2017 (1) TMI 1422 - AT - Income Tax

Disallowance of claim of expenditure under section 35D - Held that - In the case of the appellant itself in A.Y. 2007-08 and the ITAT in its order 2014 (1) TMI 33 - ITAT COCHIN has set aside the issue to the A.O for fresh consideration. Since the issue raised in the aforesaid ground of appeal is identical to the one raised in A.Y. 2007-08 we follow the same and set aside the disallowance and remand the issue to the file of A.O. for fresh consideration. Disallowance of revenue expenditure incurred by the appellant for expansion of its existing business of manufacturing tyres as being preoperative in nature - Held that - Expenses are treated as revenue in nature and deduction is permissible under section 37 of the Act. Disallowance under section 14A - Held that - The said amount has been disallowed twice as the appellant itself had disallowed the expenditure in the return of income filed for the relevant A.Y. The said facts need verification by the A.O. and we accordingly, set aside the addition and remand the matter to the file of A.O. for determining as to whether it is a case of double disallowance. The addition is set aside and Ground No. 5 is allowed for statistical purposes. Disallowance of the depreciation being the proportionate amount relating to the let out building of the appellant company - Held that - An identical issue in the case of the appellant itself for A.Y. 2009-10 came before this bench wherein the ground raised by the appellant was dismissed. Disallowance of weighted deduction claimed by the appellant under section 35(2AB) - Held that - It is pertinent to mention here that section 35(2AB) was introduced as an incentive for encouraging research and development in the industrial sector and therefore, has to be liberally construed in view of the decision of Hon ble Supreme Court in Bajaj Tempo Ltd. Vs. CIT, 1992 (4) TMI 4 - SUPREME Court . The AO and the DRP have misdirected themselves in not appreciating the true intent and purport of section 35(2AB) of the Act. Having not disputed the fact that these tests are part of R & D activities conducted by the appellant in Baroda, the disallowance in the present facts is not permissible. We therefore, hold that the appellant is entitled for deduction under section 35(2AB) Disallowance of business loss - investment in shares of subsidiary company - Held that - The unity of objectives of the appellant company and the subsidiary company clearly shows that the investment was in the nature of a trade investment only. The decision to invest in the subsidiary was not such that a prudent business man would not have made it. The business loss claimed by the appellant is in accordance with law. Addition of foreign exchange gain - assessment of income in a year - Held that - Admittedly, the amount added to the total income for the relevant A.Y. 2010- 11 has been offered to tax in the subsequent A.Y. 2011-12. The taxability of this income is also a subject matter of dispute in the subsequent A.Y. 2011- 12. We therefore, without dealing with the merits of the addition in A.Y. 2010- 11 delete the same on account of the same being taxed in the subsequent A.Y. Disallowance of loss incurred - reinstatement of forward exchange contract entered into by it for purchase of raw materials from outside of India - AO as well as the DRP has dismissed the claim of the appellant on the ground that the said loss is notional loss - Held that - We are in agreement with the submissions put forth by the Ld. AR as the moment a contract, be it a forward exchange contract, is entered into by the parties, a binding agreement comes into existence and the liability of the parties are crystallized in terms of the consideration mentioned in the contract. The fluctuation in the foreign currency has already taken place in relevant A.Y. and therefore, the loss or gain cannot be called notional or contingent. The said loss, according to us, is permissible for deduction. The appellant is consistently following the same practice for previous years also. Addition to the total income of the appellant on the basis of amount reflected in Form 26AS - Held that - Admittedly, the amount of ₹ 19,75,315/- is offered to tax in A.Y. 2011-12. Taxing the same amount in the relevant A.Y. 2010-11 would lead to double addition and incorrect determination of tax liability. In view thereof, we delete the addition to the extent of ₹ 19,75,315/- from A.Y. 2010-11. Ground partly allowed. Disallowance of prepaid expenses - Held that - We agree with the submissions made by the Ld. AR. Even if an expenditure incurred in a particular year gives a benefit which accrues over a period exceeding that financial year, such