2014 (10) TMI 211 - AT - Income Tax

Deductibility of the sums paid to banks/financial institutions by the assessee-company as guarantor Interest on loan - Held that - The denial of the claim in respect of the sums advanced by the assessee-company as a guarantor towards one time settlement as well as the interest thereon as not deductible as business expenditure either u/s.36 or 37(1) of the Act is upheld - With regard to the principal sum the AO has without prejudice also stated that the amount actually paid during the year is below that being claimed so that the claim would have to be limited thereto - the company also states of the interest disallowed being notional qua which again there is no finding by the first appellate authority nor any argument in its respect assumed before us finding mention only in the written statement which the assessee was asked to furnish at the conclusion of the hearing so as to capsule the gist of the arguments - The claim is factual and in any case the rule of law is to obtain - If and to the extent the interest is notional and not actually incurred no disallowance in its respect could obtain - The matter to this limited extent is remitted back to the AO for adjudication Decided partly in favour of assessee. Pre-operative expenses incurred for expansion of manufacturing facilities disallowed Held that - The expenditure is toward enlargement of the capital structure of the firm is not in doubt the enhancement or improvement in fact being both in quantitative and qualitative terms inasmuch as the programme under implementation is for both expansion and diversification - the expenditure results along with other expenditure in creation or bringing into existence fixed assets the profit making apparatus to be deployed in business is again not in doubt having been in fact allocated by the assessee toward the relevant assets following the decision in Assam Bengal Cement Company Limited Versus Commissioner Of Income-Tax West Bengal 1954 (11) TMI 2 - SUPREME Court - Chapter XIV-A of the Act provides for a procedure to avoid repetitive appeals - The plea in any case cannot be conditional or made alternatively concern as it does a rule of judicial precedence - the interest expenditure to be capital expenditure though allowable u/s.36(1)(iii) only the revenue expenditure could be allowed u/s.37(1) which is even otherwise trite law Decided in favour of assessee. Addition on inflation in purchases Held that - In applying the test of commercial expediency for determining whether an expenditure is wholly or exclusively laid out for the purpose of business reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Revenue - the assessee being a bulk purchaser should presumably be able to bargain a lower rate - the issue is factually indeterminate thus the matter is remitted back to the AO for fresh adjudication Decided in favour of assessee. Foreign exchange loss incurred and claimed made through debit to the profit and loss Held that - The purchase of the raw material stood completed on the delivery of the relevant goods to the assessee as per the relevant contract/s. Any subsequent increase (or decrease) in the corresponding purchase liability would be independent of the purchase cost which gets crystallized on the date of purchase i.e. on it being completed - The premise is clear that the exchange fluctuation is ordinarily not factored into the cost of purchase in-as-much as the same does not add value to the goods since purchased and neither in bringing them to their present location and condition - the liability incurred on purchase is a trade liability so that any increase therein would be only revenue expenditure deductible u/s. 37(1) Decided in favour of assessee. Modvat attributable to the closing stock Held that - The opening stock was directed by the FAA to be valued at inclusive of excise duty even as the closing stock for the immediately preceding year was not and which found acceptance throughout - it was not concerned with the correctness (or otherwise) of the method (of valuation) adopted for determining the cost price observing that that was not an issue at any stage of the proceedings nor dealt with by the tribunal - further clarifying that for the year for which s.145A is applicable the same would necessarily have to be in terms of the non obstante provision which would apply equally to all the elements/determinants of the trading profit the matter is to be remitted back to the AO for fresh adjudication Decided in favour of assessee.

Summary

Issues Involved:
1. Deductibility of sums paid by the assessee as a guarantor.
2. Disallowance of pre-operative expenses.
3. Alleged inflation in purchases.
4. Disallowance of club expenses.
5. Foreign exchange loss.
6. Disallowance of interest on one-time settlement.
7. Fees for transfer of technology and engineering fees.
8. Guest house expenses.
9. Contributions to clubs and funds.
10. Modvat attributable to closing stock.
11. Provision for bad debts.
12. Exclusion of sales tax and excise duty from total turnover for 80-HHC deduction.

