2022 (9) TMI 1395 - ITAT BANGALORE

Deduction u/s. 35(2AB) - deduction Computed on Net Expenditure as opposed to Gross Expenditure - CIT(A) upholding the action of the Respondent in allowing weighted deduction only on the net expenditure as against granting the same on the gross expenditure - HELD THAT:- Following the order passed by the coordinate bench in 2008-09 [2020 (9) TMI 814 - ITAT BANGALORE] we set aside the order passed by Ld CIT(A) on this issue and direct the A.O. to allow the deduction u/s 35(2AB) of the Act on the gross amount of expenditure - Ground is allowed in favour of the assessee.

Disallowing the provision for bad and doubtful debts - Whether CIT(A) erred in placing undue reliance on the efforts being made to recover the amounts without appreciating the treatment to the same given in the audited books of accounts maintained by the Appellant, conformably with the settled principles of accounting? - HELD THAT:- The assessee has reduced the provision for bad debts from Sundry Receivables and the same is debited to the Profit & Loss account. Therefore respectfully following the decision of the coordinate Bench in assessee’s own case [2020 (9) TMI 814 - ITAT BANGALORE] , we direct the AO to delete the impugned disallowance. Ground is allowed in favour of the assessee.

Disallowance of long service award - contingent expenditure - liability having undoubtedly accrued and the Appellant had applied a scientific basis to arrive at the quantum of the liability - HELD THAT:- The assessee makes payment towards long term service awards for employees who continued their services with the assessee for certain number of years that would be paid on completion of the required number of years of service. The assessee follows actuarial valuation as per the AS-15 to arrive at the amount to be provided towards long term service awards. The main contention of the revenue is that the liability is uncertain/contingent since the employees may not put in the required number of services. However we notice that the provision is made based on actuarial valuation and when the valuation is done based on actuarial basis, certain element towards the uncertainty of the liability is discounted and the amount to be provided for is arrived at. Therefore, the amount provided for in the books of accounts based on actuarial valuation cannot be said to be contingent as contended by the revenue. In view of the above discussion and relying on the decision of Bharath Earth Movers [2000 (8) TMI 4 - SUPREME COURT], we hold that the provision made by the assessee towards long term service award based on actuarial valuation is an allowable expenditure and therefore the disallowance made in this regard is hereby deleted.

Disallowance u/s 14A r.w.r 8D - suomoto disallowance - HELD THAT:- Hon’ble Supreme Court in the case of Maxopp Investment Ltd. [2018 (3) TMI 805 - SUPREME COURT] no disallowance can be made u/s 14A of the Act read with Rule 8D of the IT Rules, where the A.O. failed to record dissatisfaction of correctness of the claim of the assessee. A similar view has also been taken by the Hon'ble jurisdictional High Court in the case of Essilor India (P.) Ltd. [2022 (2) TMI 286 - KARNATAKA HIGH COURT] Therefore the disallowance made under section 14A r.w.r 8D(2)(iii) is deleted. Thus we hold that disallowance u/s 14A r.w. Rule 8D(2)(ii) is not warranted in the facts of the instant given case. It is ordered accordingly.

With regard to the disallowance under Rule 8D(2)(i), we notice that the assessee has not incurred any expenditure directly attributable to earning exempt income and the AO has not given any details for arriving at the amount of disallowance. In view of the same we delete the disallowance since the disallowance has to be with reference to actual expenditure and not notional expenditure.

Disallowing the amount of expenditure incurred towards activities undertaken by the Appellant as a part of its corporate social responsibility - HELD THAT:- Assessee has incurred expenditure to promote the interest of underprivileged and impaired section of society and to gain goodwill of the people living in the area of operation of the assessee. Therefore respectfully following the decision of the Hon’ble Gujarat High Court in the case of Gujarat Narmada Valley Fertilizers & Chemicals Ltd. [2019 (8) TMI 1288 - GUJARAT HIGH COURT] we hold that Explanation 2 to section 37(1) is not applicable to the assessee’s case and therefore the expenses incurred voluntarily by the assessee towards CSR expenditure is allowable us/. 37(1). The addition made in this regard is deleted.

