TaxTMI 
TaxTMI 
2026 (6) TMI 1379
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.... the Income-tax Act, 1961 [the Act], dated 31 March 2044, as passed by the JCIT, Bellary Range, Bellary [ld. AO], was dismissed. 3. The assessee has raised the following grounds of appeal :- "1. The impugned assessment order dated, 31-03-2014 passed u/s. 143(3) of the Act is arbitrary and opposed to the facts of the case; and therefore, liable to be set aside as void. NON-EOU ADDITIONS. 2. The learned AO erred in disallowing the expenditure of Rs. 3,79,79,550/- incurred by the assessee for construction of residential houses to the persons whose houses were destroyed during the unprecedented floods as per the appeal and scheme of Government of Karnataka. 3. The learned AO erred in disallowing 10% of vehicle hire and other expenses amounting to Rs. 43,96,173/- 4. The learned AO erred in disallowing 20% of Transportation charges amounting to Rs. 68,33,314/- 5. The learned AO erred in disallowing Transportation charges of Rs. 2,73,33,366/- applying section 40(a)(ia) of the Act. 100% EOU 6. The learned AO erred in disallowing the expenditure of Rs. 84,93,150/- incurred by the assessee for construction of resident....
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....4,02,47,731 u/s. 40(a)(ia) of the Act of 100% EOU. 6. The assessee challenged the assessment order before the ld. CIT(A) wherein no relief was granted and appeal of the assessee was dismissed. 7. Before addressing the grounds of appeal, the learned Authorized Representative (AR) outlined the facts of the case. The assessee is a partnership firm engaged in manufacturing iron ore, utilizing Run of the Mines (ROM) purchased from associated entities and other sources as raw material. The assessee neither possesses any mining license nor owns any mines. Its books of account are audited pursuant to Section 44AB of the Act. The assessee operates two manufacturing units: Unit-1 produces saleable grade iron ore, while Unit-2 is a 100% Export Oriented Unit (EOU) eligible for exemption under Section 10B of the Act. The EOU has reported an income of Rs. 3,86,33,206, which has been claimed as exempt under Section 10B. 8. Assessment proceedings continued for both units, and the learned Assessing Officer (AO) made identical disallowances of certain expenditures in both the non-EOU and EOU units. The AR clarified that, in the case of a 100% EOU, the assessee's income is eligible for d....
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....tained in respect of payment made by the assessee. The assessee's claim u/s. 37(1) of the Act stating that the expenditure is made with good cause and intention to serve the community is not acceptable. The AO was of the view that since the above expenditure is not incurred for the purposes of business, same cannot be allowed. The expenditure is not at all related to the assessee's nature of business. The AO further relied upon the decision of the Hon'ble Karnataka High Court in the case of CIT v. Infosys Technologies Ltd. [2013-TIOL-507- HC-KAR] wherein it has been held that any expenditure which is not a business or commercial expediency cannot be allowed as business expenditure u/s. 37 of the Act. As the assessee has incurred the total expenditure of Rs. 4,64,62,700 being amount of Rs. 3,79,79,549 contributed from non-EOU entity and a sum of Rs. 84,83,150 from EOU entity, he disallowed the sum while computing business income of tax exempt unit and ordinary unit. 12. The ld. CIT(A) confirmed the same echoing the same reasons as given by the ld. AO. 13. The ld. AR submitted that expenditure incurred by the assessee is based on the appeal of the Hon'ble CM of Karnataka in vie....
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....ssessee. He further referred to the decision of the coordinate Bench in 133 taxmann.com 250 in the case of Zeenath Transport Company wherein the claim of deduction was allowed u/s. 37(1) of the Act. Therefore the disallowance made by the ld. AO in EOU as well as non-EOU units cannot be sustained. 14. The ld. DR vehemently submitted that the expenditure incurred by the assessee are not at all related to the business of the assessee, but social welfare activity. The provisions of section 37(1) of the Act categorically provides that expenditure incurred by the assessee should be wholly and exclusively for the purposes of business. In this case, there is no relationship between the business and the purpose of expenditure incurred. It was further stated that the ld. AO has specifically relied upon the decision of Hon'ble Karnataka High Court in the case of Infosys Technologies Ltd. (supra) and therefore there is no infirmity in the orders of the ld. lower authorities in disallowing the above expenditure. 15. With respect to the claim of the assessee that disallowance made in the case of EOU unit will go to increase the profits of the assessee and therefore it will increase the ded....
