2008 (8) TMI 400 - AT - Income Tax

Tribunal Partly Allows Appeal: Grants DEPB Deduction, Recognizes Business Expenses, Deletes Delayed PF Disallowance.

The Tribunal partly allowed the appeal, overturning several disallowances by the AO. It directed the AO to grant deductions for DEPB credits under Section ... Deduction u/s 80HHC - Profits Derived From Exports - Exclusion of 90 per cent of excess provision written back from the profits of business - Disallowance on account of gifts given - Disallowance on a sum held to be disallowable in terms of Explanation to s. 37(1) - Disallowance on expenses towards hydro power projects - Disallowance on amount paid for development of website - Disallowance on delayed payment of PF. Deduction u/s 80HHC - Profits Derived From Exports - HELD THAT:- Assessee filed details being profit on sale of DEPB credit and also submitted that balance sum is in the nature of duty repaid or repayable as drawback. Thus, amount of DEPB credit utilized by the assessee himself falls under sub-s. (iiic) of s. 28 and not under sub-s. (iiid) of s. 28 - The AO and learned CIT(A) were not justified in treating the drawback of duty available to the assessee as equivalent to profit on transfer of DEPB scheme. There was no transfer of DEPB scheme credit but the assessee himself having utilized the same, is to be considered as falling under sub-s. (iiie) of s. 28 and not under sub-s. (iiid) of s. 28. Therefore, the assessee, under first proviso below sub-s. (3) of s. 80HHC, is entitled to deduction in respect of any sum referred to in sub-s. (iiie) of s. 28, in the same proportion as the export turnover bears to the total turnover of the business carried on. We, therefore, direct the AO to grant appropriate deduction as per first proviso below sub-s. (3) of s. 80HHC in respect of DEPB credits utilised by the assessee - Assessee has not made the claim as per the revised claim filed before the CIT(A) and hence, the assessee is not entitled to deduction u/s. 80HHC in respect of profit on sale of DEPB scheme as the requisite condition laid down in third proviso below sub-s. (3) of s. 80HHC is not fulfilled. Exclusion of 90 per cent of excess provision written back from the profits of business - HELD THAT:- Once the amount forms part of 'profits of business', in terms of cl. (baa) of Explanation. 90 per cent of any receipt by way of brokerage, commission, interest, rent charges or any receipt of similar nature included in such profits can be reduced - However, the excess provision written back does not fall in any of the nature of the receipts. Therefore, the AO was not justified in reducing 90 per cent of the excess provision written back while computing profits of business for the purpose of computing deduction u/s. 80HHC. AO is directed to include such amount in computing profits of business for the purpose of computing deduction u/s 80HHC. Disallowance on account of gifts given - HELD THAT:- We find that the appellant assessee is a public limited company. The company functions through the directors. Therefore, the appellant, being a corporate entity, cannot have any expenditure of personal nature. Paying small sum by way of gift at the marriage ceremony of staff/relative of customers etc. is business related expenditure and allowable as such. We, therefore, delete the disallowance. Disallowance on a sum held to be disallowable in terms of Explanation to s. 37(1) - HELD THAT:- Since the details are not available before us, we are unable to give any such finding as to whether the expenses fall in the category as contained in Explanation to s. 37(1). We, therefore, remit the matter back to the file of AO to find out as to which expenses are considered as set forth in Explanation to s. 37(1). The AO shall give proper finding in this regard. Disallowance on expenses towards hydro power projects - HELD THAT:- It is admitted position that business of assessee is already set up. The assessee is manufacturing polyester films. In this business, the assessee desired to have a captive power plant for which a tender was submitted to Uttaranchal Jal Vidyut Nigam and consultant was appointed for feasibility study of this project. The tender fees was mandatory for filing tender - Therefore, the tender fees paid to Uttaranchal Jal Vidyut Nigam and consultancy in respect of the said hydro power project are allowable as business revenue expenditure. Hon'ble Gujarat High Court in the case of CIT vs. Jyoti Electric Motors Ltd.[2001 (11) TMI 48 - GUJARAT HIGH COURT] held that fees paid for technical report for expansion of existing business is allowable revenue expenditure and cannot be considered as capital expenditure. We, therefore, delete disallowance. Disallowance on amount paid for development of website - AO treated the same as capital expenditure but allowed depreciation thereon by treating the same as acquisition of software - CIT(A) confirmed the same - HELD THAT:- By incurring the expenditure, the assessee has not acquired any software though the software itself may be needed to access the website. The website requires regular updates - Therefore, the expenses incurred for development of website cannot be equated with acquisition of software or to treat it as capital expenditure. The expenses being inclined just to promote the business