Nature of expenses - Expenses incurred towards purchase of application software whose validity was beyond a period of one year - Revenue or capital expenses - HELD THAT:- Expenditure on acquiring application software, where the shelf life of the software was one year and less - Application software is user specific and it is not needed to run the system on the whole. Application software carries a specific purpose. Some characteristic examples for application software is MS Office, Photoshop and CorelDraw. Accounting softwares like tally, are also application software. The Hon’ble Karnataka High Court in the case of CIT Vs. IBM Ltd. [2013 (10) TMI 1225 - KARNATAKA HIGH COURT] has taken the view that payment of application software though there is an enduring benefit, it does not result into acquisition of any capital asset and merely enhances the productivity or efficiency and hence has to be treated as revenue expenditure. Following the same, we hold that the expenditure on application software has to be regarded as revenue expenditure and has to be allowed deduction.

Remaining sum which was claimed as deduction by the Assessee, the CIT(A) has held that payment towards License Fee, annual updates, AMC, Antivirus software and onsite support, the AO can verify from the records as to whether payment for the same is one-time payment as in the case of MS office or it is annual payment and the assessee can't use the software, if further payment is not made to renew the license. In case of latter, the same needs to be considered as revenue expenditure and payment related to the year under consideration needs to be allowed, else it would be capital expenditure. He has also held that expenditure on annual software license is to be allowed as revenue expenditure. We are of the view that the above directions, are just and proper except with the modification that the period of the license would not be very material and that the nature of the expense and the field in which the same operates will be the deciding criteria. We accordingly modify the directions of the CIT(A) to the above extent. Thus Gr.No.8 is treated as partly allowed.

Disallowing the provision made towards 'leave availment' under Section 43B(f) - plea of the Assessee that it has ascertained the actuarial valuation (to eliminate any event of contingency) in respect of leave balance standing to the credit of the employees at the end of the year - HELD THAT:- As relying on case of Robert Bosch Engineering and Business Solutions Ltd., a subsidiary of the assessee assessee has made certain provision on account of leave encashment, but in the succeeding year leave encashment of entire leave was not done and some portion of leave was availed by employees of assessee. Therefore, the entire provision should not have been disallowed by the revenue. Only that provision would be disallowed which relate to those leave which were encashed in succeeding year and for this purpose, necessary verification is called for. We therefore set aside the order of CIT(Appeals) and restore the matter to the file of the AO for readjudication of issue afresh after affording opportunity of being heard to the assessee in the terms indicated above.

Deduction u/s 80JJAA in respect of the workmen employed by the Appellant - HELD THAT:- The issue with regard to deduction under section 80JJAA of the Act has to be remanded to the AO for fresh consideration in the light of the decision of the Hon’ble Karnataka High Court in the case of CIT(A) Vs. Texas Instruments India Pvt. Ltd. [2021 (4) TMI 1049 - KARNATAKA HIGH COURT] wherein on identical issue, the Hon’ble High Court held that the period of 300 days as mentioned under section 80JJAA could be taken into consideration both in the previous year and the succeeding year for the purpose of availing benefit under section 80JJAA.

It is not required that the workman works for entire 300 days in the previous year. The period of 300 days as mentioned under section 80JJAA of the Act could be taken into consideration both in the previous year and succeeding year for the purpose of availing the benefit under section 80JJAA. It was not required that the workman worked for entire 300 days in the previous year. We are of the view that the issue requires fresh examination by the AO in the in the light of the law laid down by the Hon’ble Karnataka High Court. The Tribunal decision rendered in Assessee’s case in the earlier AYs will no longer be applicable in view of the decision of the Hon’ble Karnataka High Court. We accordingly set aside the order of the CIT(A) and remand the issue to the AO for fresh consideration.

Disallowing the expenditure in the nature of interest paid to Micro, Small and Medium Enterprises under Micro, Small and Medium Enterprises Development Act, 2006 - HELD THAT:- As decided in assessee’s own case in Assessment Year 2010-11 [2020 (9) TMI 814 - ITAT BANGALORE] as per the Section 15 of the MSMED Act, the liability of the buyer to make the payment to MSME within the period as agreed between the parties or in case there is a delay beyond 45 days from the date of acceptance or date of deemed acceptance the interest payable as per Section 16 shall be three times of the bank rate notified by the RBI. Thus as per Section 16 of the MSMED Act, the payment of interest on delayed payment is in the nature of penalty or it is penal interest. Therefore once the payment of interest on delayed payment to MSME is regarded as a penal in nature then the said expenditure is otherwise not allowable under Section 37 of the Income Tax Act, 1961 (in short 'the Act'). Hence, in view of the specific provisions under MSMED Act, 2006 for payment of interest to the MSME being penal in nature and having the overriding effect of Sections 15 to 23, we do not find any error or illegality in the orders of the authorities below in disallowing this claim of interest paid to the MSME - we dismiss ground raised by the assessee.

