SHRI MUTHARUMUGAM MUTHUKUMARAN,CHENNAI vs. DCIT, NCC-22, TAMBARAM

This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) 10, Chennai dated 31.01.2020 relevant to the assessment year 2011-12. Besides challenging confirmation of disallowance of ₹.3,31,500/- paid as EMD to Pallavaram Tanners Industrial Effluent Treatment Co. Limited, the assessee also challenged confirmation of disallowance of ₹.1,79,831.89 on the ground that TDS provisions are not applicable.

Facts are, in brief, that the assessee filed his return of income on 26.09.2011 for the assessment year 2011-12 declaring total income of ₹.35,40,798/-. The assessee derived income from manufacturing of leather and leather products under the name and style of M.S. Leather & Leather Products. The case was selected for scrutiny and after following due procedure, the Assessing Officer has completed the assessment under section 143(3) of the Income Tax Act, 1961 [“Act” in short] by assessing total income of the assessee at ₹.1,47,75,478/- after making various additions.

On being aggrieved, the assessee is in appeal before the Tribunal. By relying on various decisions, the ld. Counsel for the assessee has submitted that since the EMD was paid to Pallavaram Tanners Industrial Effluent Treatment Co. Ltd. in respect of the production facilities taken on rental basis and EMD is not credited to the assessee’s account and does not bring into existence of an asset or an advantage of enduring benefit of a trade and the operations of the assessee’s unit cannot be carried out with such deposit and such deposit only facilitates the assessee to carry out the business transactions without stoppage, it was prayed that such expenditure be allowed under section 37 of the Act.

On the other hand, the ld. DR strongly supported the orders of authorities below.

We have heard both the sides, perused the materials available on record and gone through the orders of authorities below including case law relied on in the grounds of appeal. The point at issue is whether the EMD remittances are capital expenditure or revenue expenditure. In this case, the Assessing Officer has disallowed ₹.3,31,500/- paid as EMD to Pallavaram Tanners Industrial Effluent Treatment Co. Ltd. on the ground that such remittances are capital expenditure. On appeal, the ld. CIT(A) confirmed the disallowance. However, we find that since, the EMD was paid to Pallavaram Tanners Industrial Effluent Treatment Co. Ltd. in respect of the production facilities taken on rental basis and does not bringing into existence an asset or an advantage for the enduring benefit of a trade and the operations of the assessee’s unit cannot be carried out with such deposit and such deposit only facilitate the assessee to carry out the business transactions, we are of the considered opinion that the expenditure incurred by the assessee should be treated as revenue expenditure. Admittedly, the expenditure does not bringing into existence of an asset or an advantage for the enduring benefit of a trade and thus, cannot be capitalized. Accordingly, we direct the Assessing Officer to allow the deduction of EMD payment as revenue expenditure. Thus, the ground raised by the assessee is allowed.

In the result, the appeal filed by the assessee is allowed.