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TMI Blog2014 (3) TMI 1101X X X X Extracts X X X X X X X X Extracts X X X X ..... eferment of sales tax liability in accordance with the Sales Tax New Incentive Scheme for Industries, 1989, floated under Rajasthan Sales Tax Act is allowed. The said incentive scheme provides for the deferral of sales tax liability for a specified period. Subsequently, the Rajasthan Sales Tax Act has been replaced by the Rajasthan Value Added Tax Act 2003 (RVAT Act) w.e.f. 1-04-2006. In pursuance to section 20(3) of RVAT Act, the Finance Department, Tax Division Jaipur, issued a notification dated. 31.03.2006 according to which Sales Tax New Incentive Scheme for Industries, 1989 would continue to apply under the RVAT Act. In accordance with this incentive scheme, the assessee t was issued eligibility certificate, dated 20.09.2006 , for deferral of its sales tax liability of Rs. 31,76,81,000/- for the period from 01.04.2006 to 04.04.2008. The actual amount of sales tax deferred is Rs. 31,74,68,000/-. This amount has been treated as loan in terms of Clause 12 of this notification. Accordingly, in the financial statements for the year 2006-07 onwards, the deferred sales tax liability has been treated as loan while the same was claimed as deduction u/s 43B of the Income-tax Act, 1961 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w the assessee is further aggrieved and has raised the above grounds of appeal before us. The Ld. AR of the assessee made elaborate arguments and also filed a written submission. The written submission made by him is being reproduced as under:- 1. There is no dispute as to the fact that the amount of sales tax collected under the incentive scheme & deferred for payment was a trading liability when it was collected. CBDT vide Circular No. 674 dt. 29.12.93, in Para 3 has clarified that the amount of sales tax liability converted into loans be allowed as deduction u/s 43B in the assessment for the previous year in which such conversion has been permitted by or under the government orders. As per Clause 12 of Notification dt. 31.03.2006, the State Government has specified that tax deferred under this notification shall be deemed to be a loan. Accordingly, the amount of sales tax collected but deferred for payment is income on one hand but on the other hand it is allowed as deduction u/s 43B in as much as it is deemed to be actually paid in view of its conversion into loan by the Government. The deduction u/s 43B was thus allowed in the relevant assessment year & a loan liability of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere was a liability of payment. The sales tax collected is income of the relevant assessment year but it is allowed as deduction u/s 43B on deemed payment by considering the equal amount as loan under the Scheme. Thus, no liability to pay sales tax existed the moment it was paid by way of converting the same into loan under the Scheme. The liability that now remained is only the liability to repay the loan & not the liability to pay the sales tax. In view of same, on payment of NPV of loan amount, there is no cessation of trading liability. 3. The payment of net present value of a future liability could not be classified as remission or cessation of the trading liability so as to attract provisions of section 41(1)(a) since the State Government had not waived of the sales tax liability/loan liability. It had only chosen to receive the money immediately which was receivable after 7 years. It is a simple case of collecting the amount at net present value which was due later on. The payment of Rs. 18,43,85,796/- represents only the present value of the loan liability which otherwise was payable on deferred basis in future at Rs. 31,74,68,000/-. Therefore, on the difference arising f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said website states "NPV compares the value of a dollar today to the value of that same dollar in future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative," David L. Scott., Wall Street Words: - "the discounted value of an investment's cash inflows minus the discounted value of its cash outflows. To be adequately profitable, an investment should have a net present value greater than zero. For investment in securities, the initial cost is usually the only outflow." In view of above definitions, where the NPV of a sum/the value of a thing is equal to its future known value, the payment of the present value of such sum/thing at present, enure no benefit to the payer or the payee. 