2009 (1) TMI 881 - AT - Income Tax

Summary

Issues Involved:
1. Classification of expenditure as capital or revenue.
2. Disallowance of consultancy fee.
3. Nature of software expenses.
4. Treatment of revaluation reserve in computing book profit.
5. Sales-tax subsidy as capital or revenue receipt.
6. Disallowance under Section 14A.
7. Provision for doubtful debts and diminution in value of investments.
8. Deduction under Section 80HHC.
9. Levy of interest under Sections 234B, 234C, and 234D.

Detailed Analysis:

1. Classification of Expenditure as Capital or Revenue:
The assessee incurred expenses for setting up a new unit, which was ultimately not established. The AO and CIT(A) treated these expenses as capital expenditure. The assessee argued that the expenditure was for expanding the existing business and should be treated as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, stating that the assessee failed to prove that the new unit was an extension of the existing business.

2. Disallowance of Consultancy Fee:
The assessee paid consultancy fees to Mckinsey & Co. for improving operational efficiency. The AO and CIT(A) treated this as capital expenditure. The Tribunal agreed, citing the lack of a written agreement and the enduring benefit test. The Tribunal upheld the disallowance, referencing the jurisdictional High Court's decision in Triveni Engineering Works Ltd.

3. Nature of Software Expenses:
The assessee incurred expenses for implementing SAP/ERP software. The AO treated these as capital expenditure, which was upheld by the CIT(A). The Tribunal referred to the Special Bench decision in Amway India Enterprises, which laid down three tests (ownership, enduring benefit, and functional) to determine the nature of software expenses. The issue was remanded to the AO for fresh consideration based on these tests.

4. Treatment of Revaluation Reserve in Computing Book Profit:
The AO added back the amount withdrawn from the revaluation reserve while computing book profit under Section 115JB. The CIT(A) upheld this, referencing the proviso to Explanation (i) of Section 115JB. The Tribunal agreed, stating that the revaluation reserve created in an earlier year must be added back to the book profit if it was not added in the year of creation.

5. Sales-Tax Subsidy as Capital or Revenue Receipt:
The assessee claimed the sales-tax subsidy as a capital receipt, not liable to tax. The AO and CIT(A) treated it as a revenue receipt. The Tribunal referred to the Special Bench decision in Reliance Industries Ltd., which treated similar subsidies as capital receipts. The issue was remanded to the AO to determine if the subsidy was under a scheme similar to Reliance Industries Ltd.

6. Disallowance under Section 14A:
The assessee did not press this ground, and it was rejected as not pressed.

7. Provision for Doubtful Debts and Diminution in Value of Investments:
The CIT(A) upheld the addition of provisions for doubtful debts and diminution in value of investments while computing book profit under Section 115JB. The Tribunal, referencing the Supreme Court and various High Court decisions, held that these provisions are not unascertained liabilities and should not be added back. The Tribunal set aside the CIT(A)'s order on this issue.

8. Deduction under Section 80HHC:
The AO denied the deduction under Section 80HHC, considering unabsorbed depreciation. The CIT(A) upheld this. The Tribunal, referencing the Special Bench decision in Syncome Formulations (I) Ltd., held that the deduction under Section 80HHC should be computed with reference to book profits, not actual profits. The Tribunal allowed this part of the ground.

9. Levy of Interest under Sections 234B, 234C, and 234D:
The AO levied interest under Sections 234B and 234C. The CIT(A) deemed it consequential. The Tribunal, referencing the Special Bench decision in Ekta Promoters (P) Ltd., held that interest under Section 234D is chargeable from AY 2004-05 and not earlier. The Tribunal set aside the CIT(A)'s order, disallowing the interest under Sections 234B and 234C for the assessee, referencing the Supreme Court decision in Kwality Biscuits Ltd.

Conclusion:
The appeals were partly allowed for statistical purposes, with several issues remanded for fresh consideration by the AO. The Tribunal's decisions were based on a thorough analysis of relevant case laws and statutory provisions.