2017 (5) TMI 1825 - AT - Income Tax

Entertainment expenses: 25% deduction allowed for staff, sales promotion expenses permitted, bad debts write-off upheld

ITAT Mumbai partially allowed the assessee's appeal on entertainment expenses, allowing 25% deduction for accompanying staff members but dismissing claim ... Disallowance of entertainment expenses - Assessee’s claim is that a deduction of 50% should be allowed for accompanying staff members - CIT (Appeals) has allowed 25% for accompanying staff members - HELD THAT:- ITAT Mumbai in the Assessee’s own case for the assessment year 1996-97 had been allowing 25% of the entertainment expenditure as allowable business expenditure as has been incurred for accompanying staff members. Respectfully following the earlier orders of the Tribunal, we dismiss this ground of the Assessee. Entertainment expenses, being expenses at the time of Company’s AGM -Expenses incurred at the time of Company’s AGM are allowable expenses. Sales promotion / entertainment expenses - Counsel submitted that the Assessee sponsored dinner at All India Glass Manufacturers Conference - HELD THAT:- The special Bench in the case of Lakhanpal National Ltd.[1999 (3) TMI 105 - ITAT AHMEDABAD-C] held that expenditure on holding conference is not an entertainment expenditure. Similarly, Hon’ble Calcutta High Court in the case of Sarada Plywood Industries Ltd.[1999 (1) TMI 16 - CALCUTTA HIGH COURT] held that expenditure on holding conference of dealers is not entertainment expenditure. Following the said decisions, we hold that the dinner expenses sponsored by the Assessee in the All India Glass Manufacturers Association is not an entertainment expenditure, but it is certainly a sales promotion expenses as these expenses were incurred for the purpose of business of the Assessee. Thus we direct the Assessing Officer to allow the said expenditure. This ground is partly allowed. Disallowance of expenses on maintenance of guest house - HELD THAT:- As relying on own case for the assessment year 1996-97 we direct the AO to allow the expenditure incurred by the Assessee for the food served at the guest house. Coming to other expenses incurred on guest house i.e. salaries, repairs, society charges and maintenance expenses, the Tribunal following the decision in the case of Britannia India Industries [2005 (10) TMI 30 - SUPREME COURT] decided in favour of the Revenue and against the Assessee. Respectfully following the said decision, we uphold these disallowances made by the Assessing Officer. This ground is partly allowed. Payment to Fort Medical Society allowed. Disallowance made u/s 40A(9) regarding payment to Tata Sports Club deleted. Disallowance of expenditure incurred on survey and feasibility expenses of wind mills - This ground is connected to the additional ground raised by the Assessee regarding expenses on wind mills which were later abandoned to be allowed as revenue expenditure or not. We shall decide this ground along with the additional ground in the subsequent paras along with additional grounds. Expenditure on increase in authorized share capital and deduction u/s 35D - HELD THAT:- Expenditure incurred on increase in authorized share capital was held to be capital in nature in view of the decision of Brooke Bond India Ltd [1997 (2) TMI 11 - SUPREME COURT], thus we hold that the said expenses are capital in nature. However, the alternative claim of the Assessee that deduction u/s 35D should be allowed on such expenses may be considered by the Assessing Officer. Thus, the matter is restored to the AO for examining the alternative claim. This ground is partly allowed. Disallowance of write off of un reconciled balances of consignee distributors (bad debts written off) - HELD THAT:- This issue is covered in favour of the Assessee by the Coordinate Bench decision for the assessment year 1996-97 and also the decision of TRF Ltd. [2010 (2) TMI 211 - SUPREME COURT]. It is not in dispute that these amounts were due to the Assessee Company from its distributors and agents and these balances were written off in the books of accounts. Therefore, respectfully following the same decision of TRF Ltd. Vs. CIT (supra), we allow the claim of the Assessee. This ground is allowed. Disallowance of payment to foreign technicians - Assessee