2007 (5) TMI 363 - AT - Income Tax

Interest on capital borrowed - Treated as Revenue or Capital expenditure - Acquiring fixed assets purchased - HELD THAT - In the case of CIT v. J.K. Synthetics Ltd. 1985 (2) TMI 4 - ALLAHABAD HIGH COURT while holding that interest on amounts borrowed by a running concern in connection with its business was an allowable expenditure . Similarly in the cases of ITO v. Malwa Vanaspati Chemical Co. Ltd. 1996 (8) TMI 55 - MADHYA PRADESH HIGH COURT and CIT v. Bhillai Iron Foundry (P.) Ltd. 1997 (8) TMI 43 - MADHYA PRADESH HIGH COURT held that the interest on loan taken for the purchase of plant and machinery was deductible u/s 36(1)(iii) of Income-tax Act though no production had commenced in that case till the close of the accounting year as the assessee has borrowed funds and utilized the same in the purchase of plant and machinery for the purpose of its business. Therefore in view of the ratio of the majority decisions it is clear that in case the expenditure incurred on interest on the capital borrowed for acquiring the machinery required to be used for the business of the assessee is eligible for deduction u/s 36(1)(iii) of Income-tax Act irrespective of the fact whether the machinery was put to use or not in the accounting year relevant to assessment year under consideration. Therefore it is held that the CIT(A) has wrongly upheld the disallowance made by the Assessing Officer in respect of the deduction claimed by the assessee u/s 36(1)( iii ) of the Income-tax Act and the order of CIT(A) in this regard is set aside and Ground No. 2 of the appeal of the assessee is allowed. Disallowance on gratuity payments made to the approved gratuity fund - HELD THAT - The Hon ble Madras High Court in the case of Synergy Financial Exchange Ltd. 2006 (7) TMI 106 - MADRAS HIGH COURT . In this decision reliance was also placed on the case of CIT v. Udaipur Distillery Co. Ltd. 2003 (10) TMI 9 - RAJASTHAN HIGH COURT a Division Bench of the Rajasthan High Court wherein it was held that in order to avail of the benefits of deduction under clause ( b ) of section 43B in respect of contributions to the provident fund superannuation fund and gratuity fund or any other funds for the welfare of the employees the sums are not only to be actually paid before the end of the previous year but are further required to be paid within the time stipulated under the relevant statute or notification standing order award contract of service or otherwise and if the payments have not been made within the stipulated time the deduction cannot be claimed at any time thereafter. From the perusal of section 43B it is evident that deduction for payment of gratuity can be claimed during the year of actual payment irrespective of the fact whether or not the liability pertains to any previous year. This can only be allowed if the payment is made by the due date stipulated by the statute or within the grace period provided therein. Thus it is evident that due date of payment was 1st March of the relevant year or the 15th day of March of that period which was extended time. In the instant case the payments have been made beyond the due date as well as beyond the grace period; therefore no deduction is allowable for the payment of gratuity. Therefore the orders of the CIT(A) in this regard are upheld and Ground Nos. 2 and 3 of the respective appeals of the assessee are rejected. Disallowance relatable to bio-tech division expenses - HELD THAT - We are of the opinion that since the tax authorities below in their orders have not been able to point out any specific expenditure which could not be subjected to check and verification and on the contrary the contention of the assessee that the assessee s books of account were audited and no defects therein were found by the Assessing Officer remained uncontroverted we are of the opinion that the ad hoc impugned disallowances were arbitrary and the same cannot be upheld when admittedly the expenses incurred by the assessee were for the purposes of the business of the assessee more so when such disallowances were never made in the past. Accordingly the orders of the tax authorities below are set aside and the impugned allowance made/sustained in this regard are deleted and the Ground No. 6 and Ground No. 4 of the respective appeals of the assessee are allowed.

Issues Involved:
1. Disallowance of club subscription and expenses.
2. Disallowance of interest on capital borrowed for acquiring fixed assets.
3. Disallowance of gratuity payments to the approved gratuity fund.
4. Disallowance of loss on conversion of liability towards foreign currency loan.
5. Deduction under section 80-I(2)(iv)(b) for a new power project.
6. Disallowance of expenses related to the Bio-tech Division.
7. Disallowance of manufacturing and other expenses.