interest are allowable as revenue expenditure. We, therefore, delete the disallowance in respect of website development expenses. Disallowance on delayed payment of PF - AO noted that the employees' contribution towards PF for the months of May, June and October, 2003 in respect of Khatima Trust and the for the month of October, 2003 for the head office employees were paid beyond the due date prescribed u/s. 36(1)(va) though paid before the end of the relevant financial year - HELD THAT:- We find that High Court in the case of CIT vs. Dharmendra Sharma [2007 (11) TMI 39 - DELHI HIGH COURT] held that where the assessee made payments of PF and ESI within 2 to 4 days after the grace period but before, filing the return of income. the same are allowable. While so holding High Court relied upon the decision in the case of CIT vs. George Williamson (Assam) Ltd.[2006 (6) TMI 71 - GAUHATI HIGH COURT] and against which the SLP was dismissed by Hon'ble Supreme Court. Since in the present case, the amounts in question were paid before the end of the relevant financial year itself, the same are allowable as such. We, therefore, delete the disallowance. In the result, the appeal is partly allowed. Issues Involved:1. Deduction under Section 80HHC concerning DEPB credits and profit on sale of DEPB credits.2. Exclusion of 90% of excess provision written back from the profits of the business for computing deduction under Section 80HHC.3. Disallowance of gifts given as personal expenses.4. Disallowance of certain expenses under Explanation to Section 37(1).5. Disallowance of expenses towards hydro power projects.6. Disallowance of expenses for website development as capital expenditure.7. Disallowance of delayed payment of PF.Detailed Analysis:1. Deduction under Section 80HHC concerning DEPB credits and profit on sale of DEPB credits:The assessee company, engaged in manufacturing and selling polyester films, claimed a deduction under Section 80HHC, including DEPB credits and profits on the sale of DEPB credits. The AO contended that DEPB credits fall under Section 28(iiid) and are subject to the third proviso of Section 80HHC(3). The assessee argued that DEPB credits utilized by the company should be covered under Section 28(iiic) and not Section 28(iiid). The Tribunal concluded that DEPB credits utilized by the assessee amounting to Rs. 5,79,74,883 fall under Section 28(iiic) and directed the AO to grant appropriate deduction under the first proviso of Section 80HHC(3). However, the profit on the sale of DEPB licenses amounting to Rs. 67,10,929, did not fulfill the conditions of the third proviso of Section 80HHC(3), and thus, no deduction was allowed for this amount.2. Exclusion of 90% of excess provision written back from the profits of the business for computing deduction under Section 80HHC:The AO excluded 90% of the excess provision written back, applying clause (baa) of the Explanation to Section 80HHC. The Tribunal agreed with the assessee's contention that the excess provision written back does not fall under the nature of brokerage, commission, interest, rent charges, or any similar receipt described in clause (baa). Therefore, the AO was directed to include such amounts in computing the profits of the business for the purpose of deduction under Section 80HHC.3. Disallowance of gifts given as personal expenses:The AO disallowed Rs. 3,868 spent on gifts given at marriage ceremonies, treating them as personal expenses of the directors. The Tribunal found that the assessee, being a corporate entity, cannot have personal expenses. Gifts given at marriage ceremonies of staff or relatives of customers were deemed business-related expenditures and allowable as such.4. Disallowance of certain expenses under Explanation to Section 37(1):The AO disallowed Rs. 39,307, citing that certain expenses were incurred in violation of Explanation to Section 37(1). The Tribunal found that the details of such expenses were not clear and remitted the matter back to the AO to identify and provide proper findings on which expenses fell under the prohibited category.5. Disallowance of expenses towards hydro power projects:The AO disallowed Rs. 7,69,600 paid for tender fees and consultancy for a hydro power project, considering them related to future projects. The Tribunal held that these expenses were for setting up a captive power plant for the existing business, thus allowable as business revenue expenditures. The disallowance was deleted.6. Disallowance of expenses for website development as capital expenditure:The AO treated Rs. 1 lac spent on website development as capital expenditure, allowing depreciation. The Tribunal concluded that developing a website does not create a new capital asset but serves as a business promotional tool, thus allowable as revenue expenditure. The disallowance was deleted.7. Disallowance of delayed payment of PF:The AO disallowed Rs. 67,536 for delayed payment of PF contributions. The Tribunal noted that the payments were made before the end of the financial year and referenced the Delhi High Court's decision in CIT vs. Dharmendra Sharma, allowing such payments. Thus, the disallowance was deleted.Conclusion:The appeal was partly allowed, with several disallowances being overturned and directions provided for re-evaluation of certain expenses.