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2012 (8) TMI 696 - AT - Income TaxUnconditional grant - Voluntary and unconditional grant received by the assessee for protecting image and goodwill of the holding company - taxable as business receipt or not Held that - Payment was voluntary or that it was an unconditional payment, will not make it a capital receipt not chargeable to tax. The stand of the Assessee before the Revenue authorities that BMIL was in losses and the payment in question was made to recoup such losses is contrary to the material on record. There was holding and subsidiary company relationship between BMIL and BMG besides business relationship viz., BMIL was using the brand image of BMG, making use of the technical know-how of the parent company and was also acting as the marketing agent for BMG for sale of diagnostic products, BIO chemicals and Bio catalysts. It is only because of such relationship and also in the light of the help rendered by BMIL in terms of protecting and promoting the interests of BMG in the wake of COMSAT incident, the payment in question was made by BMG and was therefore a payment connected with the business of BMIL and was liable to be taxed u/s.28(i) read with Sec.2(24) of the Act; Whether claim of depreciation is mandatory in nature AO noticed from the schedule of depreciation furnished by the assessee that depreciation was being claimed on the WDV without adjusting for depreciation allowable for A.Y.s 1995-96 & 1996-97 in the hands of erstwhile BMIL - BMIL did not opt to claim depreciation for the assessment years 1995-96 & 1996-97 although assets have been used in the business carried on by BMIL during those years Held that Making of a claim and the furnishing of particulars have to be read as cumulative conditions. If either of the two conditions are not fulfilled the AO cannot force the depreciation allowance on the assessee - in the absence of a claim by the assessee the allowance cannot be thrust upon him even if the particulars are available to the AO. Therefore, the mere fact that the assessee did not make a claim for depreciation places a fetter upon the powers of the AO to allow depreciation Whether software development product expenses is allowable as revenue expenditure u/s. 37(1) expenditure for acquiring and implementing software programme known as known as ERP package MFG Pro-version Held that - Nature of the software and its role in business of the assessee have to be considered - matter remanded to AO for fresh consideration Computation of profit u/s. 115JA Held that - P&L Account prepared by the assessee for the purpose of 115JA of the Act has been duly certified by the Chartered Accountant. There is no complaint that the same is not in accordance with provisions of part II & Part II of Schedule VI of the Companies Act 1956. As rightly pointed out by the assessee the only restriction in 115JA(2) is regarding the depreciation which has to be in conformity with the method adopted under Companies Act. There is however, departure in section 115JB(2) of the Act which provides that the accounting policies and accounting standards adopted while preparing P&L Account for section 115JB of the Act should correspond to the one adopted for the purpose of Companies Act 1956
Issues Involved:
1. Deletion of addition of Rs. 29.26 Crores received from Boehringer Mannheim GmbH, Germany. 2. Acceptance of assessee's device of not claiming depreciation. 3. Depreciation claimed by the assessee at enhanced value. 4. Treatment of software development product expenses as revenue expenditure. 5. Computation of book profit u/s 115JA. 6. Reduction of Rs. 98.35 lakhs transferred to reserves while computing profits u/s 115JA. 7. Deletion of addition of Rs. 44.06 lakhs on account of security deposit taken on the account of bogus lease transaction. 8. Deletion of provisions for leave encashment while computing profits u/s 115JA. 9. Disallowance of Rs. 67.91 lakhs claimed as project expenses. 10. Disallowance of Rs. 8.19 lakhs claimed as machinery shifting expenses. 