submitted that the AO allowed deduction u/s 35AB of the Act at 1/6th of the total expenses during this assessment year, thus submits that the Assessee would be satisfied if a direction is given to the Assessing Officer to allow similar deduction in subsequent years - HELD THAT:- Assessing Officer having allowed deduction at 1/6th of the total expenses during this assessment year, we see no reason for not allowing the said expenses in subsequent assessment years at 1/6th of the total expenses. Thus, we direct the Assessing Officer to allow these expenses at 1/6th in subsequent assessment years. The additional ground is admitted and allowed. Additional ground raised - Expenses on wind mills - whether to be allowed as revenue expenditure or not - Deduction of 100% depreciation on wind mill - HELD THAT:- Tribunal found that cellular towers were set up for the purpose of Assessee’s own business and not for leasing out the towers and on these facts, the High Court held that since no new business asset was set up, impugned expenditure would be allowed as business expenditure. He strongly placing reliance on this decision submitted that the cost of abandoned project of the Assessee, the wind mills should be allowed as revenue expenditure for the reason that these wind mills were set up as a captive power plants for the existing business of the Assessee and not for a new source of income. The additional ground raised by the Assessee for allowing write off of cost of wind mills as revenue expenditure was made for the first time before this Tribunal. This ground was not made before the Ld.CIT(Appeals) nor it is the contention of the Assessee before the Assessing Officer. The Assessee all along was claiming only 100% depreciation on this project. The ground raised by the Assessee is purely a legal ground in the sense, the expenditure if not allowable u/s 32 should be allowed u/s 37. This contention of the Assessee was not examined by the lower authorities since the additional ground is only a legal ground, we admit this additional ground and since this was not examined by the Assessing Officer, we restore this issue to the file of the Assessing Officer, who shall decide the issue afresh in accordance with law keeping in view of the submissions of the Assessee and also the decision of the Hon’ble Bombay High Court in the case of CIT Vs. Idea Cellular Ltd. [2016 (10) TMI 181 - BOMBAY HIGH COURT]. The additional ground is allowed for statistical purpose. Non admission of additional ground in respect of amount transferred to debenture redemption reserve while computing book profits u/s 115JA - HELD THAT:- We are of the view that this issue should be addressed by the Ld. CIT (Appeals) by admitting the additional ground, hence, this ground is restored to the file of the Ld. CIT (Appeals) who shall admit the additional ground and decide the issue in accordance with law keeping in view the decision of the Jurisdictional High Court as referred to above. This ground is allowed for statistical purpose. Disallowance of expenses towards community development - CIT(Appeals) taking note of the fact that the monies spent by the Assessee on community development programmes such as running of primary schools, medical facilities, technical/industrial training, distribution of seed, distribution of fertilizer, distribution of cattle field, adult education and literacy programmes, supply of drinking water etc., held that all these expenses incurred cannot be regarded as being wholly outside the scope of Assesee’s business. The Ld.CIT (Appeals) held that all these activities are done either in the name of TCL by the Company itself or through Tata Chemicals Society for rural development. Appreciating the submissions of the Assessee that this expenditure has been incurred in order to win over the good will of the employees and the nearby villagers, Ld. CIT (Appeals) held that the expenditure is in larger interest of the smooth functioning of the company and is therefore allowable deduction. Thus we sustain the order of the Ld. CIT (Appeals) on this issue. The ground raised by Revenue is dismissed. Advertisement expenditure (deferred revenue) allowed as relying on Assessee’s own case for the assessment year 1996-97 wherein, following the decision of Bhor Industries Ltd.2003 (2) TMI 