPNs.6. Disallowance of upfront fees paid to banks.7. Disallowance of development and prototype expenses.8. Disallowance of commission, discount, and brokerage expenses.9. Disallowance of interest on interest-free loans.10. Disallowance of interest expenses due to investments in group companies.11. Disallowance of professional charges.12. Disallowance of royalty payments.Issue-wise Analysis:1. Disallowance of prior period expenses:The assessee claimed prior period expenses of Rs. 4,59,928/-. The CIT(A) allowed only part of the expenses, leading to a disallowance of the remaining amount. The Tribunal upheld the CIT(A)'s decision, emphasizing that the assessee failed to provide adequate documentation to prove that the expenses crystallized during the relevant year.2. Disallowance under Section 14A:The assessee contested the disallowance of Rs. 34,32,239/- under Section 14A. The Tribunal partly allowed the assessee's appeal, reducing the disallowance to Rs. 17,47,239/-, by excluding personal expenses that were not related to earning exempt income.3. Disallowance of inventory written off:The assessee claimed Rs. 4,73,69,355/- for inventory written off. The CIT(A) disallowed this amount, and the Tribunal upheld the decision, noting that the assessee failed to establish that the market value of the inventory was nil.4. Disallowance of investments written off:The assessee claimed a write-off of Rs. 28,56,250/- for investments. The CIT(A) disallowed this amount, and the Tribunal upheld the decision, stating that the assessee did not transfer or sell the investments, and thus, the loss could not be allowed under the Act.5. Disallowance of premium on SPNs:The CIT(A) deleted the disallowance of Rs. 22,54,277/- made by the AO on account of redemption of SPNs. The Tribunal upheld this decision, citing previous consistent decisions in the assessee's favor.6. Disallowance of upfront fees paid to banks:The CIT(A) deleted the disallowance of Rs. 3,12,75,000/- for upfront fees paid to banks. The Tribunal upheld this decision, referencing the Supreme Court's ruling in India Cements Ltd. vs. CIT, which allows such expenses as revenue expenditure.7. Disallowance of development and prototype expenses:The CIT(A) deleted the disallowance of Rs. 78,56,810/-. The Tribunal upheld this decision, noting that the expenses were for R&D activities related to the business and allowable under Section 35 of the Act.8. Disallowance of commission, discount, and brokerage expenses:The CIT(A) deleted the disallowance of Rs. 1,18,94,891/-. The Tribunal upheld this decision, emphasizing that the assessee provided sufficient evidence supporting the genuineness of the expenses.9. Disallowance of interest on interest-free loans:The CIT(A) deleted the disallowance of Rs. 4,56,00,000/-. The Tribunal upheld this decision, noting that the loans were given prior to the amalgamation and the AO failed to establish that the funds were borrowed.10. Disallowance of interest expenses due to investments in group companies:The CIT(A) deleted the disallowance of Rs. 72,32,00,000/-. The Tribunal upheld this decision, noting that the investments were made out of self-generated funds and were for business purposes.11. Disallowance of professional charges:The CIT(A) deleted the disallowance of Rs. 7,92,67,976/-. The Tribunal upheld this decision, noting that the expenses were for day-to-day business activities and were revenue in nature.12. Disallowance of royalty payments:The CIT(A) deleted the disallowance of Rs. 98,25,000/-. The Tribunal upheld this decision, referencing previous consistent decisions in the assessee's favor, noting that the royalty was paid for the use of the trade name 'Escorts' and was revenue in nature.Conclusion:The Tribunal's comprehensive analysis and decisions largely favored the assessee, upholding the CIT(A)'s deletions of various disallowances made by the AO. The Tribunal's rulings were consistent with previous decisions and supported by substantial evidence provided by the assessee.