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2016 (4) TMI 82 - ITAT DELHI

2016 (4) TMI 82 - ITAT DELHI - TMI - Disallowance u/s 36(1)(ii) - payment of commission - Held that:- The commission has not been paid to Rashmi Magazine, other shareholder of assessee company and commission was paid to Anshuman Magazine for services rendered by him as per terms of appointment as a managing director, which has been taxed as salary in his hands in the instant year. - Decided against revenue

Disallowance u/s 14A read with Rule 8D - Held that:- Even where the assessee cl .....

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cannot embark upon a determination of the amount of expenditure for the purposes of section 14A(1). In case, the assessing officer is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the assessing officer will have to determine the amount of expenditure incurred in relation to income which does not form p .....

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t revenue

Disallowance of recruitment and training expenses - Held that:- The clauses of the agreement relating to mode of payment of consideration as well as "termination" clause in the agreement. Thus, as the entire expenditure was incurred which admittedly have a nexus with the business of the assessee, it was treated as business expenditure allowable under section 37 of the Act.- Decided against revenue

Disallowance of repair and maintenance of branch offices at Pune an .....

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I, ACCOUNTANT MEMBER For The Assessee : Shri Gautam Jain and Piyush Kumar Kamal, Advocates For The Revenue : Shri B.R.R. Kumar, Senior DR ORDER PER A.T. VARKEY, JUDICIAL MEMBER : These appeals by the revenue are directed against separate orders passed by CIT (Appeals)-VI, New Delhi dated 28.11.2011 and 19.11.2012 for assessment years 2007-08 and 2008-09 respectively. 2 Since common issues were involved, the appeals were heard together and are thus being disposed off by this consolidated order. 3 .....

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; 1,08,735/- on account of extra depreciation claimed on computer peripherals. 4 The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal. 4. Briefly stated the facts are that assessee company is engaged in the business of real estate, consultancy services, site management services, professional advisory and project management services. It filed a return of income on 31.10.2007 declar .....

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ciation u/s 32 of the act 5. The CIT (A) following the decision of Delhi Bench of Tribunal in the case of Creative Travel (P) Ltd. vs. ACIT in ITA No. 190/Del/2010 for A.Y. 2006-07 dated 13.5.2011 affirmed by the Hon ble Jurisdictional High Court in the case of CIT vs. M/s Creative Travel (P) Ltd. in ITA No.1672/D/2010 deleted the disallowance of ₹ 2,88,55,000/- on account of disallowance u/s 36(1)(ii) of the Act. He also deleted the disallowance of ₹ 1,58,568/- u/s 14A and ₹ 1 .....

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e relevant facts are that there were two shareholders of assessee in the year under consideration, namely, Anshuman Magazine (99%) and Rashmi Magazine (1%). Out of two shareholders, Anshuman Magazine was being paid salary, which included incentive of ₹ 2.85 crores. He is w.e.f. 01.06.2003 is the Managing Director of the company. As per resolution of the Board dated 27.05.2003, Anshuman Magazine is entitled to incentive in the form of commission at 30% of the net profits for each year after .....

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ributed among the shareholders who are also director of the company. He thus was of the opinion that, sum of ₹ 2,85,55,000/- has been apparently paid as commission and bonus and not as dividend to reduce the income of the company and to avoid dividend distribution tax. Thereafter, he directed the assessee to show cause for admissibility of bonus/ commission to directors and on consideration of the reply, he disallowed the claim of deduction by holding that, had the company declared dividen .....

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. 9. We have considered the rival submission of both the parties and carefully gone through the material placed on the record. The CIT(A) has deleted the disallowance for the following reasons stated in the order:- i) That learned Officer has disallowed the claim of deduction essentially on the assumption that appellant company has not declared dividend and paid dividend distribution tax and as such the claim of the appellant that the arrangement is tax neutral is not tenable. It was submitted t .....

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ssment year Dividend paid (Rs.) Dividend distribution tax paid (Rs.) 2004-05 1,22,64,165/- 1,573,346/- 2005-06 2,04,40,275/- 26,71,286/ 2006-07 2,24,84,303/- 31,53,424/- 2007-08 13,88,93,870/- 1,94,93,890/- ii)) That under sub clause ii) of section 36(1) of the Act, it is provided that, where any sum is paid to an employee as bonus or commission for services rendered, the limb that, a deduction shall be allowed, in respect of an amount paid to an employee as bonus or commission for services rend .....

