TaxTMI 
TaxTMI 
2014 (3) TMI 1101
X X X X Extracts X X X X
X X X X Extracts X X X X
....manufacturing of cement & generation of power. Deferment of sales tax liability in accordance with the Sales Tax New Incentive Scheme for Industries, 1989, floated under Rajasthan Sales Tax Act is allowed. The said incentive scheme provides for the deferral of sales tax liability for a specified period. Subsequently, the Rajasthan Sales Tax Act has been replaced by the Rajasthan Value Added Tax Act 2003 (RVAT Act) w.e.f. 1-04-2006. In pursuance to section 20(3) of RVAT Act, the Finance Department, Tax Division Jaipur, issued a notification dated. 31.03.2006 according to which Sales Tax New Incentive Scheme for Industries, 1989 would continue to apply under the RVAT Act. In accordance with this incentive scheme, the assessee t was issued eligibility certificate, dated 20.09.2006 , for deferral of its sales tax liability of Rs. 31,76,81,000/- for the period from 01.04.2006 to 04.04.2008. The actual amount of sales tax deferred is Rs. 31,74,68,000/-. This amount has been treated as loan in terms of Clause 12 of this notification. Accordingly, in the financial statements for the year 2006-07 onwards, the deferred sales tax liability has been treated as loan while the same was claimed a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mplete case of which was reproduced on Page 22-29 of the order. 3.4 Now the assessee is further aggrieved and has raised the above grounds of appeal before us. The Ld. AR of the assessee made elaborate arguments and also filed a written submission. The written submission made by him is being reproduced as under:- 1. There is no dispute as to the fact that the amount of sales tax collected under the incentive scheme & deferred for payment was a trading liability when it was collected. CBDT vide Circular No. 674 dt. 29.12.93, in Para 3 has clarified that the amount of sales tax liability converted into loans be allowed as deduction u/s 43B in the assessment for the previous year in which such conversion has been permitted by or under the government orders. As per Clause 12 of Notification dt. 31.03.2006, the State Government has specified that tax deferred under this notification shall be deemed to be a loan. Accordingly, the amount of sales tax collected but deferred for payment is income on one hand but on the other hand it is allowed as deduction u/s 43B in as much as it is deemed to be actually paid in view of its conversion into loan by the Government. The deduction ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... In the present case, the liability of the assessee to pay sales tax is undisputedly a trading receipt for which there was a liability of payment. The sales tax collected is income of the relevant assessment year but it is allowed as deduction u/s 43B on deemed payment by considering the equal amount as loan under the Scheme. Thus, no liability to pay sales tax existed the moment it was paid by way of converting the same into loan under the Scheme. The liability that now remained is only the liability to repay the loan & not the liability to pay the sales tax. In view of same, on payment of NPV of loan amount, there is no cessation of trading liability. 3. The payment of net present value of a future liability could not be classified as remission or cessation of the trading liability so as to attract provisions of section 41(1)(a) since the State Government had not waived of the sales tax liability/loan liability. It had only chosen to receive the money immediately which was receivable after 7 years. It is a simple case of collecting the amount at net present value which was due later on. The payment of Rs. 18,43,85,796/- represents only the present value of the loan liabi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he profitability of an investment or project. NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield." Explaining the concept further, the said website states "NPV compares the value of a dollar today to the value of that same dollar in future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative," David L. Scott., Wall Street Words: - "the discounted value of an investment's cash inflows minus the discounted value of its cash outflows. To be adequately profitable, an investment should have a net present value greater than zero. For investment in securities, the initial cost is usually the only outflow." In view of above definitions, where the NPV of a sum/the value of a thing is equal to its future known value, the payment of the present value of such sum/thing at present, enure no benefit to the payer or the payee. 