2012 (5) TMI 504 - AT - Income Tax

Notional sales tax/ sales tax subsidy received under the schemes by the Government - Capital receipt vs Revenue Receipt - Held that - Following decision of ITAT in assessee s own case 2003 (10) TMI 255 (Tri) it is held that claim for treatment of notional sales tax is capital receipt, thus not liable to tax. Further, CIT(A) has rightly held that it is not necessary to go into the alternative plea of the assessee as claiming the notional sales tax as deductible u/s 43B - Decided in favor of assessee. Interest on borrowed funds - dis-allowance of interest being interest referable to interest free loans and advances given to subsidiary companies - Held that - High Court in the case of Reliance Utilities & Power Ltd.(2009 (1) TMI 4 (HC)), has held that if interest free funds available to an assessee is sufficient to meet its investment, it can be presumed that the investments were made from the interest free funds available with the assessee. Therefore, considering the fact that the assessee had its own funds more than the loans given to its subsidiaries and also in the absence of any nexus establishing that the interest bearing borrowed funds were given as interest free to its subsidiaries, we hold that the dis-allowance of interest is not justified - Decided in favor of assessee. Dis-allowance u/s 14A of estimated expenses out of administrative expenses being expenditure incurred in relation to earning the exempt income u/s 10(33) and 10(23G) - Held that - Assessee s own funds are far in excess than the investments made by the assessee giving exempt income, the dis-allowance of the interest is not justified as it has to be presumed that the investments had come from the interest free funds available with the assessee - Decided in favor of assessee. Deduction u/s 80HHC - exclusion of gross interest or net interest - Held that - 90% of net interest expenses have to be considered while computing deduction u/s 80HHC. See ACG Associated Capsules Pvt. Ltd. vs. DCIT(2012 (2) TMI 101 (SC)) - Decided in favor of assessee. Exclusion of profit allowed as deduction u/s 80IA/ 80IB with reference to all(exporting and non-exporting) units while arriving at deduction u/s 80HHC - assessee contended that exclusion should be restricted to export units with reference to which claim u/s 80 HHC is worked out - Held that - When the deduction u/s 80 HHC is to be considered, it is to be allowed in proportion to export turnover to the total turnover of an undertaking and accordingly that proportion of the deduction allowed u/s 80 HHC is to be considered and reduced while allowing deduction u/s 80 IA of those three exporting units subject to the condition that total deduction will not exceed the eligible profits of the undertaking. Hence, we hold that the entire deduction allowed u/s 80 IA / 80 IB should not be reduced while computing deduction u/s 80 HHC. On the other hand, the claim of export profits of these three units u/s 80 HHC should be reduced while allowing deduction u/s 80 IA in proportion of export turnover to total turnover - Decided in favor of assessee. Deduction u/s 80HHC - inclusion of excise duty and sales tax in the turnover - Held that - Excise duty and sales tax has to be excluded from the total turnover for the purpose of computing deduction u/s 80 HHC - Decided in favor of assessee. Computation of deduction u/s 80 HHC under the provisions of section 115JB with reference to the profits as worked out on the basis of adjusted book profits - Held that - Deduction under chapter VIA of I.T Act has to be worked out not on the basis of regular income tax profits but it has to be worked out on the basis of the adjusted book profits in a case where section 115JA/115JB is applicable. See DCIT vs. Syncome Formulations (India) Ltd. 2007(3) TMI 288 (Tri) Dis-allowance of expenses on account of traveling of spouse of executives - Held that - Since assessee has not been able to establish that above expenses pertaining to wives/family members of the executives was necessary for the purpose of the business,hence such expenditure is dis-allowed - Decided against the assessee. Non-compete Agreement - assessee together with its subsidiaries sold substantial number of shares held by it in L&T and entered into agreement containing restrictive covenant for a minimum period of five years - SEBI guide for treating 25% of the sale consideration, towards consideration for accepting such restrictive covenant - AY 02-03 - Held that - Part of the sale consideration received by the assessee on sale of shares has rightly been considered towards receipt on account of restrictive covenant and same is in the nature of capital receipt not taxable under the Act prior to AY 2003-04. Same has become taxable under clause (va) to section 28 w.e.f. 1/4/2003. Transfer pricing - dis-allowance u/s. 92C of ₹ 1.85 crores out of the charter hire charges paid to its associate enterprise - Held that - Neither the assessee, nor the TPO, nor the AO, or the Commissioner (Appeals) has followed any of the method prescribed in the Act and Rules, for arriving at the ALP. However, both the parties agree that the CUP method should be followed. In absence of comparable transactions, we set aside the issue to the file of the AO for the limited purpose of re computing the arm s length price by taking the date available in the public domain. Transfer pricing - dispute regarding working of Cost plus method followed by TPO - Held that - A perusal of the workings clearly demonstrates that the TPO has taken 50% of total cost and whereas the assessee has taken the actual cost relating to charter hire activity. This has made a difference to the calculation of cost. Actuals have to be taken to arrive at the correct cost and only then cost plus method can be applied. Cost plus method does not contemplate estimation of cost. When actual figures are replaced in the calculation made by the TPO, then, no adjustment is called for as the payment is at arm s length price - Decided in favor of assessee. Depreciation - restriction of depreciation claimed - assessee didn t claimed depreciation in earlier years thus claimed depreciation on WDV whereas Revenue after considering depreciation for earlier years reduced WDV, thereon restricted depreciation - Held that - Claim of depreciation prior to insertion of clause 5 to section 32(1), inserted w.e.f. 1/4/2002 as applicable from A.Y 2002-03, was optional and depreciation could not be thrust upon the assessee. Therefore, the WDV of the assets as on 31/3/2001 has to be taken for considering the depreciation to be allowed to the assessee. We hold that AO while giving effect to this order will consider the WDV as on 31/3/2001 and allow the depreciation claim accordingly - Decided in favor of assessee. Pre-operative expenses - Held that - Pre-operative expenses in question have been incurred for the purpose of business of the assessee and the expenditure was incurred for expansion of its existing activities. Hence, these preoperative expenses represent revenue expenditure incurred for the purpose of business and be allowed as deduction u/s 37 MAT - Revenue contending adding back of provision for doubtful debts while computing profits u/s 115JB - Held that - Considering amendment made by the finance (No.2) Act 2009 with retrospective effect from 1/4/2001 by inserting clause i in Explanation -1 to section 115JB the issue is to be decided against the assessee and thus addition made by AO is restored.

