2014 (8) TMI 831 - AT - Income Tax

Computation of income from House Property Held that - As decided in assessee s own case for the earlier assessment year, it has been held that the gross annual ratable value of the property for the purposes of computation of house property income is to be determined at the annual value determined by Municipal Corporation - the AO is directed to determine ALV at the value determined by Municipal Corporation Decided in favour of Assessee. Addition u/s 92 Purchases of Cefotaxime Sodium & Roxythromycin Held that - As decided in assessee s own case for the earlier assessment year, it has been held that the transaction between the assessee and the non-resident company was not an arranged transaction - The certificates produced by the assessee from various parties establish that the assessee did not buy the product cefoaxime sodium at a price higher than the price at which the same product was sold to others AO failed to establish a case where provisions of section 92 could be applied to disown the loss incurred by the assessee Decided in favour of Assessee. Full revenue deduction of VRS & early retirement incentives Held that - Various manufacturing unit of assessee at Mulund, Ankleshwar and Goa and under loan licence agreement part of the corporate business and many of the projects which were being maintained at Mulund were continued to be produced under loan licence agreement - the expenditure incurred on VRS was wholly and exclusively for the purpose of business there was no merit in the action of the lower authorities for declining the assessee s claim for deduction of VRS and early retirement incentives paid to the workers Decided against Revenue. Sales-tax set off and refund to be included in the total turnover - Computing of deduction u/s 80HHC Reduction of Processing charges Held that - Following the decision in ACG Associated Capsules Vs. CIT 2012 (2) TMI 101 - SUPREME COURT OF INDIA - sales tax refund and set off will be considered for reduction as per Explanation (baa) to Section 80HHC -the AO that only net receipts after deducting expenditure incurred for earning such income will be considered for reduction from eligible business profit as per Explanation (baa) thus, the Matter is remitted back to the AO for adjudication Decided in favour of Assessee. Indirect cost of trading exports Held that - As decided in assessee s own case for the earlier assessment year, it has been held that expenditure incurred at branch office at Hyderabad which had no connection or link with export could not be considered as part of indirect cost - the indirect cost to be considered for the purpose of Section 80HHC would be the total indirect cost incurred for the total turnover and not only relating to the export turnover - the expenses incurred at Hyderabad Branch is not directly related to domestic sales which have to be considered as part of indirect cost. Bad debts disallowed Held that - Following the decision in TRF Ltd. Vs. CIT 2010 (2) TMI 211 - SUPREME COURT - After April 1, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable - It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee - since the AO has not examined whether the debt has, in fact, been written off in accounts of the assessee - thus, the matter is remitted back to the AO for fresh consideration Decided in favour of Assessee. Levy of interest u/s 234D Held that - Relying upon CIT Vs. Indian Oil Corporation Ltd. 2012 (9) TMI 517 - BOMBAY HIGH COURT - the proceeding in regard to refund which has been granted u/s 143(1) of the Act are concluded and final - The refund which has been granted u/s 143(1) of the Act is provisional, to be finally determined when final assessment order is passed under section 143(3) of the Act - Explanation-2 to section 234D of the Act makes it clear that it would be applicable to pending proceedings i. e. where assessment in respect of such assessment year is not completed on 1/6/2003 - the order of the CIT(A) is upheld Decided against Assessee. Computation of deduction u/s 80HHC - Exclusion of processing charges and bad debts from turnover Held that - Following the decision in CIT Vs. Ravindranathan Nair 2007 (11) TMI 10 - Supreme Court of India - the processing charges were included in the gross total income from cashew business - even according to assessee the charges constituted an important component of gross total income from cashew business - in terms of clause (baa), 90% of the independent income had to be deducted from gross total income to arrive at Business Profits to which the fraction had to be applied - the processing charges constituted independent income similar to rent, commission, etc., which formed part of the gross total income, the same had to be reduced by 90% as contemplated in clause (baa) to arrive at Business Profits - the processing charges were includible in the total turnover in the formula under Section 80HHC(3) of the I.T. Act - the AO is directed to re-compute the deduction u/s.80HHC after excluding the net income from processing charges - bad debts recovered is neither part of total turnover nor export turnover for the purpose of Section 80HHC. Re-computation of indirect cost attributable to export of trading goods Held that - Following the decision in AVENTIS PHARMA LTD. Versus DEPUTY COMMISSIONER OF IN COME TAX, RANGE-8(1), MUMBAI 2013 (1) TMI 257 - ITAT MUMBAI - for the purpose of sec. 80HHC(3)(b) r.w.clause (e) of Explanation, the indirect cost to be allocated in the ratio of export turnover of trading goods to the total turnover has to be taken as the total figure of the indirect cost incurred for the total turnover and not the indirect cost directly related to the export turnover as held by the CIT(A) - the AO has reduced from the total cost of business, cost of goods as well as the other items Decided in favour of Revenue. Calculation of deduction u/s.80HHC without reducing 90% of the DEPB license sold Held that - Following the decision in Topman Exports Vs. CIT 2012 (2) TMI 100 - SUPREME COURT OF INDIA - a subject will be liable to tax and will be entitled to exemption from tax according to the strict language of the taxing statute and if as per the words used in Explanation (baa) to section 80HHC read with the words used in clauses (iiid) and (iiie) of section 28, the assessee was entitled to a deduction under section 80HHC on export profits, the benefit of such deduction cannot be denied to the assessee the AO is directed to compute the deduction u/s 80HHC Decided partly in favour of Revenue.

