We had earlier discuss in
detail about the concepts of exemption of section 37 along with various case
laws earlier in part –I. In case you want to refer, the part –I, please click
on the link below: http://taxbymanish.blogspot.in/2011/08/understanding-allowability-of-business.html
Over a period of time,
there are number of judgements comes from various levels of courts from
different locations of India and hence it is very important to know the same
for the correct treatment of exemption of section 37.
01.
Guest House. : Assessee was not
maintaining a separate guest house, but was accommodating touring employees in
the house of the estate manager itself- Contention of the assessee that the
expenditure in question being amounts reimbursed to the estate manager for the
expenses incurred by him in accommodating touring employees is not covered by
s. 37(3) cannot be sustained since s. 37(3) referred to inter alia, any
expenditure incurred by an assessee on maintenance of any residential
accommodation in the nature of guest house or in connection with travelling by
an employee or any other person (including hotel expenses or allowances paid in
connection with such travelling). It cannot be contended that reimbursement of
expenses to the estate manager was not for providing accommodation to touring
employees and hence, it would not come within the ambit of sub-s (3) of S. 37.
Refer, Parry Agro Industries Ltd v. Jt. CIT, 79 DTR 204 (Ker)(High Court).
Expenditure on maintenance of transit house
is not deductible. Refer, CIT v. Rassi Cements Ltd, 351 ITR 169.
02.
Impugned expenditure : Impugned expenditure has
not been routed through P & L A/c but has been shown in the balance sheet.
When the expenditure was incurred, the amount was shown as receivable from the
holding company and when the amount was reimbursed, the same was credited to
the pre-operative expenses account. Assessee has not claimed any deduction for
the expenditure in the year under consideration. In this year the only incident
was of reimbursement of the expenditure by the holding company. Therefore, AO
was not justified in disallowing the same. Refer, American Express (India) (P) Ltd. v. JCIT, 79
DTR 127/150 TTJ 316 (Delhi)(Trib.).
Since the assessee was maintaining books on
mercantile basis, it had duly debited the impugned amounts of “maistries due”
to profit and loss account. This was a finding of fact recorded by the Tribunal
which could not be interfered with. The Assessing Officer was not justified in
disallowing the expenses on the ground of absence of matching income in the
profit and loss account. Since the Assessing Officer had not found anywhere in
assessment order that expenses made by assessee towards 'maistry dues' was not
supported by any material documents, it was only when matter was remitted from
first appellate authority to Assessing Officer during pendency of appeal, assessee
was not in a position to produce those vouchers, for which he had also given
reason that vouchers were damaged during floods. Therefore, addition made by
Assessing Officer was to be deleted. Refer, CIT v. T. Arivunidhi, 216 Taxman 98.
03.
Software Expenses : Expenditure incurred on
development of various software packages for being sold is revenue expenditure. Refer, Opus Software Solutions Ltd. v. ACIT, 139
ITD 427 (Pune)(Trib.).
In the case of
CIT v. Toyota Kirloskar Motors P. Ltd, 349 ITR 65, it was held that When the
life of a computer or software is less than two years and the right to use it
is for a limited period, the fee paid for acquisition of the right is allowable
as revenue expenditure and if the software is licensed for a particular period,
fresh licence fee is to be paid for utilizing it for subsequent years.
Therefore, without renewing the licence or without paying the fee on such
renewal, it is not possible to use the software. Therefore, the fee paid for
obtaining the software and the licence and for renewing it was revenue
expenditure. Provision for warranty is allowable , however there should not be
double deduction hence for verification of double deduction the matter was set aside
In the case of Eimco Elecon (India) Ltd. v.
Additional CIT, Vol 22 Pg 380, it was held that Software is to enable business
to be run more efficiently and hence software fees paid is allowable.
Held merely by nomenclature, expenditure
cannot be termed either revenue or capital expenditure. The assessee had to
prove by leading cogent evidence that the software did not give any enduring
benefit. No such explanation of the assessee was forthcoming. Hence, the
disallowance of expenditure on software purchase was justified. Refer, Karur
Vysya Bank Ltd. v. ACIT, 25 ITR 731 (Chennai)(Trib.).
04.
Foreign Tour : In the case of I.J. Tools & Castings (P.)
Ltd. v. ACIT , 139 ITD 414 (Asr.)(Trib.) , Where
foreign travel expenses are for exploration of possibility of expansion of
business, they are allowable even though object for such expenditure incurred
has not been materialized i.e. even when the orders are not booked due to
commercial reasons.
The assessee claimed the foreign tour
expenses of accompanying spouse of directors of assessee-company. As the
assessee failed to provide any evidence disallowance of such expense, was held
to be proper. Refer, Harinagar Sugar Mills Ltd. vACIT, 21 ITR 383(Mum.)(Trib.).
Reliance to be places in the case of CIT v .
