2016 (8) TMI 1186 - AT - Income Tax

Depreciation on assets acquired on Demerger - Held that - The emphasis of the legislature in explanation 2B after the amendment made vide Finance Act, 2000 was that the value of the block of assets in the case of resulting company shall be the written down value of the assets of the demerged company immediately before the demerger. Hence, we do not find any infirmity in the findings of the lower authorities that only the written down value of the transferred assets of the demerged company as per the accounts maintained under the Income Tax Act shall accordingly constitute the written down value of the block of assets of the resulting company. In the present case, as observed above by us, the omission of the words as appearing in the books of account neither have in any way affected any substantive right already vested in the assessee nor has taken away any such right which was accruing to the assessee before such omission. In fact, the curative amendment was made by the Parliament vide Finance Act, 2000 and only the ambiguity has been removed vide Finance Act, 2003 so as to bring clarity. In our humble view, whatever rights had accrued to the assessee in view of the ambiguity in the provisions at the time of their insertion vide Finance Act, 1999, the same had been taken away/clarified immediately by removing the ambiguity through amendment made vide Finance Act, 2000. Hence, without going into the details of the facts of the various case laws, we have no hesitation to hold that the proposition laid therein cannot be applied to the facts and circumstances of the case in hand. These grounds are accordingly decided against the assessee Disallowance of interest expenses u/s.14A - Held that - Sufficient and justified to attribute expenses equivalent to 1% of the dividend received as expenses attributable to earning of exempt income u/s.14A. Deferred sales tax liability being the difference between the payment of net present value against the future liability credited by the assessee under the capital reserve account in its books of account was a capital receipt and could not be termed as remission/cessation of liability and, consequently, no benefit would arise to the assessee in terms of section 4l(l)(a) Expenditure incurred on brand building to be treated as revenue in nature. Interest on 64 Bonds - AO refused to entertain the claim - Held that - We find that the issue of allowing a claim by the FAA now stands decided by the judgment in the case of Pruthvi Brokers & Shareholderes 2012 (7) TMI 158 - BOMBAY HIGH COURT as held that assessee is entitled to raise not merely additional legal submissions before the appellate authorities but is also entitled to raise additional claims before them. The appellate authorities have the discretion to permit such additional claims to be raised. The appellate authorities have jurisdiction to deal not merely with additional grounds, which became available on account of change of circumstances or law, but with additional grounds which were available when the return was filed. The words could not have been raised must be construed liberally and not strictly. There may be several factors justifying the raising of a new plea in an appeal and each case must be considered on its own facts

Summary

Issues Involved:
1. Depreciation on assets acquired on demerger.
2. Disallowance under Section 14A of the Income Tax Act.
3. Gain on prepayment of sales tax deferral loan.
4. Provision made for service contract.
5. Expenditure incurred on brand improvement.
6. Claim regarding interest on 64 Bonds.

Detailed Analysis:

1. Depreciation on Assets Acquired on Demerger:
The Tribunal examined the depreciation on assets acquired due to demerger, referencing earlier decisions (ITA Nos. 4540-42/Mum/11 and ITA Nos. 4538-39/Mum/11). It was noted that the amendments brought by Finance Act, 2000, and 2003 clarified that the written down value of transferred assets should be considered. The Tribunal concluded that the amendments were curative and did not affect any substantive rights. Thus, the ground of appeal regarding depreciation was decided against the assessee.

2. Disallowance under Section 14A of the Income Tax Act:
The assessee raised additional grounds regarding disallowance under Section 14A, which were dismissed based on prior decisions by the Hon’ble Bombay High Court (328 ITR 81). The Tribunal also considered strategic investments made for business purposes, referencing earlier favorable decisions (Garware Wall Ropes Limited and others). It was concluded that provisions of Section 14A could not apply to strategic investments, partially allowing the assessee's appeal. However, the disallowance of expenses under Section 14A for computing book profits under Section 115JB was upheld, following earlier Tribunal decisions.

3. Gain on Prepayment of Sales Tax Deferral Loan:
The Tribunal referenced the case of Sulzer India Ltd., concluding that the prepayment of sales tax deferral loan at Net Present Value (NPV) did not constitute remission or cessation of liability under Section 41(1). The Tribunal upheld the view that the surplus from prepayment was a capital receipt and not taxable. Therefore, this ground was decided against the AO.

4. Provision Made for Service Contract:
The Tribunal referred to earlier decisions (ITA/3329/Mum/99 and others) where it was held that provisions for estimated future costs under product warranties were allowable. This ground was thus decided against the AO, following the precedent that such provisions were legitimate business expenses.

5. Expenditure Incurred on Brand Improvement:
The Tribunal examined the nature of expenses incurred for brand improvement, referencing the case of Godrej Industries Ltd. It was determined that the expenses were for renewing and improving an existing brand, not creating a new asset. Citing the Supreme Court's criteria for capital expenditure, the Tribunal concluded that the expenses were revenue in nature and allowed the claim, reversing the AO's disallowance.

6. Claim Regarding Interest on 64 Bonds:
The Tribunal considered the assessee's claim that interest on 64 Bonds, initially treated as taxable, was actually exempt. The AO had refused the claim, but the Tribunal, referencing the Hon’ble Bombay High Court's decision in Pruthvi Brokers & Shareholders (349 ITR 336), upheld the FAA's direction to allow the claim. It was ruled that appellate authorities could entertain additional claims even if not raised initially.

Conclusion:
The appeals filed by the assessee were partly allowed, with significant issues decided in their favor, particularly regarding strategic investments and brand improvement expenses. The AO's appeals were dismissed based on consistent application of legal precedents. The Tribunal's judgment emphasized adherence to established interpretations of tax provisions and curative amendments.