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....serves to be set aside and necessary directions are to be issued to the assessing officer to examine the claim of the appellant for deduction under section 37(1) of the IT act in accordance with law and the substantial question of law referred to above deserves to be answered in favour of the appellant and the present appeal deserves to be disposed of in terms of the judgement of this Court in Kanhaiyalal's case (supra). Accordingly the substantial question of law stands answered in favour of the appellant." 18. The honourable High Court remitted the matter back to the assessing officer for reconsideration of afresh bearing in mind the observation made in those judgements as expeditiously as possible. 19. In view of the above facts, respectfully following the decision of the Hon'ble jurisdictional High Court, we allow ground No. 2 of the appeal of the assessee, thereby direct the ld. AO to decide the issue afresh in terms of the direction of the honourable Karnataka High Court regarding disallowance of expenses of Rs. 3,79,79,550 made in the regular unit. 20. Identically ground No. 6 of the appeal where the disallowance was made of Rs. 84,93,150 is also directed to be reco....
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....e details are available and submitted before the ld. lower authorities, the disallowance made on adhoc basis @ 10% of the total expenditure is unwarranted. 24. The ld. CIT(DR) supported the actions of the ld. lower authorities and submitted that assessee did not furnish the details before the AO as stated in the assessment order and the ld. CIT(A) confirmed the action of the AO, deserves to be confirmed. 25. Ground No. 4 of the appeal is against the disallowance of 20% of the transportation charges amounting to Rs. 6,833,340. The brief facts of the case shows that on verification of the profit and loss account of the non-export oriented unit of the Assessee the learned assessing officer found that Assessee has debited the transportation charges of Rs. 34,166,707/-. The Assessee was asked to furnish the bills and vouchers for having incurred the above expenditure as according to the learned assessing officer it appears to be on higher side. The Assessee did not respond to this query and therefore the learned assessing officer in absence of bills and vouchers to cover any possible inflation of the expenditure deemed it a reasonable to disallowed 20% of the total expenditure wor....
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....l Date, Amount. 311-311 (ii) Copies of bills issued by the relevant parties. 312-321 B-6 Travelling Charges (Rs. 10,65,320/-) (i) Statement showing name of the party, Bill Number, Bill Date, Amount. 322-322 (ii) Copies of bills issued by the relevant parties. 323-346 B-7 Salary, Wages & Bonus (Rs. 61,88,196/-) (i) Statement showing break-up details of total expenditure. 347-347 (ii) Copies of ledger account extracts of: a) Salary account b) Overtime wages c) Bonus account d) Leave encashment 348-357 (iii) Copies of wage registers containing employee-wise details including signature of the receipt acknowledging the receipt of wages. 358-404 (iv) Copies of statement showing employee-wise details of bonus paid. 405-405 (v) Copies of statement showing employee-wise details of leave encashment paid. 406-408 30. On the basis of examination of the above details, we find that where there are purchases concerned, assessee has submitted the bills along with ....
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....harges received were duly accounted for and reported in their respective tax returns. 33. The learned Assessing Officer disallowed 20% of these expenses on the assumption of inflated charges. However, there is no evidence on record from the lower authorities to support the claim of inflated transportation expenses. Upon verifying the invoices, it is clear that the transportation charges were incurred for legitimate business purposes. Therefore, a disallowance based merely on presumption cannot be sustained unless the revenue provides concrete evidence indicating inflation of such expenditure. 34. In view of the above facts we do not see any reason to uphold the disallowance of Rs. 6,833,314/- made by the learned lower authorities on the basis of the exemption that the Assessee would have inflated such expenditure of transportation. Accordingly ground No. 4 of the appeal of the Assessee is allowed. 35. Ground No. 5 is with respect to the disallowance of transportation charges of Rs. 27,333,366 from non-export oriented units annual accounts and a sum of Rs. 40,247,731/- from the books of accounts of the hundred percent export-oriented unit applying the provisions of section ....
