2013 (4) TMI 864 - AT - Income Tax

Issues Involved:
1. Disallowance of amount transferred to Statutory Reserve.
2. Application of Rule 8D of Income-tax Rules in computing disallowance u/s 14A.
3. Deduction of amount transferred to Reserve Fund.
4. Disallowance of bad debts.
5. Disallowance of royalty.
6. Loss arising from derivatives/hedging transactions in foreign exchange.
7. Disallowance of Employees Stock Option Scheme (ESOP) expenses.

Summary:

1. Disallowance of amount transferred to Statutory Reserve:
The Tribunal upheld the disallowance of the amount transferred to Statutory Reserve by the assessees. It was noted that the issue had been previously decided against the assessees in their own cases, following the decisions in I.T.A. No. 701/Mds/2012 and I.T.A. No. 702/Mds/2012. The Tribunal held that the transfer to Reserve Fund could not be considered a diversion of income by overriding charge and was merely an appropriation of profits.

2. Application of Rule 8D of Income-tax Rules in computing disallowance u/s 14A:
The Tribunal found that the Assessing Officer (AO) did not provide sufficient reasoning for rejecting the assessees' suo motu disallowance under Section 14A. The AO's dissatisfaction must be based on relevant and reasonable grounds. The Tribunal followed the decision in the case of MAXOPP Investment Ltd. vs. CIT, emphasizing that the AO must record dissatisfaction with the correctness of the assessee's claim before invoking Rule 8D. Consequently, the Tribunal deleted the disallowance made under Section 14A.

3. Deduction of amount transferred to Reserve Fund:
The Tribunal dismissed the assessees' grounds regarding the deduction of the amount transferred to Reserve Fund, following its earlier decisions in I.T.A. No. 235/Mds/2009. The Tribunal reiterated that the transfer to Reserve Fund was an appropriation of profits and not a diversion of income by overriding charge.

4. Disallowance of bad debts:
The Tribunal upheld the CIT(A)'s decision to allow the assessees' claim for bad debts. It was noted that the assessees had written off bad debts in the books maintained for income-tax purposes, and the issue had been previously decided in favor of the assessees in I.T.A. No. 726/Mds/2010. The Tribunal emphasized that the write-off of bad debts was in compliance with Section 36(1)(vii) of the Income-tax Act.

5. Disallowance of royalty:
The Tribunal upheld the CIT(A)'s decision to allow the royalty expenses as revenue expenditure. It was noted that the royalty was paid for the non-exclusive use of a logo, and similar issues had been decided in favor of the assessees in earlier cases, including I.T.A. No. 726/Mds/2010. The Tribunal found no reason to treat the royalty payment as a capital expenditure.

6. Loss arising from derivatives/hedging transactions in foreign exchange:
The Tribunal upheld the CIT(A)'s decision to allow the loss arising from derivatives/hedging transactions. It was noted that similar issues had been decided in favor of the assessees in I.T.A. No. 319/Mds/2011 and I.T.A. No. 320/Mds/2011. The Tribunal found that the derivative contracts were hedge transactions, and the loss computed on a market-to-market basis was allowable as a business loss.

7. Disallowance of Employees Stock Option Scheme (ESOP) expenses:
The Tribunal upheld the CIT(A)'s decision to allow the ESOP expenses as staff welfare expenditure. It was noted that the issue had been decided in favor of the assessees by the Hon'ble jurisdictional High Court in the case of CIT v. PVP Ventures Ltd. The Tribunal found that the ESOP expenses were an ascertained liability and not a contingent one.

Conclusion:
The appeals of the assessees were partly allowed, whereas the appeals of the Revenue were dismissed. The Tribunal's decisions were based on precedents and the specific facts of the cases, emphasizing the need for reasoned and relevant findings by the AO before making disallowances.

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