TMI Blog2017 (4) TMI 405X X X X Extracts X X X X X X X X Extracts X X X X ..... sue on merits by the AO after considering the claim of the assessee that the said claim was towards cost of obsolescence and loss on account of obsolete and slow moving inventory incurred by the assessee and it is in the nature of an ascertained liability , instead of merely being a provision or unascertained liability as contended by Revenue. CSR expenses dis-allowance - Held that:- The onus lie on the assessee to prove with cogent material to have substantiated its claim that the said expenses is incurred wholly and exclusively for the purposes of business of the assessee as required u/s 37(1) of 1961 as some remote connection with business is not sufficient to claim the expenses as business expenses, which in the instant case the assessee failed to prove the same. Hence, these expenses incurred for CSR by providing ambulance services, paramedical services and medical supplies to villagers in the vicinity of its container terminal cannot be allowed as business expenses and hence, the appellate order of learned CIT(A) is hereby confirmed Business promotion expenses which are added in the CSR expenses and which were claimed by the assessee as business promotion /sponsorship e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter called the AO ) u/s 143(3) of the Income-tax Act,1961 (Hereinafter called the Act ). 2. The grounds of appeal raised by the assessee in memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called the tribunal ) read as under:- Ground I: Addition of provision of slow moving / obsolete stock to the book profit of the Appellant while computing the tax liability under Section 115JB of the Act: ₹ 1,51,33,620 1.1 The learned CIT(A) has erred in law and facts of the case in confirming the action of the AO by treating the provision for slow moving / obsolete stock as an unascertained liability and adding it to the book profit of the Appellant while computing the tax liability under Section 115JB of the Act. 1.2 The learned CIT(A) fails to appreciate that such provision for slow moving / obsolete stock was made to record the closing stock at net realizable value which is in accordance with Accounting Standard-2 (Valuation of Inventory) 1.3 Without prejudice to the above, if the action of CIT(A) on this ground is confirmed then the Appellant should be allowed reduction for reversal made in the year under appeal of the provision made i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany. These villages lack medical facilities and for the well being of the family of the employees, the Company provides ambulance services, paramedical services and medical supplies to villagers in the vicinity of its business premises. Further providing of such facilities enhances the corporate image of the company. Also such expenses were incurred on the welfare of its employees as they were directly or indirectly benefited by it. Such expenses have been incurred out of commercial expediency and should be treated as an allowable business expense u/s. 37(1) of the Act. The A.O. rejected the contention of the assessee and observed that Sec.37(1) of the Act specifically states that the assessee shall be allowed only those expenses that have been wholly exclusively incurred for the purpose of business of the assessee. The A.O. observed that CSR expenses are in the nature of donation and the same cannot said to have been incurred for the purposes of business of the assessee. The A.O. observed that the assessee is in the business of developing bulk terminal of Jawaharlal Nehru Port into a new container terminal, operating and maintaining the same, while the expenses were incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved that the assessee itself accepted the book profit treating the provision of obsolete stock as taxable under book profit while filing the original return of income with Revenue . The A.O., accordingly disallowed an amount of ₹ 1,51,33,620/~ treating the same as not allowable to arrive at book profit, while framing assessment vide orders dated 25-03-2013 u/s 143(3) of 1961 Act. The A.O. further observed that the assessee has incurred business promotion expenses and accordingly details were called for. In the opinion of the A.O. these expenses were not incurred wholly and exclusively for the purpose of business. The details of the expenses are as under:- (i) Corporate Gift Rs.2,07,808 (ii) Event Work for help management of customer Rs.24,13,196 (iii) Board Meeting expenses Rs.l,30,713 (iv) Air Ticket for Copola Lungi Rs.7,73,005 TOTAL Rs.35,24,722 The assessee submitted that these are reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that these expenses are connected with the assessee s business and hence allowable u/s 37(1) of 1961 Act . The ld. CIT(A) considered the submissions of the assessee and observed that the assessee had debited sponsorship/CSR expenditure to the extent of ₹ 38,82,316/- under the head miscellaneous expenses in the P L account. The ld. CIT(A) observed that the assessee has claimed during appellate proceedings that ₹ 22,95,302/- pertained to business promotion expenses like presentations, dinner, sponsorship of maps, cost of kits etc and only the balance of ₹ 15,87,014/- was shown by the assessee under CSR expenses, during appellate proceedings. The learned CIT(A) observed that the assessee submitted following explanations before the A.O. with respect to the CSR expenditure:- The company is located in a very far of place from the main city and is surrounded by many villages. Many inhabitants of such villages are employees of the company. These villages lack medical facilities and for the well-being of the family of the employees, the company provides ambulance services, paramedical services and medical supplies to villagers