2013 (9) TMI 522 - AT - Income Tax

Revenue or Capital Expenditure - principles to decided the nature of expenses - acquisition of a unit - Held that - Expenditure incurred by appellant for successful or aborted acquisitions was capital in nature - While holding acquisition expenditure as capital expenditure we have considered type, nature and character of advantage as well as aim, intended object, effect of expenditure in larger context of necessity and expediency - Source /manner of payment or quantum of expenditure were not at all conclusive factors for deciding issue under consideration - issue has been decided after taking in to consideration basic facts i.e. where expenditure was for running business or not - expenditure was spent for purpose of bringing into existence a new asset /obtaining a new advantage. Expenses in Connection with Development of Engine - Held that - Claim of assessee that expenditure should be allowed u/s.35 also cannot be accepted - Expenditure incurred by assessee was not for scientific research, it was for transfer Technical know-how CIT V. SWARAJ ENGINES LTD. 2008 (5) TMI 257 - SUPREME COURT - appellant had acquired Technical know how from Austrian Company - Technical Know-how had been defined as knowledge which would enable a company receiving such know-how to do project - If we take note of definition of Technical know-how it becomes clear that expenditure incurred by assessee had rightly been considered as Technical know-how by AO - As per agreement IPR were to remain with appellant and final product was to be exclusive property of assessee. - Depreciation was rightly allowed - not eligible for benefit u/s 35. Development Expenses - Compact Project for Tractors - Premium Payable on Foreign Currency Convertible Bonds (FCCB) - Reversal of Premium payable on FCCBs - Held that - CIT V. ITC Hotels Ltd. 2009 (11) TMI 582 - Karnataka High Court and CIT v. Secure Meters Ltd. 2008 -TMI - 32081 - HIGH COURT RAJASTHAN even if debenture were to be converted into share at a later date, expenditure incurred on such convertible debenture had to be treated as a revenue expenditure - expenses incurred in connection with issue of FCCB were revenue in nature - No one was entitled to double deduction, so no one should suffer double taxation - AO should tax it only in one assessment year and appellant should make claim for said amount for one assessment year only. Unutilsed CENVAT Credit on Raw Material u/s 145A - Held that - AO had deliberated upon various issues with regard to Modvat credit - But, it appeared that he had not considered data available during appellate proceedings - Even if he had considered said data, he had not mentioned anything about it in assessment order - for arriving at a logical conclusion figures furnished by assessee had to be considered and commented upon - in interest of justice we remit back issue to AO - He was directed to give proper effect to stocks, purchases and sales to arrive at a definite conclusion. Octroi Incentive - Not Taxable Being Capital Receipt - Held that - It was a known fact that Octroi was charge collected by local bodies on commodities or things entering local limits -It was collected on capital goods as well as on raw material - Sahney Steel And Press Works Limited And Others V. CIT 1997 (9) TMI 3 - SUPREME Court - subsidy received by appellant to extent of purchase of raw material was concerned it cannot be held a capital receipt - question of Octroi received for capital/revenue items was neither raised before tribunal nor was it adjudicated upon - It was sufficient to say that sales tax subsidy cannot be compared with Octroi scheme in question. Disallowance U/s. 40A(9) 14A - Payments to Clubs - Held that - Following Raasi Cement Ltd. V. CIT 2004 (12) TMI 55 - ANDHRA PRADESH High Court AO disallowed claim of assessee in view of provisions of section 40A(9) - provisions of section 40A(9) were very clear in providing that any payment or contribution made by an employer on behalf of employees to any fund, trust, society, association or person etc. would not be an allowable expense except payment made for expenses provided for u/s 36(1)(iv) and (v) - In earlier years matter was remanded back to AO - it was not decided in favour of appellant - issue in question in issue should be remitted back to AO as it was referred in earlier years - AO was directed to recompute disallowance considering materials submitted. Adjustment u/s 92CA(3) to Arm s Length Price of international transaction - Held that - It was not responsibility of appellant to make payments to US company - As per agreement, appellant had to be reimbursed for payments made by it on behalf of AE - assessee was responsible only for insurance of products in course of transit, which became a liability of AE after it reached destination - No evidence in shape of expenditure had been divided to TPO or in DRP proceedings as to documentations kept. Disallowance of Capital Loss on Sale of R D Assets - Held that - There was a fundamental, though unwritten, axiom that no Legislature could have at all intended a double deduction in regard to same business outgoing; and, if it is intended, it will be clearly expressed. In other words, in absence of clear statutory indication to contrary, statute should not be read so as to permit an assessee two deductions - section 35 was part of head Income from business,profession or vocation - section 43 was part of same heading - provisions of head Capital Gains cannot be imported here to allow assessee one more deduction. Consideration Received on sale of LCV business in form of non-compete covenant treated as business income Held that - Amount received by appellant was of a revenue nature - Guffic Chem (P) Ltd. Mandalay Investment P. Ltd v. CIT 2011 (3) TMI 6 - Supreme Court - as per amended provisions whenever any fee or compensation is received by an assessee for not indulging in business activities, that were being undertaken by him before entering into such agreement, provisions of section 28(va) come into play. Disallowance u/s40a(ia) - Held that - Provisions of tax deducted at source were not applicable - GE India Technology Centre Private Ltd. V. CIT Anr. 2010 (9) TMI 7 - SUPREME COURT OF INDIA - AO had not examined issue about year-end payments - there was a difference between payments that were made during year and payments made at end of year - in 2nd category of payments tax had been detected in subsequent year when Bills were booked - amendment made to Sec.40(a)(ia) by finance act,2008, with retrospective effect from 1.4.2005. Disallowance of Weighted Deduction u/s 35(2AB) Held that - Deduction u/s 35(2AB) for Kandivili should be allowed by AO as and when approval from DSIR was received and produced by appellant - appellant was entitled to claim weighted deduction,as far as Nasik unit was concerned - while deciding issue related with benevolent provisions like 35 (2AB) a liberal and practical approach should be followed, so that it fulfils objects with which said section was introduced. Disallowance of Deduction u/s 801C Short Credit of TDS - Held that - AO had not quantified losses suffered by new unit nor had passed a speaking order in this regard - Assessing officer is directed to quantify loss for year under consideration and to give a clear finding - Credit for TDS should be given for year under consideration, even if same was filed before finalisation of assessment proceedings.

