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Before: Shri Amit Shukla & Shri L.P. Sahu
ORDER Per L.P. Sahu, A.M.: This appeal by the Revenue is directed against the order of ld. CIT(A)- VIII, New Delhi dated 05.09.2014 for the assessment year 2010-11 on the following grounds :
1. Whether on the facts and circumstances of the case & in law, the ld. CIT(A) erred in deleting the addition of Rs.2,19,48,179/- on account of personal expense ignoring the fact that assessee has not produced documents to substantiate its claim at the time of assessment proceedings?
2. Whether on the facts and circumstances of the case & in law, the Ld. CIT (A) has erred in deleting the addition of Rs. 68,63,487/- on account of repair and maintenance ignoring the fact that addition to a fixed assets, endures benefit for a long period of time and thus capital in nature?
3. Whether on the facts and circumstances of the case & in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 26,12,024/- u/s 14A ignoring the fact that disallowance u/s 14A with rule 8D has to be made if assessee has made an investment whose income is exempt or not?
4. Whether on the facts and circumstances of the case & in law, the Ld. CIT (A) has erred in deleting the addition of Rs. 1,38,24,467/- u/s 36(1)(iii) ignoring the fact that the interest paid by assessee on loan taken for acquiring the asset has to be capitalize till the date, the asset is not put to use?
5. Whether on the facts and circumstances of the case & in law, the Ld.CIT(A) erred in deleting the addition of Rs.2,83,782/- on account of prior period expense ignoring the fact that expenses incurred by assessee do not pertain to the year under consideration?
6. That the order of the Ld. CIT(A) is erroneous and is not tenable on facts and in law.
That the grounds of appeal are without prejudice to each other.”
From the aforesaid grounds of appeal, it emerges out that following issues are involved in this appeal :
(i). Deletion of disallowance of expenses being personal in nature. 2,19,48,179 (ii). Deletion of addition on a/c of Repairs & Maintenance expenses 68,63,487 (iii) Deletion of disallowance u/s. 14A 26,12,024 (iv). Deletion of disallowance u/s. 36(1)(iii) 1,38,24,367 (v). Deletion of disallowance of prior period Exp. 2,83,782/-
Briefly stated, the facts of the case are that the assessee is a company dealing the business of manufacture and sale of equipments for mineral and rock processing. The assessee filed its return of income on 22.09.2010 declaring total income at Rs.19,00,62,360/-. The case was selected for scrutiny and notices u/s 143(2) and 142(1) along with questionnaire had been issued which were replied by the assessee. During the assessment proceeding, books of accounts, audited accounts, bills and vouchers had been produced and were test checked by the Assessing Officer. After considering various details and replies of the assessee, the Assessing Officer completed the assessment at a total income of Rs. 23,67,16,393/-, inter alia by making various additions as mentioned hereinabove.
During the course of assessment proceedings, the AO noticed that the assessee had claimed expenditure of Rs. 21,94,81,778/- under various heads as noted hereinbelow. The AO disallowed the expenditure to the tune of Rs. 2,19,48,179/-, representing to 1/10th of total expenditure claimed, the details of which are as under:
Particulars Amount (Rs.) Disallowance in Amount (%age) disallowed Telephone 2,80,08,325 10 28,00,833 Expenses Traveling 14,90,65,916 10 1,49,06,592 Expenses Employees 20,99,898 10 2,09,990 Welfare Staff Welfare 4,03,07,639 10 40,30,764 Total 21,94,81,778 10 2,19,48,179 The above disallowances were made on the premise that Various expenses debited to the Profit & Loss account have element of personal use; that assessee did not maintain any logbook for vehicles; that no details regarding telephone were maintained number-wise; that no supporting evidence was available with the assessee to prove that the expenses are incurred exclusively for the purposes of business; that entire expenses were not fully verifiable and that the element of personal use cannot be ruled out. He, therefore, in order to pluck any possible leakage of Revenue, disallowed 10% of the additions claimed, as noted above.
4. The AO further noticed that assessee claimed repair and maintenance expenditure on lease hold property for flooring, interior work etc. to the tune of Rs.72,94,797/- as per details submitted before the Assessing Officer. The AO treated it as capital in nature, as these expenditure were incurred for getting enduring benefit to the assessee. The AO, therefore, after allowing applicable depreciation as per the nature of block of assets amounting to Rs.4,31,310/-, disallowed remaining expenditure amounting to Rs.68,63,487/- as capital expenditure.
The AO further noticed that the assessee had made investment of Rs.7,23,10,255/- as per schedule-D to the balance sheet. Out of this investment, a sum of Rs.7,22,91,759/- was made in subsidiary company alone and this investment in subsidiary company was later on written off/provision made for diminution of value leaving Rs.1/- in the balance sheet. He noticed that the provision made for diminution in the value of investment is just a book entry and notional provision. It cannot be said that funds of the business are not diverted. He concluded that the investments were made out of business funds in a common Kitty. The money received as share capital as term loan as working capital as sales proceeds etc. do not have any different colour and has paid interest on the loan which has been charged to the profit and loss account. During the assessment year, the assessee has paid total interest of Rs.8,75,09,473/- whereas no any disallowance has been made u/s. 14A. Accordingly, the AO calculated the disallowance of Rs.26,12,024/- u/s. 14A.
The AO also noticed that the assessee has made investments in fixed assets, i.e., Rs.15,29,25,288/- on land – lease hold-I and Rs.32,93,66,740/- on building, which has been put to use by the assessee during the year. The assessee had paid interest of Rs.8,75,09,473/- on loans taken, till the date of assets are put to use, but no such interest on the loans taken for these assets was capitalized before the assets were put to use. Relying on the decision of Punjab & Haryana High Court in the case of M/s. Abhishekh Industries, 286 ITR 01, the AO disallowed the proportionate interest amounting to Rs.1,38,24,367/- u/s. 36(1)(iii).