7. The assessee has collected sales tax from the customers. Under the deferral scheme, the same is considered as paid ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es Centre concerned was to convert the deferred sales tax into a loan and thereafter by an amendment in 2002, the fourth proviso to section 38(4) was substituted, providing that where the net present value of deferred tax as may be prescribed was paid, the deferred tax was deemed, in public interest, to have been paid. The assessee pursuant to these amendments of the Bombay Sales Tax Act, 1959 made repayment of loan under the 1983 and 1988 Schemes on December 30, 2002 at the net present value of the deferred tax as prescribed under Trade Circular dated December 12, 2002. The assessee claimed the difference between the deferred sales tax of Rs. 7,52,01,378 and its net present value amounting to Rs. 3,37,13,393 as capital receipt, credited in the books of account of the assessee in the capital reserve account. However, the Assessing Officer on the ground that the assessee had obtained the benefit of deduction of the whole amount of Rs. 7,52,01,378 under section 43B of the Income-tax Act in view of the Central Board of Direct Taxes Circular No. 496 dated September 25, 1987, brought the difference of Rs. 4,14,87,985 to tax under section 41(1) of the Income-tax Act, 1961, treating it as....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... according to the assessee represented the net present value of the future sum as determined and prescribed by SICOM. The net present value is equivalent to the future value of the sum. In other words, what the assessee was required to repay after 12 years in six annual/equal installments, was repaid by the assessee, in the public interest, as net present value is equivalent to the future value of the sum. There was no iota of evidence to show that there was any remission or cessation of liability by the State Government. Thus, the requirements spelt out for the applicability of section 41(1)(a) were not fulfilled. Had the State Government accepted a lesser amount after twelve years or reduced such installments, then it could have been a case of remission or cessation. (iii) assessee on the basis of the letter issued by SICOM to the sales tax authority had passed necessary entries in the books of account claiming the difference of deferral amount as a capital receipt. Merely because the sales tax authorities had not issued the modified eligibility certificate the payment of Rs. 3,37,13,393 made by the assessee at net present value of the future sum of Rs. 7,52,01,378 would....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ecedents is followed. Revenue authorities may not be happy with the conclusions arrived at by the Special Bench, and they have every right to make submissions against the same at higher judicial forum but the Division Bench is certainly not the forum to adjudicate upon such submissions. In the case of Sulzer's, the Special Bench held that the deferred sales tax liability being the difference between the payment of net present value against the future liability credited by the assessee under the capital reserve account in its books of account was a capital receipt and could not be termed as remission/cessation of liability and, consequently, no benefit would arise to the assessee in terms of section 41(1)(a). In view of the same, the addition made by the AO was deleted. M/s Grasim Industries Ltd. Vs. DCIT 2011-TIOL-245-ITAT-Mum dt. 11.03.2011 Assessee Company availed the benefit of sales tax deferment scheme and deferred tax to the tune of Rs. 106.47 crore and treated this amount as loan payable to Government. Later on Government introduced another scheme vis-à-vis early repayment of outstanding loan or repayment of loan before the stipulated date. Assessee ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....by him has been considered and distinguished. Further, Hon'ble ITAT Jaipur Bench in the case referred supra, after examination has held that reduction of loan is a capital receipt not liable for tax either u/s 41(1) or u/s 28(iv). In view of above facts of the case & the decisions referred above, the addition of Rs. 13,30,82,204/- confirmed by the CIT(A) be deleted." 3.5 Per contra, the ld. CIT DR has relied on the order of the authorities below. He drew our attention to the conclusion drawn by ld CIT(A) at Page 30 and 31 of his order, particularly, where a finding is given that the ITAT Jaipur Bench has not considered the decision of Hon'ble Supreme Court in case of TVS Sunderam Iyengar (supra) and therefore the order of Hon'ble ITAT is per-incuriam and need not to be followed as a precedent. In the rejoinder, the Ld. AR has relied on the decision of the Pune Bench of ITAT reported at 164 ITD 272 in the case of ACIT vs Spicer India Ltd. and also drew our attention to the fact that the decision of Supreme Court in case of TVS Sunderam Iyengar has been considered by the Special Bench of Mumbai in the case of Sulzer India Ltd. Vs. JCIT (supra) and therefore the decisi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he