2010 (10) TMI 813 - AT - Income Tax

Disallowance u/s.14A - Rule 8D - Held that - The issue is similar to A.Y.2002.2003 appeal filed by the assessee wherein it has been held that prior to assessment year 2008-09, Rule 8D was not applicable. However, the disallowance is warranted under section 14A of the Act - Since facts are identical therefore it is covered by the order of ITAT in assessee s own case, we follow the same. The AO is directed accordingly Capital or revenue expenditure - Disallowance made by the AO has been examined by the CIT(A) and found that ₹ 41362/is only capital in nature which on account of purchase of converter. Balance amount of expenditures pertain to revenue account - After considering the discussions made by the ITAT in AY 2002-03 no error in the order of the CIT(A).We confirm the order of the CIT(A) Regarding Research & Development expenses - initially the assessee started to incur R&D expenditure on behalf of third party but finally on subsequent events after the end of the previous year, the assessee treated those expenditures for its business purposes - can such expenditure is allowable under section 35(2AB) or under section 37(1) in the first year itself? - Held that - As that ultimately products developed by incurring R&D expenditures were registered in the name of assessee, which is related to assessee s business and accordingly in fact used by assessee for its business purposes - Once it is found that the expenditures are allowable same are allowable under respective provisions as in the case under consideration under section 35(2AB) or under section 37(1) as the case may be, in accordance with law - The AO shall provide reasonable opportunity of hearing to the assessee Addition u/s 41(1) - Held that - The issue is covered in favour of the assessee by the order in the case Dsa Engineers (Bombay) VS ITO 2009 (3) TMI 646 - ITAT MUMBAI where in it was held that if the assessee has not written off the liabilities reflected in sundry creditors account it was not open to the AO to make addition invoking section 41(1) of the Act without proving that there was cessation of liabilities. As find that in this case AO invoked section 41(1) merely on the ground that the liabilities were three years old thus the order of the AO is not sustainable. In favour of assessee.

Issues Involved:
1. Disallowance under Section 14A.
2. Disallowance of expenses under the head 'repairs and maintenance'.
3. Disallowance of depreciation on royalty payment.
4. Disallowance under Section 43B for delayed payment of PF and ESIC.
5. Deduction under Section 35(1)(iv) for expenditure on construction of building.
6. Validity of assessment order under Section 143(3).
7. Disallowance of research and development expenses under Section 35(2AB).
8. Addition under Section 41(1) for creditors outstanding for more than three years.

Detailed Analysis:

1. Disallowance under Section 14A:
The Revenue challenged the deletion of disallowance of Rs. 22,42,588 made under Section 14A, arguing that the overall position of all liabilities and investments should be considered, not just a direct nexus between borrowed funds and investments yielding exempt income. The Tribunal upheld the CIT(A)'s decision, citing the High Court's judgment in Godrej & Boyce Mfg. Co. Ltd. v. DCIT, which stated that Rule 8D was not applicable prior to AY 2008-09. The AO must adopt a reasonable basis for disallowance under Section 14A. The Tribunal found no reason to dispute the CIT(A)'s acceptance of a 10% disallowance as reasonable.

2. Disallowance of expenses under the head 'repairs and maintenance':
The Revenue's appeal included a ground on allowing relief of Rs. 10,33,544 out of Rs. 10,74,906 disallowed by the AO, who considered various expenditures as capital in nature. The CIT(A) found only Rs. 41,362 as capital expenditure. The Tribunal upheld the CIT(A)'s examination and findings, confirming the order.

3. Disallowance of depreciation on royalty payment:
The Revenue contested the deletion of disallowance of Rs. 19,72,907 on royalty payment, arguing it is not a depreciable asset. The Tribunal referred to its earlier decision in the assessee's case for AY 2001-02, where it was held that royalty payment formed part of the cost of acquiring brands, thus eligible for depreciation under Section 32. The Tribunal upheld the CIT(A)'s order.

4. Disallowance under Section 43B for delayed payment of PF and ESIC:
The Revenue appealed against the deletion of disallowance of Rs. 1,98,177 under Section 43B for delayed payment of PF and ESIC. The Tribunal noted that payments made within the grace period are allowable under Section 43B, as confirmed by the CIT(A). The Tribunal upheld the CIT(A)'s order.

5. Deduction under Section 35(1)(iv) for expenditure on construction of building:
The Revenue challenged the deduction of Rs. 2,49,25,217 under Section 35(1)(iv) for expenditure on building construction, arguing that Section 35(2AB) excludes such expenditure. The Tribunal referred to its earlier decision, which distinguished between Section 35(1)(iv) and Section 35(2AB). The Tribunal upheld the CIT(A)'s order allowing the deduction.

6. Validity of assessment order under Section 143(3):
The assessee argued that the assessment order under Section 143(3) was illegal due to issues with notices. The Tribunal found these grounds general in nature, requiring no specific findings.

7. Disallowance of research and development expenses under Section 35(2AB):
The AO disallowed Rs. 20,49,85,240 claimed under Section 35(2AB), arguing the expenses were incurred on behalf of a third party. The CIT(A) upheld this, noting the claim was not made in the original return or a revised return. The Tribunal, however, found that the assessee had incurred the expenses for its business after the termination of the agreement with the third party. The Tribunal allowed the claim, directing the AO to bifurcate the expenses under Sections 35(2AB) and 37(1).

8. Addition under Section 41(1) for creditors outstanding for more than three years:
The AO added Rs. 11,72,887 under Section 41(1), assuming cessation of liability for creditors outstanding for more than three years. The CIT(A) confirmed this. The Tribunal referred to its decision in Dsa Engineers (Bombay) vs. ITO, where it was held that liabilities not written off by the assessee cannot be added under Section 41(1) without proving cessation of liability. The Tribunal deleted the addition.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, confirming various findings of the CIT(A) and allowing certain claims of the assessee, particularly under Sections 35(2AB) and 37(1).

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