7. It was also noticed that the assessee debited a sum of Rs.2,83,782/- under the head repair and maintenance expenses being amount paid to M/s. Ideal Products Data. The AO observed that the date of relevant invoice No. 2035 was 03.02.2009, which was received by the assessee on 03.04.2009. The assessee was maintaining his books of account on mercantile basis. Thus, the expenses having been related to preceding years cannot be allowed for the current year, as under the mercantile system of accounting the income and expenditure are required to be accounted for and are allowable in the relevant year to which they relate. Accordingly, the AO disallowed the expenditure to the tune of Rs.283782/- as prior period expenditure after following the conditions of section 37(1).
In appeal, the ld.. CIT(A) after considering the detailed submissions of the assessee and relying upon various decisions deleted all the above additions made by the Assessing Officer. Aggrieved by the impugned order, the Revenue is in appeal before the Tribunal.
The learned DR relying on the order of Assessing Officer submitted that in view of the discrepancies pointed out by the Assessing Officer, the ld. CIT(A) was not justified to delete the disallowance of expenditure made by AO without considering the facts that personal element was involved in the said expenditure, particularly when the same were not fully verifiable. It was also contended that the assessee has incurred capital expenditure on lease hold premises as per his own requirements. The nature of expenditure incurred unequivocally warrants to be the expenditure in capital nature for fetching enduring benefit therefrom. These were not day-to-day running business expenditure. The ld. DR also submitted that therefore, the ld. AO was justified to rely on the decision of Punjab & Haryana High Court, which is squarely applicable to the present case for disallowance of expenditure u/s. 14A. The assessee had mixed funds and has paid interest on loan taken. Merely because the assessee wrote off the investment in subsidiary, it would not exonerate the assessee from disallowance u/s. 14A. He also submitted that the capital assets were put to use during year and huge interest was paid on loan, but the assessee himself did not disallow the proportionate interest upto the date when the assets were put to use. It was also submitted that the AO after considering the invoice has rightly disallowed the expenditure on repair and maintenance treating it to be the prior period expenditure which is not admissible in the mercantile system of accounting. He, therefore, urged for restoration of assessment order.
On the other hand, the ld. AR of the assessee relying on the impugned order and reiterating the submissions made before the ld. CIT(A) has filed a detailed written synopsis, which reads as under :
The Assessing Officer had made the addition without applying her mind. a) Whatever details were required, the assessee filed the same. The AO did not make any further query or direct the assessee to produce any further evidence / explanation. Had the Assessing Officer any doubt in her mind, she should have directed the assessee to explain the same or produce further evidences. However, AO made the additions on surmises and conjectures ignoring the material fact that assessee is a company and not an individual. b) The Assessing Officer has made these disallowances without any material in his possession, on wrong and unsustainable premises. The company is a distinct assessable entity from its Directors as per the definition of “person” u/s 2(31) of the Act. A Limited Company, by its very nature, cannot have any “personal use”. The Limited Company is an inanimate person and there cannot be anything personal about such an entity. Kindly see –
Sayaji Iron & Engg. Co. vs CIT (2002) 253 ITR 74S (Guj) Deputy CIT vs Haryana Oxygen Ltd. (2001) 76 ITD 32 (Del) Seasons Catering Services (P) Ltd. vs Deputy CIT (2010) 127 ITD 50(Del ) c. Further personal expenses would include expenses on the person of the assessee or to satisfy his personal needs such as cloths, food etc or purposes not related to the business for which the deduction is claimed. Kindly see - State of Madras vs GJ Coelho (53 ITR 186)(SC) CIT vs Porrits & Spencer (Asia) Ltd. (2010) 324 ITR 257 (P&H)
ITO vs Ashoka Betelnut Co. (P) Ltd. (1984) 10 ITD 788 (Mad) d) An analysis of section 37(1) shows that any expenditure
• not being expenditure of the nature described in section 30 to 36 and • not being in the nature of capital expenditure or personal expenses of the assessee • laid out or expended • wholly & exclusively for the purposes of the business • shall be allowed in computing the income chargeable under the head “Profits & Gains of Business or Profession”. e) Business expenditure has to be viewed from the point of view of assessee. The nature of the expenditure must be adjudged in the light of accepted commercial practice and trading principles. The expenditure must be incidental to the business and must be necessitated or justified by commercial expediency. f) Expenditure incurred by the assessee have direct and intimate connection with his business and therefore, the same is allowable u/s 37(1) of the Act. Once it is established that the expenditure has been factually incurred by the assessee wholly and exclusively for the purpose of business and there is nexus between the expenditure and the business of the assessee, the Revenue cannot justifiably claim to put itself in the arm chair of the businessman and assume the roll to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. Kindly see
Travencore Titanium Product Ltd. vs CIT (1966) 60 ITR 277 AT 282-83(SC) CIT vs Dalmia Cement (P) Ltd. (2002) 254 ITR 377 (Del) Bombay Steam Navigation Co. (1953) Pvt. Ltd. vs CIT (1965)56 ITR 52(SC) g) In the present case, all the expenses has been incurred by the assessee wholly and exclusively for the purposes of business. Even Assessing Officer has not observed as to which expenditure is not for the purposes of business. Merely a guess work in the guise of preventing any possible leakage of revenue is not sufficient to disallow expenditure factually and justifiably incurred by the assessee. h) It is further submitted that neither in the preceding years nor in the subsequent years, these expenditure had been disallowed by the Assessing Officer. The comparative chart for the four years is enclosed herewith as Annexure-“M”.
In the guise of personal user, following disallowances has been made by the Assessing Officer: 1. Telephone Expenses Disallowance of Rs.28,00,833 being 1/10th of Rs.2,80,08,325/- The ledger account of communication expenses produced by the assessee at Annexure- “D” reveals that these expenses include cellular phone expenses, courier, fax, IT charges (data card, email etc), mobile expenses reimbursement, telephone expenses reimbursement, video conference etc.
