2014 (9) TMI 1006 - AT - Income Tax

Disallowance of expenditure on entertainment related to employees participating in the extension of hospitality Held that - CIT (Appeals) did not erred in not accepting the contention of the appellant that at least 60% of the total expenditure on entertainment related to employees participating in the extension of hospitality and instead confirming exclusion of only 15% thereof while computing disallowance u/s 37(2). Claim for deduction of proportionate premium on leasehold land amortised disallowed - Held that - CIT(A) was justified in confirming rejection of assessee s claim for deduction of proportionate on leasehold land amortized and charged to Profit & Loss Account of the year in question. Disallowance u/s 35AB - Held that - In so far as the fees paid under the process know-how agreements entered during the year under consideration is concerned, in order to test the efficacy of section 35AB on such claim, it would be imperative to examine as to whether the expenditure is revenue or capital in nature and depending on that answer, the Assessing Officer shall decide the applicability of section 35AB of the Act. On this limited aspect, we deem it fit and proper to restore the matter back to the file of the Assessing Officer to be adjudicated afresh, of-course after allowing assessee reasonable opportunity of being heard. In this manner, on this Ground assessee partly succeeds Disallowance under Rule 6B of the I.T. Rules, 1962 - Held that - This expenditure can only be allowed u/s.37(1) provided it is established that expenses have been incurred for the purpose of business. As name of persons to whom these gifts have been given were not available with the assessee, it was difficult to hold that such persons were business associates or having business dealings with the assessee s company. Under these circumstances, authorities below were justified to hold that such expenditure incurred could not be treated for business purpose. Disallowance made by the appellant in respect of warranty obligations - Held that - The precedent in the assessee s own case fully covers the controversy and accordingly the Assessing Officer is directed to give effect to the above precedent as per directions given in assessment years 1994-95 and 1995-96. Accordingly, the assessee succeeds on this Ground as above. Disallowance of provision for leave encashment - Held that - We decide this issue against the assessee for the detailed reasons given in the aforesaid order of the Tribunal for the assessment year 1995-96. Accordingly, this ground of appeal of the assessee is dismissed. Provision for profit equalization to recognize proportionate revenue on percentage completion basis - Held that - A similar issue came before coordinate Bench in the case of Thermax Babcock & Wilcox Ltd. Vs. DCIT 2001 (5) TMI 173 - ITAT PUNE for A.Ys. 1990- 91 and 1991-92, wherein the Tribunal has held that the provision for profit equalization to recognize proportionate revenue on percentage completion basis in case of long term contracts in accordance with the well recognized method of accounting recommended in Accounting Standard 7 issued by the Institute of Chartered Accountants of India is fully deductible. Nothing contrary has been brought to our knowledge on behalf of the Revenue. Following the same reasoning, we decide the issue in favour of the assessee Fluctuation in rate of exchange - Held that - It was a common point between the parties that the issue relating to fluctuation in exchange rate had been subjectmatter of consideration by the Tribunal in assessment year 1995- 96 and the Tribunal has restored the matters to the file of the Assessing Officer to follow the directions given therein. Following the same, we hold so and restore the issues to the file of the Assessing Officer to adjudicate the issues afresh in the light of precedent referred to above. Deduction under sec.80-HHC - reduction from profits derived from export of manufactured goods the loss suffered from export of trading goods - Held that - the issue is liable to be decided against the assessee in view of decision of the Hon ble Supreme Court in the case of IPCA Laboratories Ltd. (2004 (3) TMI 9 - SUPREME Court ). Excise Duty and Sales tax collected from total turnover are decided in favour of the assessee in view of the decision of the Hon ble Supreme Court in the case of Lakshmi Machine Works (2007 (4) TMI 202 - SUPREME Court ). Insurance claim, Bad debts recovered, Amount written back, Custom duty refund, Credit balance appropriated , Sale of scrap items of the income should be excluded from the turnover for the purpose of computing deduction u/s.80HHC Fluctuation in rate of exchange - Held that - As only component of fluctuation which is on sales is liable to be included in total turnover and not the balance, if any. The Assessing Officer is directed to re-compute the deduction under section 80HHC of the Act accordingly. Exclusions from the profits of the business as per Explanation (baa) for the purposes of section 80HHC - Held that - We deem it fit and proper to set aside the issue to the file of the Assessing Officer to be adjudicated in the light of the judgment of the Hon ble Bombay High Court in the case of Pfizer Ltd., (2010 (6) TMI 433 - Bombay High Court) except to the extent of lease rental, which is liable to be excluded in terms of Explanation (baa) to section 80HHC of the Act. The Assessing Officer shall re-adjudicate the controversy after allowing the assessee an opportunity of being heard in the matter. Subjecting the items of income / receipts to 90% reduction on net income basis by invoking Explanation (baa) to Section 80 HHC of the Act and not on gross receipts basis - Held that - Hon ble Supreme Court in the case of ACG Associated Capsules P. Ltd. (2012 (2) TMI 101 - SUPREME COURT OF INDIA ), wherein, the Hon ble Supreme Court has upheld the contention that such receipts should be considered on net income basis and not on gross receipts basis for the purpose of invoking Explanation (baa) to