2011 (6) TMI 899 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of productivity linked wages.
2. Disallowance of sales incentives.
3. Disallowance of administrative expenses under Section 14A.
4. Disallowance of sales incentives given to UPSGEWC.
5. Classification and allowance of technical knowhow payment.
6. Disallowance of managerial and administrative expenses.
7. Treatment of MIS charges.
8. Disallowance of inter-corporate deposits written off.
9. Treatment of interest income.
10. Adjustment of short-term capital gains to book profits under Section 115JB.
11. Allowance of salary/remuneration paid to an employee of Bajaj Auto Ltd.

Detailed Analysis:

1. Disallowance of Productivity Linked Wages:
The primary issue was the disallowance of Rs. 1,12,16,256 incurred towards employees' cost pursuant to a productivity-linked settlement. The Assessing Officer (A.O.) disallowed the expense, stating that the liability crystallized only after the Memorandum of Settlement was signed on 07.04.2000, not during the assessment year 2000-01. The CIT(A) deleted the disallowance, noting that the settlement was reached on 30.03.2000, and the liability was certain and contractual. The Tribunal upheld the CIT(A)'s decision, referencing a similar issue in the assessee's case for A.Y. 1995-96, where the liability was considered crystallized during the relevant year.

2. Disallowance of Sales Incentives:
The A.O. disallowed Rs. 2,57,34,649 towards sales incentives reimbursed to Bajaj Auto Ltd., questioning the benefit derived by the assessee and the timing of the approval by Bajaj Auto Ltd.'s Chairman. The CIT(A) deleted the disallowance, recognizing the joint promotional schemes between the assessee and Bajaj Auto Ltd. The Tribunal upheld the CIT(A)'s decision, emphasizing that the expenses were incurred for mutual benefit and were genuine business expenses.

3. Disallowance of Administrative Expenses under Section 14A:
The A.O. disallowed Rs. 49,88,696, estimating it as 5% of the dividend income and interest on tax-free bonds. The CIT(A) reduced the disallowance to Rs. 1 lakh, considering the minimal managerial expenses involved in earning the dividend income. The Tribunal upheld the CIT(A)'s decision, finding the A.O.'s estimate excessive and irrational.

4. Disallowance of Sales Incentives to UPSGEWC:
The A.O. disallowed Rs. 10,41,250 paid to Uttar Pradesh State Government Employee Welfare Corporation (UPSGEWC), classifying it as a capital expenditure. The CIT(A) deleted the disallowance, stating it was a simple case of sales incentives and not for warding off competition. The Tribunal upheld the CIT(A)'s decision, agreeing that the expenses were not capital in nature.

5. Classification and Allowance of Technical Knowhow Payment:
The A.O. treated the payment of Rs. 4,62,35,081 for technical knowhow as capital expenditure, eligible for depreciation. The CIT(A) and the Tribunal, referencing earlier decisions, held the payment as revenue expenditure, thus allowing it fully.

6. Disallowance of Managerial and Administrative Expenses:
The issue was the disallowance of Rs. 1 lakh towards estimated managerial and administrative expenses for earning exempt income. The CIT(A) upheld the disallowance, which was subsequently upheld by the Tribunal, referencing the reasoning in revenue's appeal.

7. Treatment of MIS Charges:
The A.O. disallowed Rs. 12,37,434 towards MIS charges, treating them as capital expenditure. The CIT(A) divided the expenses into software, hardware, and miscellaneous, allowing depreciation on software and hardware and treating miscellaneous expenses as revenue. The Tribunal upheld the CIT(A)'s decision.

8. Disallowance of Inter-Corporate Deposits Written Off:
The A.O. disallowed Rs. 17,81,500 written off as bad debts, questioning the business nature of the deposits. The CIT(A) and the Tribunal, referencing earlier decisions, allowed the write-off as business expenditure, recognizing the systematic activity of placing inter-corporate deposits.

9. Treatment of Interest Income:
The issue was whether interest income should be taxed under "Income from Business" or "Income from Other Sources." The CIT(A) and the Tribunal upheld the classification under "Income from Other Sources."

10. Adjustment of Short-Term Capital Gains to Book Profits under Section 115JB:
The issue was whether short-term capital gains should adjust book profits under Section 115JB. The CIT(A) and the Tribunal held that the provisions of Section 115JB do not permit such adjustments, thus deciding in favor of the assessee.

11. Allowance of Salary/Remuneration Paid to an Employee of Bajaj Auto Ltd.:
The A.O. disallowed the salary paid to Shri Rege, an employee of Bajaj Auto Ltd. The CIT(A) and the Tribunal allowed the salary as a business expenditure, noting the payment was made in accordance with a Board resolution and was for the assessee's business purposes.

Conclusion:
All departmental appeals were dismissed, and the assessee's appeals for A.Y. 2000-01 to 2002-03 were partly allowed, while the assessee's appeal for A.Y. 2003-04 was fully allowed.