Assessee has various offices, factories etc all over India having 550 employees on its payrolls. Mobile telephone has been provided by the assessee to its employees. Some of the employees are reimbursed the expenditure incurred by them on communication. Telephone installed at the Director premises are also for the business purposes. Looking to the volume of work (turnover of T395.76 crore) and magnitude of the workforce, expenditure incurred by the assessee is not unreasonable. Arbitrary observation without any material whatsoever particularly in the guise of personal expenditure is not sustainable in law.
2. Traveling Expenses Disallowance of Rs.1,49,06,592/- being 1/10th of Rs.14,90,65,916/- Details of traveling and conveyance filed by the assessee at Annexure-“E” reveals that the same includes foreign traveling of T1,84,11,400/- and domestic traveling at Rs.13,06,54,517/-.
During the assessment proceeding the Assessing Officer had required to furnish only the details of foreign traveling which had been furnished in extenso giving names of employees who visited the foreign country, date of departure and arrival, fare amount, boarding lodging and other expenses.
Assessing Officer was satisfied with these details, however, while framing the assessment, she disallowed 10% of the total expenditure in the guise of personal nature which is not sustainable in law.
Details of domestic traveling expenses include a sum of Rs.3,99,82,494/- spent on conveyance, employee transportation, petrol reimbursement and vehicle hire charges. It also include sum of Rs.9,06,72,023/- incurred on traveling by the employees which included air tickets, boarding and lodging expenses.
Assessee had hired various cabs at its various offices / factories to provide facility of transportation (pick-up and dropping) to its employees on daily basis.
Details of domestic traveling furnished by the assessee includes month-wise details of traveling of the employees name-wise alongwith their designation, destination, fare, lodging, boarding and other expenses.
Expenditure incurred by the assessee is wholly and exclusively for the purposes of business, it cannot have any element of personal user particularly when the assessee is a Pvt. Ltd. Company. Hence the expenditure is fully allowable u/s 37(1) of the Act.
3. Employees Welfare Disallowance of Rs.2,09,990/-being 1/10th Of Rs.20,99,898/- During the assessment proceeding, assessee had produced details of miscellaneous expenses of ^1,38,40,106/- out of which Assessing Officer picked-up two figures (a) employees welfare expenses of ^14,90,782/- and (b) sales tax penalty of T6,09,116/- and disallowed 1/10th of total of T20,99,898/-. Sales tax penalty cannot be treated as employee welfare expenses. Moreover, amount of sales tax penalty had already been offered by the assessee in the computation of income itself. This shows non-application of mind as well as bias attitude on the part of Assessing Officer.
Details of employee welfare expenses annexed as Annexure-“F” reveals that these expenses include insurance policy taken on the life of Directors and Officers, employee health check-up expenses, employee SAP cost and also the expenses reimbursed to the employees.
Looking to the volume of work and magnitude of the workforce at various offices / factories, expenditure of Rs.14,90,782/- is not excessive or unreasonable.
Staff Welfare Disallowance of Rs.40,30,764/- being 1/10th of Rs.4,03,07,639/- Details of staff welfare expenses annexed at Annexure-“G” reveals that it includes canteen expenses, Diwali and Holi expenses, internal meeting expenses, medical insurance of the employees, long term service award and various other expenses. In order to give job satisfaction and also to enhance productivity and efficiency of the work force, assessee has provided canteen facility to all its employees at various offices / factories situated in India.
Similarly, group medical insurance policy as well as group personal accident policy had also been taken on the lives of employees. Assessee has 550 employees on its payroll. Assessing Officer has ignored all the material and disallowed 1/10th treating the same as of personal nature. No prudent man of an average mind can presume the expenditure as of personal nature particularly when the assessee is a company and not an Individual.
CIT(A) has considered all these details and thereafter, deleted the addition made by the Assessing Officer. CIT(A) also considered the fact that the assessee had furnished comparative chart of expenses for last 05 years i.e. AY 2006-07 to AY 2009-10 and pointed out that Assessing Officer had not made any addition by disallowing these expenditure even in assessment orders framed u/s 143(3) of the Act. Hence, rule of consistency demands that no expenditure under these heads can be disallowed merely on the ground of personal user.
Accordingly, it is prayed that no expenditure could have been disallowed by the Assessing Officer and the addition made by her be deleted in the interest of justice.
Ground No. 2 Disallowance of repair and maintenance of Rs.68,63,487/- Department has raised the following ground of appeal:
Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of ^68,63,487/- on account of repair and maintenance ignoring the fact that addition to a fixed assets, endures benefit for a long period of time and thus capital in nature?
During the assessment proceeding, assessee had furnished the details of repairs a) and maintenance of Rs.4,93,74,261/- out of which Assessing Officer picked-up the details of expenditure of Rs.72,94,797/- either from the bills or from the contract notes or from the journal vouchers and treated the same as capital expenditure as against the claim of the assessee as revenue expenditure. She allowed depreciation at 10% or 5% thereon and made addition of balance amount of Rs.68,63.487/- to the Income of assessee. b) The details of Rs.72,94,797/- annexed at Annexure-“H” reveals that the said expenditure is in the nature of repair, maintenance, replacement or renovation either in the nature of current repair or repair allowable u/s 30(a) or section 31 or u/s 37 of the Act. c) Where the premises are occupied by the assessee as a tenant, expenditure incurred on repairs of the said premises are allowable u/s 30(a) as revenue expenditure. If the premises are not occupied as a tenant then the expenditure incurred on “current repairs” is allowable as revenue expenditure. Similarly, amount paid on current repairs of machinery, plant and furniture is allowable as deduction u/s 31. If the repairs do not fall within the ambit of section 30 & 31 then also assessee is entitled to the expenditure towards repairs, u/s 37 if the expenditure is of the nature of revenue and not capital expenditure. Kindly see Cultural Enterprises Corporation vs CIT, 196 ITR 488 (Cal) d) Assessee has taken the premises At Faridabad on lease w.e.f. 28.07.2008. Agreement was initially for three years and could have been extended for two more terms of three years. Further as per the terms of lease agreement, lessee was under an obligation not to make any pucca construction in the building as well as in the open space without the written consent of the lessor. Further as per clause 11, day-to-day repairs had to be carried out by the lessee. As per clause 17, lessee was under an obligation to keep the premises in good tenantable condition.
