2010 (7) TMI 643 - AT - Income Tax

Disallowance - The assessee claimed that the expenditure on the clubs is merely for the promotion of the business - Hon ble Delhi High Court in the case of CIT vs Samtel Color Ltd (180 Taxman 82(Del) - Held that for qualifying of the deduction u/s 37 is that expenditure incurred should not be on capital account and it should be incurred for the purpose of the business - Accordingly decided in the favour of the assessee Regarding addition on account of debts become time barred under the Limitation Act - No such condition is there in sec. 41(1) for considering the cessation of any liability and in respect of any expenditure even if within the period of limitation of three years the assessee unilaterally write off the liability within one year then also the provision of sec. 41(1) is applicable - Decided in the favour of the assessee Deduction u/s 80IB - The ITAT in AY 2001-02 had examined the years in which the borrowing had been made and year of setting up of qualifying units and found that no borrowing had been made after the setting up of the qualifying units and therefore held that no allocation of fresh borrowing was to be made to the 80IB qualifying units - Accordingly the addition is deleted Regarding deduction u/s 80HHC - High Court in the case of Godrej Agrovet Ltd vs ACIT but it is diminution in the value of the assets as the recoverable debts partake the character of the asset - Decided against the assessee The sums clamed in P&L A./c by the assesee are ascertained liability therefore they are out of purview of clause (c) of sec. 115JB of the Act - Decided in the favour of the assessee by way of remand

Issues Involved:
1. Disallowance of payment made to clubs.
2. Deletion of addition made under section 41(1) of the Income Tax Act.
3. Deletion of addition made under section 80IB.
4. Computation of deduction under section 80HHC without reducing the deduction claimed under section 80IB.
5. Addition made under section 92CA while determining the Arm's Length Price (ALP).
6. Provisions for doubtful debts and their impact on book profit under section 115JB.
7. Whether export profit should be considered as per book profit for section 115JB.
8. Phasing out provision for deduction under section 80HHC for computing book profit under section 115JB.
9. Adjustment on account of debenture redemption reserve for computing book profit under section 115JB.

Issue-wise Detailed Analysis:

1. Disallowance of Payment Made to Clubs:
The revenue challenged the disallowance of Rs. 18.14 lakhs paid to clubs, which was allowed by the CIT(A). The assessee argued that this expenditure was for business promotion. The Tribunal referred to the decision of the Delhi High Court in CIT vs. Samtel Color Ltd, which held that corporate membership fees paid to clubs for business purposes are deductible under section 37(1). The Tribunal confirmed the CIT(A)'s order, dismissing the revenue's ground.

2. Deletion of Addition Made Under Section 41(1):
The A.O. added Rs. 5.94 lakhs under section 41(1), assuming that sundry creditors outstanding for more than three years had ceased to exist. The CIT(A) deleted this addition, relying on a previous decision for AY 2001-02. The Tribunal upheld the CIT(A)'s decision, stating that section 41(1) does not consider the cessation of liability merely because it is time-barred under the Limitation Act.

3. Deletion of Addition Made Under Section 80IB:
The A.O. allocated R&D expenditure to units claiming deduction under section 80IB, which was deleted by CIT(A) based on previous Tribunal decisions. The Tribunal confirmed that no R&D expenditure was related to the 80IB qualifying units and upheld the CIT(A)'s order, referencing the assessee's case for AY 2001-02.

4. Computation of Deduction Under Section 80HHC Without Reducing the Deduction Claimed Under Section 80IB:
The A.O. reduced the profit for deduction under section 80HHC by the amount claimed under section 80IB. The CIT(A) allowed the assessee's claim, supported by Tribunal decisions in similar cases. The Tribunal upheld the CIT(A)'s order, referencing the jurisdictional High Court's decision in Godrej Agrovet Ltd vs. ACIT.

5. Addition Made Under Section 92CA While Determining the Arm's Length Price (ALP):
The A.O. made an adjustment of Rs. 23.94 lakhs based on the TPO's determination of ALP for R&D services provided to associated enterprises. The Tribunal noted that the TPO excluded a loss-making entity, Kitco Ltd, from comparables. The Tribunal set aside the issue to the A.O. for fresh determination, emphasizing the correct application of the Transactional Net Margin Method (TNMM).

6. Provisions for Doubtful Debts and Their Impact on Book Profit Under Section 115JB:
The A.O. added back Rs. 1.49 crores for doubtful debts while computing book profit under section 115JB. The CIT(A) deleted this addition, relying on the Tribunal's decision for AY 2001-02. The Tribunal reversed the CIT(A)'s order, stating that provisions for bad debts are not liabilities but diminution in asset value, and clause (i) to Explanation I to section 115JB applies.

7. Whether Export Profit Should Be Considered as Per Book Profit for Section 115JB:
The Tribunal referenced the jurisdictional High Court's decision in CIT vs. Ajantha Pharmaceuticals Ltd, which reversed the Special Bench's decision in Dy CIT vs. Silicon Formulations India Ltd. The Tribunal restored the A.O.'s order, dismissing the CIT(A)'s decision.

8. Phasing Out Provision for Deduction Under Section 80HHC for Computing Book Profit Under Section 115JB:
The assessee conceded that this issue is covered against them by the Tribunal's decision. The Tribunal reversed the CIT(A)'s order and restored the A.O.'s order.

9. Adjustment on Account of Debenture Redemption Reserve for Computing Book Profit Under Section 115JB:
The Tribunal followed its decision in the assessee's case for AY 2001-02, holding that debenture redemption reserve is an ascertained liability and should not be added back while computing book profit under section 115JB. The Tribunal dismissed the revenue's ground.

Conclusion:
The appeal filed by the department is partly allowed for statistical purposes. The Tribunal confirmed some of the CIT(A)'s decisions while reversing others, particularly on issues related to section 115JB and the determination of ALP.

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