2008 (1) TMI 440 - AT - Income Tax

Tribunal reviews deduction claims, emphasizes expense allocation for income

The case involved various issues, including claims for deductions under different sections of the Act and the denial of certain deduction claims by the ... Business Expenditure Issues Involved:1. Claim of deduction under Section 80P(2)(a)(iii) of the Act.2. Claim for deduction under Section 80HHC of the Act.3. Denial of claim for deduction of interest liability claimed by the assessee.4. Computation of deduction under Section 80P(2)(d) of the Act.5. Disallowance of claim for deduction on account of rebate given to members.6. Claim of deduction on account of ex gratia payment to employees.Issue-wise Detailed Analysis:1. Claim of Deduction under Section 80P(2)(a)(iii) of the Act:The assessee did not press grounds related to the claim of deduction under Section 80P(2)(a)(iii) in all three appeals, resulting in their dismissal as not pressed.2. Claim for Deduction under Section 80HHC of the Act:Similarly, the grounds related to the claim for deduction under Section 80HHC were not pressed by the assessee and were dismissed as not pressed.3. Denial of Claim for Deduction of Interest Liability:The primary issue was the denial of the claim for deduction of interest liability arising from an arbitration award. The assessee, a registered co-operative society, failed to fulfill a contract with M/s Alimenta SA due to government restrictions on groundnut exports. Arbitration awarded damages and interest against the assessee, which was later confirmed by the appellate authority. The assessee claimed interest liability as a deduction in the relevant assessment years, though the liability was not provided for in the books of accounts.The AO and CIT(A) rejected the claim, stating the liability crystallized only after the decree by the Delhi High Court in January 2000. The Tribunal upheld this view, stating that the liability to pay interest did not crystallize during the assessment years in question (1996-97 to 1998-99) and could only be claimed in the assessment year 2000-01.4. Computation of Deduction under Section 80P(2)(d) of the Act:The assessee claimed a deduction for interest received from co-operative societies. The AO deducted proportionate administrative expenses from the gross interest receipts to compute the net eligible amount for deduction. The CIT(A) upheld this method but allowed a deduction for dividend income from IFFCO. The Tribunal remanded the matter back to the AO to identify and allocate expenses directly connected with earning the dividend income rather than using a proportionate formula.5. Disallowance of Claim for Deduction on Account of Rebate Given to Members:The assessee claimed a deduction for rebate given to members, which was approved by the general body in the subsequent financial year. The AO and CIT(A) disallowed the claim, considering it an appropriation of profits and not an allowable expenditure. The Tribunal, however, held that the rebate was akin to commission or incentive, allowable as a deduction as it related to transactions of the previous year. The decision was supported by the Andhra Pradesh High Court's ruling in CIT vs. T.T.D. Co-operative Stores Ltd.6. Claim of Deduction on Account of Ex Gratia Payment to Employees:The assessee claimed a deduction for ex gratia payments shown as payable in the books of accounts. The AO disallowed the claim, citing that the liability was not approved within the relevant financial year and under Section 36(1)(ii) of the Act, such deductions are allowable only when actually paid. The Tribunal remanded the matter back to the AO for fresh consideration, directing adherence to the CIT(A)'s decision in the assessment year 1996-97, which allowed similar claims based on actual payment subject to Section 43B of the Act.Conclusion:- ITA No. 1915/Del/2002 was dismissed.- ITA No. 1916/Del/2002 and ITA No. 2876/Del/2003 were partly allowed.- The Tribunal provided specific directions for re-evaluation and remand of certain issues back to the AO for fresh consideration, ensuring proper identification and allocation of expenses directly linked to the income in question.