7. The assessee has collected sales tax from the customers. Under the deferral scheme, the same is considered as paid & regarded as loan repayable over a period of time. In the interim, the assessee has utilized the money for the purpose of its business. This loan has been prepaid by the assessee at its present value. It is not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escribed was paid, the deferred tax was deemed, in public interest, to have been paid. The assessee pursuant to these amendments of the Bombay Sales Tax Act, 1959 made repayment of loan under the 1983 and 1988 Schemes on December 30, 2002 at the net present value of the deferred tax as prescribed under Trade Circular dated December 12, 2002. The assessee claimed the difference between the deferred sales tax of Rs. 7,52,01,378 and its net present value amounting to Rs. 3,37,13,393 as capital receipt, credited in the books of account of the assessee in the capital reserve account. However, the Assessing Officer on the ground that the assessee had obtained the benefit of deduction of the whole amount of Rs. 7,52,01,378 under section 43B of the Income-tax Act in view of the Central Board of Direct Taxes Circular No. 496 dated September 25, 1987, brought the difference of Rs. 4,14,87,985 to tax under section 41(1) of the Income-tax Act, 1961, treating it as remission of a trading liability. CIT(A) upheld the addition made by the AO. On appeal, it was held as under:- (i) there was no material on record to show that the net present value of the future sum was not the same or in the proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12 years in six annual/equal installments, was repaid by the assessee, in the public interest, as net present value is equivalent to the future value of the sum. There was no iota of evidence to show that there was any remission or cessation of liability by the State Government. Thus, the requirements spelt out for the applicability of section 41(1)(a) were not fulfilled. Had the State Government accepted a lesser amount after twelve years or reduced such installments, then it could have been a case of remission or cessation. (iii) assessee on the basis of the letter issued by SICOM to the sales tax authority had passed necessary entries in the books of account claiming the difference of deferral amount as a capital receipt. Merely because the sales tax authorities had not issued the modified eligibility certificate the payment of Rs. 3,37,13,393 made by the assessee at net present value of the future sum of Rs. 7,52,01,378 would not cease to be towards discharge of full liability. Even assuming that the assessee did not get a modified eligibility certificate or the repayment of loan paid by the assessee at its net present value of future sum, merely because the assessee had pass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons. In the case of Sulzer's, the Special Bench held that the deferred sales tax liability being the difference between the payment of net present value against the future liability credited by the assessee under the capital reserve account in its books of account was a capital receipt and could not be termed as remission/cessation of liability and, consequently, no benefit would arise to the assessee in terms of section 41(1)(a). In view of the same, the addition made by the AO was deleted. M/s Grasim Industries Ltd. Vs. DCIT 2011-TIOL-245-ITAT-Mum dt. 11.03.2011 Assessee Company availed the benefit of sales tax deferment scheme and deferred tax to the tune of Rs. 106.47 crore and treated this amount as loan payable to Government. Later on Government introduced another scheme vis-à-vis early repayment of outstanding loan or repayment of loan before the stipulated date. Assessee opted for the same and got a benefit of Rs. 34.35Crore. During the course of assessment proceedings, the AO treated the same as capital receipt and did not tax the same. CIT while examining records took a view that the sale tax liability was revenue in nature and hence the loan would not have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,82,204/- confirmed by the CIT(A) be deleted." 3.5 Per contra, the ld. CIT DR has relied on the order of the authorities below. He drew our attention to the conclusion drawn by ld CIT(A) at Page 30 and 31 of his order, particularly, where a finding is given that the ITAT Jaipur Bench has not considered the decision of Hon'ble Supreme Court in case of TVS Sunderam Iyengar (supra) and therefore the order of Hon'ble ITAT is per-incuriam and need not to be followed as a precedent. In the rejoinder, the Ld. AR has relied on the decision of the Pune Bench of ITAT reported at 164 ITD 272 in the case of ACIT vs Spicer India Ltd. and also drew our attention to the fact that the decision of Supreme Court in case of TVS Sunderam Iyengar has been considered by the Special Bench of Mumbai in the case of Sulzer India Ltd. Vs. JCIT (supra) and therefore the decision of the ITAT Jaipur Bench in case of M/s Chambal Fertilizers & Chemicals Ltd. which has relied on the decision of Special Bench in deciding the issue cannot be said to be per-incuriam. 