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....ired to be deducted under Section 194C. Furthermore, mere violation of Section 194C(7) would not attract disallowance under Section 40(a)(ia) of the Act. Accordingly, it was submitted that no disallowance is warranted in the present case. 41. With respect to the disallowance made for the hundred percent export-oriented unit for non-deduction of tax it was submitted that the income and hence due to disallowance under section 40 (a) (ia) is to be considered as eligible profits while computing deduction under section 10 B of the act as held by the coordinate bench in case of Precision Camshaft Ltd versus assistant Commissioner of income tax (2016) 67 taxmann.com 126 (Pune) dated 10/11/2015. He further relied upon the decision of the coordinate bench in case of income tax officer versus Cerner healthcare solutions private limited (2017) 83 taxmann.com 62 (Bangalore) wherein it has been held that where assessee was eligible for deduction under section 10 A, even disallowance made under section 40(a)(i) would only go to enhance the profit derived by the assessee and on such enhanced profit deduction under section 10 A had to be allowed. Thus even otherwise the disallowance made by the....
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....ermanent account numbers and complied with section 194C(6), tax deduction at source was not required, and no disallowance could be made. The coordinate bench also relied on another decision reported at 74 taxmann.com 90. 46. Considering these facts-specifically, the assessee's submission of permanent account numbers and supporting statements on all transporters-the disallowances imposed by the assessing officer with respect to the 100% export-oriented unit and the non-export-oriented unit are deleted. Accordingly, grounds No. 5 and 7 of the appeal are allowed. 47. Ground No. 8 of the appeal pertains to the disallowance made in the hundred percent export-oriented unit, which, if disallowed, would have increased the profit of the export-oriented unit and consequently resulted in a higher deduction under section 10B of the Act. In light of various precedents cited before us, this issue is required to be decided in favour of the assessee. However, since the disallowance relating to ground No. 7 of the appeal has already been deleted on its merits, this ground is rendered infructuous. 48. Ground No. 9 of the appeal is general in nature and therefore dismissed. 49. In the res....
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....laimed the total deduction under section 10 B of the act of Rs. 23,358,719/-. The case of the assessee was picked up for the scrutiny which resulted into an assessment order dated 29th of March 2016 passed under section 143(3) of the act. 53. The addition has been made in the hands of the assessee on account of following items which were challenged before us. (1) accrued and unaccounted interest income of Rs. 554,025/-, (2) disallowance of repairs and maintenance expenditure of Rs. 40 lakhs, (3) disallowance under section 43B of the act of Rs. 1,539,827/-, (4) disallowance of infrastructure of sharing charges of Rs. 4,921,368 and (5) Addition under section 41(1) of the act of Rs. 5,574,237/-. 54. The assessee preferred an appeal before the learned CIT - A wherein the above additions were confirmed whereas the other disallowance/addition made by the learned assessing officer were deleted which are not in dispute before us. 55. The ground No. 1 of the appeal is general in nature, no arguments were advanced, and therefore same is dismissed. 56. Ground No. 2 of the appeal is with respect to the addition of interest income of Rs. 554,025 made by the learned assessing officer....
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....nty about the receipt of ability of the above sum in assessment year 2013 - 14, this income could not have been added by the learned assessing officer. 60. The learned departmental representative vehemently supported the order of the learned lower authorities and submitted that the assessee has maintained its books of accounts on mercantile basis, assessee has also claimed the tax deduction at source as tax credit in its annual return about the tax deduction at source made on such income but has not disclosed the income for assessment year 2013 - 14. He submitted that income has accrued to the assessee for assessment year 2013 - 14 and therefore subsequently disclosure of the assessee of the same income would not change the position. 61. The learned authorized representative vehemently made an alternative proposal that as the assessee has already offered the above sum to tax for assessment year 2014 - 15, the learned assessing officer may be directed to grant the refund in the subsequent year as it amounts to double taxation. 62. Upon careful consideration of the parties' arguments and review of the orders issued by the lower authorities, we conclude that simply listing in....
