2019 (1) TMI 2065 - AT - Income Tax

Disallowance of interest on Bonds issued to the shareholders of erstwhile company amalgamated with appellant company - HELD THAT - Identical issue was involved in appellant s own case for earlier assessment years. The CIT(A)-1 Baroda in his order for AY. 1998-99 has held that such interest is not allowable as it was held to be not for the purpose of business and ld. CIT(A) followed the decision and disallowance was upheld. Decided against the assessee. Disallowance being 5% of other expenses - HELD THAT - AO has we find adopted a global approach in the matter and brought about the instances where the assessee was unable to substantiate its claim of the relevant expenditure being incurred only and exclusively for business purposes. No presumption it is trite can hold and it is only on a determination of the discrepancies in the assessee s claim can be proceed to estimate the same by applying a percentage that he considers justified also delineating the reason for the same so that the appellate authority would while adjudicating on quantum i.e. where required to do so be aware of the same and consider it on merits. Decided in favour of assessee. Disallowance u/s. 43B in respect of employer s contribution to PF before due date of return - HELD THAT - Since CIT(A) has followed earlier year in assessee s own case as held Employer s contribution of PF etc. paid within the year though with a delay as claimed in the return of income and contributions paid even after the end of previous year but before the due date of return of income cannot be held as disallowable u/s. 43B thus we allow this ground of appeal. Disallowing of PF damages U/S. 14B of the PF Act - HELD THAT - CIT(A) has discussed that 40% of the disallowance has been considered as compensatory in nature and has been allowed by way of deduction in computation of total income. Following the same 40% of sum is directed to be allowed as a deduction in computation of income and disallowance of the balance amount is upheld. Disallowance being salary and wages of employees of Packart Press Unit - HELD THAT - As only the expenses as stated incurred or in relation to which the liability has in terms of underlying contract stands accrued shall be allowed as an expenditure in the assessment for the current year and set aside the matter back to the file of the A.O. to decide the same after proper examination of the relevant facts giving reasonable opportunity to the assessee to present its case before him and decide as per law. Disallowance made u/s. 40A(9) in respect of payment to Ambalal Sarabhai Foundation - HELD THAT - We hold that payment made to Ambalal Sarabhai Foundation is outside the scope of provision of Section 40A(9) of Income Tax Act. Disallowance of 50% of Foreign travel expenses - HELD THAT - As we can see one of the Director Dr. Anand Sarabhai visited USA for company related discussion with various customers to whom company is exporting its product vis Amphoteicin B and met various other parties for export and has submitted foreign tour details to the lower authorities. Therefore we allow this ground of appeal. Disallowance made for employees contribution - HELD THAT - This issue is covered against the assessee by the judgment of GSRTC 2014 (1) TMI 502 - GUJARAT HIGH COURT Therefore respectfully following the Jurisdictional High Court we dismiss this ground of appeal. Addition of buying commission - HELD THAT - An identical issue were involved in appellant s own case for earlier year in CIT order for assessment year 1998-99 it has been mentioned that the issue decided in favour of the assessee. Festival allowance Misc. expenses Telephone expenses Vehicle expenses etc 40% of Provident Fund damages selling expenses prior period expenses allowed by CIT(A) Allowance of balance written off - HELD THAT -Assessee explained the said amounts to have been paid to customers in terms of tenders issued by them so that the write-off of the said amount on it being found not recoverable is only a nature of business loss. Similarly the petty cash amount at depot also represents an allowable business loss. Payment made to ONGC being claim for difference in price - HELD THAT - As decided in Saurashtra Cement Chemical Industries 1994 (10) TMI 30 - GUJARAT HIGH COURT merely because the assessee was negotiating with the ONGC alongwith other members of the association for softer terms and for charging simple interest instead of compound interest would not mean that this liability was in any manner contingent. The assessee when debited such amount in the profit and loss account towards interest liability the same was therefore rightly granted by the assessing officer. Commissioner therefore committed legal error in disturbing such order of AO. Decided against revenue.