expenditure is deductible from the business income of the assessee. The said expenditure does not in any way create any new asset on the capital side. Transfer pricing issue - addition on account of the difference between the conversion rate - Held that - The order dated 15.06.2015 passed by DRP under section 154 r.w.s 144C(5) of the Act clearly shows that the DRP has held that the valuation should be made at ₹ 42.88/CHF as against ₹ 42.68/CHF claimed by the appellant in the application under section 154. The TPO ought to have given effect to the directions of the DRP in the order dated 15.06.2015. The addition on account of the difference between the conversion rate of ₹ 44.57/CHF and ₹ 42.88/CHF is deleted. Deduction under section 80IA of the Act in respect of the profit derived from the windmill undertaking - admission of additional ground - Held that - An assessee apart from raising an additional ground can raise an additional claim before the appellate forum. In view thereof, the AO is directed to examine the matter on merits after considering the evidence produced by the appellant with regard to the claim of deduction under section 80IA. The additional ground is allowed for statistical purposes Addition on account of additional depreciation deleted Disallowance being the salary paid by the assessee to its employee working for Apollo - Held that - We are not in agreement with the view of the department. Admittedly, in the present case the nature of the expenditure for R & D is not disputed by the department. The Department has further not disputed the fact that the said employee of the assessee company is overall in-charge of the R & D activities at Baroda. The mere fact that the said employee was paid by Apollo Tyres Germany and thereafter, reimbursed by the assessee company would not ipso facto lead to a conclusion that the expense on R & D is made outside India. The deduction is therefore within the parameters of Section 35(2AB) of the Act Power generation unit have a separate existence, thus an undertaking capable of having profits deductible under section 80IA Disallowance under section 36(i)(va) - employee s contribution to provident fund delayed - Held that - If the employees contribution is not deposited by the due date prescribed under the relevant Acts and is deposited late, the employer not only pays interest on delayed payment but can incur penalties also, for which specific provisions are made in the Provident Fund Act as well as the ESI Act. Therefore, the Act permits the employer to make the deposit with some delays, subject to the aforesaid consequences. Insofar as the Income Tax Act is concerned, the assessee can get the benefit if the actual payment is made before the return is filed. Unrealized foreign exchange fluctuation gain on capital account - Held that - Section 43A contemplates adjustment in the actual cost of the asset at the time of payment. The said position of law is evident from the perusal of section itself as indicated by the phrase at the time of making payment appearing in the provision. This section can be invoked in case of a realized foreign exchange gain on capital account. We agree with the submissions made by the Ld. AR that invoking section 43A for taxing unrealized foreign exchange gain as revenue receipts in the hands of the appellant is not permissible. It is pertinent to note here that no payment for purchase of asset has been made during the year under consideration. Transfer pricing addition - comparability selection - Held that - It is seen from the chart prepared by the AR and the functional profile produced thereof of the comparable companies, the companies which are functionally similar to that of the appellant have been excluded. For example in the case of Mindtree Ltd., the said company has been excluded only because it has under gone merger. Similarly in the case of R Systems International Ltd. and Helios & Metheson Information Technology Ltd., though the companies are functionally comparable, the same have been excluded only for the reason that they follow different accounting year ending in December. The exclusion made on this basis is not permissible and is not accordance with law. Similarly, while choosing his own comparables, the TPO has ticked up companies having functions of high end IT services, IT consulting, product companies, business intelligence companies etc. The companies which are functionally dissimilar to that of the assessee have to be excluded from the comparable list. As the issue requires reconsideration, we remit the same to the file of AO to properly apply the comparables in accordance with the objections raised by the appellant in the present appeal.

