September 2008
II. Travelling expenses incurred by non-employees allowable if for business. 691 IV. Sponsorship, prize money revenue expenditure for business purposes. 691 VI. Repairs of building owned by assessee used by directors for residence, allowable expenditu
By C. N. Vaze
Shailesh Kamdar
Chartered Accountants
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New Page 2
Part A — Reported Decisions
43 (2008) 112 ITD 57 (Kol.) (SB)
JCIT, Special Range 16 Kolkata v. ITC Ltd.
A.Y. 1997-98. Dated : 7-9-2007
In the reported case the Tribunal has considered various
grounds which have been described in the case as fact-I, fact-II and so on. Out
of XI grounds, the following grounds appear to be more relevant and important.
Fact-II :
Travelling expenses incurred even by non-employees is
allowable if it is for the business.
The assessee-company claimed deduction of Rs.40.91 crores
towards travelling expenditure, out of which Rs.58.30 lakhs was incurred in
connection with travelling of auditors, retainers, consultants, etc. The company
disallowed on its own Rs.8.92 lakhs under Rule 6D. The AO disallowed balance
Rs.49.38 lakhs, as it had not been incurred by the employees or executives of
the company. He further disallowed 1% of the claim of Rs.33.72 lakhs over and
above the said disallowance on account of possibility of personal and pleasure
trips. The CIT(A) deleted the addition. On Revenue’s appeal, the ITAT upheld the
order of CIT(A) on the following grounds :
(1) The assessee had various factories, godowns, stock
points apart from branches and offices at various locations.
(2) The travelling expenditure was very much incurred for
the business.
(3) It is immaterial whether it is incurred by the employee
or non-employee.
(4) The AO had nowhere brought on record that the
expenditure was not incurred for the business.
Cases referred to :
(i) ACIT v. Perfect Project Ltd., (2002) 253 ITR 16
(AT) Calcutta Bench
(ii) Sayaji Iron & Engg. Co. v. CIT, (2002) 253 ITR
749 (Guj.)
(iii) Dinesh Mills Ltd. v. CIT, (2002) 254 ITR 673
and a few more.
Fact-IV :
Expenditure for sponsorship, prize money, etc. is revenue
expenditure for the purposes of business.
Payments made to clubs by the assessee included expenditure
for sponsorship, prize money, etc. The AO disallowed the same, observing that
the same was not incidental to the business. The CIT(A) deleted the addition by
following the earlier appellate order for A.Y. 1994-95. On Departmental appeal,
the ITAT upheld the order of CIT(A) and allowed the expenditure on the following
grounds :
(1) The assessee submitted proper details in respect of the
expenditure which was incurred by it for sponsorship of events.
(2) Nowadays it is very common to sponsor some sports or
events to advertise the products of the company or for the company’s corporate
image.
(3) The AO has not given any congent reason for disallowing
the expenditure.
(4) The said expenditure is very much revenue expenditure
for the purposes of business.
Case referred to :
(i) CIT v. Delhi Cloth & General Mills Co., (1999)
240 ITR 9 (Delhi).
Fact-VI :
Repairs to the building owned by the assessee-company used by
its directors for residence is an allowable expenditure. Secondly, expenditure
on reinstallation of machinery from one factory to another factory is not
capital expenditure.
(A) The assessee-company incurred expenditure on repairs to
buildings, which included repairs to company flats. The said flats were
exclusively used by the directors and the higher executives of the company.
The AO disallowed 25% of such claim on the ground that the personal element in
the expenditure could not be ruled out.
(B) The assessee-company also incurred expenditure on
repairs to machinery, which included expenditure on reinstallation of Loga
machine at Bangalore factory. The said machine was brought from company’s
Saharanpur factory. The AO disallowed the same as it was a capital
expenditure. The CIT(A) deleted both the additions. On Revenue’s appeal, the
ITAT upheld the CIT(A)’s order and referred to the following :
(A) (1) The flats were owned by the assessee company
and were utilised by the assessee-company’s directors and executives.
(2) Hence, the expenditure incurred on maintenance
cannot be said to be personal nature just because the flats are occupied
by the directors for their residence.
(3) The expenditure incurred by the company for
personal benefit of directors cannot be considered as personal expenditure
of assessee company, since the assessee and the employees are two
different entities.
Regarding the installation expenditure of machinery it held
that :
(B) (1) The machinery from Saharanpur has been shifted
to Bangalore unit for its effective utilisation.
(2) This has not resulted into any addition to the
assets of the assessee-company and hence it cannot be considered as
capital expenditure.
Cases referred to :
(i) Sitapur Sugar Works Ltd. v. CIT, (1963) 49 ITR
160
(ii) Otis Elavators Co. (India) Ltd. v. CIT, (1992)
195 ITR 682
Fact-IX :
S. 36(1)(iii) – The interest on borrowed funds is an allowable expenditure if the assessee has sufficient own funds to justify interest-free advances to sister concerns.
The assessee borrowed money and claimed deduction of interest paid thereon. The assessee had also made interest-free advances to its subsidiaries. The AO disallowed the interest by calculating notional interest @ 18% p.a. on loans to subsidiaries, observing that interest-free advances were made to subsidiaries out of borrowed funds. The CIT(A) deleted the addition. On Departmental appeal, the ITAT upheld the order of CIT(A) and allowed the interest on the following grounds:
- The AO has not made a case that these advances were not made in the course of business for commercial expediency and for the purpose of business.
- The assessee is making such interest-free advances to its sister concerns since long, during the regular course of business.
- The assessee has shown substantial profit to justify the claim of the assessee to have made advances out of own fund.
Cases referred to:CIT v. Britannia Industries Ltd., (2006) 280 ITR 525 and a few more.