Summary

ISSUES PRESENTED and CONSIDERED

The Tribunal considered several issues related to disallowances and deductions claimed by the assessee and the revenue's objections to such claims. The core legal questions included:

• Whether the disallowance of interest on bonds issued during the amalgamation of Standard Pharmaceuticals Ltd. was justified.
• Whether the disallowance of 5% of "other expenses" was appropriate.
• Whether employer's contributions to PF paid after the end of the previous year but before the due date of return were disallowable under Section 43B.
• Whether the disallowance of PF damages levied under Section 14B of the PF Act was correct.
• Whether the disallowance of salary and wages of employees of the Packart Press Unit was justified.
• Whether the disallowance under Section 40A(9) concerning payments to Ambalal Sarabhai Foundation was appropriate.
• Whether the disallowance of 50% of foreign travel expenses of the working directors was justified.
• Whether the disallowance of employees' PF contribution paid within the previous year was correct under Sections 2(24)(x) and 36(1)(VA).
• Whether the deletion of buying commission to Teknoserv (Jersey) Ltd. was appropriate.
• Whether various other expenses, including festival allowance, selling expenses, and prior period expenses, were allowable.

ISSUE-WISE DETAILED ANALYSIS

1. Interest on Bonds Issued during Amalgamation:

The Tribunal upheld the disallowance of interest on bonds issued during the amalgamation of Standard Pharmaceuticals Ltd. The CIT(A) had previously decided that such interest was not allowable as it was not for business purposes, and the Tribunal agreed with this reasoning.

2. Disallowance of 5% of Other Expenses:

The Tribunal found that the disallowance of 5% of other expenses was not justified. The assessee had substantiated the expenses, and similar disallowances were allowed in previous years. The Tribunal allowed this ground in favor of the assessee.

3. Employer's Contributions to PF:

The Tribunal allowed the employer's contributions to PF paid after the end of the previous year but before the due date of the return. The CIT(A) had followed earlier decisions in favor of the assessee, and the Tribunal upheld this decision.

4. PF Damages under Section 14B:

The Tribunal confirmed the disallowance of PF damages levied under Section 14B, following previous ITAT orders against the assessee.

5. Salary and Wages of Packart Press Unit:

The Tribunal set aside the issue of disallowance of salary and wages of the Packart Press Unit to the file of the A.O. for re-examination, following ITAT directions.

6. Payment to Ambalal Sarabhai Foundation:

The Tribunal allowed the payment to Ambalal Sarabhai Foundation, holding it outside the scope of Section 40A(9) of the Income Tax Act, following previous ITAT decisions.

7. Foreign Travel Expenses:

The Tribunal allowed the foreign travel expenses of the working directors, as the directors had engaged in business-related activities, and similar expenses were allowed in previous years.

8. Employees' PF Contribution:

The Tribunal dismissed the ground regarding the disallowance of employees' PF contributions, following the Gujarat High Court decision in the GSRTC case.

9. Buying Commission to Teknoserv (Jersey) Ltd.:

The Tribunal upheld the CIT(A)'s decision to delete the disallowance of the buying commission, as the issue was decided in favor of the assessee in previous years.

10. Miscellaneous Expenses:

The Tribunal dismissed the revenue's appeal concerning miscellaneous expenses, as similar expenses were allowed in previous ITAT decisions.

11. Prior Period Expenses:

The Tribunal dismissed the revenue's appeal regarding prior period expenses, following the Supreme Court's decision in the Saurashtra Cement case.

SIGNIFICANT HOLDINGS

The Tribunal's significant holdings include:

• Interest on bonds issued during amalgamation is not allowable as it is not for business purposes.
• Employer's contributions to PF paid after the end of the previous year but before the due date of return are not disallowable under Section 43B.
• PF damages under Section 14B are not allowable as business expenditure.
• Payments to Ambalal Sarabhai Foundation are outside the scope of Section 40A(9).
• Foreign travel expenses incurred for business purposes are allowable.
• Prior period expenses can be allowed based on the Supreme Court's decision in the Saurashtra Cement case.

The Tribunal's final determinations included allowing several grounds in favor of the assessee while dismissing the revenue's appeal on multiple grounds. The Tribunal's decisions were largely based on precedents and previous ITAT orders.