Ansal Properties and Industries Ltd, 352 ITR 637, where it was held that maintenance
of accommodation for employees and executives for duration of projects outside
India is allowable as intention of employer not to provide for guest house
Held, it was customary in the European
countries for the wives to accompany their husbands, and the travelling of the
wives along with their husbands could not be said to be personal visits of the
wives, but to be regarded as having been
undertaken for the purpose of business of the company. The expenses on foreign
travel were deductible. Sponsoring programmes like Centenary Celebrations of
Cotton College, State Level National Children Congress and programmes of club
in which director was member leads to advertisement and wider acknowledgment of
the assessee and its products. Such an expenditure could not but be regarded
as having been incurred for the purpose
of augmentation of the income of the company because the assessee's banners as
sponsors of the events were displayed at the functions and hence, allowable..
Refer, CIT v. Williamson Tea (Assam) Ltd, 355 ITR 323.
Assessee claimed deduction of expenditure
incurred on foreign tour claiming it to be undertaken for business purposes.
However, it failed to furnish details of foreign visits and explain its
justification to assessee's business. It was held that expenditure of foreign
tour be disallowed in entirety. Refer, Peerless General Finance &
Investment Co. Ltd. v. CIT, 88 DTR 26.
05.
Brand Name: Assessee-company entered
into an agreement with a foreign company for use of trade mark and brand name
of said company on its licensed products for a period of 10 years. It was held
that where lump-sum royalty was paid to a foreign company for use of its brand
name and trade work for 10 years, 25 percent of said payment was to be allowed
as depreciation whereas balance 75 per cent was to be allowed as revenue
expenditure. Refer, Fenner
(India) Ltd. v. ACIT, 139 ITD 406.
The assessee company is engaged in the
business of licensing, manufacturing, distribution and selling of diamonds
under the brand “Nakshatra”. ‘B’, a Swiss-diamond manufacturer was owner of
mark “Nakshatra” B’ licensed said mark to ‘D’, who in turn, had sub-licensed to
assessee. Assessee sold diamonds under brand name “Nakshatra”. Assessee made
payment to ‘D’ for its share on promotion of mark ‘N’ and claimed sales
promotion expenses. Assessing Officer disallowed 20 per cent of payment holding
same to be capital in nature.It was held that facts revealed that entire rights
and goodwill through marketing campaign and advertisement would be owned by ‘B’
and ‘D’; assessee had no right either on mark or in intellectual property right
or goodwill of mark; and what assessee was enjoying was only profit from
selling of premium products under said mark. Therefore, expenditure incurred
was revenue in nature and was to be allowed. Refer, Brightest Circle Jewellery
(P.)Ltd. v. ACIT, 140 ITD 11 (Mum.)(Trib.).
06.
Non Compete Fees: It was held that the
amount paid for non-compete fees is capital outlay and same cannot be allowed
as revenue expenditure under section 37(1). Further, since amount is not in
nature of revenue expenditure, a part of it cannot be considered as deferred
revenue expenditure so as to allow over period of non-compete agreement. Refer, NELITO
Systems Ltd. v. DCIT, 139 ITD 321 (Mum)(Trib.).
In the case of
Sharp Business System v. CIT, 79 DTR 329 held that Advantage which the assessee
derived on account of its agreement with L&T was that the latter, a
previous joint venture partner to the extent of 26 per cent was kept put out of
the market for a period of 7 years. Coupled with the fact that the L&T has
its own presence in consumer goods sector and would be, if it chooses, able to
put up an effective competition for business engaged in by the assessee, there
is no doubt that the amount is to ensure a certain position in the market by
keeping out L&T. Payment of non-compete fee therefore constituted capital
expenditure
07.
Warranty : Where warranty clause
was part of sale document and it imposed a liability upon assessee to discharge
its obligations under said clause for period of warranty, provision made for
warranty charges was to be allowed as deduction. Refer, 139 ITD 139.
Assessee had acquired personal computer and
laptops division of IBM India and continued business of trading and manufacture
of PCs and MCs. It provided either 1 year or 3 years warranty on sale of PCs
and laptops made to its customers in India. Assessee debited actual warranty
expenditure incurred during year and also made additional provision on basis of
assessment of warranty liability on sales made for unexpired period to profit
and loss account and claimed it as deduction. It was held that since IBM was carrying
on business in India in earlier assessment years and it was making provision
for warranty on basis of its global data, assessee could use data used by IBM
for past years for making estimation and if assessee had made provision on a
scientific basis, it had to be allowed as deduction. Refer, Lenovo India P.
Ltd. v. ACIT, 140 ITD 127 (Bang.)(Trib.).
In the case of CIT v . Forbes Campbell
Finance Ltd., 352 ITR 602 it was held that when provision for warranty not made
on any reliable scientific process, then same is not allowable. Further, in the case of CIT v. IBM India Ltd ,
357 ITR 88 it was held that when
provision for warranty made on any
reliable scientific process, then same is allowable.
