2003 (7) TMI 278 - AT - Income Tax

Appeal Outcome: Deductions Allowed for Sales-Tax and Royalty; Business Losses and 80-IA Disallowed; 80-HHC Approved.

The Tribunal partially allowed the appeal, directing the AO to permit deductions for sales-tax liability under Section 43B and royalty payments under ... Disallowance u/s 43B - Certain deductions to be allowed only on actual payment - Payment of royalty - Written Off. HELD THAT:- We find that the sanction of loan of Rs. 65,95,132 was accorded by PICUP for treating the sales-tax of the same amount collected by the assessee as paid on 30th March, 1998, and a proposal to this effect was sent on that very day to Government for release of funds from the budget of Industries Department who later on released the same by an order dt.30th March, 1998. After obtaining the said GO and bill, relevant challans were prepared by PICUP and submitted to the Treasury, Lucknow. From the relevant challans, it is abundantly clear that the above transaction was completed on 31st March, 1998, itself when apart from the other formalities, the loan of Rs. 65,95,132.02 was deposited in the trade tax account of the State Government on behalf of the assessee. A letter to this effect was issued by the Jt. Director, Industries, Lucknow and PICUP. We have also carefully perused the letter dt. 7th April, 1998, and find that through this letter that the assessee was simply informed that the tax liability was converted into loan liability on its payment to sales-tax Department by PICUP on 31st March, 1998. Since it has been made bundantly clear from these documents that the sales-tax liability has been converted into loan liability within the previous year relevant to the impugned assessment year, the assessee is entitled for a claim of deduction for the purpose of s. 43B of the IT Act. We, therefore, set aside the order of the CIT(A) on this count and direct the AO to allow the claim of deduction of Rs. 65,95,132. With regard to the other claim of Rs. 29,18,459, the Trade Tax Tribunal has passed an order in succeeding previous year restoring the matter to the lower authorities and the assessee was directed to meet the requirements. From these facts it appears that after the Tribunal order, the assessee was required to complete certain formalities in order to obtain the eligibility certificate and to get this tax liability converted into loan liability of any financial institution within the previous year relevant to the impugned assessment year. In these circumstances, we do not find any merit in the contention of the assessee. We, therefore, uphold the order of the CIT(A) on this count. Payment of royalty - The legislature has used the conjunction as or which means if any one of the conditions is fulfilled, the assessee is entitled to claim deduction of the payment of royalty. Had the legislature ever intended to make both the conditions imperative they would have used the conjunction ‘any’. In this backdrop, we find force in the contention of the assessee that if the tax is deducted at source, during the year and is deposited before the due date which lies in the succeeding year, the assessee is entitled to claim deduction of the payment of royalty in that previous year in which the tax at source was deducted. We also find force in the contention of the assessee that if the payment was made late, the Revenue may take recourse of charging interest u/s 201(1A) of the Act but the deduction of royalty u/s 40(a)(i) could not be disallowed. We have also carefully examined the judgment of the Rajasthan High Court and the Tribunal’s order which supports the aforesaid view. We, therefore, do not find ourselves in agreement with the findings of the CIT(A). We, accordingly, set aside the order of the CIT(A) and direct the AO to allow the claim of the assessee. Written off - If the assessee claims the short delivery as loss incidental to the business, he is required to place some documentary evidence on record to this effect but we do not find any concrete evidence in support of the contention of the assessee. So far as second limb of the argument of the assessee is concerned that the aforesaid amount includes the advances to the vendors against the purchase orders issued for supply of material, we are of the view that this a new plea raised first time before the Tribunal. Since this factual aspect requires investigation and no evidence is placed in support of this stand before us, we find no justification to entertain this new limb of the argument. In these circumstances, we do not find any merit in the contentions of the assessee. We, therefore, decide this ground against the assessee. Accordingly, the order of the CIT(A) is hereby confirmed. In the