Disallowing the 'mark to market losses' incurred by the Appellant on the basis that the same were notional and contingent in nature and were speculative transactions in terms of Section 43(5) - Appellant entered into the forward contracts to purchase foreign exchange in order to effect purchases/import of goods for its business and to protect itself from the risk of fluctuations in foreign currency against Indian rupee - HELD THAT:- As already stated the AO has not disputed the fact that the forward contracts in foreign currency was entered into to protect the fluctuation in price owing to foreign currency fluctuation of contract to purchase stock-in-trade of the Assessee, which would be on revenue account. The details in this regard are available at page 276 of the Assessee’s paper book. Section E of the RBI Circular No.32 dated 28.12.2010 permits such commodity hedging and such transactions are permitted only after satisfaction by the authorized dealers in foreign exchange that the forward contracts are purely hedging transactions to protect price fluctuation of importers against risk of fluctuation of price. In our view, the aforesaid decision rendered by the Tribunal is squarely applicable to the facts of the assessee’s case. Following the same, we hold that the assessee is entitled to deduction on account of mark to market loss in respect of forward contracts to purchase foreign exchange in order to protect itself from the risk of fluctuation in foreign currency and in order to hedge the fluctuation of purchase price of in terms of foreign currency of goods to be imported for the purpose of its business. We therefore allow Ground raised by the Assessee.

Disallowing depreciation on the intangibles arising on the slump sale of the service solution business of SPX Pvt. Ltd. ("SPX") to the Appellant - HELD THAT:- When a purchaser acquires a business on a going concern basis by paying more than the fair market value of the net tangible asset, the difference in the purchase consideration and the net value of the assets and liabilities is attributable to the commercial benefit which is nothing but goodwill on which depreciation has to be allowed. In the absence of such Intangible assets, i.e., business claims, business information, business records, contracts, employees and know-how, the transferee would have to commence business from scratch and go through the gestation period. Therefore by acquiring the aforesaid business rights along with the tangible assets, the assessee got an up and running business and the specified intangible assets acquired under slump sale agreement are in the nature of “any other business or commercial rights of a similar nature” on which depreciation is allowable. In the light of the judicial pronouncement referred to by the learned AR, we are of the view that the claim of the assessee has to be allowed and the same is accordingly directed to be allowed.

Expenditure incurred by the Appellant towards shifting of its plant at Goa - expenditure occasioned as a result of expiry of lease contracts of leased buildings was incurred to ensure the manufacturing facility continued to exist and carried on the existing business of the concern - CIT(A) ought to have appreciated that although the claim was never raised by the Appellant in its return of income, the same was claimed before the Respondent, who however, failed to adjudicate on the same - HELD THAT:-The assessee submitted that the expenditure on dismantling, shifting and refitting of the plant and machinery in the old location in Goa to a new location in Goa was primarily incurred for the purpose of improving convenience and efficiency of the working of the plant and was a revenue expenditure which should be allowed as a deduction. Both the Revenue authorities did not consider the claim of the assessee on the ground that it was not claimed in the return of income. We are of the view that the fact that the assessee did not make a claim in the return of income is not bar for making a claim for deduction of a legitimate business expenditure. We therefore set aside this issue to the AO for fresh consideration. AO will decide the issue in accordance with law after affording the assessee opportunity of being heard.

Additional ground with regard to dividend distribution tax - claim of the Assessee that the Assessee beings a subsidiary of RB GmbH, Germany and since RB GmbH is a tax resident of Germany that dividend received by Robert Bosch GmbH is subject to Article 10 of Double Taxation Avoidance Agreement ("DTAA") between India and Germany - HELD THAT:- We find that on this issue, there has been conflicting views and the matter has been referred by the Mumbai Bench of ITAT for constitution of a larger Bench. In the light of the development, we are of the view that it would be just and appropriate to set aside this issue to the AO for consideration afresh in the light of the law on the issue after affording the assessee opportunity of being heard.