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....orded an amount of Rs. 4,531,650 as repairs and maintenance expenses, which was charged to the profit and loss account. The firm operates its office from a rented building, for which an annual rent of Rs. 307,117 is paid; as it does not own the premises, the expenditure incurred for repairs and maintenance was claimed as a revenue expense. 67. The learned assessing officer determined that, since the assessee does not own any building, such substantial expenditure is questionable and therefore not allowable. The assessee argued that the repairs and maintenance were for the rented property and should not be considered capital in nature. It was further contended that renovations of leasehold premises are to be treated as revenue expenditures. The assessing officer noted that certain expenses, such as roof alterations and fencing, confer enduring benefits and are thus not revenue in nature. Additionally, considering the rent paid for the year (approximately Rs. 370,000), the repairs and maintenance costs appeared excessively high. The assessee failed to provide adequate details regarding the obligation to incur such expenses. Consequently, the assessing officer allowed Rs. 531,650, ....
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....re is properly evidenced with tax deducted at source, and payments and invoices have been shown. The high repair cost compared to the rent does not mean the expenses are excessive or capital in nature, as supported by the Hon. Supreme Court's decision in Madras Auto Services Pvt. Ltd. The assessing officer did not classify the expenses as capital but found them excessive, which is unsupported given the documentation provided. We therefore direct the deletion of the Rs. 40 lakh disallowance, and ground no. 3 of the appeal is allowed. 72. Ground No. 4 of the appeal pertains to the disallowance of customs duty amounting to Rs. 1,539,827 under the provisions of section 43B of the Act. The facts indicate that the assessee recorded a total of Rs. 2,539,827 as customs duty in the profit and loss account. However, upon reviewing Schedule 3 of the balance sheet, which outlines expenses payable, it was observed that only Rs. 1,539,827 was shown under 'custom duty payable.' The assessee clarified that this liability had crystallized during the year, it was explained to the Assessing Officer that the Directorate of Revenue Intelligence had initiated an investigation into iron or....
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....g year. The balance sum of Rs. 1,539,827 was paid by the assessee on 24th of June 2013. In view of the above facts as the demand of the above stated sum was raised by the customs department on 19 December 2012, the above said liability could not have been stated to be contingent in nature. The liability arose on the assessee during the assessment year itself. Accordingly we direct the learned assessing officer to delete the disallowance of Rs. 1,539,808 27 which is an accrued and definite liability of customs which was also deposited before the due date of filing of the return of income and therefore the same was a liability arising during the previous year and was also not hit by the provisions of section 43B of the act. Accordingly ground No. 4 of the appeal of the assessee is allowed. 78. Ground No. 4 of the appeal pertains to the disallowance of infrastructure sharing expenditure amounting to Rs. 4,921,368. The facts of the case indicate that the assessee recorded Rs. 4,921,368 under infrastructure sharing charges, which were paid to M/s Wahab Holdings Private Limited. The Assessing Officer determined that this payment was not incurred for the purposes of the assessee's ....
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....0,000/- to M/s Wahab Holdings Private Limited, No. ¼, Chambers, Cunningham Road, Bangalore 46, pursuant to invoice No. 236 dated 31st March 2013, which included service tax at 12.36% (Rs. 541,368), bringing the total payment to Rs. 4,921,368. The assessee has disclosed that this payment was made for the use of a fully equipped annual office of the said entity, exclusively for business purposes. 82. It has been further clarified that the assessee did not maintain an office in Bangalore but required such a facility due to significant business operations in that location. Consequently, the assessee availed itself of a ready-made office with complete infrastructure and skilled manpower by paying the above sum to Wahab Holdings Private Limited. The assessee has also submitted the income tax return and audited accounts of Wahab Holdings Private Limited, reflecting the aforementioned sum as income. 83. Given these circumstances, there is no basis to conclude that the assessee has not incurred the expenditure wholly and exclusively for the purposes of its business. It is undisputed that the assessee lacked an office in Bangalore yet had substantial work to be conducted there; ....