The Assessing Officer questioned the allow
ability of claim of warranty expenses on ground that the said liability was not
expended in current year but was only a contingent liability. The assessee's
case was that the provision was made at a bare 0.5 per cent of gross sale and
actual warranty expenses incurred during same period far exceeded amount of
provision made. Since consistently, actual expenditure exceeded provision made
and assessee produced various details of past working-out which formed basis
for current year, deduction was to be allowed. Refer, CIT v. Eimco Elecon
(India) Ltd., 216 Taxman 170.
Provision for service warranty was an
allowable expenditure. Refer, ACIT v. LG Electronics India P. Ltd, 24 ITR 634
(Delhi)(Trib.).
Method for quantifying provision for warranty
claims was consistently followed and was a scientific method based on past
practice. Hence, the provision for warranty on accrual basis was an allowable
deduction. Refer, Canon India P. Ltd. v. DCIT, 24 ITR 694(Delhi) (Trib.).
08.
Technical Know how : Royalty paid by assessee
to another company for supply of technical know how to manufacture goods of a
particulars brand under a knowhow licence agreement which could be terminated
and did not grant the licensee any right to exploit or in any way to use the
know how after the expiration of the agreement could not be treated as capital
expenditure. Refer, CIT v.
Modi Revlon (P) Ltd, 78 DTR 342 (Delhi) (High Court).
09.
Overseas Education : Expenditure on sending a trainee abroad for
higher education in the field of software development which was not the
business of assessee was not allowable as deduction, more so as this was also
not a regular practice of the company, in as much as no one before or thereafter
had been selected by the company for such preferential treatment in the matter
of obtaining overseas education. Refer, Standipack (P) Ltd v. CIT, 78 DTR 252
(Cal)(High Court).
10.
New
Project : Professional fees paid by the assessee in respect of its new
project was a capital expenditure and not revenue expenditure. Refer, Larsen
& Toubro Ltd v. CIT, 79 DTR 225 (Bom)(High Court).
In the case of
Gujarat Power Corporation Ltd. v. Additional CIT, VOL 21 PG 683, it was held
that expenses incurred before commencement of business is not deductible
Reliance to be placed in the case of Russian
Technology Centre P. Ltd. v. Deputy CIT, where it was held that Assessee was
not granted registration as vendor by the Ministry of Defence as supplier, and
hence, no supply took place. Therefore, expenditure was rightly disallowed as
business was not set up. However, expenditure incurred after obtaining
registration was allowable
However, in the case of CIT v . Samsung India
Electronics Ltd, 356 ITR 354, where all prior to date of incorporation assessee
ready to commence commercial operations by recruiting key personnel, entering
into agreements and starting necessary infrastructure and commercial operations
starting on 1-10-1995. Expenses up to this date not pre-commencement expenses
and allowable.
11.
Lease rent : Arrangement between lessor and assessee
constituted sale of property, hence lease rent was treated as capital
expenditure. Assessee was held to be entitled to depreciation on said capital
expenditure. (S. 32). Refer, Mather & Platt (I) Ltd v. CIT, 210 Taxman 509.
In the case of
CIT v.Perot Systems TSI India Ltd., 349 ITR 563, it was held that The Assessing
Officer disallowed the lease rent payment of Rs. 2,04,400 to the Noida
authorities treating it as capital expenditure. The Tribunal allowed it as
revenue expenditure holding that the amount paid was not for acquiring any
leasehold right by way of annual lease rent. Thus, the payment was for
continuing to enjoy the leasehold rights. In such situation, the assessee would
not acquire any new capital asset but merely maintain capital asset already
acquired. Thus, the expenditure assumed the character of revenue in nature and
not capital expenditure. On appeal by revenue the order of Tribunal was up
held.
Lease premium paid in addition to the rent
paid for acquiring a long lease for a period of 90 year with the permission to
construct a office complex could not be allowed as revenue expenditure by
amortization over the period of lease. Refer, Krishak Bharati Co – operative
Ltd. v. Dy. CIT, 80 DTR 264 (Delhi)(High Court).
Lease rentals
incurred by assessee were allowable as business expenditure in view of the
decision in the cases of CIT v. Shann Finance (P.) Ltd. [1998] 231 ITR 308(SC)
and Rajshree Roadway v. Union of India [2003] 263 ITR 206 (Raj.) and not as
interest, by treating cost of leased asset as loan amount. Refer, CIT v.
Banswara Synthetic Ltd, 216 Taxman 113.
12.
Employee Stay expenses : Following the ratio in CIT v. Gannon Dunkerly
& Co (1993) 69 Taxman 563 it was held that the expenses incurred by the
employee after reaching the place of destination including stay expenses was to
be treated as disallowance under section 37 read with Rule 6D.Following the
ratio in CIT v. Aorow India Ltd (1998) 229 ITR 325 (Bom)(High Court ) it was
held that the disallowance under rule 6 D should be worked out on each employee
basis rather than on trip basis Refer, Mather & Platt (I) Ltd v. CIT, 210
Taxman 509.