Detailed Analysis:

Issue No. 1: Deductibility of Sums Paid as Guarantor
The assessee's claim for deducting sums paid as a guarantor for VCCL was rejected. The Tribunal found no merit in the assessee's argument that the formation of the JV company was a mode of conducting its business. The sums advanced were considered capital in nature, not deductible as business expenses under sections 36 or 37(1) of the Income Tax Act. The Tribunal upheld the Revenue's disallowance, emphasizing that the payments were for setting up a new project and not in the ordinary course of business.

Issue No. 2: Disallowance of Pre-Operative Expenses
The Tribunal upheld the disallowance of pre-operative expenses incurred for expanding manufacturing facilities. The expenses were considered capital in nature, as they were incurred for setting up a new project. The Tribunal emphasized that such expenses should be capitalized and not treated as revenue expenditure. The Tribunal also distinguished between interest expenditure and other pre-operative expenses, allowing interest under section 36(1)(iii) but not other expenses under section 37(1).

Issue No. 3: Alleged Inflation in Purchases
The Tribunal found the issue factually indeterminate and restored it to the Assessing Officer (AO) for fresh adjudication. The AO had disallowed 10% of the purchase cost from two suppliers, suspecting inflation. The Tribunal directed the AO to issue definite findings of fact after allowing the assessee an opportunity to present its case.

Issue No. 4: Disallowance of Club Expenses
The Tribunal confirmed the disallowance of club expenses amounting to Rs. 2,43,505/-. The assessee failed to substantiate its claim before the CIT(A) and the Tribunal found no reason to overturn the disallowance.

Issue No. 5: Foreign Exchange Loss
The Tribunal deleted the addition of Rs. 14,71,000/- made on account of foreign exchange loss. It held that the exchange fluctuation should not be factored into the cost of purchase post-delivery, as it does not add value to the goods. The liability incurred on purchase was considered revenue expenditure deductible under section 37(1).

Issue No. 6: Disallowance of Interest on One-Time Settlement
The Tribunal upheld the disallowance of interest on amounts paid under one-time settlement for guarantees. It directed the AO to ensure that only actual interest incurred is disallowed, not notional interest. The matter was remanded to the AO for quantification.

Issue No. 7: Fees for Transfer of Technology and Engineering Fees
The Tribunal confirmed the AO's action of allowing deduction under section 35AB instead of section 37(1). The Tribunal found that the fees were related to substantial expansion of existing capacity and thus fell under section 35AB.

Issue No. 8: Guest House Expenses
The Tribunal confirmed the disallowance of guest house expenses under section 37(4), following the decision in Britannia Industries Ltd. vs. CIT.

Issue No. 9: Contributions to Clubs and Funds
The Tribunal confirmed the disallowance of contributions to Lohia Officer's Club, LML Officer's Club, and Worker's Benevolent Fund under section 40A(9), following its previous order for earlier years.

Issue No. 10: Modvat Attributable to Closing Stock
The Tribunal restored the issue to the AO for verification. For years prior to the introduction of section 145A, the AO was directed to ensure that the net amount of duty suffered or recovered is properly accounted for. For A.Y. 1999-2000 onwards, section 145A mandates valuation of inventories inclusive of all taxes and duties.

Issue No. 11: Provision for Bad Debts
The Tribunal noted that the CIT(A) had confirmed the disallowance of Rs. 2,39,000/- for provision for bad debts. The ground did not arise out of the impugned order and was considered misconceived.

Issue No. 12: Exclusion of Sales Tax and Excise Duty from Total Turnover for 80-HHC Deduction
The Tribunal confirmed the CIT(A)'s order excluding sales tax and excise duty from total turnover for computing deduction under section 80-HHC, following the decision in CIT vs. Laxmi Machine Works.

Conclusion:
The Tribunal's detailed analysis upheld several disallowances made by the AO while providing specific directions for re-examination in certain cases. The judgment emphasized the importance of substantiating claims with proper evidence and adhering to statutory provisions.