Section 80 HHC of the Act. We direct the Assessing Officer to decide the issue in the light of the same. Taxability of lump sum payment made gratuitously to the widow Mrs. Arnawaz Aga - Held that - . The lump sum gratuitous payment is a testimonial of the nature of a gift and not remuneration to the employee for his services. The purpose for which the amount was paid was to express gratitude for what he had done and in appreciation of his personal qualities. Obviously the terms of the employment of the deceased director Mr. Aga did not entitle him to such a benefit. The lump sum gratuitous payment made after death to the widow therefore cannot be said to be wholly and exclusively incurred by the assessee for the purpose of its business. It is pertinent to mention that in the light of the clarification given by the CBDT in Circular No.573 the testimonial in the nature of gratuitous lump sum payment is not taxable under the Act in the hands of the widow Mrs. Aga. One and the same outgoing would not be eligible for tax relief twice in such circumstances. Accordingly, ground raised by the assessee in this regard is dismissed. Non-compete covenant - assessable as income of the appellant - CIT(A) confirmed the order of the AO that the said sums were taxable either as business income or as short term capital gains u/s 50 of the Act - Held that - case the assessee has transferred on a going concern basis for a lump sum price its Water treatment Product business undertaking consisting of all tangible and information intangible assets, products, goodwill, manpower, proprietary information, trademark, licences, know how, customer orders and all other information/material relevant for the conduct of business. For that purpose the assessee has entered into Business Transfer Agreement and Non Competition Agreement under a negative covenant for 25 years. The business undertaking has been transferred by the assessee on a going concern basis for a lump sum price without values assigned to the individual assets in the previous year relevant to the A.Y. 1997-98. In the light of the attendant facts and circumstances the transfer of the business undertaking does not involve itemised sale of assets and provisions of Section 50 are therefore not attracted. The said transfer of business undertaking is for a lump sum price involving monetary consideration and therefore provisions of Section 28 (iv) are also not applicable in such a case. We draw support in this regard from the decision of Hon ble Bombay High Court in the case of Mahindra & Mahindra Limited (2003 (1) TMI 71 - BOMBAY High Court ). We find that the provisions of Section 50 B and 28 (va) being prospective in nature as held by the Hon ble Apex Court Guffic Chem P. Ltd. reported in 2011 (3) TMI 6 - Supreme Court are not applicable to the impugned capital receipts on transfer of business undertaking by the assessee in the previous year relevant to the A.Y. 1997-98. In the light of the attendant facts and circumstances of the case and respectfully following the decisions of the Hon ble Apex Court and jurisdictional Bombay High Court cited above the grounds raised by the assessee are allowed. Attributable to dividend income while computing deduction u/s 80M - Held that - Hon ble Supreme Court in the case of Distributors (Baroda) P. Ltd. (1985 (7) TMI 1 - SUPREME Court ) has held that it is only net dividend which is to be considered for the purpose of deduction under Section 80 M in the light of the provisions of Section 80 AA of the Income Tax Act. The learned CIT Appeals has attributed expenses for earning the dividend income at 2.5% instead of 5% of gross dividend amount considered by the Assessing Officer as against the assessee s plea that no expenditure can be considered to be attributable for earning the dividend income. In the light of the facts and circumstances of the case we do not find it necessary to interfere with the finding of CIT Appeals in this regard. The amount of expenditure at 2.5% of the gross dividend income can be considered attributable to earning the dividend income to meet the ends of justice Manner of computing indirect costs of trading goods for the purposes of section 80HHC - Held that - We direct the Assessing Officer to follow the directions as given for assessment year 1995-96 as while giving effect to the direction of the Commissioner of Income-tax (Appeals) for the year under consideration, the Assessing Officer had accepted the computation of indirect costs attributable to trading exports excluding costs that had no nexus with such trading exports. In our view, it would be in the fitness of things that the Assessing Officer reviews the working already accepted by him so as to be in conformity with the aforesaid decisions and also directions of the Tribunal contained in its order for the assessment year 1994-95 (supra). As a result thereof, on this Ground, the Revenue succeeds for statistical purposes only Capital receipt not chargeable to tax - Held that - he learned counsel for the assessee has submitted that Central Board of Direct Taxes has issued Circular no. 573 dated 21.8.1990 clarifying that any such gratuitous lump sum payment will not be taxable as income in the hands of the recipient widow under the Income Tax Act. Learned CIT Appeals has given the finding accordingly upholding the claim that such a receipt is not taxable in the hands of Mrs. Aga. We find that the lump sum gratuitous payment is a testimonial of the nature of a gift and not remuneration to the employee for his services. The purpose for which the amount was paid was to express gratitude for what he had done and in appreciation of his personal qualities. The amount paid by Thermax Ltd. has been held by us to be not deductible in its hands for the impugned A.Y. 1997-98 in appeal of Thermax Ltd. (ref. 970/PN/01). In the light of the facts and circumstances of the case we do not find it necessary to interfere with the finding of the CIT(A) that the said receipt is therefore not taxable in the hands of Mrs. Aga. We order accordingly.