in the vicinity of its business p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not relating to business and not of revenue in nature. The learned CIT(A) observed that the A.O. duly verified the accounts and applied his discretion and disallowed 25% of the expenditure debited in the books of accounts , thus as per the ld. CIT(A), no interference is required in the assessment order of the A.O., which addition of the learned AO was upheld by learned CIT(A) , vide appellate order dated 29-02-2016 passed by learned CIT(A). With respect to the addition of provision of slow moving/obsolete stock to the book profits u/s 115JB of 1961 Act, the learned CIT(A) observed that the assessee had added back ₹ 1,51,33,620/- in the computation of income on above account and offered it for taxation while working out book profit u/s 115JB of 1961 Act in the return of income originally filed with the Revenue , but in the revised return of income filed with Revenue, the assessee had withdrawn the above provision on the basis that the said amount is not provision or unascertained liability. It was submitted that the said amount was correctly reduced by the assessee as value of slow moving inventories which is determined on scientific basis consistently over several years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted losses for valuing inventories. It is submitted that no addition has been made in regular assessment under normal provisions and the A.O. accepted the same but while computing book profits u/s 115JB of 1961 Act, additions have been made. The ld. Counsel placed reliance on the decision of Hon ble Supreme Court in the case of Apollo Tyres v. CIT [2002] 122 Taxman 562 (SC) and also decision of Hon ble Apex Court in the case of Vijaya Bank v. CIT Anr., Civil Appeal No. 3286-3287 of 2010 arising out of SLP(c) Nos. 21568-21569 of 2009, judgment dated 15th April, 2010. The ld. Counsel contended that the said amount of loss on account of obsolete and slow moving inventory to the tune of ₹ 1,51,33,620/- should be allowed and should not be added to the book profit as these are actual business losses sustained by the assessee. The ld. Counsel also relied on the decision of the Mumbai-tribunal in the case of Esquire Private Limited v. DCIT in ITA No. 5688/Mum/2011 for assessment year 2008-09 vide orders dated 29.8.2012. With respect to ground No. 2, it is submitted that the assessee has incurred CSR expenses of ₹ 15,87,014/- during the year which should be allowed as a ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ho visited Bahrain has been placed at paper book /page 10. It was submitted that these expenses to the tune of ₹ 24,13,196/- were reimbursed to parent company who is its AE.It was submitted that there were 6 to customers of the assessee who participated in the event at Bahrain who contributed more than 25% of turnover of the assessee along with 3 employees of the assessee company and the event took place at Bahrain. It is submitted that these are international transactions and the AO has referred t international transactions with AE for making transfer pricing adjustment to TPO who has accepted international transactions to be at ALP and no TP adjustment was proposed by TPO . The ld. Counsel invited our attention to the assessment order page 2 whereby the computation of ALP recommended is given:- 4. Computation of Arms Length Price: It is seen from the details in Form NO.3CEB filed along with the return of income that the assessee has entered into international transaction with associate enterprises of more than ₹ 15 crores. As per CBDT's Instruction No.3 of 2003 dated 20.05.2003, reference u/s.92CA(1) of the I.T. Act for computation of Arms Length Price w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee. 11. We have considered rival contentions and also perused the material available on record including the case laws. We have observed that the assessee company is engaged in the business of developing bulk terminal of Jawaharlal Nehru Port into a new container terminal, operating and maintaining the same. The activities carried out by the Company broadly include the loading and unloading of containers from shore to ship and from ship to shore; reefer services; container storage facilities; handling over-dimensional and hazardous containers etc. . We find that the assessee had made provision for obsolete and slow moving stock amounting to ₹ 1,51,33,620/- which was added to the book profit u/s 115JB of the Act but was later withdrawn in the revised return of income filed by the assesse with the revenue. The assessee had claimed that these are business losses arising out of cost of obsolescence and loss on account of obsolete and slow moving inventory which has been consistently claimed by the assessee computed in a scientific manner and is not merely the provision or an unascertained liability was the averment of the assessee. It is also averred by assessee that no suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO on merits and to consider the claim on merits in accordance with law. Needless to say that proper and adequate opportunity of being heard shall be provided to the assessee by the AO in accordance with law. We order accordingly. With respect to CSR expenses of ₹ 15,87,014/- claimed by the assessee, we have observed that the assessee is in the business of developing bulk terminal of Jawaharlal Nehru Port into a new container terminal, operating and maintaining the same which includes loading and unloading of containers from shore to ship and from ship to shore; reefer services; container storage facilities; handling over-dimensional and hazardous containers etc.. As per the contention of the assessee, the villages in the immediate vicinity of the container terminal of the assessee lacks medical facilities and for