3.6 We have considered the rival submission and have given a careful thought to the various contentions raised. We have noted that this issue has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company is required to install a "dry fly ash handling system" for the collection of fly ash, comprising of plant & storage silo on the land owned by RRVUNL. As per Para 2.2 of this agreement, KSTPS will provide the land for installing the said infrastructure facility at a token lease initially for 5 years. On expiry/termination of the agreement the "dry fly ash handling system" would become the property of RRVUNL/KSTPS as per Para 2.12 of the agreement. This dry fly ash handling system lifts the fly ash from the existing silo located in Unit 6 of KSTPS. The same is then transported for storage at assessee company's silo constructed on RRVUNL land. As per para 2.8 of the agreement, the fly ash is supplied free of cost for a period of 5 years to the assessee. Assessee company has incurred total expenditure of Rs. 5,25,41,773/- comprising of Rs. 5,02,61,166/- on the installation of dry fly ash handling system and Rs. 22,80,607/- on common property work at KSTPS. The total expenditure of Rs. 5,25,41,773/- on installation of dry fly ash handling system was capitalized by the assessee in the books of accounts. However, in computation of total income, the same has been claimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business more efficiently & profitably. The same has benefited the assessee company by way of reduced revenue expenditure since the assessee company has been able to procure fly ash free of cost for a period of five years by incurring expenditure on installation of the dry fly ash handling system. For the purpose of allowability of expenditure u/s 37(1) of the IT Act, 1961, it was sated that for the classification of the capital and revenue expenditure of deferred revenue expenditure is not relevant. . If the expenditure is a revenue expenditure, it is allowable in the year of incurrence irrespective of whether its benefit enure in one year or more than one year. In the present case, as explained in Para 2 above, the expenditure on installation of dry fly ash handling system is a revenue expenditure. According to the ld. AR , part of the expenditure cannot be disallowed by holding it as deferred revenue expenditure. He argued that the concept of deferred revenue expenditure is an accounting concept and is alien to the IT Act. When any expenditure is treated as deferred revenue expenditure, it pre-supposes that concerned expenditure is in revenue field and is thus is a revenue expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess and not for acquiring the capital asset. Further, as per para 2.1 of the agreement, RRVUNL has allowed the assessee to install the system only for collection of fly ash free of cost, initially for a period of 5 years, and as per Para 2.12 of the Agreement, the system becomes the sole property of RRVUNL on the expiry/termination of the agreement. Thus, the entire arrangement has benefited the assessee only by way of free supply of fly ash by incurring the expenditure on installation of the system which become the property of RRVUNL. By allowing 20% of the expenditure, the authorities have accepted that the expenditure is revenue in nature and not a capital expenditure. There is no concept of deferment of expenditure in the I.T. Act. We also find that this very issue is decided by the ITAT Chennai Bench in case of ACIT Vs. Chettinand Cement Corporation Ltd. 133 ITD 317 where the finding given at Para 33 of the order is reproduced as under:- We have perused the orders and heard the rival submissions. There is no dispute that the assessee had an MoU with TNEB which clearly specified the fly ash system equipment installed by the assessee to be the property of the TNEB. It is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l at Ramganjmandi by holding that the same cannot be allowed as business expenditure. 5.2 The facts apropos to this ground as brought before us by the Ld. AR are that the Collector & District Magistrate, Kota vide its letter dated 09.04.2007 addressed to the MD of assessee informed that it has planned to construct a 100 bed hospital on 10 bigha land at Ramganjmandi at an estimated cost of Rs. 200 lacs with an object to expand the health & specialized medical services. In pursuance of same, assessee was requested to contribute 50% of the total cost i.e. Rs. 100 lacs to Medicare Relief Society, Community Health Centre, Ramganjmandi as its positive initiation towards the welfare of common man of District Ramganjmandi, where the plant of assessee is located. The Board of Directors of assessee in its meeting held on 28.04.2007 resolved to contribute the said amount since the same will also cater to the medical needs of its employees and in turn also increase its goodwill & brand image in the community. Thereafter, in pursuance of order dt. 30.07.2007 of District Collector, a hospital named "Mangalam Cement Government Hospital" was planned to be constructed at Ramganjmandi. An executive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its/advantages which was also explained during the course of assessment proceedings vide 15.03.2011:- (i) At present for treatment of any serious injury/disease, hospitals were situated at Jhalawar i.e. 40 kms away or at Kota i.e. 65 kms away from the plant site whereas the newly constructed hospital is just 10 kms away from the plant site thereby helping in timely treatment. (ii) Not only there are reservations of few beds for assessee employees but priority is also given for their treatment. (iii) The hospital itself is named as "Government Mangalam Cement Hospital". The contribution, thus, made by assessee increased its goodwill, brand image and relationship with district administration. 