Summary

Issues Involved:
1. Disallowance of entertainment expenses under Section 37(2).
2. Deduction of proportionate premium on leasehold land.
3. Deduction of process know-how fees under Section 35AB.
4. Disallowance under Rule 6B of the I.T. Rules, 1962.
5. Disallowance of provision for warranty obligations.
6. Disallowance of provision for leave encashment.
7. Recognition of profits from long-term contracts under AS 7.
8. Eligibility of certain incomes for deduction under Section 80-I/80-IA.
9. Exclusion of retention money from business income.
10. Computation of deduction under Section 80-HHC.
11. Deduction of testimonial payment to Mrs. A.R. Aga.
12. Taxability of receipts from non-compete covenant and business transfer.
13. Computation of deduction under Section 80M.
14. Levy of interest under Section 234B.

Detailed Analysis:

1. Disallowance of Entertainment Expenses:
The assessee argued that only individual entertainment expenses exceeding Rs. 10,000 should be disallowed under Section 37(2). The CIT(A) rejected this, confirming only 15% of the total entertainment expenses related to employees. The Tribunal dismissed the ground, aligning with previous decisions for earlier assessment years.

2. Deduction of Proportionate Premium on Leasehold Land:
The assessee claimed a deduction for amortized leasehold land premium. The CIT(A) rejected this, following the Special Bench decision in Mukund Limited and previous Tribunal orders. The Tribunal upheld this rejection.

3. Deduction of Process Know-How Fees:
The assessee claimed the entire process know-how fees as revenue expenditure under Section 37(1), but the CIT(A) allowed only 1/6th under Section 35AB. The Tribunal restored the issue to the Assessing Officer (AO) for reconsideration, following the Supreme Court's decision in Swaraj Engines Ltd.

4. Disallowance under Rule 6B of the I.T. Rules, 1962:
The CIT(A) disallowed Rs. 1,10,959 under Rule 6B, as the assessee failed to prove the business purpose of the gifts. The Tribunal upheld this disallowance.

5. Disallowance of Provision for Warranty Obligations:
The CIT(A) disallowed Rs. 2,13,34,281 as contingent liability. The Tribunal directed the AO to follow the precedent set in earlier years, deciding in favor of the assessee.

6. Disallowance of Provision for Leave Encashment:
The CIT(A) disallowed Rs. 23,42,000 for leave encashment, rejecting the assessee's reliance on the Supreme Court decision in Bharat Earth Movers Ltd. The Tribunal upheld this disallowance, following previous Tribunal orders.

7. Recognition of Profits from Long-Term Contracts:
The CIT(A) partially allowed the assessee's claim for profit equalization under AS 7, but the Tribunal directed the AO to follow the precedent in Thermax Babcock & Wilcox Ltd., allowing the assessee's claim.

8. Eligibility of Certain Incomes for Deduction under Section 80-I/80-IA:
The CIT(A) disallowed various incomes, including other income, interest, and service charges, from Section 80-I/80-IA benefits. The Tribunal upheld the disallowance of interest and other income but allowed service charges and restored the issue of exchange rate fluctuation to the AO.

9. Exclusion of Retention Money from Business Income:
The assessee did not press this issue, and the Tribunal dismissed it as not pressed.

10. Computation of Deduction under Section 80-HHC:
The Tribunal decided against the assessee on reducing losses from trading goods from export profits, following the Supreme Court decision in IPCA Laboratories Ltd. It allowed the exclusion of excise duty and sales tax from total turnover, following the Supreme Court decision in Lakshmi Machine Works. The Tribunal restored other issues, including the exclusion of specific incomes and exchange rate fluctuations, to the AO for reconsideration.

11. Deduction of Testimonial Payment to Mrs. A.R. Aga:
The CIT(A) disallowed the Rs. 2 crores testimonial payment as business expenditure. The Tribunal upheld this disallowance, agreeing it was a gratuitous payment not incurred for business purposes.

12. Taxability of Receipts from Non-Compete Covenant and Business Transfer:
The CIT(A) treated the Rs. 3 crores from the non-compete agreement and Rs. 3 crores from the business transfer as business income or short-term capital gains. The Tribunal, following the Supreme Court decision in PNB Finance Ltd., held the receipts as capital receipts not taxable under Section 45, Section 50, or Section 28(iv).

13. Computation of Deduction under Section 80M:
The CIT(A) attributed 2.5% of gross dividend income as expenses for earning the dividend, reducing the deduction under Section 80M. The Tribunal upheld this estimation.

14. Levy of Interest under Section 234B:
The Tribunal noted this issue as consequential and did not provide a detailed ruling.

Separate Judgments:
The Tribunal delivered a consolidated order for the sake of convenience and brevity, addressing all issues raised in the cross-appeals and the assessee's appeal.