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-05 54,35,88,969/- 10,40,92,862/- 1,19,48,350/- 2005-06 72,17,39,964/- 10,69,57,576/- 1,91,75,160/- 2006-07 1,02,42,92,452/- 18,53,73,829/- 3,81,76,000/- 2007-08 1,55,45,13,626/- 24,86,29,998/- 2,89,55,000/- It was submitted that, no -doubt second limb of the said clause provide that, where such sum should not have been payable to him, as profits or dividend, had it not been paid as bonus or commission, however the same is not the fact in the instant case. iii) That in the instant case, the amou .....

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of the appellant company, as would be evident from resolution of the Board dated 7.05.2003 (pages 43 to 44 of Paper book). It is submitted that, as per the resolution, he was entitled to commission at 30% of the net profits for each year after adding back depreciation. It was submitted that, the incentive so paid to Shri Anshuman Magazine from Assessment year 2004-05 has been assessed as salary as would be evident from the tabular chart hereunder: A.Y. Incentive (Rs) Total salary Declared and a .....

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of Employees to whom incentive given Total salary for the year to such employees Total incentive for the year 2004-05 344 11,46,72,189/- 2,55,71,348/- 2005-06 536 18,27,78,117/- 5,64,39,455/- 2006-07 601 29,84,15,605/- 9,59,43,058/- 2007-08 680 55,79,07,291/- 24,19,96,004/- On illustrative basis, incentive paid to Shri Manish Kashyap, one of the employee was also paid, the detail of which is as under:- F.Y. A.Y. Sale (Rs) Profit (Rs) Incentive paid to Shri Manish Kashyap (Rs.) 2003-04 2004-05 54 .....

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,000/- 143(3 (49-58) 2004-05 1,19,48,350/- (78) - 143(1) 2005-06 1,91,75,160/- 143(3) (58A-58G) 2006-07 3,81,76,000/- 143(1) Reliance was placed on rule of consistency as held by Hon'ble Apex Court in the case of Radha Saomi Satsang vs. CIT 193 ITR 321 and CIT vs. J. K. Charitable Trust 308 ITR 161 vi) That burden was upon the Assessing Officer and not on the assessee to establish that, what had been paid by way of commission would have been payable by way of dividend, which on the facts of .....

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ion of any sum payable as dividend viii) Reliance was also placed on the following judicial pronouncements: a) ITA No. 1900/2011Mis Creative Travel (P) Ltd. vs. ALIT for Assessment Year 2006-07 dated 13.05.2011 b) ITA No. 4746/De1/2010 DCIT vs Celsius Refrigeration (P) Ltd. for Assessment Year 2007-2008 c) 139 TTJ 48 (Del) ACIT vs Career Launcher India Ltd. d) 36 SOT 456 (Del) ACIT vs. Bony Polymers (P) Ltd. ix) That, the revenue cannot adopt inconsistent positions since the sum of ₹ 2,85, .....

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e disallowance made is revenue neutral that no such disallowance is warranted. Reliance is placed on following judicial pronouncements: a) 33 ITR 681 (Born) CFI vs. Nagri Mills Co. Ltd. b) 331 ITR 10 (Del) CIT vs Dinesh Kumar Goel c) 196 Taxman 94 (Del) CIT vs Triveni E igd. and Industries Ltd. d) 53 DTR 1 (Del) Cyber Media (India) Ltd vs. CIT In view of the aforesaid submissions, it was most respectfully submitted commission paid to Shri Anshuman Magazine for the aforesaid years be allowed and .....

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lant company. The aforesaid sum has been paid under resolution of the Board dated 27.05.2003 appointing him the Managing Director of the appellant company. However, the learned Additional Commissioner of Income Tax has held that sum is not allowable in view of section 36(1)(ii) of the Act. According to the learned officer, appellant company has through worked out profit of ₹ 28.42 crores but no dividend has been proposed or distributed amongst the shareholder and therefore sum of ₹ 2 .....

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as commission and bonus and not as dividend to reduce the income of the company and to avoid dividend distribution tax . 5.4 I have perused through the financial statement filed by the appellant company for the financial year 2006-07 relevant to the instant assessment year. It is evident there form that, profit declared for the instant year is ₹ 24.46 crores and for the preceding year is of ₹ 18.54 crores. It is further seen that on the aforesaid profit, the assessee had declared div .....

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profit and gain from business or profession in computation of income and thus, overlooked the figure of profit of ₹ 24.46 crores in the profit and loss account. Therefore, the basis adopted to deny the claim of deduction overlooks the factual position. Even otherwise, it is seen that commission alongwith salary has been paid to Sh. Anshuman Magazine year after year based on the improved financial position of the company, as is evident from the chart hereunder: A.Y. Sales (Rs) Profit (Rs) S .....

