2018 (4) TMI 1555 - AT - Income Tax

Disallowance on account of expenses claimed against animal breeding and co-operative development expenses etc. - nature of expenditure - revenue or capital - Held that - Test for allowance of expenditure u/s 37 is enough to show that; the money was expended out of necessity and with a view to direct a minimum benefit to the trade but voluntarily and on the ground of commercial expediency and in order to facilitate directly or indirectly the carrying on of the business. In deciding whether the payment of money is a taxable expenditure or otherwise one has to take into consideration not only; the commercial expediency but also the principles of ordinary commercial trading and legitimate commercial necessity for incurring such expenses. Incurring of expenditures are directly benefited to the appellant more than one way besides increase in turnover and income. Thus it can be said that this expenditure on account of reimbursement of member unions against co-co. development expenses and expenses towards fertility improvement programme are wholly and exclusively for the purpose of business of the appellant and therefore the A.O. is not correct in making - addition of this amount to the total income of the appellant for the year under consideration. Disallowing of business loss - misappropriation/embezzlement of sale proceeds of milk by its employees - Held that - The correctness of the version of the assessee that misappropriation/embezzlement of sale proceeds has irretrievably happened is not corroborated by action taken by the assessee thus far. The assessee has neither recognized the sale proceeds as not recoverable nor has initiated any criminal action against the identifiable employees for claiming net of embezzlement on account of misappropriation etc. The assessee has failed to throw light as to what happened in the subsequent years till today on this score. Therefore the narrative of the assessee to claim such whopping loss does not inspire any confidence. The onus for justification of claim is on assessee. The assessee has totally failed to discharge onus. We thus find that the impugned action of the AO and CIT(A) in disallowing such business loss is on a sound footing.

Summary

Issues Involved:
1. Disallowance of expenses claimed against animal breeding and cooperative development.
2. Disallowance of loss claimed due to misappropriation of milk sale proceeds.

Detailed Analysis:

1. Disallowance of Expenses Claimed Against Animal Breeding and Cooperative Development:

The Revenue challenged the CIT(A)'s decision to treat expenses related to animal breeding and cooperative development as revenue expenses, which were initially disallowed by the AO as capital expenses. The AO argued that these expenses provided a benefit of enduring nature, thus should be considered capital in nature. The CIT(A), however, after detailed examination, treated these expenses as revenue in nature, citing that they were incurred wholly and exclusively for the business purposes of the assessee.

The CIT(A) relied on a previous decision in the case of Gujarat Cooperative Milk Marketing Federation Ltd. for AY 2008-09, where similar expenses were allowed as revenue expenses. The CIT(A) concluded that the expenses were directly related to trade and incurred out of commercial expediency, and thus should be considered as revenue expenses under Section 37 of the Income Tax Act. The Tribunal, agreeing with the CIT(A) and following the precedent, dismissed the Revenue's appeal, affirming that the expenses were revenue in nature.

2. Disallowance of Loss Claimed Due to Misappropriation of Milk Sale Proceeds:

The assessee claimed a deduction for a loss of Rs. 1,49,42,167 due to misappropriation of milk sale proceeds by employees. The AO disallowed this claim on the grounds that the loss was not crystallized, as the matter was still under investigation, and no legal action had been initiated against the employees. Additionally, the AO noted that the assessee had not debited this loss in the profit and loss account but shown it as recoverable from the employees.

The CIT(A) upheld the AO's decision, stating that the loss had not crystallized during the year under consideration and that the assessee had not written off the amount in its profit and loss account. The CIT(A) emphasized that the assessee's claim over the money was still alive, as it was shown as recoverable in the balance sheet.

The Tribunal also upheld the CIT(A)'s decision, noting that the assessee had failed to provide sufficient evidence to support the claim of misappropriation. The Tribunal observed that the assessee had not taken any legal action against the employees and had not recognized the sale proceeds as not recoverable. Consequently, the Tribunal dismissed the assessee's appeal, affirming that the loss had not crystallized and thus was not allowable as a deduction.

Conclusion:

The Tribunal dismissed all appeals, upholding the CIT(A)'s decisions. The expenses related to animal breeding and cooperative development were confirmed as revenue expenses, and the loss claimed due to misappropriation of milk sale proceeds was disallowed as it had not crystallized during the year under consideration.