20 - BOMBAY HIGH COURT] allowed the claim of the Assessee. Allocation of interest expenses on the borrowings between business income and interest income from tax free bonds and dividend income for the purpose of the provisions of Section 14A - HELD THAT:- We find that an identical issue arose for the assessment year 2006-07 upheld the order of the Ld. CIT (Appeals) in holding that entire borrowings was utilized for putting up new plant at Paprala and no part of the borrowings was utilized for the purpose of investment - it was held that there is no nexus between the income on investments and the interest paid on borrowings.Decided in favour of the Assessee. MAT - computation of book profits u/s 115JA - AO completing the assessment added back provision for doubtful debts to the book profits and further deduction of profits u/s 80IA of fertilizer division was not considered while computing the book profits u/s 115JA - HELD THAT:- CIT (Appeals) following the decision of Echjay Forgings Pvt. Ltd.[2001 (2) TMI 56 - BOMBAY HIGH COURT] allowed the claim of the Assessee in respect of the provision for doubtful debts. Following the said decision, he directed the Assessing Officer not to add provision for doubtful debts while computing book profits. We do not find any infirmity in the order passed by the Ld. CIT (Appeals) as he followed the decision of the jurisdictional High Court allowing the claim of the Assessee. Deduction u/s 80IA while computing book profits u/s 115JA - HELD THAT:- The provisions of Clause (v) of Explanation to section 115JA clearly stipulates that an industrial undertaking located in an industrially backward state or district referred to in Clause referred to sub section (2) of 80IA is to be reduced while computing the book profits. Therefore, the direction given by the Ld. CIT (Appeals) appears to be in accordance with law. However, since the Assessing Officer has not given any explanation as to why deduction is not allowed, we direct the Assessing Officer to examine this issue afresh in accordance with law after providing adequate opportunity of being heard, in view of the direction given by the Ld. CIT (Appeals) that subject to other provisions, the Assessee is entitled for deduction u/s 80IA of the Act. This ground is partly allowed. Issues Involved:1. Banwad Prospecting and Survey Expenses2. Disallowance of Entertainment Expenses3. Expenses on Maintenance of Guest House4. Payment to Fort Medical Society5. Disallowance under Section 40A(9) regarding Payment to Tata Sports Club6. Expenditure on Survey and Feasibility Expenses of Wind Mills7. Disallowance of Prior Period Expenses8. Expenditure on Increase in Authorized Share Capital and Deduction under Section 35D9. Write-off of Unreconciled Balances of Consignee Distributors (Bad Debts)10. Payment to Tata Chemicals Society for Rural Development11. Payment to Foreign Technicians12. Payment to Tata Council for Community Initiatives13. Provisions for Repairs of Damaged Wind Mills, Reprocessing Detergent Powder, Bad and Doubtful Debts, and 100% Depreciation on Wind Mill14. Additional Ground on Wind Mills Write-off as Revenue Expenditure15. Non-Admission of Additional Ground on Debenture Redemption Reserve16. Entertainment Expenditure on Food Subsidy Coupons17. Disallowance under Section 40A(9) for Payments to Schools18. Disallowance of Share Issue and Preliminary Expenses19. Disallowance of Community Development Expenses20. Deduction of Advertisement Expenditure (Deferred Revenue)21. Allocation of Interest Expenses under Section 14A22. Computation of Book Profits under Section 115JADetailed Analysis:1. Banwad Prospecting and Survey Expenses:The Assessee's appeal on this ground was dismissed as infructuous since the deduction was already allowed under Section 35E of the Act.2. Disallowance of Entertainment Expenses:- Accompanying Staff Members: The Tribunal upheld the CIT (Appeals) decision allowing 25% of the entertainment expenditure for accompanying staff members, following the precedent set in the Assessee’s case for the assessment year 1996-97.- Company’s AGM: Expenses incurred during the Company’s AGM were allowed as deductible, following the Tribunal's earlier decision.