13.
Sub-division of shares: Expenditure incurred for purpose of sub-division of
shares for purpose of easy trading of shares in market is revenue in nature
and, therefore, allowable. Refer, G.S.F.C. Ltd. v.DCIT, 210 Taxman
448(Guj.)(High Court).
14.
Head Office Expenses: The assessee carries on business inter alia of
manufacturing Ayurvedic medicines and ointments It has head office and four
units .The head office as well as each units have their own R&D departments
equipped with a laboratory. The Assessing Officer allocated the head office
expenses on the basis of proportionate turnover of various units. On appeal Commissioner
(Appeals) and Tribunal confirmed the addition .On appeal to the High Court the
Court held that Tribunal was not justified in confirming the allocation of
R&D expenses incurred by the head office among the four manufacturing units
on the presumption that the expenditure so incurred is for the benefit of these
manufacturing units, when in fact such research conducted had no connection
with the business of said units , nor any benefit is received by them from the
said research. Assessees appeal was allowed. Refer, Zandu Pharmaceuticals Works
Ltd v. CIT, 80 DTR 322.
The assessee owned multiplexes and was in the
business of screening films. Some of the multiplexes were in operation and some
in various stages of construction. Expenditure other than the interest of head
office was allocated on the basis of capital cost of each project. The assessee
allocated the expenditure at 67.16% to revenue and 32.84% to capital during the
year. There was justification in the claim of the assessee as the newly
operational projects also would require more attention and in some projects
there was no activity except purchase of land. In the absence of any details of
manpower allocation and time spent on each project, the only rational method
adopted by the assessee was capital cost allocation. This could not be faulted
as the Assessing Officer did not examine any other method to allocate
expenditure, but estimated it at two-third capital and one-third revenue.
Refer, E-City Entertainment (India) Pvt. Ltd. v. Add.CIT, ) 24 ITR
73(Mum.)(Trib.).
15.
Foreign exchange difference : Tribunal relying on audited accounts and deleting
disallowance held to be justified. Refer, CIT v.Timken India Ltd, 349 ITR
546(Jharkhand) (High Court).
16.
Advancement or Repairs : In the case of CIT
v.H. P. Global Soft Ltd, 349 ITR 462 it was held that Precise rules for
distinguishing capital expenditure from revenue expenditure cannot be
formulated. The line of demarcation is thin. Certain broad tests have, however,
been laid down. Each case turns on its own facts. The aim and object of the
expenditure would determine the character of the expenditure whether it is a
capital expenditure or a revenue expenditure. When an expenditure is made for
acquiring or bringing into existence an asset or an advantage for the enduring
benefit of the business, it is properly attributable to capital and is of the
nature of capital expenditure. Amount spent on providing wooden partition,
painting of leased premises, carrying out repairs so as to make premises
workable, to replace glasses is held to be revenue expenditure. Expenditure on
electricity and civil works and interior decoration, matter remanded to find
out nature of expenditure.
Assessee-firm filed return claiming depreciation
on iron rolls of machinery. Later on it filed revised return contending that
during production rolls were used to avoid friction and such rolls suffer
damage necessitating frequent replacement and hence, be treated as ‘current
repairs’. However, only on basis of no objection of managing partner to treat
rolls as depreciable assets, Assessing Officer held same as capital expenditure
.When a specific question was raised before Tribunal as regards nature of
expenditure, Tribunal should have adverted to issues raised viz., to consider
whether expenditure was, in fact, a ‘revenue’ or ‘capital expenditure’; it
should not have based its decision on statement of managing partner ,matter
remanded. Refer, Chamundi Steel Rolling Mills v. ACIT, 212 Taxman 30 (Mad.)(High
Court).
In the case of Thiru Arooran Sugars Ltd. v.
Dy. CIT, 350 ITR 324(Mad)(High Court), The assessee is in occupation of leased
premises, carried out renovation work by providing false ceiling and furniture
modification spending Rs. 1.71 lakhs and Rs. 9.19 lakhs. The assessee claimed
that the sums were eligible for depreciation at 100 per cent. However, this
expenditure was treated as capital expenditure eligible for depreciation at 10
per cent. This was upheld by the Tribunal. On appeal to the High Court,held,
that the temporary structure by means of false ceiling and office renovation
had not resulted in any capital expenditure.Appeal of assessee allowed.
In the case of Dy. CIT v. Lasik Centre
(India) P. Ltd., it was held that expenses incurred to make the advancement of
the process is revenue expenditure.
Expenditure on upgrading computer hardware
and software is revenue expenditure. Refer, DCIT v. Mcleod Russel India Ltd, 24
ITR 262 (Kol.)(Trib.).