Issue-wise Detailed Analysis:

1. Disallowance of Club Subscription and Expenses:
The assessee claimed deductions for club subscription and expenses for its directors, which were disallowed by the CIT(A) as non-business expenditures. The Tribunal, referencing decisions from various High Courts (CIT v. Sundaram Industries Ltd., Goyal Gases (P.) Ltd. v. Dy. CIT, OTIS Elevator Co. (India) Ltd. v. CIT), concluded that such expenses are allowable under section 37 of the Income-tax Act. Consequently, the Tribunal set aside the CIT(A)'s order and allowed the deductions for both assessment years.

2. Disallowance of Interest on Capital Borrowed for Acquiring Fixed Assets:
The assessee's claim for deduction of interest on borrowed capital for acquiring fixed assets was disallowed by the tax authorities, reasoning it was capital in nature. The Tribunal noted conflicting judicial opinions but leaned towards the majority view, including the Supreme Court's decision in CIT v. Associated Fibre & Rubber Industries (P.) Ltd. and Delhi High Court's judgments (CIT v. Dalmia Cement (Bharat) Ltd., CIT v. Modi Industries, CIT v. Orissa Cement Ltd.), which allowed such deductions under section 36(1)(iii) irrespective of the asset's use within the year. Thus, the Tribunal set aside the CIT(A)'s order and allowed the deduction.

3. Disallowance of Gratuity Payments to the Approved Gratuity Fund:
The assessee claimed deductions for gratuity payments made to the approved gratuity fund, which were disallowed due to late payments beyond the statutory due date. The Tribunal, referencing the decision in CIT v. Synergy Financial Exchange Ltd., upheld the CIT(A)'s disallowance, emphasizing that deductions are only permissible if payments are made within the stipulated statutory period. Thus, the Tribunal rejected the assessee's grounds for both assessment years.

4. Disallowance of Loss on Conversion of Liability Towards Foreign Currency Loan:
The assessee's claim for loss due to foreign currency loan conversion was disallowed by the tax authorities. The Tribunal, acknowledging the principle of consistency and referencing previous favorable CIT(A) decisions for the assessee, directed the Assessing Officer to verify if the facts were identical to those in the earlier years. Consequently, the Tribunal upheld the CIT(A)'s remand order for verification.

5. Deduction Under Section 80-I(2)(iv)(b) for a New Power Project:
The assessee's claim for deduction under section 80-I(2)(iv)(b) for a new power project was initially disallowed by the Assessing Officer but allowed by the CIT(A) in the first year. Subsequent years saw a reversal, with the CIT(A) upholding the disallowance. The Tribunal, referencing its prior decision in favor of the assessee for the initial year, concluded that the power unit was a separate industrial undertaking eligible for the deduction. Thus, the Tribunal set aside the CIT(A)'s order and allowed the deduction.

6. Disallowance of Expenses Related to the Bio-tech Division:
The assessee's expenses related to the Bio-tech Division were disallowed on an ad hoc basis by the tax authorities, citing excessiveness and lack of verification. The Tribunal found the disallowances arbitrary, noting that the expenses were vouched and audited with no specific defects identified. Thus, the Tribunal set aside the tax authorities' orders and allowed the deductions for both assessment years.

7. Disallowance of Manufacturing and Other Expenses:
Similar to the Bio-tech Division expenses, the tax authorities disallowed manufacturing and other expenses on an ad hoc basis, assuming potential personal use without identifying any specific unverifiable expenses. The Tribunal, applying the same reasoning as for the Bio-tech Division expenses, found the disallowances unjustified and set aside the tax authorities' orders, allowing the deductions for both assessment years.

Conclusion:
The Tribunal's comprehensive review resulted in the partial allowance of the assessee's appeals, setting aside several disallowances made by the tax authorities based on established judicial precedents and principles of consistency.

← Previous Next →