Similarly at Gurgaon, office was taken on lease w.e.f. 12.01.2008 initially for the e) period of 03 years and the term could have been extended for two more terms. In CIT vs Hiline Pens Pvt. Ltd. (2008) 306 ITR 182, 189(Del), Delhi High Court f) have held that where assessee incurred expenses towards repairing of rented premises for carrying on its business activity without any intention to bring new capital asset into existence, such expenses fall within the purview of the expression “repairs to premises” u/s 30(a)(i) and hence admissible. g) The details furnished by the assessee reveal that by incurring the expenditure on repairs, no new asset has been brought into existence, rather the old assets are repaired. It is not the nomenclature given by the assessee but the substance of expenditure is relevant. Further even the magnitude of the expenditure is also not relevant, the real test is whether the asset is merely maintained or is replaced or improved by the expenditure incurred. Kindly see
CIT vs Seraikella Glass Works (P) Ltd., 157 ITR 584 (Pat) As per concise oxford dictionary, "to repair” is to restore to good condition, h) renovate, mend by replacing or re-fix,ng parts or compensating loss or exhaustion.
As per Laxicon Webster Dictionary, "to repair” is to restore to a sound or good state after decay, injury, dilapidation or partial destruction. i) Section 30(a)(ii) and section 31 (i) allow deduction in r/o current repairs. The idea of periodicity, recurrence and need is implicit in the expression “current repairs”. Accumulated repairs can be understood as current repairs.
The guidelines for inference of “current repair” has been set out by the Hon’ble Delhi High Court in CIT vs Volga Restaurant (2002) 253 ITR 405 (Del) after referring to judgement of Apex Court in Ballimal Nawal Kishore vs CIT (1937) 224 ITR 414 (SC) and of Bombay High Court in New Shorrock Spg and Manufacturing Co. Ltd. vs CIT (1956) 30 ITR 338 (Bom). Current repairs has also been discussed by the Bombay High Court in CIT vs Chowgule & Co. Pvt. Ltd. (1995) 214 ITR 523 (Bom) j) Repair implies renewal or replacement of a part. As held in CIT vs India United Mills Ltd., 141 ITR 399 (Bom) CIT vs Kaira District Co-op Milk Producers Union Ltd., 192 ITR 608 (Guj) Comfort Living Hotels (P) Ltd. vs CIT (ITA No.67 of 2001) CIT vs Satyadeo Chemicals Ltd. (1997) 226 ITR 95 (Guj) CIT vs Jagatjit Industries Ltd. (2000) 241 ITR 556 (Dei) CIT vs Co-op. Sugars Ltd. (239 ITR 908) (Ker) SLR filed by the Revenue against this judgement has been dismissed by the Supreme Court reported at (1998)234 ITR ST 32 k) While examining the expenditure being revenue or capital, regard must be had to rapid strides in science and technology. The revenue has to take into consideration the need for updating the plants in view of further development and advancement of science and technology.
Alembic Chemical Works Co. Ltd. vs CIT (177 ITR 377)(SC) CIT vs Co-op. Sugars Ltd. (1999) 235 ITR 343 (Ker) l) The test of an improvement or an advantage of enduring nature is not conclusive. The object of every repair is to improve the condition or the efficiency of the asset. Empire Jute Co. Ltd. vs CIT (1980) 124 ITR 01 (SC). CIT vs Mahalaxmi Textile Mills Ltd. (1967) 66 ITR 710 (SC) m) Expenditure on current repairs is generally covered by section 30 & 31. In r/o types of repairs that do not fall under the above description, a deduction can still be allowed u/s 37 if its requirements are fulfilled.
CIT vs Kusum Products Ltd. (1989) 175 ITR 557 (Cal). Permali Wallace Ltd. vs CIT (1S85) 151 ITR 43(MP). Gurnarain Khanna & Sons vs CIT (1986) i£9 ITR 231 (Del) CIT vs Zafar Bhai Akbar AM & Bros (1895) 211 ITR 496 (Bom) CIT vs Jawahar Mills Ltd. (1997) 226 ITR 230 (Mad) CIT vs Laxmi Talkies (2005) 275 ITR 125 (Guj) CIT vs Dr A M Singhvi (2008) 302 ITR 26 (Raj) n) In the present case, the Assessing Officer has arbitrarily picked up the items amounting to Rs.72,94,797/- and has treated the same as capital expenditure. However, nature and character of each item reveals that it is in the nature of repair, maintenance or replacement of a part or renovation and therefore, allowable as revenue expenditure either u/s 30 or 31 or 37 as the case may be. o) It is not out of place to mention here that neither in the preceding years, nor in the subsequent year, Assessing Officer has disallowed expenditure incurred by the assessee by way of repair and maintenance.
CIT(A) has considered all these details and arguments and deleted the addition treating the amount of Rs.72,94,797/- as revenue expenditure towards repairs and maintenance.