Parts like CD ROM drive, hard disk drive and
RAM being spares of Central Processing Unit of computer cannot be considered as
separate and independent machinery, thus, expenditure incurred on such parts is
allowable as revenue expenditure. However, printer, scanner and web camera are
independent and separate devices, therefore, expenditure incurred on such
devices is capital in nature. / Expenditure incurred by assessee to make
office premises fit for business use without bringing any new capital asset
into existence is allowable as revenue expenditure. Expenditure on split AC is
capital in nature as assessee has brought into existence a new asset. Refer, APL
India (P.)Ltd. v Add.CIT, 58 SOT 41.
17.
Provisional Expenses : Provision for
wage revision based on past experience, previous Pay Commission reports of
public sector employees, union demands and other relevant factors the same
cannot be disallowed as contingent liability. Refer, CIT v. Bharat Heavy
Electrical Ltd, 80 DTR 7 (Delhi)(High Court).
Assessee-company issued optionally
convertible debentures to another company – Assessee had debited interest on
debentures in profit and loss account and claimed deduction of same. OCDs had
been converted to equity shares of assessee-company. The Tribunal held that
interest on debentures could not be treated as contingent liability and accordingly,
same was to be allowed. Whether debentures , fully or partly or optionally
(OCDs) are noting but debt till date of conversion and any interest paid on
these debentures is allowable as normal business expenditure. Refer, DCIT v.
UAG Builders (P.) Ltd, 53 SOT 370 (Delhi)( Trib.).
The assessee-company is engaged in the
business of development, operation and maintenance of toll roads. For the
assessment year 2002-03, it claimed deduction of Rs. 1,61,37,960 being
expenditure on road overlay or renewal. It was observed by the Assessing
Officer that a certain sum was debited to the profit and loss account. When the
details were called for the assessee explained it to be provision made on a
scientific basis. The Assessing Officer disallowed the claim and this was
confirmed by the Commissioner (Appeals). On appeal to the Tribunal held that it
was evident that the entire expenses claimed by the assessee were a provision
made in the books of account and did not pertain to actual expenses incurred by
the assessee during the year. The expenses were not deductible. Refer, Dy. CIT
v. Gujarat Road and Infrastructure Co. Ltd., 21 ITR 88 (Ahd.)(Trib.).
In the case of ITO v. Kamala Vihar Sports
Club, it was held that Provisions for unascertained liabilities actually paid
by club and hence allowable
18.
Prior
Period Expenses : Assessee claimed deduction in respect of audit fee and
purchase of raw material – Assessing Officer rejected assessee’s claim holding
that said expenses were prior period expenses. Tribunal held that as regards
audit fee, since audit was carried out in earlier years, even if bill was not
received in previous year, expenses should have been considered in respective
year and hence deduction was not allowable in year under consideration. As
regards raw material cost, since assessee failed to bring any material on
record to show in support of its case that there was any dispute regarding
payment to be made to supplier and said dispute was settled in relevant year,
no case was made out for deduction, hence disallowance was held to be
justified. Refer, Cadila Pharmaceuticals Ltd. v. ACIT, 53 SOT 356 (Ahd.)(Trib.).
Assessee provided for audit fee of Rs. seven
lakhs in books of account as on 31-3-2006 on basis of old rates fixed by
Registrar of co-operative societies which was paid on 31-7-2006. By letter
dated 17-8- 2006, Registrar raised audit fee from Rs. 7 lakhs to Rs. 10 lakhs
and Chief Auditor requested for depositing audit fee for year 2005-06 on new
rate, i.e., Rs. 10 lakhs. The assessee debited Rs 3 lakhs to profit and loss
account for which provision was not made. The amount is allowable in relevant
year. Refer, ACIT v. Punjab State Co-op. Bank Ltd, 143 ITD 571.
When the assessee filed additional evidence
before the Tribunal against the disallowance made by the AO on account of
licence fee by holding that the same was not related to any actual services
rendered and that expenditure was not incurred wholly and exclusively for
purpose of business, the matter was to be restored back to the AO./ Assessee
which is in the business of supply and erection of transmission towers,in view
of Tribunal's decision for earlier year, assessee's claim of pre-operative
expenses in relation to foreign project from which no income had been
recognized, was allowable. / Business expenditure–Professional fee–Merely because
there is no formal agreement express cannot be disallowed. Refer, KEC
International Ltd. v. DCIT, 58 SOT 18.
Assessee is engaged in business of
engineering and construction work in India. Assessee entered into a contract
with NHAI for improving and fourlaning a part of national highway. Assessee
filed its return declaring loss. A.O. completed assessment at NIL income by
disallowing assessee's claim of pre-commencement expenditure. On appeal, it was
noted that assessee had not brought on record details regarding its EPC
contract and thus it was not possible to determine actual date of commencement
of business. The Honourable ITAT held that it is not necessary that all
activities which go to make up business should have been started, however the
matter was to be remanded back for disposal afresh with a direction to assessee
to bring necessary details on record. Refer, UE Development India (P.) Ltd. v.
