2015 (3) TMI 760 - AT - Income Tax

Disallowance of additional depreciation - new machinery and plant acquired after September 30 2006 - According to assessee for the assessment year 2007-08 additional depreciation was granted only at 10 per cent the balance 10 per cent. has to be allowed during the year under consideration - Held that - Assessee is entitled for additional depreciation at 10 per cent. during the year under consideration. Accordingly the orders of the lower authorities are set aside and the Assessing Officer is directed to allow 10 per cent. of the balance depreciation.- Decided in favour of assessee. Disallowance of share issue expenditure - equity shares and fee paid to the Registrar of Companies for increasing the authorised capital - Held that - The assessee now claims that expenditure was incurred for issue of shares to Qualified Institutional Buyers and fees paid to the Registrar of Companies. Therefore it has to be amortised for five years and one-fifth of the amount shall be allowed during the year under consideration. A bare reading of the draft assessment order; the objection filed by the asses see before the Assessing Officer and the decision of the Dispute Resolution Panel clearly shows that the assessee claimed that additional capital was raised for augmentation of the working capital ; therefore it was in the revenue field. It was also not claimed before the lower authority that the expenditure was incurred in respect of issue of shares and fees paid to the Registrar of Companies. Therefore the lower authorities had no occasion to examine whether the expenditure was in fact incurred for issue of shares and fees paid to the Registrar of Companies. Since now the assessee claims that the expenditure was incurred for issue of shares to the Qualified Insti tutional Buyers and on fees paid to the Registrar of Companies this Tribunal is of the considered opinion that the matter needs to be reconsidered by the Assessing Officer. The decision rendered for the assessment year 2007-08 equally holds good for the assessment year under consideration also. As such consistent with the decision taken earlier for the assessment year 2007-08 we remit the matter back to the file of the Assessing Officer with similar directions. - Decided in favour of assessee for statistical purposes. Disallowance of additional weighted deduction of 50 per cent - Held that - Consistent with the earlier decision taken for the assessment year 2007-08 the orders of the lower authorities are set aside and the issue under section 35(2AB) of the Act is remanded back to the file of the Assessing Officer for reconsideration as the assessee failed to claim the same before the Assessing Officer. The Assessing Officer shall reconsider the issue and decide the same afresh in accordance with law after giving reasonable opportunity of hearing to the assessee.- Decided in favour of assessee for statistical purposes. Disallowance of pre-operative expenditure - expenses incurred by the assessee for setting up for a new manufacturing plant at Chennai - Held that - It is settled principles of law that an expenditure incurred in the process of earning of profit is to be treated in the revenue field. However in the case on hand the assessee claims that the authorities below proceeded on misconception of fact that the preoperative expenses are related to construction and erection of plant and machinery and building at Chennai whereas expenses in question relates to salary travelling conveyance provident fund postage and miscellaneous expenses incurred by the head office for the purpose of exploratory work done by the project division which are in the nature of administrative expenses which need to be allowed under section 37 of the Act. For this proposition learned counsel relied upon a plethora of judgments. The assessee also claims that no deduction was claimed during the year under consideration. The cost of land acquired to the extent of Rs. 13.79 crores was claimed to be capitalised in the balance-sheet. Therefore there was a factual misconception as claimed by the assessee. If there is no purchase of plant and machinery and construction during the year under consideration there is no question of treating the expenditure as capital in nature. However the matter needs to be verified by the Assessing Officer whether the expenditure was incurred for purchase and erection of plant and machinery or it is only administrative expenses as claimed by the assessee. This factual aspects need to be verified by the Assessing Officer. - Decided in favour of assessee for statistical purposes. Disallowance of depreciation - Rental income received by the assessee from its sister concern in respect of let out portion at the corporate office at Gurgaon - Held that - The very same issue came up before this Tribunal for the assessment year 2007-08 2014 (1) TMI 33 - ITAT COCHIN wherein by following the earlier orders of this Bench of this Tribunal for the assessment years 2001-02 to 2006-07 we found that the assessee was not entitled for depreciation on the let out portion of the property. - Decided against assessee. Transfer pricing adjustment on reimbursement received by the assessee from Dunlop Tyres International Pty. Ltd. - Held that - In the case before us the Transfer Pricing Officer found that the reimbursement received by the assessee from its associate enterprises and he adjusted 5 per cent. of marking on the ground that the reimbursement of expenditure does not consistent with the arm s length price. The Transfer Pricing Officer has not discussed any comparable cases as per the method provided in the Income-tax Act. If the Assessing Officer found that the reimbursement received by the assessee is not consistent with the arm s length price then he ought to have compared the case as per the proper method as provided in the Act. If the Assessing Officer found that there are more than one price as per the computation made by the most appropriate methods then he may determine the arithmetic mean of such prices. In this case without considering any comparables and without determining more than one price the Transfer Pricing Officer made adjustment of 5 per cent. mark up. Unless and until more than one price is determined after considering comparables on the basis of the most appropriate method this Tribunal is of the considered opinion that adjustment of 5 per cent. is not permissible. Therefore before making any adjustment the services rendered by similarly placed industries needs to be determined on the basis of the appropriate method prescribed in the Income-tax Act. Since the lower authorities have not considered the comparable cases the orders of the lower authorities are set aside and the matter is remanded back to the file of the Assessing Officer. The Assessing Officer shall consider the comparable cases and determine the arm s length price for the services rendered by the assessee on the basis of the most appropriate method and thereafter decide the issue in accordance with law after giving reasonable opportunity to the assessee. - Decided in favour of assessee for statistical purposes. Income from sale of certified emission reduction (carbon credit) - Held that - In the case on hand the certified emission reduction/carbon credit was obtained by the assessee in the course of its business activity therefore the same cannot be treated as a capital asset. This Tribunal is of the considered opinion that certified emission reduction/ carbon credit is at par with import entitlement. Admittedly the import entitlement was given to the exporter on the basis of the foreign exchange earned through export under the import and export scheme formulated by.Government of India. In this case also the certified emission reduction/ carbon credit was given on the basis of the United Nations Framework Convention on Climate Change under Kyoto Protocol. Therefore both import entitlement and certified emission reduction/carbon credit comes from a scheme. Therefore this Tribunal is of the considered opinion that import entitlement as well as certified emission reduction/carbon credit are at par. The income on sale of certified emission reduction/carbon credit cannot be treated as capital receipt therefore it is to be treated as profits and gains of business or profession ; hence liable for taxation. - Decided against assessee. Entitlement for deduction under section 80-IA - Held that - Deduction of an amount equal to 100 per cent. of the profit derived from business undertaking is alone eligible for deduction under section 80-IA of the Act. While interpreting the words derived from the apex court in the case of Sterling Foods 1999 (4) TMI 1 - SUPREME Court found that the expression attributable to is wider in import than the expression derived from . In this case also the income on sale of certified emission reduction/ carbon credit was attributable to the business of the assessee since the same was conferred on the assessee under the scheme promoted by the United Nations Framework Convention on Climate Change under Kyoto Protocol. But it is not the direct source of income from the industrial undertaking of the assessee. At the best we may say that it has nexus with the business of the assessee or attributable to the business of the assessee. Therefore the income on sale of certified emission reduction/carbon credit would form part of the profit and gains of business ; however cannot be treated as profit derived from the industrial undertaking. Since the Legislature has specifically used the term derived from we are of the considered opinion that the assessee is not entitled for deduction under section 80-IA of the Act. - Decided against assessee.