Ground No 3 Addition of Rs.26,12,024/- invoking the provisions of section 14A Department has raised a following ground of appeal Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of T26,12,024/- u/s 14A ignoring the fact that disallowance u/s 14A with rule 8D has to be made if assessee has made an investment whose income is exempt or not? During the assessment proceeding for AY 2011-12, Assessing Officer observed that a) the assessee had shown investment of Rs.7,23,10,255/- in Schedule-D to the Balance Sheet out of which, a sum of Rs.7,22,91,759/- had been invested in subsidiary company alone. He further observed that this entire amount of investment had been written off / provision made for diminution of value, leaving Rs.1/- in the Balance Sheet. The Assessing Officer held that the provisions of section 14A were applicable as investment was made out of business fund which included borrowed fund as well on which assessee had paid interest. Accordingly he applied Rule 8D and computed interest disallowance at Rs.22,50,565/- and man power and other resources disallowance at Rs.3,61,459/- totaling to Rs.26,12,024/- invoking provisions of section 14A of the Act. b) It is submitted that assessee had invested the amount of Rs.7,22,91,759/- in equity shares of a subsidiary company 8-10 years back. Since the value of investment i.e. the shares diminished and therefore, assessee made provision of Rs.7,22,91,758/- in its Balance Sheet of FY 2002-03 relevant to AY 2003-04, however, this provision had been offered by the assessee for taxation in its statement of income which had been accepted by the Revenue in the assessment order u/s 143(3) for AY 2003-04. All the relevant documents have been annexed as Annexure-“J”. c) It is further submitted that the Assessing Officer has wrongly invoked the provisions of section 14A. It is applicable only when the assessee had claimed deduction of expenditure which had been incurred in relation to exempted income, against the taxable income. Expenditure of Rs.26,12,024/- disallowed by the Assessing Officer has not been incurred by the assessee lor earning the exempted income. d) In any case, interest on borrowed capital is allowable as deduction u/s 36(1 )(iii) and expenses u/s 37(1) of the Act.
India Cement Ltd. vs CIT (1986) (60 ITR 52) (SC Deputy CIT vs Core Healthcare Ltd. (2008) (298 ITR I94)(SC) e) In CIT vs Walfort Share & Stock Brokers (P) Ltd. (2010) (326 ITR 01) Supreme Court have held that the mandate of section 14A is clear It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income.
Distinction has to be made between return of investment (e.g. sale consideration of investment) and return on investment (e.g. dividend). Diminution in value of investment has impact on Balance Sheet and not on Profit & Loss A/c whereas dividend has impact on Profit & Loss A/c. In any case, it is a capital loss and not an exempted income so as to invoke provisions of section 14A of the Act. Hence the addition of Rs.26,12,024/- is liable to be deleted.
It is very relevant to point out here that assessee has shown Rs.1/- as investment in f) subsidiary company since AY 2003-04 but no addition had been made by the Assessing Officer, in earlier years, invoking provisions of section 14A of the Act though section 14A has been inserted in the statute book by the Finance Act 2001 with retrospective effect from 01.04.1962.
CIT(A) has considered the facts on record and had rightly held that the provision of section 14A are not all attracted as the same was applicable when the assessee had claimed deduction of expenditure which had been incurred in relation to exempted income against the taxable income, in the present case, assessee had not claimed any income as exempt. Expenditure incurred and claimed by the assessee is wholly and exclusively for the purposes of business, income of which has been shown as profit of the business and has offered for taxation. Therefore, expenditure incurred for earning such income has to be allowed as deduction. Diminution in value of investment is a capital loss and therefore, no expenditure can be disallowed invoking the provisions of section 14A of the Act.
Accordingly, it is prayed to delete the addition of Rs.26,12,024/- made by the Assessing Officer in the interest of justice.
Ground No. 4 Disallowance of Rs.1,38,24,3671- u/s 36(1 )(iii) Department has raised a following ground of appeal Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.1,38,24,367/- u/s 36(1 )(iii) ignoring the fact that the interest paid by assessee on loan taken for acquiring ihe asset has to be capitalize till the date, the asset is not put to use? a) During the assessment proceeding, Assessing Officer observed that assessee had made investment in fixed assets which had been put to use during the year as under: Land-leasehold Rs.15,29,25,280/- Building Rs.32,93,66,740/- Total Rs.48,22,92,020./-
The Assessing Officer further observed that the assessee haa borrowed the money and paid interest to bank and others at Rs.8,75,09,473/-. He relied on the judgement of Punjab & Haryana High Court in the case of M/s Abhishek Industries (286 ITR 01) and disallowed a sum of Rs.1,38,24,367/- u/s 36(1 )(iii) in the proportion of investment in land & building to total borrowed fund.
It is submitted that the total borrowed funds adopted by the Assessing Officer at Rs.152,64,77,997/- included deferred sales tax liability of Rs.8,40,85,293/- which cannot be taken into consideration for computing proportionate disallowance. a) As per the accounting followed by the assessee, the expenditure directly related to the fixed asset had been directly debited to the said asset. However, the expenses which could not have been directly allocated to a particular asset had been debited to pre- operative expenses and were allocated to the assets in the year in which they are put to use. For this purposes, assessee had adopted accounting standard AS-10 and AS-6 relating to accounting for- fixed assets and depreciation respectively. This accounting practice has been adopted by the assessee since the beginning and in none of the years, Assessing Officer has rejected the same. b) During the assessment proceeding, assessee had produced the details of preoperative expenses as well as their allocation to the assets. The details are now annexed as Annexure-“K”. These expenses were in the nature of advertisement, consultation, bank interest, bank charges, salary, staff welfare, traveling, interest etc. c) During the year assessee had claimed total interest at Rs.11,98,81,762/-, out of which, a sum of Rs.2,48,87,306/- was transferred to preoperative expenses. Pre-operative expenses of Rs.14,79,23,076/- included interest of Rs.3,32.44,566/- which contained interest of Rs.2,48,87,306/- transferred during the year and also the brought forward interest. Total expenses of Rs.14,79,23,076/- has been allocated by the assessee to the fixed assets i.e. building, Plant & Machinery etc.
Since the assessee had already allocated interest to the fixed assets, the action of d) the Assessing Officer in disallowing interest of Rs.1,38,24,368/- invoking provisions of section 36(1 )(iii) amounted to double disallowance, once when the assessee transferred the amount from interest account to preoperative expenses being capital in nature and again by the Assessing Officer while making addition. Hence the addition be deleted in the interest of justice. e) The judgement of Punjab & Haryana High Court in the case of Abhishek Industries is also not applicable to the facts of present case as it pertains to allowability of interest on borrowed capital when the assessee had given interest free advances to sister concerns and subsidiaries.