ACIT, 144 ITD 112.
19.
Discontinued Business: Assessee-company,
doing business of offset printing and typesetting, it developed land and
constructed factory in it. Land and building became part of business assets.
Later on assessee shifted its business into new line of business being real
estate development and converted land and building into stock in trade.
Assessee demolished factory building and had used factory land for putting up
construction of dwelling units and sold same. Assessee claimed that development
cost incurred earlier for land portion was now to be allowed as business
expenditures. Since business in respect of which said development cost had been
incurred was discontinued, same could not be claimed as revenue expenditure in
respect of another business being real estate business. Held in favour of
revenue. Refer, CIT v. Rajeswari Foundations Ltd., 53 SOT 569.
In the case of Kansai Nerolac Paints Ltd. v. Deputy CIT
(Mumbai), it was held that when operations
of manufacture discontinued at one factory, then expenses incurred to protect
business assets is to be allowed. However, assets of unit having already
entered block of assets of assessee, depreciation not to be disallowed on
ground of non-use.
Assessee set up as joint venture with
Government of India for business of consultancy for State Governments. Revenue
was generated in two years following incorporation of assessee. Thereafter,
lull in business must not to be considered as cessation of business and
business ought to be considered as commenced on setting up. Hence, consultancy
fees cannot be disallowed on the grounds that the business had ceased. / An
amount was advanced by the Government by way of application for shares and due
to non allotment of shares, the Government and the assessee ultimately agreed
to treat it as advance eligible for compensation thereon and termed it as
"return". Not returning the amount to Government would have cost the
assessee its business prospects and its title over the business. In these
circumstances, the assessee in order to protect its business interest and
business propriety refunded the amount which was allowable to the assessee as
business expenditure. Refer, Urban Mass Transit Company Ltd. v. ACIT, 24 ITR
741.
Retirement compensation paid to workmen, even
where such expenditure was incurred upon closure of business, was revenue
expenditure and was an allowable deduction.
Assessee debited certain amount in its profit
and loss account in respect of prepaid payment for SEBI fees, insurance,
repairs and maintenance etc. A.O. disallowed said amount because business of
assessee had already been transferred. On appeal Tribunal held that as the
business was transferred and discontinued disallowance of expenses was justified.
Refer, IGFT Ltd. v. ITO, 144 ITD 57.
20.
Travel Expenses: Travelling expenses
were incurred by assessee-company on travel of its director so as to enable him
to attend Board meetings and to file various documents before various
authorities, assessee’s claim for deduction was to be allowed. Refer, ITO v.
RSG Media (P.) Ltd, 53 SOT 588.
In the case of Munish Gupta v. Deputy CIT, it
was held that Expenses were not allowable as the assessee was unable to produce
logbook or record to establish use of car for purposes of proprietary business/
The assessee had furnished on record a certificate of the diamonds institution
showing that his wife had undergone a course in polished diamonds and held a
diploma in jewellery technique. Further details of foreign travelling expenses
undertake by the wife including the foreign exchange purchased by her were also
shown. Held, the wife of the assessee was qualified and had visited different
places for the purpose of the business undertaken by the proprietary concern of
the husband. Therefore, the expenditure incurred for the purpose of business of
the assessee was to be allowed as a deduction.
21.
Commission : During assessment
proceedings, Assessing Officer rejected assessee’s claim in respect of
commission paid to foreign agents. On appeal, it was noted that liability to
pay commission had arisen by virtue of sales in relevant financial year. In
this regard, realization of sale amount in next financial year would not make
much difference as liability to pay commission had crystallised in year of sale
itself. The Tribunal held that in view of above, assessee’s claim for deduction
in respect of commission payment was to be allowed . Refer, Devendra Exports
(P.) Ltd. v.ACIT , 54 SOT 220( Chennai) (Trib.).
22.
Common
Expenses : The assessee is a film maker and an event manager. The assessee
followed the project completion method, showed loss from film business and
profit from music albums. In addition to this, the assessee showed receipts
from old films, i. e., royalty, telecast rights of films, satellite rights of
movies and corresponding expenditure in respect of each of her ventures
separately. Over and above this the assessee claimed common expenditure under
various heads like Diwali expenditure, printing and stationery, professional
fee, conveyance, credit card charges, depreciation, dress and costume, interest
on loan, miscellaneous expenses and telephone charges. The Assessing Officer
held that the expenditure booked on account of professional fee, publicity,
business promotion, dress and costume, etc. was not in any way linked to old
film income and was not allowable. The Commissioner (Appeals) upheld the order
of the Assessing Officer. On appeal the Tribunal held that expenses and title
registration expenses not attributable to common expenditure for running
business is held to be not allowable/ The Tribunal held that expenditure on
purchase of new furniture not replacement hence capital expenditure, not
allowable. The Tribunal also held that there was no material to show
replacement of electric installation or nature of electric installation
replaced hence deduction is not allowable. Refer, Gurudas Mann v. Dy. CIT, 21
ITR 57 ( Chandigarh) (Trib.).
