2012 (11) TMI 420 - AT - Income Tax

Interest u/s 36(1)(iii) - disallowance as interest bearing funds have been utilized for making investments - CIT(A) allowed the claim - Held that - Persuing the P/L A/C of assessee net profit after tax for the year ending 31-3- 2003 is ₹ 488.04 lakhs and the depreciation in that year is of ₹ 150.14 lakhs and hence total generation of own fund in that year is ₹ 638.18 lakhs, whereas investment in shares in that year is only of ₹ 352 lakhs & similarly in the year ending as on 31-3-2004 profit after tax is ₹ 214.25 lakhs and the depreciation in this year is ₹ 195.16 lakhs and hence total generation of funds is ₹ 309.41 lakhs whereas the investment in shares in this year is of only ₹ 55.25 lakhs - it is not justified to make any disallowance of interest claimed by the assessee u/s. 36(1)(iii) in the absence of any direct nexus between the investment in shares and interest bearing borrowed funds - in favour of assessee. Deduction u/s. 80IA - disallowance as undertaking is not a distinct entity with no separate plant and machinery owned by the enterprise having not approved by the Central Government - Held that - The facts in the year under appeal are identical to that of A.Y. 2004-05 and A.Y. 2005-06, thus following the order of co-ordinate Bench, restore the matter back to the file of A.O. for examining the allowability of deduction u/s. 80IA. The assessee has to furnish the required information called for by the A.O. that enterprise or undertaking is a distinct entity with a separate plant and machinery owned by the enterprise approved by the Central Government/State Government or local authority & maintaining separate books of accounts - in favour of Revenue for statistical purpose. Consumption of closing stock - addition for excise duty debited to P/L A/C - Held that - No contrary material has been shown proving that any excise duty has been debited in the profit and loss account relating to the finished gods. It is also not shown by the Revenue that cost of finished goods as worked out by the assessee did not contain the element of excise duty paid by it on the raw material consumed in the making of the finished goods. On the other hand, assesse has submitted that excise duty component of raw material has been duly debited to the profit and loss account addition considered in the costing of closing stock. This ground of Revenue is therefore also rejected - in favour of assessee. Disallowance u/s.40A(2)(a) - CIT(A) allowed the claim - Held that - A.O. has not proved that excessive payment has been made to an associate concern of the assessee. The genuineness of the transactions is not in dispute. The reliance by A.O. on the order of associate concern of the assessee is not proper as that order has been reversed by the CIT (A) and confirmed by the Tribunal. The assessee had provided calculation of fair value of services before the CIT (A) which was sent to the A.O. during remand proceedings. There is no material to justify the disallowance made by the A.O. Further, Tribunal in the case of associate concern of the assessee decided on 30-9-2009 held that there is no excessive payment for services provided to assessee. Thus once factum of excessive payment for services are not proved, there is no case of any addition even in the case of the assessee - in favour of assessee. Software expenses - Revenue v/s capital - Held that - As assessee has not been able to demonstrate as to how the expenses are of revenue in nature, thus need to be treated as capital - against assessee.

Summary

Issues Involved:
1. Deletion of disallowance of interest under Section 36(1)(iii)
2. Deduction under Section 80IA
3. Valuation of closing stock including excise duty under Section 145A
4. Disallowance under Section 40A(2)(a)
5. Software expenses as revenue expenditure under Section 37

Detailed Analysis:

1. Deletion of Disallowance of Interest under Section 36(1)(iii):
The first issue pertains to the deletion of disallowance of interest of Rs. 68,13,750/-. The Assessing Officer (A.O.) observed that the assessee company had investments in shares of associate concerns and concluded that interest-bearing funds were utilized for these investments. Consequently, the A.O. disallowed the interest. The CIT (A) deleted this disallowance, noting that the investments were made out of commercial expediency and sufficient own funds were available. The ITAT upheld CIT (A)'s decision, referencing a previous ITAT order which found that there was no direct nexus between the interest-bearing borrowed funds and the investments.

2. Deduction under Section 80IA:
The second issue involves the disallowance of deduction under Section 80IA amounting to Rs. 61,18,677/-. The A.O. disallowed the deduction on several grounds, including the lack of a distinct entity and separate books of accounts for the undertaking. CIT (A) allowed the deduction, citing similar decisions in earlier assessment years. The ITAT remitted the matter back to the A.O. for verification, directing the A.O. to consider the issue afresh and allow the deduction as per law, following the precedent set in the assessee's own case for earlier years.

3. Valuation of Closing Stock Including Excise Duty under Section 145A:
The third issue concerns the valuation of closing stock without including excise duty. The A.O. added an amount of Rs. 8,61,827/- to the closing stock, based on Section 145A, which mandates the inclusion of tax, duty, cess, etc., in the valuation of inventory. CIT (A) upheld this addition but allowed relief under Section 43B for the duty paid before filing the return. The ITAT, referencing a previous decision in the assessee's own case, deleted the addition, noting that excise duty becomes payable only upon the removal of goods and was not incurred at the time of valuation.

4. Disallowance under Section 40A(2)(a):
The fourth issue relates to the disallowance of Rs. 45,89,729/- under Section 40A(2)(a) for house-keeping charges paid to a group company. The A.O. disallowed the amount, deeming it excessive. CIT (A) deleted the disallowance, following earlier decisions for the same assessee. The ITAT upheld CIT (A)'s decision, noting that the genuineness of the transaction was not in dispute and the earlier Tribunal order had confirmed no excessive payment for services provided by the group company.

5. Software Expenses as Revenue Expenditure under Section 37:
The final issue in the cross-objection filed by the assessee concerns the treatment of software expenses as revenue expenditure. The A.O. treated the expenses as capital in nature, allowing only depreciation. CIT (A) upheld this view, referencing a decision by the ITAT Delhi. The ITAT also upheld the CIT (A)'s decision, as the assessee failed to demonstrate how the expenses were of a revenue nature.

Conclusion:
The ITAT's judgment addressed multiple issues, confirming the deletion of interest disallowance, remitting the Section 80IA deduction issue back to the A.O., deleting the addition of excise duty to closing stock, upholding the deletion of disallowance under Section 40A(2)(a), and maintaining the treatment of software expenses as capital expenditure. The Revenue's appeal was partly allowed, and the assessee's cross-objection was dismissed.