TMI Blog2019 (1) TMI 1062X X X X Extracts X X X X X X X X Extracts X X X X ..... te 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 ₹ 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 ₹ 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 ₹ 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 2,19,48,179/-, representing to 1/10th of total expenditure claimed, the details of which are as under: Particulars Amount (Rs.) Disallowance in (%age) Amount disallowed Telephone Expenses 2,80,08,325 10 28,00,833 Traveling Expenses 14,90,65,916 10 1,49,06,592 Employees Welfare 20,99,898 10 2,09,990 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 purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the case of M/s. Abhishekh Industries, 286 ITR 01, the AO disallowed the proportionate interest amounting to ₹ 1,38,24,367/- u/s. 36(1)(iii). 7. It was also noticed that the assessee debited a sum of ₹ 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 ₹ 283782/- as prior period expenditure after following the conditions of section 37(1). 8. 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ₹ 1,49,06,592/- being 1/10th of ₹ 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 ₹ 13,06,54,517/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployee 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 ₹ 14,90,782/- is not excessive or unreasonable. 4. Staff Welfare Disallowance of ₹ 40,30,764/- being 1/10th of ₹ 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 asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. e) Similarly at Gurgaon, office was taken on lease w.e.f. 12.01.2008 initially for the period of 03 years and the term could have been extended for two more terms. f) 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 premi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xamining 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares diminished and therefore, assessee made provision of ₹ 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 ₹ 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved 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 ₹ 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 ₹ 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 ₹ 152,64,77,997/- included deferred sales tax liability of ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 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 ₹ 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 ₹ 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 b) It is submitted that M/s Ideal Products Data was paid a sum of ₹ 2,83,782/- for 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred 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 ₹ 28,00,833/- being 10% of the total expenditure of ₹ 2,80,08,325/- is hereby deleted. In so far as traveling expenses are concerned, Assessing Officer has disallowed ₹ 1,49,06,592/- being 10% of total expenditure of ₹ 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 ₹ 14,90,65,916/- which includes amount of ₹ 1,84,11,400/- on foreign traveling and ₹ 13,06,54,517/- on domestic traveling. Assessee has furnished the details of foreign travel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. Sales tax penalty cannot be treated as employee welfare expenses and therefore, I am deleting this amount of ₹ 6,09,116/- from total expenditure of ₹ 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 ₹ 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 ₹ 2,09,990/- is hereby deleted. In so far as disallowance of ₹ 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. Deta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction 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 ₹ 68,63,487/- is hereby deleted and the amount of ₹ 72,94,797/- is treated as revenue expenditure towards repairs and main ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest of ₹ 3,32,44,566/- (Rs 2,48,87,306 + ₹ 83,57,260) has been transferred by the assessee to preoperative expenses and total preoperative expenses of ₹ 14,79,23,076/- has been allocated to fixed assets. Accordingly amount of ₹ 7,44,64,117/- has been allocated to building account out of preoperative expenses of ₹ 14,79,23,076/-. Assessing Officer has ignored the facts produced by the appellant and has disallowed interest of ₹ 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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