Summary

Issues Involved:
1. Disallowance of expenditure under section 35D.
2. Disallowance of revenue expenditure as preoperative in nature.
3. Disallowance of loan processing fee and bank charges.
4. Disallowance under section 14A.
5. Disallowance of depreciation on let-out building.
6. Disallowance of weighted deduction under section 35(2AB).
7. Disallowance of business loss on sale of subsidiary.
8. Addition of foreign exchange gain.
9. Disallowance of loss on forward exchange contracts.
10. Addition based on Form 26AS.
11. Disallowance of prepaid expenses.
12. Disallowance of commission.
13. Transfer pricing issues.
14. Deduction under section 80IA.
15. Jurisdiction under section 263.

Issue-wise Detailed Analysis:

1. Disallowance of expenditure under section 35D:
The appellant claimed expenditure under section 35D for issue expenses and increase in authorized capital, which was disallowed by the AO based on precedents. The tribunal remanded the issue back to the AO for fresh consideration, following its earlier decision in the appellant's case for A.Y. 2007-08.

2. Disallowance of revenue expenditure as preoperative in nature:
The appellant incurred expenses for the expansion of its business, which were disallowed by the AO as preoperative. The tribunal found that the expenses were revenue in nature and related to the expansion of an existing business, not a new one. The tribunal allowed the deduction under section 37.

3. Disallowance of loan processing fee and bank charges:
The appellant's claim for loan processing fees and bank charges for setting up a new plant was disallowed as preoperative. The tribunal allowed the deduction, treating the expenses as revenue in nature.

4. Disallowance under section 14A:
The AO disallowed an amount under section 14A, which was reduced by the DRP. The appellant claimed double disallowance, and the tribunal remanded the issue to the AO for verification.

5. Disallowance of depreciation on let-out building:
The appellant's claim for depreciation on a let-out building was treated as income from house property by the department. The tribunal dismissed the appellant's ground, following its earlier decision for A.Y. 2009-10.

6. Disallowance of weighted deduction under section 35(2AB):
The appellant's claim for weighted deduction on R&D expenses incurred outside India was disallowed. The tribunal allowed the deduction, holding that the expenses were related to in-house R&D activities.

7. Disallowance of business loss on sale of subsidiary:
The appellant claimed a business loss on the sale of its subsidiary, which was disallowed by the AO. The tribunal allowed the claim, holding that the investment was made for commercial purposes and not for accretion of investment.

8. Addition of foreign exchange gain:
The AO added unrealized foreign exchange gain to the total income. The tribunal deleted the addition, noting that the same amount was offered to tax in the subsequent year.

9. Disallowance of loss on forward exchange contracts:
The AO disallowed the loss on forward exchange contracts as notional. The tribunal allowed the deduction, holding that the loss was a business loss and not notional.

10. Addition based on Form 26AS:
The AO added an amount based on Form 26AS, which the appellant claimed was offered to tax in the subsequent year. The tribunal directed the AO to verify and delete the addition if it was already taxed.

11. Disallowance of prepaid expenses:
The AO disallowed prepaid expenses as not related to the income of the year. The tribunal allowed the deduction, holding that the expenses were revenue in nature and did not create any capital asset.

12. Disallowance of commission:
The AO disallowed a provision for commission as unascertained liability. The tribunal dismissed the appellant's ground, following its earlier decision for A.Y. 2009-10.

13. Transfer pricing issues:
The appellant challenged the transfer pricing adjustments made by the AO. The tribunal remanded the issues related to the exchange rate, corporate guarantee, and provision of IT services to the AO for fresh consideration.

14. Deduction under section 80IA:
The appellant's claim for deduction under section 80IA was not made in the return. The tribunal directed the AO to examine the claim on merits.

15. Jurisdiction under section 263:
The Pr. CIT revised the draft assessment order under section 263. The tribunal quashed the revision, holding that the draft assessment order cannot be revised under section 263.

Conclusion:
The tribunal partly allowed the appeals of the assessee for statistical purposes, dismissed the appeals of the revenue, and allowed the appeal against the revision under section 263. The matters were remanded to the AO for fresh consideration on specific issues.