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2011 (4) TMI 787 - AT - Income TaxDisallowance of 1% u/s 14A - As per the Hon ble jurisdictional High Court in Godrej and Boyce Mfg. Co. Ltd. vs. DCIT and Another 2010 -TMI - 78448 - BOMBAY HIGH COURT has held , v) The provisions of Rule 8D of the Rule which have been notified w.e.f. 24.3.2008, shall apply with effect from Asst. Year 2008-09. (vi) Even prior to the Asst. Year 2008-09 when Rule 8D was not applicable, the A.O. has to enforce the provisions of sub-section (1) of section 14A - For that purpose, the A.O. is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act - Held that the learned CIT(A) was fully justified in restricting the disallowance at 1% of such income so earned - The grounds taken by the assessee and revenue are, therefore, rejected. Deduction - Clause (baa) in the Explanation to section 80HHC of the Act -Items included/exclude while calculating deduction u/s. 80HHC of the Act - Regarding to documentation charges reimbursed - Since the reimbursement of documentation charges fall under the category of any other receipts of similar nature, therefore, respectfully following the decision of the Hon ble jurisdictional High Court in the case of Dresser Rand India P. Ltd. (supra) hold that 90% of the same has to be excluded for the purpose of computation of deduction u/s. 80HHC of the Act. Regarding to sale of scrap - The scrap generation is part of the manufacturing activity and therefore income arising from scrap sales is an operational income of the company - Therefore, in our view the scrap sales has to be treated as part of the business profits and 90% of the same is not required to be excluded as per clause (baa) of Explanation to section 80HHC. Regarding the AMC charges - This issue is admittedly covered against the assessee as per the decision of the Hon ble jurisdictional High Court in the case of Dresser Rand India P. Ltd. , therefore, this issue is decided against the assessee. Regarding the cash discount - The same is covered in favour of the assessee by the decision of the Tribunal in the case of Pam Glatt Pharma Technologies Pvt. Ltd. - In the absence of any distinguishable features brought on record by the revenue, direct the Assessing Officer to treat the cash discount as business profits and 90% of the same is not required to be excluded. Regarding the sundry credit balance - The same is covered in favour of the assessee by the decision of the co-ordinate Bench of the Tribunal in Diamond Dye Chem Ltd. wherein it has been held that the written back suppliers and right back customers cannot be considered as a receipt by way of brokerage, commission, interest, rent charges or any other receipt of similar nature - Held that the receipt of sundry credit balance has to be treated as part of the business profit and 90% of the same is not required to be excluded as per clause (baa) Explanation to section 80HHC. Regarding to insurance claim - This issue is covered in favour of the assessee by the decision of Hon ble jurisdictional High Court in the case of Pfizer Ltd.wherein it has been held that the claim on account of insurance for the stock in trade did not constitute a receipt of similar nature within the meaning of Explanation (baa), not liable to be reduced to the extent of 90%. Respectfully following the same, deduction u/s. 80HHC is allowed on this issue - The grounds taken by the assessee are, therefore, partly allowed. Regarding to interest income received on credit facilities to dealers and customers - According to the Revenue above interest from customers and dealers falls within the clause (baa) and therefore, 90% of the same should be excluded from the profits of the business - However,find the Hon ble Bombay High Court in the case of Alfa Laval (India) Ltd. vs. DCIT reported in 266 ITR 418 has held that interest from customers and sales tax set off received by the assessee being assessed as part of the business profits - In the absence of any distinguishable features brought on record by the revenue, respectfully following the above, set aside the order passed by the CIT(A) and allow the ground raised by the assessee. Rregarding to the interest on loan from staff - The decision of the Hon ble Supreme Court in the case of K. Ravindranathan Nair (supra) wherein it has been held that independent income like rent, commission, brokerage, etc though it formed part of the gross total income had to be reduced by 90% as contemplated in clause (baa) Explanation to 80HHC in order to arrive at business profits, we are of the view that 90% of interest on staff loan Rs. 666882 and Rs. 2500/- had to be excluded for the purpose of computation of special deduction u/s. 80HHC. Regarding to rent/lease rent, sales tax refund , Commission and sales tax set off - the above items are squarely covered against the assessee by the decision of Hon ble Supreme