assessee from the Rajasthan Rajya Vidyut Utpadan Nigam Ltd. (RRVUNL) from its Kota Thermal Power Station (KSTPS) where it is generated in the process of generation of electricity. The assessee company has entered into an agreement, dated 14.10.2004, with RRVUNL for disposal/utilization of fly ash. As per Para 2.1 of this agreement, the assessee company is required to install a "dry fly ash handling system" for the collection of fly ash, comprising of plant & storage silo on the land owned by RRVUNL. As per Para 2.2 of this agreement, KSTPS will provide the land for installing the said infrastructure facility at a token lease initially for 5 years. On expiry/termination of the agreement the "dry fly ash handling system" would become the property of RRVUNL/KSTPS as per Para 2.12 of the agreement. This dry fly ash handling system lifts the fly ash from the existing silo located in Unit 6 of KSTPS. The same is then transported for storage at assessee company's silo constructed on RRVUNL land. As per para 2.8 of the agreement, the fly ash is supplied free of cost for a period of 5 years to the assessee. Assessee company has incurred total expenditure of Rs. 5,25,41,773/- comprising o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssee company only enjoyed the right to use it for lifting the fly ash from the silo of KSTPS. He argued that the expenditure on installation of dry fly ash handling system, whose ownership did not vest in the assessee, but in RRVUNL/KSTPS, has been incurred not for the purpose of acquisition of capital asset but for the purpose of running the business more efficiently & profitably. The same has benefited the assessee company by way of reduced revenue expenditure since the assessee company has been able to procure fly ash free of cost for a period of five years by incurring expenditure on installation of the dry fly ash handling system. For the purpose of allowability of expenditure u/s 37(1) of the IT Act, 1961, it was sated that for the classification of the capital and revenue expenditure of deferred revenue expenditure is not relevant. . If the expenditure is a revenue expenditure, it is allowable in the year of incurrence irrespective of whether its benefit enure in one year or more than one year. In the present case, as explained in Para 2 above, the expenditure on installation of dry fly ash handling system is a revenue expenditure. According to the ld. AR , part of the expen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Tribunal. 4.6 We have considered the rival submissions and have gone through the copy of the agreement placed in the Paper Book. When the agreement is read as a whole, it becomes evident that the system was installed by the assessee to get the fly ash, which is an important component for manufacturing of cement on a regular basis. Thus, the system is installed by the assessee for the purpose of its business and not for acquiring the capital asset. Further, as per para 2.1 of the agreement, RRVUNL has allowed the assessee to install the system only for collection of fly ash free of cost, initially for a period of 5 years, and as per Para 2.12 of the Agreement, the system becomes the sole property of RRVUNL on the expiry/termination of the agreement. Thus, the entire arrangement has benefited the assessee only by way of free supply of fly ash by incurring the expenditure on installation of the system which become the property of RRVUNL. By allowing 20% of the expenditure, the authorities have accepted that the expenditure is revenue in nature and not a capital expenditure. There is no concept of deferment of expenditure in the I.T. Act. We also find that this very issue is deci....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is to be approached from commonsense point of view by ignoring the legal provisions of the Act. Therefore, the AO is directed to delete the disallowance made by him. Thus ground no. 2 of the assessee's appeal is allowed. 5.1 The Ground No. 3 of the assessee's appeal is against confirmation of the disallowance of Rs. 40 lacs incurred by way of contribution to District Administration towards construction of hospital at Ramganjmandi by holding that the same cannot be allowed as business expenditure. 