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77; 55.79 crores incentive paid in the year under consideration was of ₹ 24.20 crores. It may be relevant to state here that, one of the employees Sh. Manish Kashyap has received incentive of ₹ 1.02 crores in the instant year. Moreover dividend has been declared consistently by the appellant company and dividend distribution tax has been separately paid as would be evident from the tabular chart hereunder: Assessment year Dividend Paid Dividend distribution tax paid (Rs.) 2004-05 1,2 .....

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/s Creative Travel (P) Ltd. in 'TA No. 1672/D/2010 noted in the case of M/s Creative Travel (P) Ltd. vs. ACTT in 1TA No. 190/D/2010 for Assessment Year 2006-07 dated 13.05.2011 has held as under: "On the facts of this case, the Income Tax Appellate Tribunal has allowed the payment of bonus and commission to the employee-Directors of the assessee company under Section 36(1)(ii) of the Income Tax Act and one of the reasons given by the Tribunal, which has specifically weighed with it, is .....

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allowed in the past, no disallowance is warranted Ws 36(1)( ) of the Act. The same is squarely applicable to the facts and as such, no disallowance other warranted. Section 36(1)(ii) of the Act, reads as under: "36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 - (i) - (ia) - (ib) - ii) Any sum paid to an employee as bonus or commission for services rendered. (where s .....

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Anshuman Magazine and therefore the same is allowable as deduction. There is no material brought on record to suggest the aforesaid sum was payable as profit or dividend. On the contrary, the basis adopted to hold the sum paid of ₹ 2,85,55,000/- is profit or dividend was that, no dividend has declared in the year under consideration which has been found to be factually incorrect and thus not tenable. In view of the aforesaid, disallowance made of ₹ 2,85,55,000/- is deleted and groun .....

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in the instant year. Moreover it is also noticed that identical commission paid to MD Anshuman Magazine has been allowed as deduction in the preceding assessments u/s 143(3) of the Act and also correspondingly such incentive stands assessed as salary in the hands of Anshuman Magazine for the instant year. Further, likewise incentive paid to other employees has also been allowed as deduction. During the course of hearing the learned counsel for assessee supported the order by relying of the judg .....

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) of the Act. At this stage it is necessary to refer the Section 36(1)(ii) of the Act, which reads as under:- "any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission.." 8. It is also apparent from the reading of the aforesaid provision that bonus or commission paid to an employee is expressly allowed as deduction. The only exception is where the bon .....

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d to the kitty of distributable profits the same would have to be distributed prorata to all the shareholders and not selectively to the said Directors. Dividend is paid by a company as distribution of profits to its shareholders in the ratio of their shareholding in the company. In the present case, the Directors were not the only shareholders of the company and, therefore, in the event the Commission had not been paid by the assessee it could not have been distributed to them as dividends. 9. .....

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was for services rendered by him as per terms of appointment as a managing director." 10. Thus, in our view, the Tribunal and the Income Tax Authorities below erred in holding that the payments of commission to the Directors fell within the exclusionary limb of Section of 36(1)(ii) of the Act. 12. Also in the case of AMD Metplast (P) Ltd. (supra) it has been held as under: We fail to understand how the aforesaid observations assist and help the Revenue in the factual matrix of the present c .....

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6. Dividend has to be paid to all shareholders equally. This position cannot be disputed by the Revenue. Dividend is a return on investment and not salary or part thereof. Herein the consideration in the form of commission which was paid to Ashok Gupta was for services rendered by him as per terms of appointment as a managing director. 13. The aforesaid judgments are squarely apply to the facts of the assessee company. Here too, the commission has not been paid to Rashmi Magazine, other sharehol .....

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lly gone through the material placed on the record. We find that CIT(A) has directed the AO to compute the disallowance in accordance in the manner held in para 42 of Hon ble jurisdictional High Court in the case of Maxopp Investment Ltd. - 347 ITR 272 (Del). The relevant portion of the judgment reads as under :- 42. Thus, the fact that we have held that sub-sections (2) & (3) of section 14A and Rule 8D would operate prospectively (and, not retrospectively) does not mean that the assessing o .....

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ptable method of apportionment. It would be appropriate to recall the words of the Supreme Court in Walfort Share & Stock Brokers (P.) Ltd. (supra) to the following effect:- "The theory of apportionment of expenditure between taxable and nontaxable has, in principle, been now widened under section 14 A." So, even for the pre-Rule8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the ass .....

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icer is to accept the claim of the assessee insofar as the quantum of disallowance under section 14A is concerned. In such eventuality, the assessing officer cannot embark upon a determination of the amount of expenditure for the purposes of section 14A(1). In case, the assessing officer is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the rea .....