Summary

Issues Involved:
1. Deemed payment of sales tax under Section 43B.
2. Disallowance of interest on interest-free loans to subsidiaries.
3. Addition of interest on income tax refund.
4. Disallowance of administrative expenses under Section 14A.
5. Deduction under Section 80HHC.
6. Disallowance of expenses on spouse travel.
7. Disallowance of prior period expenses.
8. Computation of capital gains on sale of shares.
9. Transfer pricing adjustments.
10. Depreciation allowance.
11. Disallowance of pre-operative expenses.
12. Provision for doubtful debts under Section 115JB.

Detailed Analysis:

1. Deemed Payment of Sales Tax under Section 43B:
The assessee claimed deduction of notional sales tax as a capital receipt, which was deleted by the AO treating it as revenue receipt. The CIT(A) upheld the assessee's claim. The Tribunal followed the Special Bench decision in the assessee's own case, affirming the CIT(A)'s decision that the notional sales tax is a capital receipt not liable to tax. The alternative plea under Section 43B was rejected.

2. Disallowance of Interest on Interest-Free Loans to Subsidiaries:
The AO disallowed interest on interest-free loans given to subsidiaries, which was confirmed by the CIT(A). The Tribunal, relying on the Bombay High Court decision in Reliance Utilities & Power Ltd., held that since the assessee's own funds exceeded the loans given, no disallowance of interest was justified, and allowed the appeal.

3. Addition of Interest on Income Tax Refund:
The assessee conceded that the issue was decided against them in previous years. The Tribunal confirmed the CIT(A)'s order, rejecting the assessee's appeal.

4. Disallowance of Administrative Expenses under Section 14A:
The AO disallowed a significant portion of expenses under Section 14A, which was reduced by the CIT(A) to 1% of the exempt income. The Tribunal upheld the CIT(A)'s decision, rejecting the department's appeal for a higher disallowance and the assessee's appeal for no disallowance.

5. Deduction under Section 80HHC:
The AO excluded 90% of interest, rent, and miscellaneous income from profits for Section 80HHC deduction and included excise duty and sales tax in total turnover. The CIT(A) partly upheld and partly rejected the AO's method. The Tribunal, following the Supreme Court's decision in ACG Associates Capsules Pvt. Ltd., held that 90% of net interest should be considered. It also upheld the CIT(A)'s decision to exclude excise duty and sales tax from total turnover and to compute deduction under Section 80HHC based on book profits under Section 115JB.

6. Disallowance of Expenses on Spouse Travel:
The AO disallowed expenses on spouse travel, which was upheld by the CIT(A). The Tribunal confirmed the disallowance, agreeing that the expenses were not for business purposes.

7. Disallowance of Prior Period Expenses:
The AO disallowed prior period expenses due to lack of evidence, which was upheld by the CIT(A). The Tribunal restored the issue to the AO to allow the expenses in the year they got crystallized.

8. Computation of Capital Gains on Sale of Shares:
The assessee claimed that 25% of the sale consideration of shares was for a restrictive covenant and not taxable. The AO and CIT(A) rejected this claim. The Tribunal, referencing SEBI regulations and Supreme Court decisions, held that 25% of the consideration was a capital receipt for the restrictive covenant, not taxable in the assessment year.

9. Transfer Pricing Adjustments:
The AO made adjustments to the charter hire charges and consultancy fees paid to associated enterprises. The CIT(A) partly upheld these adjustments. The Tribunal restored the issue to the AO for fresh determination of ALP, considering special features and costs incurred by the associated enterprise.

10. Depreciation Allowance:
The AO allowed lower depreciation based on written down value, which was restored by the CIT(A). The Tribunal upheld the CIT(A)'s decision, directing the AO to consider the written down value as of 31/3/2001 and allow depreciation accordingly.

11. Disallowance of Pre-Operative Expenses:
The AO disallowed pre-operative expenses, treating them as capital expenditure. The CIT(A) allowed the expenses as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, following its earlier orders in the assessee's case.

12. Provision for Doubtful Debts under Section 115JB:
The AO added provision for doubtful debts to book profits under Section 115JB, which was deleted by the CIT(A). The Tribunal reversed the CIT(A)'s decision, following the retrospective amendment to Section 115JB.

Conclusion:
The appeals by both the assessee and the department were partly allowed, with several issues being restored to the AO for fresh consideration. The Tribunal provided detailed guidance on the application of legal principles and precedents in determining the various claims and adjustments.