23.
Adhoc disallowance : Tribunal held that
vehicle related expenses and telephone expenses, disallowance of 20 per cent.
for personal use is proper. Conveyance, lodging and boarding, travelling staff
welfare, business promotion and publicity expenses no disallowance can be made
for personal use./ The tribunal held that disallowance for bills and vouchers
not verifiable made after discussion with assessee is cannot be challenged. Ad
hoc disallowance without pointing out nature of discrepancies and head of to
which expenditure related disallowance is not proper. Refer, Manjit Mann (Mrs.)
v. Dy.CIT, 21 ITR 57 (Chandigarh)(Trib.).
Assessee engaged in real estate development.
The Assessing Officer made an ad hoc disallowance of 25 per cent. of the
expenditure claimed on levelling and fencing charges. After examining details
the Commissioner (Appeals) held that such expenses appeared to be genuine and
were generally incurred in the course of the assessee’s line of business. He
also found that some of such expenses were supported only by self vouchers and
cash receipts which were not verifiable, and therefore restricted the
disallowance. On appeal to the Tribunal held that the assessee had not
furnished any cogent evidence to establish that the expenses, which stood
disallowed, were verifiable. The disallowance was justified/ Assessee is
engaged in real estate development. Out of the total expenses claimed under the
head “Brokerage and commission”, the Assessing Officer holding that in this
line of business of land transactions the average percentage of commission and
brokerage was one per cent., disallowed the balance. The Commissioner (Appeals)
examined the matter in detail and came to the view that expenses on commission
and brokerage charges, on which tax had been deducted at source and remitted to
the treasury, were genuine according to the facts placed before him and
accordingly allowed the assessee relief and Confirmed the disallowance of Rs
4,44, 342. Tribunal confirmed the order of Commissioner (Appeals) and dismissed
the cross appeal of assessee. Refer, ITO v. Nam Estates P. Ltd, 21 ITR
109(Bang.)(Trib.).
Reliance to be placed in the case of Sonic
Biochem Extractions P. Ltd. v. ITO, where it was held that assessee being a public limited company and maintaining books
of account and further audited and hence
Question of any element of personal nature does not arise and adhoc
expenses to be deleted.
The Assessing Officer held that excess
deductions were claimed by the assessee by comparing expenses of earlier year.
He, therefore, disallowed the same and made addition to assessee's income.
Held, the Assessing Officer cannot make addition merely by comparing expenditure
with preceding year's expenditure, and hence, said addition was to be deleted.
Refer, CIT v. Symphony Comfort System Ltd, 216 Taxman 225.
The Assessing Officer disallowed amount paid
to various parties as sales promotion expenses on ground that payment made to
those parties were not genuine. The Commissioner (Appeals) allowed appeal and
held that assessee was dealing with organizations of repute and many of clients
had reimbursed expenses to assessee. The Tribunal held that provisions of s. 68
cannot be invoked while considering expendit are on sales promotion as sought
to be done by the Assessing Officer. Expenses were incurred for purpose of
business and, therefore, allowable under s. 37(1). Refer, CIT v. Sankalp
Consumer Products (P.) Ltd, 216 Taxman 184.
The AO held that the assessee failed to
produce vouchers and substantiate the claim and disallowed 20% of petrol and
diesel expenses. The Commissioner (Appeals) restricted the disallowance to 10%.
Held, that one more opportunity be granted to the assessee to substantiate its
claim by producing the vouchers and other details. Therefore, the Assessing
Officer was directed to verify the details after affording the assessee a
reasonable opportunity of being heard. Refer, Indian Research Manifestation
Labs P. Ltd. v. ACIT, 24 ITR 30 (Ahd.)(Trib.).
The Assessing Officer concluded that the
assessee was claiming 100% of the cost of video rights/other copy rights even
in a case where small portion of the total bundle of rights was sold and even
when small portion of the total period of rights were sold. The Assessing
Officer held that only proportionate expenditure could be claimed, but he found
that it was difficult to quantify such amount; therefore, he held assessee
should be allowed expenditure only to the extent the amount received by the
assessee as sale during the year and balance cost of acquisition should be taken
as cost of acquisition or inventory of closing stock. Held, consistent method
adopted by assessee could not be disturbed without adequate reason. Since
expenditure was allowable, full amount of expenditure was to be allowed, and
same could not be restricted to extent of revenue earned during year under
consideration. Refer, Venus Records & Tapes (P.) Ltd. v. Add.CIT, 58 SOT 47.
24.