5.2 The facts apropos to this ground as brought before us by the Ld. AR are that the Collector & District Magistrate, Kota vide its letter dated 09.04.2007 addressed to the MD of assessee informed that it has planned to construct a 100 bed hospital on 10 bigha land at Ramganjmandi at an estimated cost of Rs. 200 lacs with an object to expand the health & specialized medical services. In pursuance of same, assessee was requested to contribute 50% of the total cost i.e. Rs. 100 lacs to Medicare Relief Society, Community Health Centre, Ramganjmandi as its positive initiation towards the welfare of common man of District Ramganjmandi, where the plant of assessee is located. The Boar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eeds of the employees of the assessee. The words "for the purpose of the business" should not be limited to the meaning of 'earning profit alone'. Business expediency or commercial expediency might require providing facilities like school, hospital etc. for employees or their children. The contribution, thus, made by assessee for construction of 'Government Mangalam Cement Hospital' is directly linked with the following benefits/advantages which was also explained during the course of assessment proceedings vide 15.03.2011:- (i) At present for treatment of any serious injury/disease, hospitals were situated at Jhalawar i.e. 40 kms away or at Kota i.e. 65 kms away from the plant site whereas the newly constructed hospital is just 10 kms away from the plant site thereby helping in timely treatment. (ii) Not only there are reservations of few beds for assessee employees but priority is also given for their treatment. (iii) The hospital itself is named as "Government Mangalam Cement Hospital". The contribution, thus, made by assessee increased its goodwill, brand image and relationship with district administration. 2. AO has not disputed the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....O 44 TTJ 113 (Jpr.)(Trib.) In this case, there was a hospital nearest to assessee's mines. Accommodation for indoor patients available in the hospital was insufficient, having regard to the population. Thus, on demand of workers, other people in the area & on persuasion of Minister for Medical & Health, Rajasthan, at a meeting, the MD of the company declared that assessee would undertake construction of an additional indoor ward in the hospital and assurance was given that workers of assessee was to be given priority in admission to the new ward to be constructed. Therefore, assessee undertook the construction of additional ward & claimed the expenditure. This claim was disallowed by AO on the ground that deduction is not available u/s 80G on donation in kind. It was held that from the copy of letter, it is found that Minister gave an assurance that labourer's of assessee's mines were to be given priority for medical treatment & admission if a new ward was constructed in the hospital. Further, five beds were to be reserved for mine workers of assessee who were to be given priority for their treatment. It is therefore, clear that it was not a case of donation but of incurri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ironmental and philanthropic responsibilities in addition to their responsibilities to earn a fair return for investors & comply with the law. Putting all together, the alternative synonymous for CSR is People, Planet & Profit, also known as triple bottom line. As a broad measure of policy, Govt. has prescribed certain areas for making expenditure on CSR activities. One of such area is "Social Business Projects". If companies use 2% for philanthropic & shared value projects that create new business opportunities, reduce costs or strengthen their industry cluster, then such expenditure would take route of an investment that bring fruits back to the company. The basic objective of CSR is to maximize the company's overall impact on society & stakeholders keeping in consideration that companies need to develop a long tradition of engaging with the communities in which they work by aligning community involvement with business activities & clients relationships to ensure maximum impact. In view of same, contribution made by assessee as its duty towards citizens for social upbringing, protecting goodwill/reputation or increasing business competitiveness is wholly & exclusively for the pur....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under section 37(1) of the Act when such payment had been made for the purpose of the assessee's business. The principal laid down in this case and various other cases relied by Ld. AR are fully applicable in the present case. All these cases were relied before the ld CIT(A) but he has not given any finding as to how these cases are not applicable nor the Ld. DR has brought to our notice any distinguishable facts vis-à-vis the facts of the applicant case. In view of above, we have no hesitation in deleting the addition made by the lower authorities. Thus Ground No.3 of the assessee's appeal is allowed. 6.1 Ground Nos. 4 and 5 of the assessee are against confirming the disallowance out of various expenses and in directing the AO to recompute the FBT payable by the assessee on staff welfare expenditure, general expenses, social welfare expenses, gift expenses and sales promotion by holding that FBT on assessee would be leviable only on the balance amount after reducing the amount disallowed out of total expenses instead of deleting the disallowances made under these heads when....