TMI Blog2015 (5) TMI 926X X X X Extracts X X X X X X X X Extracts X X X X ..... ere over-stated, an independent enquiry could have been made to ascertain the correct expenses. However, this has not been done. Looking to the circumstances and also the fact that the excess subsidy received has been included in the taxable income, it is held that the AO was not justified in making the addition of ₹ 1,48,54,169/-, which is directed to be deleted - Decided against revenue. Disallowance of claim of guarantee fees paid to Government of Gujarat - disallowance of claim of cost of raising finance for specialized job - CIT(A) deleted the addition - Held that:- In the instant case, the assessee did not acquire any right to exploit a commercial technology or process, and neither was the benefit enduring , since the payment of guarantee commission was an annual charge. The benefit derived from payment of such commission thus lasted for exactly one year only. Such shortlived benefit cannot be categorized as enduring . Hence, inclined to the view that the payment of guarantee commission was a revenue expenditure. Further, the jurisdictional Bench of ITAT had occasion to consider the allowability of guarantee commission paid to a Director of the company in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at prepared in terms of Schedule-VI of the Companies Act. the Department of Company Affairs has issued Circular dt. 7.3.2009 which allows depreciation to be claimed at higher rates on the basis of bona fide technological evaluation. It has been clearly stated therein that the rates prescribed in Schedule - XIV could be viewed as minimum rates. From Part B (wherein notes to the accounts have been disclosed) it is seen at item- 5(vii) relating to depreciation, that the company provides depreciation as per the rates notified by CERC, a regulatory commission by virtue of section 76 of Electricity Act, 2003, which are different from the rates prescribed under the Companies Act, 1956. During the year such rates were reduced, which could not however be implemented by the assessee during the year due to the fact that the notification was received very late. The assessee has complied with the provisions of Schedule-VI of Companies Act while preparing its accounts. In the instant case, from the facts as above, the assessee has complied with the provisions contained in Schedule-VI to the Companies Act read with Schedule-XIY and Circular dt. 7.3.2009 of the Department of Company Affairs. Hence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring nature in the assessee s business and hence capital in nature. 3. On the facts and in the circumstances of the case and in law, the ld.CIT(Appeals) erred in deleting the addition of ₹ 45,24,582/- made on account of disallowance of claim of cost of raising finance for specialized job as revenue expenditure. The ld.CIT(Appeals) erred in not appreciating the fact that as the result of this expenditure, the assessee had derived benefit of enduring nature, hence the expenditure is of capital nature. 4. On the facts and in the circumstances of the case and in law, the Ld.CIT(Appeals) erred in deleting the addition of ₹ 3,13,53,470/- made on account of disallowance of loss of material through pilferage, shortage of material in transit, shortage arising on physical verification, etc. The ld.CIT(Appeals) erred in not appreciating the fact that the addition was made due to the reason that the assessee had failed to substantiate their claim documentary evidence. 5. On the facts and in the circumstances of the case and in law, the Ld.CIT(Appeals) erred in deleting the addition of ₹ 6,29,000/- made on account of disallowance of claim under the head penalty expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputing the book profit u/s.115JB of the Act. The assessee feeling aggrieved by the assessment order, preferred an appeal before the ld.CIT(A), who after considering the submissions of the assessee deleted the addition of ₹ 1,48,54,169/- claimed on account of losses due to flood, cyclone, fire, etc. The ld.CIT(A) also deleted the disallowance of ₹ 8,39,04,550/- claimed on account of guarantee fees paid to Government of Gujarat. The ld.CIT(A) deleted the disallowance of ₹ 45,24,582/- claimed to have been incurred for cost of raising finance treated as capital expenditure. The ld.CIT(A) also deleted the disallowance of ₹ 3,13,53,470/- claimed on account of write off of loss of material through pilferage, shortage of material in transit, shortage arising on physical verification, etc. The ld.CIT(A) also deleted the addition of ₹ 29,78,900/- out of the addition made on account of disallowance of ₹ 1,48,94,500/- by applying the provisions of section 35DD of the Act. The ld.CIT(A) also deleted the disallowance of ₹ 6,29,000/- made on account of penalties claimed by the assessee. The ld.CIT(A) further deleted the disallowance of ₹ 57,43,80,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 169/- only. Both the receipt of subsidy and the expenditure on repair of damaged assets were recognized as revenue items. The receipt was credited to the profit and loss account under the head revenue subsidies and grant . Details in this regard had been disclosed in Schedule 15 to the profit and loss account. At the same time, the expenditure was also claimed as a venue expense. Hence, there was no justification for disallowing ₹ 1,48,54,169/-. 