Summary

Issues Involved:
1. Computation of income from house property.
2. Addition under Section 92 in respect of purchases of Cefotaxime Sodium & Roxythromycin.
3. Disallowance of estimated depreciation on obsolete assets.
4. Fair market value for computation of long-term capital gain.
5. Disallowance under Section 14A.
6. Deduction of VRS & early retirement incentives.
7. Inclusion of sales-tax set off and refund in total turnover for Section 80HHC.
8. Reduction of processing charges under Clause (baa) of Section 80HHC.
9. Expenditure at Hyderabad Branch as part of indirect cost of trading exports.
10. Disallowance of bad debts.
11. Levy of interest under Section 234D.
12. Disallowance of interest attributable to tax-free investment income.
13. Exclusion of excise duty from total turnover for Section 80HHC.
14. Exclusion of processing charges and bad debts from total turnover for Section 80HHC.
15. Recalculation of indirect cost attributable to export of trading goods.
16. Calculation of deduction under Section 80HHC for DEPB license sold.
17. Adjustment in valuation of closing stock.

Detailed Analysis:

1. Computation of Income from House Property:
The issue pertains to the computation of income from the 5th floor of Hoechst House. The assessee let out the property at a nominal rent of Re.1 per month, which the AO contested and computed the ALP at Rs. 150 per sq.ft. per month. The CIT(A) directed the AO to compute ALV at Rs. 24,00,000. The Tribunal observed that the Municipal Corporation's ratable value should be used for computation, following earlier decisions in the assessee's own case. The AO was directed to determine ALV based on the Municipal Corporation's value, allowing the assessee's ground and dismissing the Revenue's ground.

2. Addition under Section 92:
The AO made additions for the inflated purchase price of raw materials Cefotaxime Sodium and Roxythromycin. The CIT(A) partly allowed the assessee's claim, noting that the AO did not present new facts warranting higher addition. The Tribunal followed the Bombay High Court and earlier Tribunal decisions, concluding that the transactions were not "arranged" and the AO failed to establish a case for invoking Section 92. The Tribunal decided in favor of the assessee, dismissing the Revenue's ground.

3. Disallowance of Depreciation on Obsolete Assets:
The AO disallowed depreciation on obsolete assets. The Tribunal, referencing the Bombay High Court's decision in CIT Vs. GR Shipping Ltd. and earlier Tribunal decisions in the assessee's case, allowed the depreciation claim, dismissing the AO's disallowance.

4. Fair Market Value for LT Capital Gain:
The issue of the fair market value as of 01.04.1981 for computing long-term capital gain on land sale was decided against the assessee, following the Tribunal's decision in the assessee's own case for previous years. The Tribunal dismissed the assessee's ground and decided in favor of the Department.

5. Disallowance under Section 14A:
The AO's disallowance under Section 14A was contested by the assessee. The Tribunal, referencing earlier decisions in the assessee's own case and the Bombay High Court's ruling in Topstar Mercantile (P) Ltd., found no merit in the disallowance, ruling in favor of the assessee.

6. Deduction of VRS & Early Retirement Incentives:
The AO disallowed VRS expenses, considering them as retrenchment costs. The CIT(A) allowed part of the expenses. The Tribunal, referencing the Supreme Court's decision in K. Ravindranathan Nair Vs. CIT and the Bombay High Court's decision in CIT Vs. Foseco India Ltd., allowed the full deduction of VRS expenses, dismissing the Revenue's ground.

7. Inclusion of Sales-Tax Set Off and Refund:
The Tribunal held that sales tax refund and set off should be considered for reduction as per Explanation (baa) to Section 80HHC, following the Supreme Court's decision in ACG Associated Capsules Vs. CIT.

8. Reduction of Processing Charges:
The Tribunal directed the AO to consider only net receipts after deducting expenditure for earning such income for reduction under Explanation (baa), following earlier Tribunal decisions in the assessee's case.

9. Expenditure at Hyderabad Branch:
The Tribunal upheld the inclusion of Hyderabad Branch expenses as part of indirect costs for computing deduction under Section 80HHC, following its earlier decision in the assessee's case.

10. Disallowance of Bad Debts:
The Tribunal, referencing the Supreme Court's decision in TRF Ltd. Vs. CIT, remanded the matter back to the AO to verify if the bad debts were written off in the assessee's accounts, allowing the ground for statistical purposes.

11. Levy of Interest under Section 234D:
The Tribunal upheld the levy of interest under Section 234D, following the Bombay High Court's decision in CIT Vs. Indian Oil Corporation Ltd.

12. Disallowance of Interest Attributable to Tax-Free Investment:
The Tribunal dismissed the Revenue's ground, following its earlier decision in the assessee's case for A.Y. 2000-01.

13. Exclusion of Excise Duty from Total Turnover:
The Tribunal upheld the exclusion of excise duty from total turnover for computing deduction under Section 80HHC, following the Supreme Court's decision in CIT Vs. Laxmi Machine Works.

14. Exclusion of Processing Charges and Bad Debts:
The Tribunal directed the AO to recompute the deduction under Section 80HHC, excluding net income from processing charges and bad debts, following the Supreme Court's decision in CIT Vs. Ravindranathan Nair.

15. Recalculation of Indirect Cost:
The Tribunal upheld the AO's method of computing indirect costs for trading exports, following its earlier decision in the assessee's case for A.Y. 1998-99.

16. Calculation of Deduction for DEPB License:
The Tribunal directed the AO to compute the deduction on DEPB license sold in terms of the Supreme Court's decision in Topman Exports Vs. CIT.

17. Adjustment in Valuation of Closing Stock:
The Tribunal remanded the matter back to the AO for de novo consideration, following its earlier decision in the assessee's case for A.Y. 1999-2000.

Conclusion:
Both the assessee's and Revenue's appeals were partly allowed for statistical purposes, with directions for the AO to follow the Tribunal's and higher courts' decisions in the assessee's own case on similar issues.