2012 (7) TMI 406 - AT - Income Tax

Treatment of sales tax subsidy - CIT(A) directed it to treat the sale tax subsidy as capital receipt - Held that - Since the incentives were given for bringing about addition to necessary infrastructure in processing/developing the backward area, it would be in the nature of capital receipt not liable to tax - the purpose of granting sales tax incentive is clearly only to provide an incentive for establishment of new industries in the underdeveloped regions or to expand its existing units of the State of Maharashta. That the intention is not to increase the viability of the eligible units but to promote development of further industry and infrastructure in the region. That in the aforesaid circumstances, the exemption availed of by the assessee s eligible units under the said notification would be a capital receipt not liable to tax. Computation of depreciation allowance - assessee contested against reduction on proportionate basis from the written down value of the respective block of assets the sales tax subsidy received - Held that - No linking of the subsidy received to the acquisition of asset. The subsidy in this case has been received for encouraging investment in backward area, even if computed with reference to cost of investment in fixed assets, will not be reduced from the cost of assets - the payment of subsidy is not related to the actual acquisition of assets and subsidy is granted on capital investment on land, building and machinery, then it cannot be reduced from the value of asset (WDV) - in favour of assessee. Disallowance of software maintenance / software development expenses - Held that - The expenditure on computer software was incurred with the view to increasing efficiency of the operations and maintenance of vital data, which was necessary for carrying on the business more efficiently. CIT(A) gave a finding that the amount involved has actually been paid towards monthly license user fee. It is neither a technology up-gradation nor a capital expenses which gives enduring benefit in subsequent years. That as per details and supporting documents provided by assessee, the said expenses are revenue in nature, hence were to be allowed fully - in favour of assessee. Disallowance on account of brokerage and commission - Held that - No infirmity in the finding given by the Ld. CIT(A) that the documents submitted by the assessee for the payments made to M/s Sidhi Vinayak Enterprises are bonafide and in the course of business and the disallowance made by the AO needs to be deleted - in favour of assessee. Computing book profit u/s 115JB - CIT deleted addition on account of provisions for doubtful debts and advances being provisions for diminution in value of investment and being provisions for Gratuity - Held that - As per sub clause (x) of clause (II) Schedule 15 of the accounts that provision for gratuity in this case has been made on the basis of actuarial valuation and the liability can be said to be ascertained, accordingly, no disallowance in this regard provision towards gratuity liability is ascertained and could not have been added back under clause (c) of Explanation u/s. 115JB - in favour of assessee. Computing book profit under section 115JB - CIT directed the adjustment of the amount eligible for deduction under section 80HHC to be calculated after reducing unabsorbed depreciation from profits of business and not the amount of deduction calculated on the profit disclosed in the profit and loss account - Held that - As decided in Ajanta Pharma Ltd.Vs CIT 2010 (9) TMI 8 (SC) for computing book profit in terms of section 115JB, net profit as shown in the P&L account have to be reduced by the amount of profits eligible for deduction u/s. 80HHC and not by the amount of deduction u/s. 80HHC - in favour of assessee. Charging interest u/s 234B, 234C and 234D - Held that - The assessee in this case became liable for advance tax due to the retrospective amendment made by the Finance Act, 2008 - It was not possible for the assessee, at that time, to foresee the retrospective amendment, which was yet to be introduced in future, and accordingly adjust his advance tax liability. Therefore, by no stretch of imagination can it be held that, during the relevant previous year, there was any default on the part of the assessee in payment of advance tax - in favour of assessee.

Issues Involved:
1. Treatment of sales tax subsidy as capital or revenue receipt.
2. Disallowance of software maintenance/software development expenses.
3. Computation of book profit under section 115JB.
4. Charging of interest under sections 234B, 234C, and 234D.
5. Disallowance of brokerage and commission expenses.
6. Disallowance of provision for doubtful debts, diminution in value of investment, and gratuity.
7. Reduction from written down value (WDV) of assets for sales tax subsidy.

Detailed Analysis:

1. Treatment of Sales Tax Subsidy:
The primary issue was whether the sales tax subsidy received by the assessee should be treated as a capital receipt or a revenue receipt. The assessee argued it was a capital receipt, citing the ITAT (Special Bench) decision in CIT vs. Reliance Industries Ltd. The AO, however, treated it as a revenue receipt, reasoning that the subsidy was not intended as a contribution towards capital outlay but to assist the assessee in its business. The CIT(A) sided with the assessee, noting that the subsidy aimed to promote industrialization in backward areas and was thus a capital receipt. This decision was upheld by the Tribunal, referencing the Special Bench decision and other precedents.

2. Disallowance of Software Maintenance/Software Development Expenses:
The AO had disallowed software maintenance expenses, treating them as capital expenditure. The CIT(A) and Tribunal found these expenses to be revenue in nature, considering them as recurring expenses necessary for the efficient operation of the business. The Tribunal upheld the CIT(A)'s decision, noting that the expenses were for annual license fees and not for acquiring new software or technology upgrades.

3. Computation of Book Profit under Section 115JB:
The CIT(A) held that for computing book profit under section 115JB, the adjustment for deduction under section 80HHC should be calculated after reducing unabsorbed depreciation from business profits. The Tribunal, however, reversed this decision, following the precedent set by the Supreme Court in Ajanta Pharma Ltd. vs. CIT, which stated that the net profit shown in the P&L account should be reduced by the amount of profits eligible for deduction under section 80HHC.

4. Charging of Interest under Sections 234B, 234C, and 234D:
The assessee contended that interest under section 234B should not be charged due to retrospective amendments in law. The Tribunal agreed, referencing the Calcutta High Court decision in Emami Ltd. v. CIT and ITAT Delhi's decision in DCIT vs. Uttam Sugar Mills Ltd., which held that interest should not be levied when the tax liability arises from retrospective amendments.

5. Disallowance of Brokerage and Commission Expenses:
The AO disallowed brokerage and commission expenses due to insufficient documentation. The CIT(A) and Tribunal found the expenses to be bona fide and in the course of business, supported by proper documentation. The Tribunal upheld the CIT(A)'s decision to delete the disallowance.

6. Disallowance of Provision for Doubtful Debts, Diminution in Value of Investment, and Gratuity:
The assessee conceded the disallowance of provisions for doubtful debts and diminution in value of investment due to retrospective amendments. However, the CIT(A) and Tribunal found the provision for gratuity, made on actuarial valuation, to be an ascertained liability and thus not to be added back under section 115JB.

7. Reduction from WDV of Assets for Sales Tax Subsidy:
The CIT(A) directed the AO to reduce the WDV of assets by the amount of sales tax subsidy, treating it as a capital receipt. The Tribunal, however, reversed this decision, citing precedents that subsidy received for encouraging investment in backward areas should not be reduced from the cost of assets, even if computed with reference to the cost of investment in fixed assets.

Conclusion:
The Tribunal's decisions were largely in favor of the assessee, particularly on the treatment of sales tax subsidy, software maintenance expenses, and the computation of book profit under section 115JB. The Tribunal also ruled against the charging of interest under section 234B due to retrospective amendments and upheld the bona fide nature of brokerage and commission expenses. The disallowance of provisions for doubtful debts and diminution in value of investment was conceded by the assessee, while the provision for gratuity was allowed as an ascertained liability.

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