After considering the facts on record, CIT(A) has deleted this addition recording a finding of fact that the assessee had already capitalized interest of Rs.2,48,87,306/- out of total interest paid during the year at Rs.11,98,81,762/-. CIT(A) has also recorded a fact that the assessee had adopted guidelines issued by ICAI AS10 & AS6. No fault has been found out by the Assessing Officer in the accounting policy adopted by the assessee. Hence. CIT(A) has rightly deleted the addition.
Ground No. 5 Disallowance of Rs.2,83,782/- as prior period expenses Department has raised a following ground of appeal Whether on the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in deleting the addition of Rs.2,83,782/- on account of prior period expenses ignoring the fact that expenses incurred by assessee do not pertain to the year under consideration? a) The Assessing Officer has disallowed the amount of T2,83,782/- on the ground that the payee company M/s Ideal Products Data had issued invoice on 03.02.2009 and therefore, it is a prior period expenditure
It is submitted that M/s Ideal Products Data was paid a sum of Rs.2,83,782/- for b) maintenance of computer unit for the period from 01.01.2009 to 31.12.2009. Invoice was received by the assessee on 03.04.2009 and the payment was made on 24.04.2009. Thus the amount was crystallized during the year and therefore, expenses were allowable during the year. Assessee had produced all the details vide Annexure-“L”. c) In the present case, invoice was issued for calendar year and thus period from 01.01.2009 to 31.03.2009 pertains to the preceding year. However, since the amount has been crystallized during the year, the same is allowable in the current year, the same cannot be treated as prior period item. Assessee is relying on the following judgements:
CIT vs Modipon Ltd. (2011) 334 ITR 102 (Del) CIT vs Shri Ram Pistons & Rings Ltd. (2008) 174 Taxmann 147 (Del) Saurasthra Cement & Chemical Industries Ltd. vs CIT (1995) 213 ITR 523 (Guj)
CIT(A) has deleted this addition holding that the amount had been crystallized during the year, even services had been rendered during the year and therefore, the amount cannot be treated as prior period item so as to disallow the same.
Last but not the least, it is to be pointed out that neither in the preceding years nor in the subsequent years except AY 2011-12, Assessing Officer had made any addition on these grounds. Hence, Rule of Consistency demands that in this very year also no addition could be made in view of the judgement of Supreme Court in the case of Radhasoami Satsang vs CIT (193 ITR 321). It is not out of place to mention here that in AY 2011-12, Assessing Officer had made similar additions relying on the assessment order for the present year, however CIT(A) has deleted the additions.
In view of above submissions, it is stated that the assessment has been framed by the Assessing Officer on surmises and conjectures. The Assessing Officer had arbitrarily disallowed the various expenditures and has framed the assessment at a very huge amount ignoring the material produced by the assessee. Accordingly, the additions have rightly been deleted by the CIT(A).”
We have heard the rival submissions and have gone through the entire material available on record including the impugned order and various decisions relied by both the parties and we find no justification to interfere with the impugned order. For the sake of ready reference, the findings reached by the ld.CIT(A) in each of the above issues are as under :
Deletion of disallowance of expenses of Rs.2,19,48,179/- I have considered the submissions oral and written made by the appellant as well as the assessment order. Assessing Officer has made the addition out rightly at 10% of these expenditures basically on the ground of personal nature. It is true that the company is a distinct assessable entity from its directors and employees. A limited company, by its very nature, cannot have any personal use. Gujarat High Court in Sayaji Iron & Engg. Co. vs CIT (2002) 253 ITR 749 (Guj) have held that the assessee which is a private limited company is a distinct assessable entity as per the definition of “person” u/s 2(31) of the Act. Therefore, it cannot be stated that when the vehicles are used by the Directors “even if they are personally used by the Directors” the vehicles are personally used by the company because a limited company by its very nature cannot have any “personal use”. The limited company is an inanimate person and there cannot be anything personal about such an entity. Similar to the effect have been held by Punjab & Haryana High Court in the case of CIT vs Porrits & Spencer (Asia) Ltd. (2010) 324 ITR 257. Even Delhi Bench of ITAT in the case of Deputy CIT vs Haryana Oxigen Ltd. (2001) 76 ITD 32 and in the case of Season Catering Services (P) Ltd. vs Deputy
CIT (2010) 127 ITD 50 have held that the legal entity of a company, apart from its Directors, is well established. When the directors and the company are two separate legal entities, the use of the car by the directors of the company could not be characterized as for non-business purposes or is for the personal use; no disallowance u/s 37(1) was justified. In so far as personal user is concerned, in State of Madras vs GJ Coelho (53 ITR 186)(SC), Supreme Court has explained the term “personal expenses” and has observed that any expense to discharge a personal obligation do not become a personal expense within section 5(e) of 1922 Act which is similar to section 37(1) of 1961 Act. Personal expenses would include expenses on the person of the assessee or to satisfy his personal needs such as cloths, food etc or purposes not related to the business for which the deduction is claimed. Therefore, the finding given by the Assessing Officer that there is always an element of personal user under these heads of expenses is misconceived and therefore cannot be sustained in law in the absence of any material. In so far as telephone expenses are concerned, Assessing Officer has observed that no details regarding telephone expenses was maintained phone number wise. As per the details furnished by the assessee, telephone / communication expenses of '2,80,08,325/- includes cellular phone expenses, courier, fax charges, IT charges (data card, email), mobile expense reimbursement, expenses on telephones installed at various offices of the company, telephone expenses reimbursement, video conference etc. Assessee has maintained details running into 200 pages giving each and every detail against each item of expenditure. Even giving name of the employee / person on whose behalf expenditure is incurred. Month-wise details on each of the category of expenses has been shown. In fact, all these details had been verified by the Assessing Officer during assessment proceeding while examining books of accounts. It appears that she has ignored this material and in the enthusiasm has disallowed 10% of the expenditure. She has ignored that the assessee has corporate office at Delhi, registered office at Gurgaon, warehouse at Faridabad, factory at Bawal and Alwar, foundry at Ahmedabad and other service stations at various places. Moreover, 550 employees