TMI Blog2017 (8) TMI 361X X X X Extracts X X X X X X X X Extracts X X X X ..... a. as against assessee had availed bank loans for which interest paid is 13% - Held that:- For availing the loans from the banks, assessee has to give main security as well as collateral security and has to execute various loans documents and third party guarantee also. The procedures involved in availing loans from the banks are very cumbersome. While granting the bank loan, they will see the various factors like turnover of the assessee, security, marketing conditions, credit worthiness of the parties etc. and it takes long time to get a loan from banks. The bank is also charging compound interest method. Considering this, assessee availed, when it is required an urgent amount, loans from specified persons and which made the assessee to pay rate of interest @ 18% per annum and which is without executing any documents and assessee is able to get money at call. Being so, there is variation of 5%, which is higher than the bank rate of interest cannot be found that excessive or unreasonable as compared to the prevailing marketing conditions. Any market, provide borrowings interest ranging from 30 to 36%, as such in our opinion, the interest paid by the assessee to specified perso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a provision and commencing from the accounting year ended 31.3.2006 relevant to the A.Y. 2006-07, there has been a change in the method of valuation of closing stock. The stock shown at cost as per books was subject to a provision which was calculated at a fixed percentage on the stock as per the financial accounts. Through the proves of ageing, the stock was identified with the relevant year of purchase and provision was made at increasing percentages depending upon the year of purchase. 3.1 The method of valuation adopted for valuing the stock is as under : Particulars Provision Percentage AY 09-10 Provision Percentage AY 08-09 Provision Percentage AY 07-08 Provision Percentage AY 06-07 Provision for unsold stock out of purchases of current year (Yo) Nil Nil Nil Nil Provision for unsold stock out of purchases of one year before current year (Y1) 25% 50% 25% 50% Provision for unsold stock out of pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he stock. However, this method of reduction is not following year by year. For example, as seen from the above table, in the assessment year 2009-10, the assessee adopted the reduction of value of purchase price at 25%, when the stock is one year old. However, for the assessment year 2008-09, it was 50%, for the assessment year 2007-08 again 25% and for the assessment year 2006-07, the same was 50%. There is no explanation for such kind of arbitrary reduction of either 25% or 50%. There is no consistency in the method followed by the assessee for valuing the closing stock. The closing stock is to be valued at market price or cost whichever is less and that should be consistent from year to year. The assessee is not disputed that it has been followed the same method. However, consequent to search action, the assessee wanted to change the method of stock valuation for the first time, which is nothing but an after-thought so as to reduce the income which cannot be permitted at this point of time. Accordingly, this ground in all these appeals is rejected. Aggrieved, the assessees are in appeals before us. 4. We have heard both the sides and perused the material on record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of business as specified in sec.37(1) of the Act. Many times these donations are made so as to maintain social status rather than business necessity. Therefore, we are of the opinion that the lower authorities are justified in dismissing this ground of appeal. 8. Next common ground raised by the assessee in ITA Nos.1097 1098/Mds/2016 for the AYs 2010-11 and 2011-12 is with regard to disallowance of claim of expenditure relating to repairs. 9. The facts of the case as in assessment year 2010-11 are that during the year, the assessee has claimed expenditure by way of repairs to machinery, building and other repairs. In this connection, the assessee was asked to furnish detailed break-up and the corresponding bills in respect of expenditure exceeding Rs. 1 lakh. From the break-up furnished, the AO observed that some of the expenditure are directly incurred by the assessee and major amounts are incurred by the flag-ship firm M/s. RmKV Et Sons, which are in-turn allocated to the group concerns based on floor space occupied in the Chennai and Tirunelveli complex. As called for, the assessee produced bills/invoices in connection with repairs. However, the AO observed that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ft.) % age Expenditure apportioned 1 M/s. RmKV Sons 14500 41.67% 7,03,999 TIRUNELVELI COMPLEX S.No. Name of the Entity Floor space Occupied (in Sq.ft.) % age Expenditure apportioned 1 M/s. RmKV Sons 19620 21.43% 21,53,136 Therefore, in the absence of bills, the AO disallowed an amount of Rs. 28,56,685/-. Aggrieved, the assessee went in appeal before the CIT(Appeals). 10. On appeal, the CIT(Appeals) observed that the assessee is a leading textile trader in Tamilnadu having shops at various places. During the year under appeal, the assessee has claimed expenditure by way of repairs on machinery, building and other repairs. Further, the CIT(Appeals) observed that some of the repairs are directly incurred by each entity of this group and most of the repairs are incurred by fla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised the following additional grounds 1. The expenditure of Rs. 1,90,69,018/- incurred on the lease hold property at Coimbatore during the period ended 31.03.2010 is rightly allowable as revenue expenditure in this assessment year, as concluded by the Assessing Officer himself in his order for the assessment year 2011-12. 2. The expenditure of Rs. 2,66,52,936/- incurred in the lease hold property at Tirunelveli, during the period ended 31.03.2010 is rightly allowable as revenue expenditure in this assessment year, as concluded by the Assessing Officer in the assessment for the assessment year 2011-12. 13. The assessee filed petition for additional ground stating that due to inadvertence, the assessee failed to file this additional ground while filing the appeal and placed reliance on the judgment of Delhi High Court in the case of M.K. Yashwant Singh (231 ITR 145)[Del] and the judgment of the Supreme Court in the case of National Thermal, Power Co. Ltd. [229 ITR 383] (SC) and prayed that these additional grounds to be admitted and to be decided on merits. 14. We have heard both the parties and perused the material on record. In our opinion, the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e building. 