11. Grant of depreciation on Rs. 13,73,793/- being amount capitalized in AY 1989-90 out of repairs to building. Detailed Analysis: 1. Deletion of Addition of Rs. 29.26 Crores: The Assessee, engaged in manufacturing pharmaceutical formulations, received Rs. 29.26 crores from Boehringer Mannheim GmbH, Germany (BMG), which was credited to the capital reserve. The Assessee claimed it as a capital receipt, not chargeable to tax, arguing it was an unconditional grant for goodwill enhancement. The AO contended it was taxable under business income, citing Supreme Court's decision in P. Krishna Menon vs. ITO. The CIT(A) sided with the Assessee, deeming the payment as a non-taxable capital receipt. The Tribunal reversed the CIT(A)'s decision, holding the payment as taxable income connected with the business activity of the Assessee. 2. Acceptance of Assessee's Device of Not Claiming Depreciation: The Assessee did not claim depreciation for AYs 1995-96 and 1996-97, and the AO adjusted the WDV of assets accordingly. The CIT(A) upheld the Assessee's claim, referencing the Supreme Court's decision in Mahindra Mills Ltd., which allowed the Assessee to forgo depreciation. The Tribunal affirmed the CIT(A)'s decision, stating that depreciation cannot be forced upon the Assessee without a claim. 3. Depreciation Claimed at Enhanced Value: The Assessee claimed depreciation on the market value of assets acquired from Sumitra Pharmaceuticals and Chemicals Ltd. (SPCL). The AO allowed depreciation based on the WDV in SPCL's books. The CIT(A) allowed the Assessee's claim, and the Tribunal upheld this decision, noting that the transfer was not akin to amalgamation, thus the market value should be considered. 4. Software Development Product Expenses: The Assessee incurred Rs. 32.90 lakhs on ERP software, claimed as revenue expenditure. The AO treated it as capital expenditure. The CIT(A) allowed the Assessee's claim, but the Tribunal remanded the issue back to the AO for reconsideration in light of the principles laid down by the Special Bench in Amway India Enterprises. 5. Computation of Book Profit u/s 115JA: The Assessee prepared a revised P&L account for section 115JA, incorporating losses of the Bulk Drugs Division (BDD) for the period before acquisition. The AO rejected this, insisting on the P&L account prepared for corporate purposes. The CIT(A) sided with the Assessee, and the Tribunal upheld this, noting that section 115JA allowed for different P&L accounts for tax purposes. 6. Reduction of Rs. 98.35 Lakhs Transferred to Reserves: The Assessee reduced Rs. 98.35 lakhs transferred to the Debenture Redemption Reserve from book profits. The AO added it back, treating it as a reserve. The CIT(A) and the Tribunal held it was a provision for an ascertained liability, thus allowable as a deduction from book profits. 7. Deletion of Addition of Rs. 44.06 Lakhs on Account of Security Deposit: The Assessee forfeited a security deposit of Rs. 44.06 lakhs from terminated lease agreements, initially offered as short-term capital gain. The CIT(A) directed its exclusion from income, noting the Assessee had offered depreciation claimed under KVSS & VDIS schemes. The Tribunal upheld this decision. 8. Deletion of Provisions for Leave Encashment: The Assessee claimed provision for leave encashment as an ascertained liability. The AO treated it as contingent. The CIT(A) and the Tribunal, referencing Bharat Earth Movers Ltd. vs. CIT, held it as an ascertained liability, thus allowable in computing book profits under section 115JA. 9. Disallowance of Rs. 67.91 Lakhs Claimed as Project Expenses: The Assessee claimed expenses for consulting and feasibility studies as revenue expenditure. The AO and CIT(A) treated them as capital. The Tribunal upheld the disallowance, noting insufficient evidence linking the expenses to the Assessee's business. 10. Disallowance of Rs. 8.19 Lakhs Claimed as Machinery Shifting Expenses: The Assessee claimed machinery shifting expenses as revenue expenditure. The CIT(A) and the Tribunal, following Sitapur Sugar Works Ltd. vs. CIT, treated it as capital expenditure. 11. Grant of Depreciation on Rs. 13,73,793/- Capitalized in AY 1989-90: The Assessee sought depreciation on repairs capitalized in AY 1989-90. The Tribunal directed the AO to verify and grant depreciation accordingly. Conclusion: The Tribunal's decisions largely upheld the CIT(A)'s findings, with remands for reconsideration on specific issues. The judgment emphasized the need for clear evidence and adherence to legal precedents in determining the nature of receipts and expenses for tax purposes.
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