are on the payroll of the assessee company. Therefore, looking to the setup of the appellant company, expenditure incurred by the assessee appears to be reasonable also in view of the fact that assessee has also given mobile phones to its employees and telephone facilities has been given to its Directors / Officers. Accordingly additions made by the Assessing Officer at Rs 28,00,833/- being 10% of the total expenditure of Rs 2,80,08,325/- is hereby deleted. In so far as traveling expenses are concerned, Assessing Officer has disallowed Rs 1,49,06,592/- being 10% of total expenditure of Rs 14,90,65,916/-. Assessing Officer has disallowed this expenditure observing that proper supporting evidence is not available to prove that expenses under this head are incurred purely for the purpose of business, it cannot be denied that there is always an element of personal expenditure under these heads of expenses. Therefore, to prevent any possible leakage of revenue, 10% of the expenditure is disallowed. Assessee has furnished full details of traveling and conveyance amounting to Rs 14,90,65,916/- which includes amount of Rs 1,84,11,400/- on foreign traveling and Rs 13,06,54,517/- on domestic traveling. Assessee has furnished the details of foreign traveling which includes name of the employee, his designation, name of the country visited, date of departure, date of arrival, fare amount, boarding and lodging and other expenses etc. All these details were filed before the Assessing Officer, however, Assessing Officer has not given any finding as to which expenditure is not for the purposes of business. Similarly, assessee has furnished the details of domestic traveling which is given in two annexures. Annexure-1 pertains to the expenses amounting to Rs 3,99,82,494/- incurred by the appellant on conveyance, employee transportation, petrol and diesel expenses, travel domestic allowance, vehicle hire expenses etc. Annexure-2 contains the details of traveling expenses amounting to Rs 9,06,72,023/- which include name of employee and his designation who visited various places in India. All the details were examined by the Assessing Officer during the assessment proceeding, however, she has not given any finding as to which of the expenditure is not for the purposes of business of the assessee or have no direct nexus with the business of assessee. Assessee had hired various cabs at its various offices / factory and has provided facility of transportation (pick-up and dropping facility) to its employees on daily basis. Assessee has produced the vouchers showing payment to the travel agencies to whom the payment is made after deducting tax at source. Looking to the details furnished by the assessee, it cannot be said that the expenses incurred by the assessee have any personal element or that the expenditure incurred by the assessee is not verifiable. Assessee had produced the vouchers during the assessment proceeding as well as during the appellate proceeding. Assessing Officer has made the addition ignoring the material furnished by the assessee. In fact, expenditure incurred by the assessee has direct nexus with the business activities carried on by him, hence I am deleting the addition of 1,49,06,592/- made by the Assessing Officer. In for as addition of Rs 2,09,990/- in respect of employees welfare expenses are concerned, Assessing Officer has disallowed the same merely on the ground of personal user. Total expenditure of Rs 20,99,898/- has been determined by the Assessing Officer taking into consideration sales tax penalty of Rs 6,09,116/- as stated by the appellant. Sales tax penalty cannot be treated as employee welfare expenses and therefore, I am deleting this amount of Rs 6,09,116/- from total expenditure of Rs 20,99,898/-. During the assessment proceeding as well as appellate proceeding, assessee has produced details of employee welfare expenses at Annexure-“F” which reveals that these expenses include insurance policy taken on the life of Directors and Offices, employee health checkup expenses as well as expenses reimbursed to the employees. This cannot be treated as personal expenditure of the appellant. Moreover looking to the turnover and the magnitude of workforce, amount of Rs 14,90,782/- incurred by the assessee on employees welfare is not excessive or unreasonable. Rather it has direct nexus with the business activity of the appellant and therefore, addition of Rs 2,09,990/- is hereby deleted. In so far as disallowance of Rs 40,30,764/- in respect of staff welfare is concerned, Assessing Officer has not given any reason except that element of personal expenditure cannot be denied under these heads of expenses. The reasoning given by the Assessing Officer appears to be very vague. Details of staff welfare expenses produced by the appellant at Annexure-“G” reveals that it includes canteen expenses, Diwali & Holi expenses, Medical Insurance of the employees, long term service award and various other expenses. The appellant has 550 employees on its payroll. Assessee has provided canteen facility to all its employees at various offices / factories situated in India. Group Medical Insurance Policy as well as Group Personal Accident Policy have also been taken on the lives of employees, contention of the appellant that in order to enhance productivity and efficiency of the work force, aforesaid facilities has been provided, cannot be rejected as it has direct nexus with the business activity of the appellant. The Assessing Officer has not examined as to which particular expenditure is not related to business activity. Hence the disallowance of Rs 40,30,764/- is hereby deleted. I have also taken into consideration the comparative chart of expenses produced by the appellant for last five years and it appears that in AY 2006-07 to 2009-10, Assessing Officer has not made any addition by disallowing these expenditure even in assessment orders framed u/s 143(3) of the Income Tax Act. Hence Rule of Consistency also demands that no expenditure under these heads can be disallowed merely on the ground of personal user. Findings on disallowance of repairs and maintenance expenses: I have considered the assessment order passed by the Assessing Officer, long submissions and short synopsis filed by the appellant and the case law relied upon by him. Appellant has produced the details of Rs 72,94,797/- at Annexure-“H” and also the Lease Deed entered into with Bright Industries Pvt. Ltd. for taking the premises on lease at Faridabad and with M/s DLF Cyber City Developers Ltd. for taking the premises on lease at Gurgaon. Initial term for both the leases was 03 years and the same could be extended for 02 more terms of 03 years. Substantial repair work has been carried out by the appellant in these two premises. Day- to- day repairs has been taken over by the appellant under the lease deed and the assessee was even under an obligation to keep the premises in good tenantable condition.
The details furnished by the assessee reveals that the repair is in the nature of current repair, maintenance or replacement of a part or reconstruction or renovation which is allowable as revenue expenditure either u/s 30 or section 31 or section 37.