Penalty
: Assessee taking business decision not to honour its commitment of
fulfilling export entitlement in view of losses and thus encashment of bank
guarantee by Export Promotion Council. Payment
recorded as penalty in assessee's books and claimed as deduction. Since this
was no contravention of any provisions of law and Compensatory in nature and allowable.
In the case of Ford India P. Ltd. v. Deputy
CIT, Large Taxpayer Unit, it was held that Penalty paid under Central excise
and service tax law is not allowable.
Merely because agreement referred to interest
on delayed payment as penal interest, any such payment would not partake character of penalty. Also,
since it was not case of revenue that amount paid by assessee was for payment
of penalty rather it was simplicitor liability of interest on delayed payment
of instalments, Tribunal was justified in allowing said payment as business
expenditure. Refer, CIT v. Gujarat State Financial Corporation, 216 Taxman 183.
25.
Charity: Payment made to temples etc and
shown as advertisement and have no business connection and hence disallowed. Refer,
P. A. Jose v. Assistant CIT (Cochin).
26.
Loan Re-structuring: In the case of Dy.
CIT v. Gujarat Narmada Valley Fertilizers Co. Ltd, 356 ITR 460, it was held
that same is allowable expenditure.
27.
Club expenses: Corporate membership of
club is meant for benefit of assessee and not for any particular employee and
hence expenditure wholly and exclusively for purposes of business and allowable.
Refer, Development Credit Bank Ltd. v. Deputy CIT.
Club expenses incurred by the assessee on
behalf of its directors for networking and marketing were allowable. Refer, Canon
India P. Ltd. v. DCIT, 24 ITR 694(Delhi) (Trib.).
28.
Court Order : The Assessee could not
fulfill contract with a party which filed suit before the High Court claiming compensation
from assessee towards loss suffered by it. Assessee revised its return and
claimed deduction of said amount. The Tribunal found issues as to whether
payment was made, whether High Court had allowed such claim and whether
assessee had made such a claim for any subsequent year were to be examined by
the Assessing Officer and hence, remanded the matter back to the Assessing
Officer. The Tribunal’s order was to be upheld. Refer, CIT v. Sambhav Media Ltd,
216 Taxman 115.
29.
Marketing Research : Expenditure incurred by assessee towards
conducting study in products, marketing, etc. to carry on business more
efficiently and profitability would be a revenue expenditure and not a capital
expenditure. Refer, EL Forge Ltd. v. DCIT, 216 Taxman 114.
30.
Stock Option : “Expenditure" means
not only "paying out" but also "incurring". Discount on
issue of options under employees’ stock option scheme is allowable as
deduction. This discount is neither capital expenditure nor a contingent
liability. Refer, Biocon Ltd. v. DCIT, 25 ITR 602.
31.
Compensation: Compensation paid to
vendors for deficiency in lifting contracted quantum of raw material, which was
to become a part of running stock of assessee, was revenue expenditure and
allowable., Refer, Ford India P. Ltd. v. DCIT, 25 ITR 456.
32.
Pension Fund : On the ground that the
assessee had not made the payment to any approved pension fund in compliance
with rule 89 of the Income-tax Rules, 1962 the Assessing Officer disallowed the
claim and this was confirmed by the Commissioner (Appeals). Held, that the
assessee was eligible in principle to deduction qua the direct payment of
pension under section 37(1) of the Act. However, the aspect of the commercial
expediency (on the parameters settled by the Supreme Court) had admittedly not
been examined by the Assessing Officer, a perquisite for the allowance of a
claim under section 37(1), and the onus to establish this was on the assessee
especially as there was no subsisting employer-employee relationship between
the assessee and its retired employees. There was no enumeration of the basic
and relevant facts in the assessment order for this year or in the orders for
earlier years. The allowance of deduction under section 36(1)(iv), was qua the
contribution to the fund, and was no bar for the claim of deduction under
section 37(1). However, it had to be on its merits, i.e., on a stand-alone
basis. The Assessing Officer was to pass a fresh order in accordance with law
after affording adequate opportunity of hearing to the assessee. Refer, Karur
Vysya Bank Ltd. v. ACIT, 25 ITR 731 (Chennai)(Trib.).
33.
Artwork : Considering the average life
span of artwork, which was only less than six months, it could not be inferred
that any capital apparatus had come into existence which could be the source of
income generation for the assessee. The "artworks" was not capital
expenditure. Refer, Parle Agro P. Ltd.
v. ACIT , 25 ITR 551 (Mum.) (Trib).
34.
Gift : Reliance to be placed in the case
of General Motors India P. Ltd. v. Deputy CIT where it was held that Gifts to
dealers, business associates, employees, etc., during festivals is allowable
due to customary.
In case you have any further clarification,
feel free to contact me at taxbymanish@yahoo.com or else you
can view more articles & news related to Indian tax & finance at http://taxbymanish.blogspot.in/.
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