TaxTMI 
TaxTMI 
2017 (4) TMI 405
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....the Appellant while computing the tax liability under Section 115JB of the Act: Rs. 1,51,33,620 1.1 The learned CIT(A) has erred in law and facts of the case in confirming the action of the AO by treating the provision for slow moving / obsolete stock as an unascertained liability and adding it to the book profit of the Appellant while computing the tax liability under Section 115JB of the Act. 1.2 The learned CIT(A) fails to appreciate that such provision for slow moving / obsolete stock was made to record the closing stock at net realizable value which is in accordance with Accounting Standard-2 (Valuation of Inventory) 1.3 Without prejudice to the above, if the action of CIT(A) on this ground is confirmed then the Appellant should be allowed reduction for reversal made in the year under appeal of the provision made in the immediately preceding year. Ground II: Disallowance of corporate social responsibility expenses ('CSR'): Rs. 38,82,316 2.1 The learned Commissioner of Income-tax (Appeals) - 10, Mumbai ['CIT(A)'] has erred in law and on facts in confirming the action of the Income Tax Officer 5(1 )(2), Mumbai (' AO') by disallowing Rs. 38,82,316 deb....
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....irectly benefited by it. Such expenses have been incurred out of commercial expediency and should be treated as an allowable business expense u/s. 37(1) of the Act." The A.O. rejected the contention of the assessee and observed that Sec.37(1) of the Act specifically states that the assessee shall be allowed only those expenses that have been wholly & exclusively incurred for the purpose of business of the assessee. The A.O. observed that CSR expenses are in the nature of donation and the same cannot said to have been incurred for the purposes of business of the assessee. The A.O. observed that the assessee is in the business of developing bulk terminal of Jawaharlal Nehru Port into a new container terminal, operating and maintaining the same, while the expenses were incurred towards ambulance services, paramedical services and medical supply to villages which can in no way be said to have been even connected with the business activity of the assessee company. The contention of the assessee that it enhances image of the assessee was also rejected by the AO , as then in that situation it was held that then it will be capital expenditure which shall not be allowable u/s 37(1) of 1961....
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....ssee has incurred business promotion expenses and accordingly details were called for. In the opinion of the A.O. these expenses were not incurred wholly and exclusively for the purpose of business. The details of the expenses are as under:- (i) Corporate Gift Rs.2,07,808 (ii) Event Work for help management of customer Rs.24,13,196 (iii) Board Meeting expenses Rs.l,30,713 (iv) Air Ticket for Copola Lungi Rs.7,73,005 TOTAL Rs.35,24,722 The assessee submitted that these are revenue expenses while the A.O. observed that corporate gift to valued customers on special occasions, festivals are to increase the goodwill of the assessee in the minds of customer and are in the nature of brand building expenditure to maintain good relations with the customers which cannot be treated as revenue expenses. These were held to be in the nature of brand building which in the opinion of the AO are to be treated as capital expenditure and not fully allowable. The A.O. relied on the decision of Hon'ble Supreme Court in the case of Brooke Bond India Limited, (1997) 225 ITR 798 (SC) wherein the Hon'ble Supreme Court held that if benefits of an expenditure are of enduring i....
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....xplanations before the A.O. with respect to the CSR expenditure:- "The company is located in a very far of place from the main city and is surrounded by many villages. Many inhabitants of such villages are employees of the company. These villages lack medical facilities and for the well-being of the family of the employees, the company provides ambulance services, paramedical services and medical supplies to villagers in the vicinity of its business premises. Further providing of such facilities enhances the corporate image of the company. Also such expenses were incurred on the welfare of its employees as they were directly or indirectly benefited by it, Such expenses have been incurred out of commercial expediency and should be treated as an allowable business expenditure u/s 37 of the Act." . The ld. CIT(A) observed that the expenses incurred towards ambulance services, paramedical services and medical supplies to villages can in no way be said to have been even connected with the activity of the assessee, hence, CSR expenses cannot be allowed as business expenses as they are not going to help the business of the assessee. Accordingly, the ld. CIT(A) confirmed the addition mad....