9. If the answer to the aforementioned questions is in affirmative, the assessee falls within the purview of Explanation 1 to sec. 32(1). In the instant case, it is an admitted fact that the assessee has taken building on lease for setting up of bakery. It is also undisputed that the assessee has carried on interior work in the leased building. These interior decoration works carried out by the assessee if put on to the test of Explanation 1 would show that the construction made by the assessee on the leased out premises would amount to capital expenditure. The assessee in order to support his case has relied on the judgment of the Madras High Court in the case of TVS Lean Logistics Ltd. (supra). In the said case, the assessee had constructed a building on the leased land for the business advantage. The Court held that the entire cost of construction is admissible as revenue expenditure. Explanation 1 categorically states that the business or profession is carried on in a leased building and not on land. The High Court in para 4.4 of the judgment further held as under:- 4.4 What constitutes a capital expenditure and what does not, to attract Expln. 1 to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture. Moreover, assessee in the present case did not get any capital asset by spending the said amounts. The assessee therefore could not have claimed any depreciation. Looking to the nature of the advantage which the assessee obtained in a commercial sense, the expenditure appears to be revenue expenditure. 13. Thereafter, the Apex Court referring to several cases decided held as under: 11.All these cases have looked upon expenditure which did bring about some kind of an enduring benefit to the company as a revenue expenditure when the expenditure did not bring into existence any capital asset for the company. The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. In all these cases, the expenses have been looked upon as having been made for the purpose of conducting the business of the assessee more profitably or more successfully. In the present case also since the asset created by spending the said amounts did not belong to the assessee but the assessee got the business advantage of using modern premises at a low rent, thus saving considerable revenue expenditure for the next 39 year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal is partly allowed for statistical purposes. 16. The facts of the case are that the assessee claimed expenditure by way of interest payable to the persons u/s.40A(2)(b) of the Act as mentioned in the tax audit report wherein it was mentioned that interest paid to these persons at 18%. The assessee has also advanced loans to the partners and had collected interest only @ 13%. The assessee had also availed term loan from Indian Overseas Bank and the interest paid thereon was only 13%. In view of the facts, the interest 18% paid to the persons considered as excessive and calls for disallowance. Accordingly, the interest paid in excess of 13% is disallowed by the AO. Against this, the assessee went in appeal before the CIT(Appeals). 17. On appeal, the CIT(Appeals) observed that the assessee firm has paid interest to the relatives @ 18% per annum. Whereas, according to the AO, the assessee had availed bank loans for which interest paid is 13%. Invoking the provisions of sec.40A(2)(b) of the Act, the AO proceeded to disallow 5% as excessive. Before the CIT(Appeals), the argument of the ld. AR was that the AO had disallowed interest payment over 13% per annum holding the same t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able as compared to the prevailing marketing conditions. Any market, provide borrowings interest ranging from 30 to 36%, as such in our opinion, the interest paid by the assessee to specified persons u/s.40A(2)(b) of the Act is very reasonable and the same to be allowed. Accordingly, we do not find any infirmity in the order of the CIT(Appeals) in allowing the claim of assessee. Hence, this ground of appeal by Revenue is dismissed. 19. The next ground in Revenue s appeal is that the CIT(Appeals) erred in directing the Assessing Officer to delete the disallowance in respect of claim of bonus redemption of Rs. 1,99,32,784/-. 20. The facts of the issue are that the assessee claimed an amount of Rs. 37,16,963/- under the head Business Redemption Expenses in the break-up for misc. expenses. Further, an amount of Rs. 1.99 crores was also claimed under the head hospitality and under the sub-head Bonus Redemption Expenses . It was pointed out during the course of assessment, as to why the assessee has chosen to claim similar expenditure under two different heads, the assessee submitted vide its reply dated 17.3.2014 as follows : i. That the assessee floated a scheme, as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the total income of the assessee. Aggrieve d, the assessee went in appeal before the CIT(Appeals). 21. The CIT(Appeals) observed that while disallowing the claim of the assessee, the AO observed as under : In the scheme of the things, accrual of liability to pay discount has to be reckoned with reference to the actual visit by the customer in a given year but not with reference to the probable visit by him in future. In other words, whatever discount which was availed by the customers during the relevant previous year that alone is admissible as expenditure. Most importantly, there is no contractual compulsion for the customer to make purchase in future. It is purely optional. Hence, providing for anticipated liability in the present year which is dependent upon option of the customer and uncertain future visit by the customer is not correct and acceptable. In view of the foregoing discussion, the said accrued liability of Rs. 1.99 crores which was debited to the profit and loss account and which depends upon next visit by the customer in future which is uncertain, is not an allowable deduction from the profits of the current year. The assessee is free t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of liability is a certain, the same is not a contingent liability. But it is a liability in praesenti, though it may have to be discharged at a future date. The fact of discharged at a later date does not make any difference in coming to the conclusion that the liability as arising in the previous year relevant to assessment year under consideration. The cases relied by the assessee s counsel cited supra, the Supreme Court pointed out that if such a liability can be worked out on a scientific basis, the amount so determined has to be allowed in computing the income. In the present case, the AO has raised the point that the assessee has received the value of first purchase and discount of 1% would be given only to a subsequent purchase and the liability accrues only on when the customer visits for second time and only at that point of time, when the customers visits the second time and makes a purchase, the discount on second purchase accrues to the assessee. In this contention, we do not find any merit, the assessee has provided the liability as soon as the first customer made first purchase, 1% of the first purchase value and liability to give discount to the customer accrued ..... X X X X Extracts X X X X X X X X Extracts X X X X
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