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ver, the AO has only specified expenditure of Rs. 36,69,468/- under the five heads which according to him can not be treated entirely & exclusively for business purpose. Hence, disallowance of 50% of the entire expenses is unjustified. 2. No discussion was made in respect of the expenses specified by the AO in the assessment order. From the details of the expenses (PB 90), it can be noted that expenditure under this head is exclusively for the purpose of the business. AO has no pointed any particular expense which is not for the purpose of business. Hence, no disallowance out of these expenses is called for. 3. We may also point out that the assessee has paid FBT on entertainment expenses & employee welfare expenses (PB 82-85). CBDT in Circular No. 8/2005 dt. 29.08.2005 in respect of the issue as to whether expenses disallowed under section 37 of the Income-tax Act on the plea that the expenses are personal in nature, would also be liable to FBT has clarified that to the extent the expenses incurred by the employer are personal in nature and have, therefore, been disallowed under section 37 of the Income-tax Act, such disallowance would not be liable to FBT. In th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....urpose. Hence, disallowance of 20% of the entire expenses is unjustified. 2. It is to be noted that the complete details of general expenses were submitted during the course of assessment proceedings vide letter dt. 15.02.2011 (PB 7981). From the said details (PB 91-111), it can be noted that it includes expenses on food, tea, snacks, newspapers, soap, washing charges etc at guest house & other general expenses at depot. The ledger account contains the details of the nature of expenditure incurred. The expenses are reasonable considering the volume of business of the assessee. In assessment proceedings considering the voluminous expenditure files, the same were not produced nor it was specifically required by the AO. The assessee has complete supporting evidence. Few sample vouchers are placed at PB 112-114. The reasons given by the AO for making the disallowance is not justified. No disallowance should be made just for the sake of making disallowance. The entire expenditure incurred by the assessee company is necessarily and exclusively for the purpose of business and qualify for deduction u/s 37(1). Further, the expenditure of the nature of entertainment & hospitality in....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Expenditure incurred on repair/renovation of Kalyan Mandpam Morak 9. 1,08,200/- Contribution towards repair/renovation/electrical items/electricity/water & construction of Samudayik Bhawan for Gram Panchayat Budhkhan 10. 2,00,000/- Provision towards expenses at Gram Panchayat Budhkhan 2. From the above table, it can be noted that the expenditure is incurred on the general welfare of the public where the factory of the assessee is located. The expenditure is as per the agreement & are fully supported by bills & vouchers (PB 119-139). AO has incorrectly held that these are personal in nature & not for the purpose of business. The entire expenditure incurred by the assessee company is necessarily and exclusively for the purpose of business and qualify for deduction u/s 37(1). Reliance in this connection is placed on various decisions given in Ground No. 3 supra. In view of above, adhoc disallowance of 20% confirmed by the CIT(A) without specifying any particular expenditure which is not allowable or unverifiable is uncalled for & be deleted. Gift Expenses Facts & Submission:- 1. During the year under consideration, asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....essment proceedings vide letter dt. 15.02.2011 (PB 79-81). The expenses are reasonable considering the volume of business of the assessee Thus, the very basis of disallowing the expenditure is misplaced. AO has no pointed any particular expense which is not for the purpose of business. It has not given any justifiable reasons for making adhoc disallowance. No disallowance can be made just for the sake of disallowance. Thus, the entire expenditure incurred by the assessee company is necessarily and exclusively for the purpose of business and qualify for deduction u/s 37(1). Further, assessee has paid FBT on sales promotion expenses (PB 82-85 & PB 86-89) & therefore, once the FBT is levied on such expenditure, no part of the expenditure can be disallowed u/s 37. 3. Reliance in this connection can be placed on the case of Seasons Catering Services (P) Ltd. Vs. DCIT 43 DTR 397 (Del) (Trib). In this case, assessee claimed business promotion expenses of Rs. 7,08,293/-, out of which an estimated sum of Rs. 1 lacs was disallowed by the AO & confirmed by the CIT(A). It was held that without pointing out any specific item, the authorities below are unjustified in disallowing the par....