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....in the return of income originally filed with the Revenue , but in the revised return of income filed with Revenue, the assessee had withdrawn the above provision on the basis that the said amount is not provision or unascertained liability. It was submitted that the said amount was correctly reduced by the assessee as value of slow moving inventories which is determined on scientific basis consistently over several years and hence the same should be allowed to the assessee. The ld. CIT(A) after considering the contentions of the assessee held that going by the provisions of the Act, any provision made without the actual payment of the amount during the year will become unascertained liability and the same is not to be allowed while working out book profit u/s 115 JB of the Act. The learned CIT(A) held that the assessee has not furnished any details with regard to the computation of the obsolete stock which really become obsolete and same required to be reduced. The learned CIT(A) also observed that the assessee has itself reversed the entry for the next assessment year. The ld. CIT(A) accordingly confirmed the additions made by the A.O., vide appellate order dated 29-02-2016 passe....
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....re actual business losses sustained by the assessee. The ld. Counsel also relied on the decision of the Mumbai-tribunal in the case of Esquire Private Limited v. DCIT in ITA No. 5688/Mum/2011 for assessment year 2008-09 vide orders dated 29.8.2012. With respect to ground No. 2, it is submitted that the assessee has incurred CSR expenses of Rs. 15,87,014/- during the year which should be allowed as a deduction u/s 37(1) of the Act. The ld. Counsel drew our attention to the assessment order of the A.O. and argued that these are normal business expenses. It is submitted that the assessee is engaged in the business of developing bulk terminal of Jawaharlal Nehru Port into a bulk container terminal which is located in a remote area and the villages lack medical facilities and for the well-being of the family of the employees, the company provides ambulance services, paramedical services and medical supplies to villagers in the vicinity of its business premises. Further providing of such facilities enhances the corporate image of the company and such expenses were incurred on the welfare of its employees as they were directly or indirectly benefited by it. It is submitted that out of Rs....
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....ion of Arms Length Price: It is seen from the details in Form NO.3CEB filed along with the return of income that the assessee has entered into international transaction with associate enterprises of more than Rs. 15 crores. As per CBDT's Instruction No.3 of 2003 dated 20.05.2003, reference u/s.92CA(1) of the I.T. Act for computation of Arms Length Price was made to Transfer Pricing Officer on 16.08.2011. Addl. Commissioner of Income Tax, Transfer Pricing-I(3), Mumbai vide his order dated 31.08.2012 has passed order ujs.92CA(3) of the I.T. Act, 1961 wherein he has made no adjustment to the value of the international transactions entered into by the assessee." The ld. Counsel submitted that with respect to board meeting and air ticket expenses to the tune of , for verification purposes the matter can be sent back to the A.O.. 9. The ld. D.R. submitted that with respect to the provision for obsolete and slow moving stock, the assessee added an amount of Rs. 1,51,33,620/- on account of provision for obsolete and slow moving stock in the original return of income while determining book profit u/s 115JB of 1961 Act. The assessee is not able to quantity the same and did not submitt....
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.... business losses arising out of cost of obsolescence and loss on account of obsolete and slow moving inventory which has been consistently claimed by the assessee computed in a scientific manner and is not merely the provision or an unascertained liability was the averment of the assessee. It is also averred by assessee that no such addition has been made by Revenue in the normal regular computation of income while only additions were made to book profits computed u/s 115JB of 1961 Act. However, the assessee has not submitted details of non-moving/slow moving and obsolete inventories before the authorities below and was not able to substantiate the basis of computing said working which is claimed to be based on scientific method been followed consistently over the years. Thus , in the absence of details , no verification could be made by the authorities below to verify the contention of the assessee that it represented business loss arising on account of cost of obsolescence and loss on account of obsolete and slow moving inventory and it is an ascertained liability as claimed by the assessee , instead of merely being a provision or unascertained liability as contended by Revenue.K....