- Sales Promotion/Entertainment Expenses: The Tribunal held that the expenses for sponsoring dinner at the All India Glass Manufacturers Conference were sales promotion expenses, not entertainment expenses, and directed the Assessing Officer to allow these expenses.3. Expenses on Maintenance of Guest House:- Food Expenses: Directed the Assessing Officer to allow the expenditure for food served at the guest house, following the Tribunal's earlier decision.- Other Expenses: Upheld the disallowances for salaries, repairs, society charges, and maintenance expenses, following the Supreme Court's decision in Britannia India Industries Vs. CIT.4. Payment to Fort Medical Society:Allowed the Assessee's claim, following the Tribunal's earlier decision for the assessment year 1996-97.5. Disallowance under Section 40A(9) regarding Payment to Tata Sports Club:Allowed the Assessee's claim, following the Tribunal's earlier decision for the assessment year 1996-97.6. Expenditure on Survey and Feasibility Expenses of Wind Mills:This ground, along with the additional ground on wind mills, was restored to the Assessing Officer for fresh adjudication.7. Disallowance of Prior Period Expenses:Dismissed as not pressed by the Assessee.8. Expenditure on Increase in Authorized Share Capital and Deduction under Section 35D:Held that the expenses were capital in nature but directed the Assessing Officer to consider the alternative claim for deduction under Section 35D.9. Write-off of Unreconciled Balances of Consignee Distributors (Bad Debts):Allowed the Assessee's claim, following the Supreme Court's decision in TRF Ltd. Vs. CIT and the Tribunal's earlier decision.10. Payment to Tata Chemicals Society for Rural Development:Dismissed as not pressed by the Assessee.11. Payment to Foreign Technicians:Directed the Assessing Officer to allow the expenses at 1/6th in subsequent assessment years, following the existing pattern.12. Payment to Tata Council for Community Initiatives:Dismissed as not pressed by the Assessee.13. Provisions for Repairs of Damaged Wind Mills, Reprocessing Detergent Powder, Bad and Doubtful Debts, and 100% Depreciation on Wind Mill:- First Three Items: Dismissed as not pressed by the Assessee.- 100% Depreciation on Wind Mill: Not considered as the Assessee's additional ground on wind mills was to be decided.14. Additional Ground on Wind Mills Write-off as Revenue Expenditure:The Tribunal admitted this legal ground and restored the issue to the Assessing Officer for fresh adjudication, considering the decision in CIT Vs. Idea Cellular Ltd.15. Non-Admission of Additional Ground on Debenture Redemption Reserve:Restored to the CIT (Appeals) to admit and decide the issue in accordance with the law.16. Entertainment Expenditure on Food Subsidy Coupons:Dismissed the Revenue's appeal, following the Tribunal's earlier decision for the assessment year 1996-97.17. Disallowance under Section 40A(9) for Payments to Schools:Dismissed the Revenue's appeal, following the Tribunal's earlier decision for the assessment year 1996-97.18. Disallowance of Share Issue and Preliminary Expenses:Held that the expenses were capital in nature but restored the issue to the Assessing Officer to examine the alternative claim for deduction under Section 35D.19. Disallowance of Community Development Expenses:Sustained the CIT (Appeals) decision allowing the expenses, following the decisions in CIT Vs. Madras Refineries Ltd. and Mysore Kirloskar Ltd. Vs. CIT.20. Deduction of Advertisement Expenditure (Deferred Revenue):Dismissed the Revenue's appeal, following the Tribunal's earlier decision for the assessment year 1996-97.21. Allocation of Interest Expenses under Section 14A:Dismissed the Revenue's appeal, following the Tribunal's earlier decision for the assessment year 2006-07.22. Computation of Book Profits under Section 115JA:- Provision for Doubtful Debts: Upheld the CIT (Appeals) decision not to add back the provision for doubtful debts, following the Bombay High Court's decision in CIT Vs. Echjay Forgings Pvt. Ltd.- Deduction under Section 80IA: Directed the Assessing Officer to examine the issue afresh and allow the deduction subject to other conditions.Conclusion:The appeals of both the Assessee and Revenue were partly allowed for statistical purposes. The detailed analysis provides a comprehensive understanding of each issue and the Tribunal's rationale for its decisions.