Summary

Issues Involved:
1. Disallowance of Rs. 7.97 Crores as capital expenditure.
2. Expenses in connection with the development of the engine.
3. Development expenses for the compact project for tractors.
4. Disallowance of pro-rata premium on FCCBs.
5. Reversal of premium payable on FCCBs.
6. Unutilized CENVAT credit on raw material.
7. Octroi incentive not taxable being capital receipt.
8. Special pension liability.
9. Provision for warranties.
10. Provision for pending labor demand.
11. Disallowance under section 40A(9).
12. Expenses on Employees' Stock Option.
13. Disallowance under section 14A.
14. Payments to clubs.
15. Adjustment to Arm's Length Price of international transaction.
16. Disallowance of capital loss on sale of R&D assets.
17. Consideration received on sale of LCV business treated as business income.
18. Provision for price escalation/obsolescence.
19. Disallowance under section 40a(ia) in respect of year-end provisions.
20. Disallowance of weighted deduction under section 35(2AB).
21. Disallowance of deduction under section 80-IC.
22. Short credit of TDS.

Detailed Analysis:

1. Disallowance of Rs. 7.97 Crores as Capital Expenditure:
The AO disallowed Rs. 7.97 Crores treating it as capital expenditure. The Tribunal held that expenditure for acquisitions like consultancy fees, acquisition of Tractoral UTB SA, and other entities was capital in nature. However, the Tribunal allowed depreciation on the said expenditure, treating it as part of investment.

2. Expenses in Connection with Development of Engine:
The AO treated Rs. 1.08 Crores incurred on the development of Euro IV Compliant Engine as capital expenditure. The Tribunal upheld this view, allowing only depreciation under section 32, rejecting the claim under section 35.

3. Development Expenses for Compact Project for Tractors:
The AO considered Rs. 1.89 Crores spent on the compact project for tractors as capital expenditure. The Tribunal agreed, allowing depreciation under section 32, while Rs. 69.37 lakhs were treated as revenue expenditure.