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....l family of the employees living in these villages around assessee's business terminal, the assessee provides ambulance services, paramedical services and medical supplies to villagers in the vicinity of its container terminal. However, we find that the assessee could not prove that these expenses are incurred wholly and exclusively for the purpose of the business which is mandate of Section 37(1) of 1961 Act. There may be a remote nexus of the assessee's business with these CSR expenses as the villages are situated in vicinity of the assessee's container terminal but that is not sufficient to claim an expense as business expense as mandate of Section 37(1) of the Act is that expenses are to be incurred wholly and exclusively for the business of the assessee, which in the instant case we are of considered view that the assessee could not demonstrate that how said expenses are incurred wholly and exclusively for the purposes of business of the assessee. These expenses no doubt have been incurred for the betterment of villages and people living around assessee's container terminal which in turn will help creating goodwill and conducive environment among local inhabitants for assessee....
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....al, on behalf of the revenue, pointed out, on the other hand, a note made by the chairman of the assessee- Corporation to its board of directors on the basis of which the resolution was passed authorising the making of the said grant to the Government of Maharashtra. He contended that the amount had not been given in lieu of any levy on export, but had been given as an outright grant. It was not even connected with the price structure of the ore purchased by the assessee. Even the workers in the village to whom the amenities, according to the assessee, had been provided, were not the workers of the assessee. There was no connection between the said grant and the business carried on by the assessee. He, therefore, urged that the view of the Tribunal was correct and the said amount should not be regarded as an expenditure laid out wholly and exclusively for the purpose of the assessee's business. While considering the true connotation of the expreesion "for the purpose of business", the Supreme Court in the case of Malayalam Plantation's case (Supra) examined the case law on the subject, both in England and in India. Broadly, the true tests applied by the English courts were....
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....prehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it his capacity was a person carrying on the business." Bombay Steam Navigation Co. ( 1953) P. Ltd. v. Commissioner of Income-tax [1965] 56 ITR 52 ; [1965] 1 SCR 770 (SC) was another case cited before us, where the Supreme Court was of the view that transaction of acquisition of assets was closely related to the commencement and carrying on of the assessee's business and interest paid on the unpaid balance of the consideration for the assets acquired had, in the normal course, to be regarded as expended for the purposes of the business which was carried on in the accounting periods. In Indian Steel & Wire Products Ltd. v. Commissioner of Income-tax [1968] 69 ITR 379 (Cal.) the Calcutta High Court disallowed the contribution made by the assessee to the Indian National Congress, which was a political party in power, for seeking its patronage for the preservation an....
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....er of Maharashtra requested that: in view of the serious damage suffered by the Konkan region due to the recent floods and heavy rains the State Trading Corporation should extend it's most sympathetic consideration. After some discussion the Chief Minister agreed to a sum of Rs. 2,00,000 being given by the State Trading Corporation as outright grant and not to press the matter further. This note brings out the "sympathetic consideration" which prevailed with the assessee while making the grant. The payment thus had no connection with the business of the assessee. The Tribunal did notice the assessee's argument that its business would have suffered if his payment had not been made by it. But the Tribunal did not notice any material to support it and was unable to give a finding to that effect. The provision of amenities to the labour not of the assessee- Corporation but in the village in general and the development of the port and of the roads in the village were not found to have a connection with the assessee's business. In any case, even if there might have been a connection, it was too remote to be considered as relevant for our purpose. This expenditure in no case, can ....
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....ng business promotion/ sponsorship expenses of Rs. 22,95,302/- claimed by the assessee before the A.O. for verification and examination by the AO on merits and to consider the claim on merits in accordance with law.Needless to say that proper and adequate opportunity of being heard shall be provided to the assessee by the AO in accordance with law. We order accordingly. With respect to the third issue in respect of disallowance of 25% of Rs. 35,24,722/-, we have observed that the assessee spent an amount of Rs. 24,13,196/- towards event organized in Bahrain and payments were made in the nature of reimbursement to Bahrain Terminals which is an AE and the transactions with AE were international transactions. The TPO has not proposed any TP adjustment w.r.t. international transactions entered into by the assessee with AE. The assessee has explained that these expenses were incurred for an event wherein 6 top customers (contributing more than 25% of its turnover) participated along with 3 employees of the assessee for which these costs were incurred by the assessee by reimbursing the same to Bahrain Terminal which is its AE. The assessee has claimed the said expenses as incurred for m....