In CIT vs Hiline Pens Pvt. Ltd. (2008) 306 ITR 182, 189(Del), Delhi High Court have held that where assessee incurred expenses towards repairing of rented premises for carrying on its business activity without any intention to bring new capital asset into existence, such expenses fall within the purview of the expression “repairs to premises” u/s 30(a)(i) and hence admissible.
The decision relied upon by the appellant on the cases of CIT vs Volga Restaurant (2002) 253 ITR 405 (Del), New Shorrock Spg and Manufacturing Co. Ltd. vs CIT (1956) 30 ITR 338(Bom), CIT vs Jagatjit Industries Ltd. (2000) 241 ITR 556 (Del) and Empire Jute Co. Ltd. vs CIT (1980) 124 ITR 01 (SC) are also worth noting.
I have also taken into consideration the comparative chart produced by the appellant for last 05 years. In none of the years i.e. AY 2006-07 to 2009-10, Assessing Officer has disallowed expenditure on these grounds. Accordingly the addition of Rs 68,63,487/- is hereby deleted and the amount of Rs 72,94,797/- is treated as revenue expenditure towards repairs and maintenance as claimed by the assessee. Finding on disallowance u/s. 14A: I have considered the assessment order framed by the Assessing Officer and the submissions made by the appellant. It is an admitted fact that the assessee had made investment of Rs 7,22,91,759/- in a subsidiary company long back and this investment had been duly reflected in the Balance Sheet. It is also an admitted fact that in the FY 2002-03 relevant to AY 2003-04. appellant had provided a sum of Rs 7.22.91.758/- in its Profit & Loss A/c on account of diminution in value of investment. However, the said provision had been offered for taxation in the computation of income and the same had been accepted by the Assessing Officer while framing assessment u/s 143(3) for the said AY 2003-04. Thereafter, appellant is regularly showing a sum of Rs. 1/- as investment in its Balance Sheet since AY 2003-04 and in none of the years, provisions of section 14A have been invoked by the Assessing Officer. In my opinion, provisions of section 14A are not at all attracted as the same are applicable when the assessee had claimed deduction of expenditure which had been incurred in relation to exempted income, against the taxable income. In the present case, assessee had not claimed any income as exempt. Expenditure incurred and claimed by the assessee is wholly and exclusively for the purposes of business, income of which has been shown as profit of the business and has offered for taxation. Therefore, expenditure incurred for earning such income has to be allowed as deduction. Diminution in value of investment is a capital loss, it has no effect on the Profit & Loss A/c of the assessee and therefore, no expenditure can be disallowed invoking the provisions of section 14A of the Income Tax Act. Hence, disallowance of Rs 26,12,024/- made by the Assessing Officer is hereby deleted. Finding on disallowance u/s. 36(1)(iii): I have considered the assessment order as well as the details furnished by the appellant alongwith the submissions. The details filed by the appellant reveals that the assessee has already capitalized interest of '2,48,87,306/- out of total interest paid during the year at Rs 11,98,81,762/-. Assessee had also brought forward interest of Rs 83,57,260/- in its pre-operative expenses account pending allocation. Thus total interest of Rs 3,32,44,566/- (Rs 2,48,87,306 + Rs 83,57,260) has been transferred by the assessee to preoperative expenses and total preoperative expenses of Rs 14,79,23,076/- has been allocated to fixed assets. Accordingly amount of Rs 7,44,64,117/- has been allocated to building account out of preoperative expenses of Rs 14,79,23,076/-. Assessing Officer has ignored the facts produced by the appellant and has disallowed interest of Rs 1.38,24,367/- out of total interest, invoking provisions of section 36(l)(iii) of the Act, which amounts to double disallowance. Once when the assessee has transferred interest to preoperative expenses and again when the Assessing Officer has made disallowance which is not sustainable in law. It is true that as per the proviso to section 36(1)(iii) of the Act, any amount of interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of accounts or not) for any period beginning from the date on which the capital was borrowed -till the date on which such assets was first put to use, shall not be allowed as deduction. Assessee had borrowed the amount basically for investment in its new constructed factory at Alwar which had been put to use during the year. The expenses which were directly allocable to the asset had been directly allocated to that particular asset and the expenses which were not directly allocable, were gathered in pre-operative expenses and allocated to the assets when they were first put to use. For this purposes, assessee has adopted guidelines issued by ICAI AS-10 & AS-6. No fault is found by the Assessing Officer in the accounting policy adopted by the appellant.
In view of above discussion, disallowance of Rs 1,38,24,367/- is hereby deleted. Finding on disallowance of prior period expenditure:- I have considered the assessment order framed by the Assessing Officer and the submissions made by the assessee as well as case law relied upon. It is not disputed that the invoice has been received in the month of April-2009 and the payment has also been made in the month of April-2009. Thus the amount has been crystallized during the year.
In CIT vs Modipon Ltd. (2011) 334 ITR 02, Jurisdictional Delhi High Court have held that Tribunal had gone into the details of each and every expense and had recorded a finding of fact that all these expenses were settled during the year. Moreover, there was no loss of revenue, had this expense been allowed in the previous year, the assessee would have paid less tax. In the present case also, amount has been crystallized during the year, even services has been rendered during the year and therefore, the amount cannot be treated as prior period item so as to disallow the same. Hence, the addition of Rs.2,83,782/- is deleted.”
Having gone through the aforesaid findings and order of the Assessing Officer, we find that the ld. CIT(A) has done good reasoned order which does not require any interference. The ld. CIT(A) has discussed the entire issues in detail after considering the detailed submissions made before him and relying on various case laws. No contrary material is brought on record on behalf of the Revenue to discard the conclusions arrived at in the impugned order. Therefore, finding no infirmity in the impugned order, the appeal of the Revenue is found devoid of merits and deserves to fail.
In the result, the appeal is dismissed.
Order pronounced in the open court on 18.01.2019.