the well being of the villagers as well family of the employees living in these villages around assessee s business terminal, the assessee provides ambulance services, paramedical services and medical supplies to villagers in the vicinity of its container terminal. However, we find that the assessee could not prove that these expenses are incurred wholly and excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplies of iron ore which was to be exported by the assessee. The learned counsel also relied upon State of Madras v. G.J. Coelho [1964] 53 ITR 186 ; [1964] 8 SCR 60 (SC), where payment of interest on the amount borrowed by the purchaser of the plantation was held to be closely related to the plantation and the expenditure was held to be laid out or expended wholly or exclusively for the purpose of the plantation. Mr. Sharma further submitted that if the said payment had not been made, the assessee's business would have suffered not only for want of regular supplies owing to discontentment amongst the village labourers but also on account of the roads and the port not being in a capacity to handle the requisite volume of export. He also pointed out that in subsequent years the assessee had to pay a levy of fifty paise per tonne export from this port. Mr. B.N. Kirpal, on behalf of the revenue, pointed out, on the other hand, a note made by the chairman of the assessee- Corporation to its board of directors on the basis of which the resolution was passed authorising the making of the said grant to the Government of Maharashtra. He contended that the amount had not been given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e test laid down was that expenses which enabled a person to carry on trade for making profits in the business are permitted, but not if they are merely connected with the business. Summing up, in Malayalam Plantation's case (Supra), the Supreme Court observed: The expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits'. Its range is wide: it may take in not only the day-to-day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outright grant. The Tribunal has found that this amount was not connected at all with the price structure of the ore purchased by the assessee or the quantity exported. The workers who were said to be benefited by the amenities sought to be provided were not employees of the assessee. There is no finding or even suggestion that the road development in the village was in respect of any road leading from the assessee's premises or from where the ore was to be obtained to the port or as to how otherwise the said development could be of any benefit to the assessee's business. This payment was found by the Tribunal to have been made as a result of a note by the chairman to the board of directors of the assessee-Corpora- tion, who had passed a resolution on the basis thereof, authorising the grant of ₹ 2,00,000 to be made to the Maharashtra Government. According to the said note, the Chief Minister of Maharashtra requested that: in view of the serious damage suffered by the Konkan region due to the recent floods and heavy rains the State Trading Corporation should extend it s most sympathetic consideration. After some discussion the Chief Minister agreed to a sum of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses amounting to ₹ 22,95,302/- which are added in the CSR expenses and which were claimed by the assessee as business promotion /sponsorship expenses , details were submitted by the assessee which are placed in paper book /page 1-5,18 to 25 filed with tribunal. It is the contention of the authorities below that no details were submitted before them to show that the same was incurred wholly and exclusively for the purposes of business of the assessee . In our considered view, , this matter also need to go back to the file of the A.O. for denovo determination of the issue on merits wherein assessee is directed to produce all relevant evidences to prove before the AO that the said expenses were incurred wholly and exclusively for the purposes of business of the assessee and it satisfy the mandate of section 37(1) of 1961 Act. Accordingly, we direct the assessee to produce all the details relevant to the issue regarding business promotion/ sponsorship expenses of ₹ 22,95,302/- claimed by the assessee before the A.O. for verification and examination by the AO on merits and to consider the claim on merits in accordance with law.Needless to say that proper and adequate op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tend board meetings as also for other travels. The assesssee has prayed that if the matter is restored to the file of the AO, all the details of these expenses along with evidences for having incurred these expenses shall be duly placed before the AO to prove that these expenses were incurred wholly and exclusively for the purposes of business of the assessee and it satisfy the mandate of Section 37(1) of 1961 Act. The learned DR fairly agreed that this matter can be set aside to the file of AO for de-novo adjudication on merits. Thus, we are inclined to set aside and restore this matter to the file of the AO for de-novo determination of the issue on merits and direct the assessee to produce cogent material and evidences in support of its claim before the A.O.to prove that the said expenses towards board meeting to the tune of ₹ 1,30,713/- and air tickets for Copola Lungi (Benzy Tours and Travels) of ₹ 7,73,005/- were incurred wholly and exclusively for the purposes of business as required u/s 37(1) of 1961 Act. Accordingly, we set aside this matter back to the file of the A.O. and the A.O. is directed to verify the material produced by the assessee in support of its cl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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