Deduction u/s 37 of the Finance Act, 2014 allowed on safety and work environment expenditure

Deduction u/s 37 of the Finance Act, 2014 allowed on safety and work environment expenditure

Reetu | Oct 9, 2021 |

Deduction u/s 37 of the Finance Act, 2014 allowed on safety and work environment expenditure

Deduction u/s 37 of the Finance Act, 2014 allowed on safety and work environment expenditure

Expenditure towards the safety and work environment was incurred for deriving benefit for the purposes of business of assessee and is allowable as deduction u/s 37 of the Finance Act, 2014

M/s Toyota Boshoku Automotive India Pvt. Ltd. vs The Deputy Commissioner of Income Tax, LTU Bangalore; 24.09.21; ITA No. 1704/Bang/2018

Appeal filed by assessee against the order by CIT(A), Bengaluru, on the grounds that the Ld. CIT(A) erred in not accepting the contentions of the assessee company that layout charges of Rs.74,82,268/- incurred by the assessee company is in revenue in nature and the same is allowable under section 37 of Income Tax Act, 1961. Further that the CIT (A) erred in not appreciating the fact that expenses incurred in connection with readjustment and relocation of machineries in the existing building including for reasons of employees safety.

Facts:

  • The Assessee is a company engaged in the business of manufacture of seats and other interior parts for motor vehicles. The Assessee had claimed as deduction a sum of Rs.74,82,268/- while computing income from business.
  • Before the Assessing Officer (AO), the Assessee claimed that the expenditure in question to have been incurred for the purpose of modifying the existing layout of the assessee’s manufacturing facility. It was claimed that the expenditure was revenue expenditure which should be allowed as a deduction.
  • The AO asked the Assessee to clarify why this expenditure should not be capitalized as the benefits of such layout changes are enduring in nature and hence the expenditure should be regarded as a capital expenditure. As per AO, the assessee did not file any information. The AO therefore, treated the expenditure as resulting in enduring benefit to the assessee and he therefore held the expenditure to be capital expenditure.

Assessee’s contention:

  • The assessee submitted that the change of the layout was carried out keeping in mind the safety of the employees as well as for other reasons like environmental issues. The expenses did not increase the life of the machineries nor its usage. The assessee furnished invoice copies of the various expenses incurred. In respect of balance expenditure, the assessee submitted that these expenses related to small value of items like electrical, water and airlines expenses and in view of the huge volume of the bills the same are not being furnished.
  • The Assessee further submitted that several layout changes were carried out in terms of restrictions by local authority. It was reiterated by the Assessee that layout change expenditure was laid out wholly and exclusively for the purpose of the business with objective of improving the safety and work environment and reducing the material movement distance and that the expenses were routine operating expenses and included revamp and replacements of electrical lines, air lines, replacement of water lines, repositioning of fume suction points for removal of hot air and to provide good air flow, relocation / repositioning of Andon — Abnormality warning system consequent to the shifting of machines.
  • The expenditure incurred in layout changes does not increase the capacity or the profit making apparatus of the company. It was also submitted that enduring benefit, if any is incidental and that test by itself does not make this expenditure capital in nature. Hence, the disallowance of claim for revenue expenditure Rs. 74,82,268/- needs to be deleted.
  • However, the CIT(A) did not agree with the submissions made on behalf of the assessee. Further, the Dispute Resolution Panel (DRP)-2 also held that the expenses were incurred for making ready an old premises with refurbishment and renovation to make it fit for the production of new corolla cars and to increase the capacity of production of cars. Following the said findings, the CIT(A) confirmed the order of the AO.
  • Hence the present appeal before the Appellate Tribunal.

Observations and findings:

  • Explanation 2 to section 37(1) of the Act was inserted by the Finance Act, 2014 w.e.f. 01.04.2015 and therefore not applicable to Assessment Year 2012-13. The CIT(A) was therefore not right in concluding that the expenditure in question was in the nature of corporate social responsibility and hence not allowable as a deduction. The Bench was of the view that going by the nature of expenses incurred by the assessee, the deduction claimed should be allowed.
  • The decision of the ITAT, Bengaluru Bench in the case of Mysore Sugar Co. Ltd. supports the plea of the assessee where it was held that Contribution to Sugarcane welfare trust by an Assessee a sugar manufacturing company to be utilised for taking up various welfare measures for welfare of ryots (farmers) who were sugar cane growers, was incurred for deriving benefit for the purposes of business of assessee and was allowable as deduction. Following the same, we direct the AO to allow the claim of the assessee.

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