2010 (12) TMI 872 - AT - Income Tax

Capital or revenue expenditure - In the course of three previous year period, when the expenditure were incurred by the assessee-company, those expenditure were debited in the accounts of the assessee- company under the head expenditure pending allocation - When the assessee has offered the recovered amount as its income, it is quite rightful in its part to claim the earlier expenditure as deductions in computing the income arising out the amount recovered from Indonesian subsidiary - accounting treatment given by the assessee-company can be justified for the reason that the real character could be decided only when the assessee-company was able to recover the amounts from its Indonesian subsidiary - Decided in favor of the assessee Regarding disallowance u/s 40(a)(i) - After examining the scheme of sec.195, the Board has clarified that no tax is deductible under sec.195 and consequently the expenditure on export commission and other related charges payable to a non-resident for services rendered outside India becomes an allowable expenditure - If the tax is not so assessable, there is no question of tax at source being deducted - The Court in its earlier decision what was held is that the Assessing Officer has to be approached under sec.195(2), to decide the correct amount of deduction where tax is deductible and not to invoke sec.195(2) indiscriminately without bothering and looking into whether the payments contained element of income or not.

Issues Involved:
1. Inclusion of scrap sales in total turnover for deduction under sec.80HHC.
2. Inclusion of 90% of interest income, cutter-re-sharpening charges, and export incentives from business profits for sec.80HHC.
3. Treatment of replacement cost of dies and moulds as revenue or capital expenditure.
4. 100% depreciation on civil works connected with reverse osmosis plant.
5. Disallowance of ASEAN project expenses.
6. Disallowance under sec.14A for earning dividend income.
7. Deductions in respect of work-in-progress under sec.35/35(2AB), entry tax, and 100% depreciation on temporary construction works.
8. Addition towards the difference between sales tax deferral loan amount and settlement on NPV basis.
9. Disallowance of processing fee paid to non-residents and consultancy payment under sec.40(a)(i).

Detailed Analysis:

1. Inclusion of Scrap Sales in Total Turnover for Deduction under sec.80HHC:
The Tribunal upheld the inclusion of scrap sales in the total turnover for computing the deduction under sec.80HHC, referencing the Supreme Court's decision in CIT v. K. Ravindranathan Nair, which stated that scrap sales and labor charges have no nexus with the export business and should not form part of business profits. This issue was decided against the assessee.

2. Inclusion of 90% of Interest Income, Cutter-Re-Sharpening Charges, and Export Incentives from Business Profits for sec.80HHC:
The Tribunal, following its earlier decision for the assessment year 2003-04, held that the lower authorities were correct in excluding these incomes from business profits for the purpose of sec.80HHC. This issue was also decided against the assessee.

3. Treatment of Replacement Cost of Dies and Moulds as Revenue or Capital Expenditure:
The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision that replacement costs of dies and moulds should be treated as revenue expenditure, not capital expenditure. This decision was based on the Tribunal's earlier ruling and the Karnataka High Court's judgment in Mysore Spun Concrete Pipe Pvt. Ltd.

4. 100% Depreciation on Civil Works Connected with Reverse Osmosis Plant:
The Tribunal confirmed the assessee's entitlement to 100% depreciation on civil works connected with the reverse osmosis plant, considering these civil structures as integral parts of the effluent treatment system. This decision was based on the Tribunal's earlier ruling for the assessment year 2003-04.

5. Disallowance of ASEAN Project Expenses:
The Tribunal held that the assessee was entitled to claim the ASEAN project expenses as deductions in computing taxable income for the assessment year 2005-06. The expenses were incurred for assisting a subsidiary in Indonesia and were initially recorded under "expenditure pending allocation." The Tribunal found no accounting or legal infirmity in the assessee's claim and directed the assessing authority to modify the computation of income accordingly.

6. Disallowance under sec.14A for Earning Dividend Income:
The Tribunal vacated the Commissioner of Income-tax (Appeals)'s direction to apply Rule 8D retrospectively and confirmed the assessing authority's 2% disallowance. Rule 8D was held to be prospective, not applicable to the assessment year 2005-06.

7. Deductions in Respect of Work-in-Progress under sec.35/35(2AB), Entry Tax, and 100% Depreciation on Temporary Construction Works:
The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision to grant deductions for work-in-progress, replacement of dies and moulds, entry tax, and 100% depreciation on temporary construction works, referencing its earlier decision for the assessment year 2003-04.

8. Addition Towards Difference Between Sales Tax Deferral Loan Amount and Settlement on NPV Basis:
The Tribunal, referencing the Special Bench decision in Sulzer India Ltd. v. Jt. CIT, held that the remission of sales tax deferral liability is not chargeable as business income under sec.41(1) or as a capital receipt. The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision to delete the addition made by the Assessing Officer.

9. Disallowance of Processing Fee Paid to Non-Residents and Consultancy Payment under sec.40(a)(i):
The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision to delete the disallowance of payments made to non-residents for export agency commission and consultancy fees. The Tribunal found that these payments were not liable to tax in India as per the DTAA and the Supreme Court's ruling in GE India Technology Centre P. Ltd. v. CIT, which clarified that tax is deductible only if the payment contains taxable income.

Conclusion:
The appeal filed by the assessee for the assessment year 2000-01 was dismissed, while the appeal for the assessment year 2005-06 was allowed. The appeals filed by the Revenue for both assessment years 2000-01 and 2005-06 were dismissed.

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