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d raised by the revenue is rejected. 17. Ground No.3 is regarding disallowance of deprecation of ₹ 1,08,735/- on computer accessories. The AO has held that assessee is eligible for depreciation at 15% and not at the rate of 60%. It was stated that this issue is covered by the decision of Calcutta Bench of the tribunal in the case of ITO vs. Samiran Majumdar - 280 ITR 74 (AT) wherein it has been held that, printers and scanners are integral part of the computer and therefore, the same are a .....

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ve considered the rival submission of both the parties and carefully gone through the material placed on the record. In our opinion, since computer accessories in the aforesaid decisions have been held to be part of computer, therefore they are also entitled to higher rate of deprecation. Hence, the finding of ld. CIT(A) deleting the disallowance is upheld and ground raised by the revenue is dismissed. 19. Now we will deal with the appeal in ITA No. 775/Del/2012 for the assessment year 2008-09. .....

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payable as profit or dividend. 2. Whether the Ld. CIT (A) has erred on facts and in law in deleting the addition made on account of depreciation on computer peripherals amounting to ₹ 17,955/- ignoring the facts that as per the I.T. Rules, only the computers and computer software are eligible for depreciation of 60% and the same cannot be extended to computer accessories and peripherals. 3. Whether the Ld. CIT (A) has erred on facts and in law in deleting the addition of ₹ 27,22,514 .....

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or renovation of capital assets and accordingly the same qualifies as capital expenditure. 21. Ground No.1 is regarding disallowance of ₹ 6,47,27,888/- representing commission paid to Shri Anshuman Magazine, Director of the assessee company by invoking section 36(1)(ii) of the Act. 22. We have considered the rival submission of both the parties and carefully gone through the material placed on the record. We notice that identical disallowance was made by the AO in order of assessment and d .....

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the material placed on the record. In light of the discussions in Ground No.3 in ITA No.709/Del/2012, it is clear that the issue is squarely covered. Thus, following the said reasons, the ground raised by the revenue is rejected. 25. Ground No.3 is regarding disallowance of ₹ 27,22,514/- out of recruitment and training expenses 26. We have considered the rival submission of both the parties and carefully gone through the material placed on the record. The CIT(A) has deleted the disallowanc .....

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not incurred for the purpose of the business of the appellant company. The basis adopted is contrary to judgment of Hon ble Delhi High Court in the case of CIT v Industrial Finance Corporation of India Ltd. reported in 228 CTR132. The facts of the said case were that, assessee was engaged in the business of granting loans and advance to various industrial concerns. For meeting its lending requirements, the assessee also raises foreign currency borrowings. The assessee swapped such foreign curre .....

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ssessee entered into forward contracts with banks as a safeguard against foreign currency fluctuations. The assessee recognized the difference between the forward contract rate and, the exchange rate on the date of the transaction. The assessee thus determined the exchange difference of ₹ 8,172.85 lakhs arising out of realignment of foreign currency borrowings covered against forward contracts and treated the same as cost of borrowings. In its books of account, a sum of ₹ 1,466.65 la .....

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the expenditure claimed pertain to the future period and not to eh period relevant to the assessment year under consideration, in as much as, the transaction in question was to safeguard against future currency fluctuations. The CIT(A) held that while the Assessing Officer was wrong in treating a portion of the expenditure, not relating to the current assessment year, as capital expenditure but, at the same time, disallowance was sustained on the ground that such expenditure did not relate to th .....

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377; 67.06 crores incurred in connection with swapping of foreign currency funds in the year under consideration, i.e., the assessment year 1995-96. It is clear from the nature of the transaction, that the assessee had raised foreign currency borrowings and swapped such foreign currency into Indian rupees in order to augment its rupee resources for meeting its lending requirements. The foreign currencies borrowed were repayable to the foreign lenders on later dates falling within the current pre .....

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very year. The forward contract is an agreement between two parties, requiring the delivery at some specified future date of a specified amount of foreign currency by one of the parties, against payment in domestic currency to the other party, at the price agreed upon in the contract. The rate of exchange applicable to the forward contract is called the forward exchange rate and the market for forward transactions is known as the forward market. Thus, in case of a forward contract, assessee ent .....

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t is clear that the swapping cost incurred by the assessee is capable of determination at the time of execution of the forward contract and such determination does not get postponed. 21. Therefore, the test laid down in the aforesaid judgments to treat it as business expenditure in the same year, though part of the liability occurs on a future date, is allowable as expenditure in this very year. It was a debt owed by the assessee, which accrued on the date of entering into the forward contract i .....