result, the appeal of the assessee is partly allowed. Issues Involved:1. Disallowance under Section 43B of the Act for sales-tax deferral scheme.2. Disallowance under Section 40(a)(i) of the Act for royalty paid to a foreign collaborator.3. Disallowance of loss incidental to business on account of material not received by customers.4. Ad hoc disallowance of telephone expenses on account of personal use by directors.5. Non-allowance of deduction under Section 80-IA of the Act.6. Non-allowance of deduction under Section 80-HHC of the Act due to non-furnishing of auditor's report.7. Levy of interest under Section 234B of the Act.Issue-wise Detailed Analysis:1. Disallowance under Section 43B of the Act for Sales-Tax Deferral Scheme:The assessee claimed deductions under Section 43B for Rs. 95,13,591, which included Rs. 65,95,132 paid by PICUP under the Sales Tax Deferment Scheme and Rs. 29,15,459 based on a sales-tax tribunal order. The AO disallowed these claims, stating that the liabilities did not pertain to the year under consideration. The CIT(A) confirmed this disallowance, noting that the eligibility certificate for tax exemption was granted beyond the relevant previous year. The Tribunal admitted additional evidence and documents, which showed that the sales-tax liability was converted into a loan within the relevant financial year. Consequently, the Tribunal directed the AO to allow the deduction of Rs. 65,95,132 but upheld the disallowance of Rs. 29,18,459 as the eligibility certificate was granted in the subsequent year.2. Disallowance under Section 40(a)(i) of the Act for Royalty Paid to Foreign Collaborator:The assessee claimed a deduction for royalty payments amounting to Rs. 70,87,102 to a foreign collaborator. The AO disallowed this on the grounds that the tax deducted at source was not paid within the relevant previous year. The CIT(A) upheld this decision. The Tribunal, however, concluded that if either the tax is deducted or paid within the previous year, the deduction is allowable. The Tribunal set aside the CIT(A)'s order and directed the AO to allow the deduction, emphasizing that late payment of tax could attract interest under Section 201(1A) but should not disallow the deduction.3. Disallowance of Loss Incidental to Business on Account of Material Not Received by Customers:The assessee claimed a loss of Rs. 9,23,227 for materials not received by customers. The AO disallowed this, arguing that the material should be part of the closing stock. The CIT(A) confirmed the disallowance, noting that the assessee had not pursued recovery from the insurance company. The Tribunal upheld the CIT(A)'s decision, finding no documentary evidence to support the claim that the material was lost in transit or that the advances to vendors were irrecoverable.4. Ad Hoc Disallowance of Telephone Expenses on Account of Personal Use by Directors:The AO disallowed Rs. 1,00,000 out of telephone expenses, suspecting personal use by directors. The CIT(A) upheld this disallowance. The Tribunal, however, found that in the case of a company, such expenses are presumed to be for business purposes. Citing various judgments, the Tribunal set aside the CIT(A)'s order and deleted the addition.5. Non-Allowance of Deduction under Section 80-IA of the Act:The AO did not allow the deduction under Section 80-IA, stating that the eligible unit was an expansion of the existing business and that there were no profits to compute the deduction. The CIT(A) upheld this decision. The Tribunal found no infirmity in the CIT(A)'s order, noting that the issue of whether the unit was new or an expansion would only arise in a year with profits.6. Non-Allowance of Deduction under Section 80-HHC of the Act Due to Non-Furnishing of Auditor's Report:The AO disallowed the deduction under Section 80-HHC because the auditor's report was not filed with the return. The CIT(A) confirmed this. The Tribunal, however, noted that the audit report was filed during the assessment proceedings and, citing various judgments, directed the AO to allow the deduction, as the audit report was filed before the completion of the assessment.7. Levy of Interest under Section 234B of the Act:The AO charged interest under Section 234B in ITNS 150 without a specific direction in the assessment order. The CIT(A) upheld this. The Tribunal, referencing its earlier decision, ruled that charging interest in ITNS 150 is integral to the assessment order and amounts to a direction to charge interest. The Tribunal upheld the CIT(A)'s order.Conclusion:The appeal was partly allowed, with the Tribunal directing the AO to allow certain deductions while upholding other disallowances and confirming the levy of interest under Section 234B.