Court in K. Ravindranathan Nair (supra) and the recent decision of Hon ble jurisdictional High Court in the case of Dresser Rand India P. Ltd. (supra) - Held accordingly, that 90 per cent of recovery of freight, insurance and packing receipts amounting to Rs.49,14,076, sales tax set off/refund amounting to Rs.38,33,148 and service income of Rs.2,89,17,545 had to be excluded for the purpose of computation of special deduction under section 80HHC. - Accordingly, ground No.3 taken by the assessee is partly allowed. Disallowance - Depreciation on software treated as capital expenditure - the plea of the parties that the issue stands covered by the decision of the Special Bench of the Tribunal in Amway India Enterprises vs. Dy. CIT 2008 -TMI - 64346 - ITAT DELHI-C - Following the above decision of the Special Bench of the Tribunal we set aside the order passed by the revenue authorities on this account and send back the matter to file of the Assessing Officer who shall decide the issue afresh in the light of the directions of the Tribunal , and according to law after providing reasonable opportunity of being heard to the assessee.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act. 2. Treatment of various receipts under Section 80HHC of the Income Tax Act. 3. Disallowance of depreciation on software treated as capital expenditure. Issue-Wise Detailed Analysis: 1. Disallowance under Section 14A of the Income Tax Act: The assessee and the Revenue both contested the disallowance under Section 14A. The Assessing Officer (A.O.) observed that the assessee had shown exempt dividend income and made significant investments in shares, while also claiming substantial interest expenses. The A.O. disallowed 5% of the dividend income as related expenses. The CIT(A) restricted this disallowance to 1%, considering minimal administrative expenses necessary for earning the dividend. The Tribunal upheld the CIT(A)'s decision, citing the jurisdictional High Court's ruling in Godrej and Boyce Mfg. Co. Ltd. vs. DCIT, which necessitates a reasonable basis for such disallowance. Thus, both the assessee's and Revenue's grounds on this issue were rejected. 2. Treatment of Various Receipts under Section 80HHC of the Income Tax Act: The assessee challenged the CIT(A)'s decision to reduce 90% of certain receipts from the profits of the business for computing deductions under Section 80HHC. The receipts included documentation charges, sale of scrap, AMC charges, cash discounts, sundry balances written back, and insurance claims. - Documentation Charges: The Tribunal held that 90% of documentation charges should be excluded, following the Bombay High Court's decision in Dresser Rand India P. Ltd. - Sale of Scrap: The Tribunal ruled that the sale of scrap should be considered part of business profits and not excluded under clause (baa) of Explanation to Section 80HHC, aligning with the Tribunal's decision in Pam Glatt Pharma Technologies Pvt. Ltd. - AMC Charges: The Tribunal upheld the CIT(A)'s decision to exclude 90% of AMC charges, following the Dresser Rand India P. Ltd. case. - Cash Discounts: The Tribunal directed that cash discounts should not be excluded from business profits, referencing the decision in Pam Glatt Pharma Technologies Pvt. Ltd. - Sundry Balances Written Back: The Tribunal held that these should be treated as part of business profits and not excluded, following the decision in Diamond Dye Chem Ltd. - Insurance Claims: The Tribunal ruled that insurance claims should not be excluded from business profits, citing the Bombay High Court's decision in Pfizer Ltd. 3. Disallowance of Depreciation on Software Treated as Capital Expenditure: Both parties agreed that the issue of depreciation on software should be reconsidered in light of the Special Bench decision in Amway India Enterprises vs. Dy. CIT. The Tribunal set aside the previous orders and remanded the matter back to the A.O. to re-examine the facts and determine whether the expenditure is capital or revenue in nature, and if capital, to allow appropriate depreciation. Revenue's Appeal: The Revenue's appeal included issues already adjudicated in the assessee's appeal. The Tribunal upheld the CIT(A)'s decision on the disallowance under Section 14A and the treatment of sale of scrap and AMC charges. Cross Objections by the Assessee: The assessee's cross objections on the disallowance under Section 14A and the treatment of sale of scrap and AMC charges were also addressed in the main appeal and thus rejected. Conclusion: The Tribunal partly allowed the assessee's appeal for statistical purposes, partly allowed the Revenue's appeal, and dismissed the assessee's cross objections. The judgment emphasized the application of relevant High Court and Tribunal decisions in determining the treatment of various receipts and disallowances.
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