4.2. I have considered the submissions of the ld.AR and the facts of the case. The disallowance has been made only on the ground that the assessee could not substantiate that it had incurred expenditure of ₹ 1,48,54,169/- on repairing its assets damaged due to flood. It is seen that the assessee had receivd finaicial assistance amounting to ₹ 16,01,00,000/- for this purpose. This is evident from the Government of Gujarat Resolution NOs.GUV-1105-2724-K1 dated 4.7.2005, 10.10.2005 and 13.10.2005 issued by the Principal Secretary, Energy Petrochemicals Department. The assessee had incurred less expenditure than the subsidy received and the excess has been duly offered for taxation. Being an undertaking wholly owned by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om an analysis of such cases a few guiding principles/tests can be identified. One of the important tests for categorizing any expenditure as capital in nature is whether the laying out of the impugned expenditure results in the acquisition of creation of any new asset. Where no such asset is created, it would be indicative of an expenditure which was not capital in nature. Another test relates to the principle of enduring benefit . Enduring benefit may be in the form of long lasting use of an asset or the acquisition of a right to exploit certain commercial processes, etc. In the instant case, the assessee did not acquire any right to exploit a commercial technology or process, and neither was the benefit enduring , since the payment of guarantee commission was an annual charge. The benefit derived from payment of such commission thus lasted for exactly one year only. Such shortlived benefit cannot be categorized as enduring . Hence, I am inclined to the view that the payment of guarantee commission was a revenue expenditure. 5.3. Further, the jurisdictional Bench of ITAT had occasion to consider the allowability of guarantee commission paid to a Director of the company in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .CIT(A), same is hereby upheld. Thus, these two grounds raised in the Revenue s appeal are rejected. 8. Ground No.4 is against deletion of addition of ₹ 3,13,53,470/-. The ld.CIT-DR has supported the order of AO and submitted that the ld.CIT(A) was not justified in deleting the addition. However, ld.counsel for the assessee supported the order of the ld.CIT(A) and submitted that the ld.CIT(A) has verified from the records that there was pilferage, shortage of material in transit, shortage arising on physical verification, etc. 9. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that the ld.CIT(A) has given a finding in para-7.2 of his order, which is reproduced hereunder:- 7.2. I have considered the submissions of the ld.AR and the facts of the case. The amount written off consists of numerous items of small spares and consumable items. In a business of the size of the appellant, keeping tract of small consumable stores and spares with perfect accuracy is not always possible. At the time of annual stock verification, some items were found to be in excess or short of the number ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owance of ₹ 6,29,000/-, which is directed to be deleted. 11.1. This finding of the ld.CIT(A) is not controverted by the ld.CIT-DR by placing any contrary material on record, therefore, we do not see any reason to interfere with the order of the ld.CIT(A), same is hereby upheld. Thus, this ground of Revenue s appeal is rejected. 12. Ground No.6 is against the direction given to the AO to recompute the book profit u/s.115JB of the Act for the purpose of computing MAT by the ld.CIT(A). The ld.CIT-DR supported the order of the AO and submitted that the ld.CIT(A) was not justified in giving direction to the AO for recomputing the book profit u/s.115JB of the Act for MAT. 12.1 On the contrary, ld.counsel for the assessee supported the order of the ld.CIT(A) and submitted that ld.CIT(A) has followed the decision of Hon ble Jurisdictional High Court rendered in the case of DCIT vs. Vardhman Fabrics (P) Ltd. reported at 122 Taxman 375. 13. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that the ld.CIT(A) has decided this issue in paras-12.3 12.4 of his order, which are reproduce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reciation on the basis of a bonafide technological evaluation and proper disclosure thereof in the notes forming part of annual accounts. In the instant case, from the facts as above, I am of the opinion that the assessee has complied with the provisions contained in Schedule-VI to the Companies Act read with Schedule-XIY and Circular dt. 7.3.2009 of the Department of Company Affairs. Hence the AO's action in reducing the claim of depreciation under item (ii)(a) by ₹ 14,32,02,331/- is held to be unjustified. The AO is directed to recompute the book profit for MAT by allowing the depreciation claimed. 13.1. The ld.CIT(A) has applied the ratio laid down in the judgements of Hon ble Apex Court rendered in the case of Apollo Tyres Ltd. (255 ITR 273), Malayala Manorama Co.Ltd. vs. CIT (168 Taxman 471) and the judgement of Hon ble Jurisdictional High Court rendered in the case of DCIT vs. Vardhman Fabrics (P) Ltd. (122 Taxman 375). The ld.CIT-DR could not distinguish the facts of the case, therefore we do not find any reason to interfere with the order of the ld.CIT(A), same is hereby upheld. Thus, this ground of Revenue s appeal is rejected. 14. In the result, Revenue s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 61,00,00,000/- is disallowed and added back to total income being contingent liability. The ld.CIT(A) confirmed the finding of the AO by observing that the report of the 6th Pay Commission was submitted to the Government of India in March- 2008. In respect of the Central Government employees the liability accrued from the day when the report was accepted by the Central Government. In respect of State Governments the report is not binding and it is not to be mandatorily accepted and adopted. In fact, number of State Governments were against accepting the report because of huge financial burden and in fact Government of Madhya Pradesh constituted Pay Commission of its own, to reframe the recommendations. In other words, without acceptance of the report the liability cannot be said to have accrued or crystallized. Crystallization of employee cost liability is contingent upon approval or otherwise from Gujarat Government. The Gujarat Government accepted the six Pay Commission Report in December-2008. In view thereof, in my humble opinion for AY 07-08 the provision towards employees cost for arrears payable upto 31.3.07 is a contingent liability, contingent upon the State Government a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability shall have to be discharged is not certain. 15.3. Further, the High Court held as under:- 6. In this case, the Tribunal had noticed that there was no dispute as regards the terms of employment of the workers and officers. The only question was the exact quantification of the compensation or wage revision. The Tribunal also held that provision for wage revision was based on past experience, interim Pay Commission of government employees, previous Pay Commission's reports of public sector employees, union demands and other relevant factors. The Tribunal also held that with the expiry of one wage settlement or agreement, invariably, there is a time lag when another fresh wage revision agreement is negotiated and entered. The deduction claimed for that period cannot be termed as contingent because the wage and the probable revision or rates of revision would be within the fair estimation of the employer. In this case, BHEL had the benefit of past experience of such pay revisions. Its liability could not be characterized as contingent but was in fact ascertained; the quantification, however, had not happened. 15.4. The Hon ble Kerala High Court in the case of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confirming the enhancement of book profit computed under section 115JB of the Act by ₹ 61,00,00,000/- on account of provision for employees cost pending the decision of pay commission treating the same as unascertained liability. The CIT-DR supported the orders of the authorities below, whereas the ld.counsel for the assessee relied upon the judgement of Hon ble Kerala High Court in the case of CIT vs. Kerala State Financial Enterprises Ltd.(supra) and the judgement of Hon ble Delhi High Court in the case of CIT vs. Bharat Heavy Electrical Ltd.(supra). 17. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. Since we have allowed the ground No.1 of assessee s appeal(supra) by following the judgement of Hon ble High Court of Kerala in the case of CIT vs. Kerala State Financial Enterprises Ltd.(supra) and the judgement of Hon ble High Court of Delhi in the case of CIT vs. Bharat Heavy Electrical Ltd.(supra), this ground of assessee s appeal is also allowed. The AO is directed to recomputed the book profit u/s.115JB of the Act in the light of the aforesaid judgement(s) of the Hon ble High Courts. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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