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same. However, in those cases where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of matching concept is satisfied, which up to now has been restricted to the cases of debentures. 7.8 The above judgment squarely applies to the facts of the case of appellant in as much as the expenditure is on revenue account and has been incurred in the year under consideration and hence is an eligible expenditure. It is not the case .....

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read over and, therefore, expenditure on the aforesaid counts was required to be spread over. The Income-tax Appellate Tribunal, however, denounced this reasoning of the Commissioner of Income-tax (Appeals) and accepted the plea that the expenditure incurred had nothing to do with the period of length of time and had no linkage, whatsoever, to any period, the entire expenditure was allowable in the year in which it was incurred. The Tribunal has further held that the expenditure is incurred once .....

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eration the clauses of the agreement relating to mode of payment of consideration as well as "termination" clause in the agreement. Thus, as the entire expenditure was incurred which admittedly have a nexus with the business of the assessee, it was treated as business expenditure allowable under section 37 of the Act. The Tribunal also relied upon the judgment of the Supreme Court in the cases of Calcutta Company Ltd. v. CIT[1959] 37 ITR 1 (SC), CITv. Associated Cement Companies Ltd.[1 .....

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CIT v Industrial Finance Corporation of India Ltd. (supra) and CIT v Citi Financial Consumer Finance Ltd. (supra). Following the above precedent, we do not find any infirmity in the order of CIT(A). No reasons have been stated by the ld. DR in the course of hearing to arrive at another conclusion. Thus, in light of the above, ground raised by the revenue is rejected. 28. Ground No.4 is regarding disallowance of ₹ 35,60,431/- out of the total value of expenditure of ₹ 77,88,935/- rep .....

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of ₹ 35,60,431/- comprises of ₹ 30,00,000/- being repair charges of the office at Bangalore and ₹ 5,60,431/- being repair charges of the office at Pune. Both the above expenditure are undisputedly for leased premises and as such allowability of expenditure has to be examined in terms of section 30(a)(i) which provides as under: 30 In respect of rent, rates, taxes, repairs and insurance for premises, used for the purpose of the business or profession, the following deductions s .....

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them, we are of the view that the assessee s claim for deduction under section 30(a)(i) has been rightly allowed by the Tribunal. The decisions cited by learned counsel for the Revenue relate to current repairs . There is a clear distinction between the expression repairs and the expression current repairs . It is obvious that the word repairs is much wider than the expression current repairs . This fact has also been taken note of by the Supreme Court in the case of Saravana Spinning Mills P. L .....

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n on lease so as to make it more conductive to its business activity. Such expenses would clearly fall within the expression of repairs to the premises as appearing in section 30(a)(i). The Legislature has made a distinction between expenses incurred by a tenant for repairs of the premises and expenses incurred by a person who is not a tenant towards current repairs to the premises. This distinction was that a tenant would, by the very nature of his status as a tenant, not undertake expenditure .....

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sallowing such an expenditure and relegating the assessee to claim depreciation. It has claimed deduction under section 30(a)(i). Once the assessee s claim falls within that provision there is no question of considering the question of applicability of section 32. Consequently, the question that has been framed is answered in favour of the assessee and against the Revenue. The appeal is dismissed. 8.6 Also in the case of CIT vs. Delhi Press Samachar Patra (Private) Limited 322 ITR 590, it was he .....

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ng works: "(i) Water proofing of roofs with stones. (ii) Reinforcement of old beams in which steel bars and plasters were corroded. (iii) Relaying of worn out flooring of print shop/process rooms, etc. (iv) Repairing and relaying/carpeting of roads running inside the press compound. (v) Repairing and replacement of workers wash rooms, hand wash areas, damaged glass, wood work. (vi) Repairing and relaying boundary walls and gates. (vii) Repairing and reconstructions of cooling towers area. ( .....

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, replacement of dilapidated beams, pillars, walls, etc., of the existing press building and that the assessee did not bring into existence any new asset over and above the existing building. The Tribunal also observed that the assessee had been incurring such expenditure in the past as and when the need arose and it was towards preserving and maintaining the existing asset. The Tribunal also noted several decisions of the Supreme Court including that of CIT v. Saravana Spinning Mills P. Ltd. [2 .....

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t could not bring on record any evidence to justify the stand that the expenditure was actually for erection of a new building or asset. The Tribunal also noticed that the contention of the assessee that it had undertaken major repairs to put the dilapidated columns, beams, roofs, etc., in its original position, which had become dangerous and unsafe for the workmen and hindered the normal operation of the business, was not controverted by the Departmental representative nor had any evidence to t .....

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