2. AO has not disputed the business expediency of making the contribution but he considered the expenditure as capital in nature. The term "capital expenditure" is not defined in the Act but the commonly held perception is that expenditure made with a view to bring into existence an asset or "an advantage for the enduring benefit of a trade" is treated as capital expenditure. But if the advantage consists merely in facilitating the assessee's trading operations or enabling the management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... workers of assessee was to be given priority in admission to the new ward to be constructed. Therefore, assessee undertook the construction of additional ward & claimed the expenditure. This claim was disallowed by AO on the ground that deduction is not available u/s 80G on donation in kind. It was held that from the copy of letter, it is found that Minister gave an assurance that labourer's of assessee's mines were to be given priority for medical treatment & admission if a new ward was constructed in the hospital. Further, five beds were to be reserved for mine workers of assessee who were to be given priority for their treatment. It is therefore, clear that it was not a case of donation but of incurring an expenditure for welfare of staff which is allowable u/s 37(1). (ii) DCIT Vs. Co-operative Sugars Ltd. 84 ITD 237 (Coch.) (Trib.) Assessee carrying on the business of manufacturing & sale of sugar, made contribution to State Irrigation Department towards cost of cement lining of a canal. It was held that there is no basis at all for the plea taken by the Departmental Representative that the contribution is not for business purposes and is of the nature of donation. The min ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then such expenditure would take route of an investment that bring fruits back to the company. The basic objective of CSR is to maximize the company's overall impact on society & stakeholders keeping in consideration that companies need to develop a long tradition of engaging with the communities in which they work by aligning community involvement with business activities & clients relationships to ensure maximum impact. In view of same, contribution made by assessee as its duty towards citizens for social upbringing, protecting goodwill/reputation or increasing business competitiveness is wholly & exclusively for the purpose of business & thus qualify for deduction u/s 37(1). In view of above, disallowance of expenditure of Rs. 40 lacs confirmed by the Ld. CIT(A) be deleted." 5.5 Per contra, the Ld. CIT DR relied on the orders of the authorities below and has repeated the reasons given by the A.O. and by the ld CIT(A) to substantiate his arguments. . 5.6 We have considered the rival submissions and have gone through the material placed on record. We find that the assessee has contributed Rs. 40 lacs to Medicare Relief Society, Community Health Centre, Ramganjmandi, in pursuan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, we have no hesitation in deleting the addition made by the lower authorities. Thus Ground No.3 of the assessee's appeal is allowed. 6.1 Ground Nos. 4 and 5 of the assessee are against confirming the disallowance out of various expenses and in directing the AO to recompute the FBT payable by the assessee on staff welfare expenditure, general expenses, social welfare expenses, gift expenses and sales promotion by holding that FBT on assessee would be leviable only on the balance amount after reducing the amount disallowed out of total expenses instead of deleting the disallowances made under these heads when FBT on the same is paid and assessed by the AO whereas the only Ground of the Department is against reducing the disallowance from 50% to 20% made on account of staff welfare expenses. 