4. Disallowance of Pro-rata Premium on FCCBs:
The AO disallowed Rs. 5.39 Crores as pro-rata premium on FCCBs. The Tribunal, following decisions of other courts, held that such expenses were revenue in nature.

5. Reversal of Premium Payable on FCCBs:
The Tribunal directed that the AO should not tax the reversal of premium payable on FCCBs in the current year if it was taxed in earlier years, to avoid double taxation.

6. Unutilized CENVAT Credit on Raw Material:
The AO treated the incremental CENVAT credit balance of Rs. 25.18 lakhs as revenue income. The Tribunal remitted the issue back to the AO for a detailed examination.

7. Octroi Incentive Not Taxable Being Capital Receipt:
The AO treated Octroi incentive of Rs. 2050.92 lakhs as revenue receipt. The Tribunal held that the incentive related to revenue items was taxable, while the part referable to capital items was not.

8. Special Pension Liability:
The AO allowed only 1/5th of the special pension liability of Rs. 48.87 lakhs under section 35DDA. The Tribunal remitted the matter back to the AO for a detailed examination.

9. Provision for Warranties:
The AO disallowed Rs. 16.19 Crores as provision for warranties, treating it as contingent liability. The Tribunal remitted the issue back to the AO to decide as per guidelines laid down in the Rotrok case.

10. Provision for Pending Labor Demand:
The AO disallowed Rs. 78.45 lakhs as provision for pending labor demand. The Tribunal allowed the deduction, following earlier years' decisions.

11. Disallowance under Section 40A(9):
The AO disallowed Rs. 26.38 lakhs under section 40A(9). The Tribunal remitted the matter back to the AO for a detailed examination.

12. Expenses on Employees' Stock Option:
The AO disallowed Rs. 3.69 Crores as ESOP expenses. The Tribunal upheld the disallowance, following the decision in Ranbaxy Laboratories Ltd.

13. Disallowance under Section 14A:
The AO disallowed Rs. 29.37 Crores under section 14A. The Tribunal remitted the issue back to the AO to recompute the disallowance.

14. Payments to Clubs:
The AO disallowed Rs. 1.17 Crores as capital expenditure for club memberships. The Tribunal remitted the matter back to the AO for reconsideration.

15. Adjustment to Arm's Length Price of International Transaction:
The AO made an adjustment of Rs. 1.26 Crores for international transactions. The Tribunal directed the AO to follow the decision of ITAT Hyderabad or the amended provisions of the Act.

16. Disallowance of Capital Loss on Sale of R&D Assets:
The AO disallowed Rs. 1.85 Crores as capital loss on the sale of R&D assets. The Tribunal upheld the disallowance, stating that allowing indexation would result in double benefit.

17. Consideration Received on Sale of LCV Business Treated as Business Income:
The AO treated Rs. 10.5 Crores received as non-compete covenant as business income. The Tribunal upheld this view, stating it was covered by section 28(va).

18. Provision for Price Escalation/Obsolescence:
The AO disallowed Rs. 4.59 Crores as provision for price escalation/obsolescence. The Tribunal dismissed the ground, directing the AO to exclude the amount from taxation in subsequent years.

19. Disallowance under Section 40a(ia) in Respect of Year-end Provisions:
The AO disallowed Rs. 4.25 Crores under section 40a(ia). The Tribunal decided in favor of the assessee, stating that provisions of TDS were not applicable for year-end provisions.

20. Disallowance of Weighted Deduction under Section 35(2AB):
The AO disallowed weighted deduction for R&D expenses at Kandivali and Nashik. The Tribunal allowed the deduction for Nashik and directed the AO to allow deduction for Kandivali upon receiving approval from DSIR.

21. Disallowance of Deduction under Section 80-IC:
The Tribunal directed the AO to quantify the loss for the new unit at Haridwar and to give a clear finding on whether the unit was set up in January 2006.

22. Short Credit of TDS:
The Tribunal directed the AO to allow credit for TDS amounting to Rs. 1.85 Crores for the year under consideration.

Conclusion:
The appeal filed by the appellant is partly allowed, with several issues remitted back to the AO for reconsideration and detailed examination.