6.2 The brief facts of these grounds are that the AO made disallowances out of various expenses as under:- S.No. Particulars Amt. claimed Expenses disallowed (%) Amt. of expenses disallowed 1. Staff welfare expenses 69,24,191/- 50% 34,62,095/- 2. Charges General expenses 12,78,469/- 20% 2,55,693/- 3. Social welfare expenses 16,10,832/- 20% 3,22,166/- 4. Gift expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inment expenses & employee welfare expenses (PB 82-85). CBDT in Circular No. 8/2005 dt. 29.08.2005 in respect of the issue as to whether expenses disallowed under section 37 of the Income-tax Act on the plea that the expenses are personal in nature, would also be liable to FBT has clarified that to the extent the expenses incurred by the employer are personal in nature and have, therefore, been disallowed under section 37 of the Income-tax Act, such disallowance would not be liable to FBT. In the present case, FBT is levied on entertainment expenses & employee welfare expenses & therefore, once the FBT is levied on such expenditure, no part of the expenditure can be disallowed u/s 37. Hon'ble ITAT Jaipur Bench in case of M/s Natural Slate & Sandstone Exports (P) Ltd. in ITA No 1090/JP/10 dt. 04.02.2011 (PB 86-89, Page 7-8 of the order, Para 3.4) held that since the assessee has paid FBT in respect of expenses included in the disallowance by the AO, there was no case of making disallowance u/s 37 of the Act. 4. AO has incorrectly applied section 10(10CC) & section 40(a)(v). Section 10(10CC) provides that income in the nature of perquisite u/s 17(2) shall not be included in computi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has complete supporting evidence. Few sample vouchers are placed at PB 112-114. The reasons given by the AO for making the disallowance is not justified. No disallowance should be made just for the sake of making disallowance. The entire expenditure incurred by the assessee company is necessarily and exclusively for the purpose of business and qualify for deduction u/s 37(1). Further, the expenditure of the nature of entertainment & hospitality included under these expenses has been subjected to FBT & therefore, once the FBT is levied on such expenditure, no part of the expenditure can be disallowed u/s 37 (PB 82-85 & PB 86-89) In view of above, adhoc disallowance of 20% confirmed by the CIT(A) without specifying any particular expenditure which is not allowable or unverifiable is uncalled for & be deleted. Social Welfare Expenses Facts:- Assessee company claimed social welfare expenses of Rs. 56,10,862/-. Out of the same, Rs. 40 lacs is in respect of contribution made for construction of hospital at Ramganjmandi (PB 117). The remaining expenditure of Rs. 16,10,832/- was in respect of contribution made to Gram Panchayat towards its welfare fund, repair/renovation of panchay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnection is placed on various decisions given in Ground No. 3 supra. In view of above, adhoc disallowance of 20% confirmed by the CIT(A) without specifying any particular expenditure which is not allowable or unverifiable is uncalled for & be deleted. Gift Expenses Facts & Submission:- 1. During the year under consideration, assessee company claimed gift expenses of Rs. 18,26,636/- (PB 140-146). AO in the assessment order only specified expenditure of Rs. 2,48,810/- in the assessment order without any further discussion on the same. However, he made adhoc disallowance of 50% out of the total claimed expenses i.e. Rs. 9,13,318/- by observing that assessee company failed to file the complete details of the same. CIT(A) confirmed the disallowance. 2. It is to be noted that the complete details of the gift expenses were submitted during the course of assessment proceedings vide letter dt. 15.02.2011 (PB 7981). From the said details, it can be noted that the gifts have been distributed to dealers/gov. officials on festival/visit which is a common phenomenon. The expenses are reasonable considering the volume of business of the assessee Thus, the very basis of disallowing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed business promotion expenses of Rs. 7,08,293/-, out of which an estimated sum of Rs. 1 lacs was disallowed by the AO & confirmed by the CIT(A). It was held that without pointing out any specific item, the authorities below are unjustified in disallowing the part of total expenses incurred on account of business promotion expenses. The AO should have pointed out some of the instances in respect of which he was of the view that expenses were not incurred for the purpose of the business, but the AO has not done so, & disallowed the amount purely on estimate. Thus, the adhoc disallowance is unjustified. Reliance is also placed on the following cases:- CIT Vs. Premier Vegetable Products Ltd. (2014) 97 DTR 230 (Raj.)(HC) ACIT Vs. Ganpati Enterprises Ltd. (2013) 142 ITD 118 (Delhi)(Trib.) CIT Vs. Oracle India (P) Ltd. 199 Taxman 181 (Del) (HC) (Mag.) [PB 215-217] Arthur & Anderson & Co. Vs. ACIT 2010-TIOL-416-ITAT-Mum." 6.5 Per contra, the Ld. CIT DR relied on the order of the authorities below and has verbatim read them in support of his case. 6.6 We have heard the rival submissions and have carefully perused the entire material on record We have found that the AO has made ..... X X X X Extracts X X X X X X X X Extracts X X X X
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