Summary

Issues Involved:
1. Disallowance of additional depreciation.
2. Disallowance of share issue expenditure.
3. Disallowance of additional weighted deduction.
4. Disallowance of pre-operative expenditure.
5. Disallowance under section 14A.
6. Rental income from let out portion.
7. Transfer pricing adjustment on reimbursement.
8. Income from sale of certified emission reduction (carbon credit).

Issue-wise Detailed Analysis:

1. Disallowance of Additional Depreciation:
The assessee claimed additional depreciation under section 32(1)(iia) of the Act for new machinery and plant acquired after September 30, 2006. The Assessing Officer restricted the disallowance for the assessment year 2007-08 as the machinery was used for less than 180 days, allowing only 10% depreciation. The Tribunal, referencing a prior decision, ruled that the balance 10% should be allowed in the subsequent year, directing the Assessing Officer to allow the remaining depreciation.

2. Disallowance of Share Issue Expenditure:
The assessee incurred expenditure for increasing the authorized capital and paid fees to the Registrar of Companies. The Tribunal, referencing a previous decision, remitted the matter back to the Assessing Officer to verify if the expenditure was for acquiring a capital asset or for working capital. The Assessing Officer was directed to reconsider the issue afresh and provide a decision after giving the assessee a reasonable opportunity.

3. Disallowance of Additional Weighted Deduction:
The assessee claimed additional weighted deduction under section 35(2AB). The Tribunal, consistent with a prior decision, remitted the issue back to the Assessing Officer for reconsideration. The Assessing Officer was instructed to decide the matter afresh in accordance with the law after giving the assessee a reasonable opportunity.

4. Disallowance of Pre-operative Expenditure:
The assessee incurred pre-operative expenditure for setting up a new manufacturing plant at Chennai. The Tribunal noted a factual misconception by the authorities below and remitted the matter back to the Assessing Officer to verify whether the expenditure was for administrative expenses or for the purchase and erection of plant and machinery. The Assessing Officer was directed to re-examine the issue and decide afresh after considering all case laws quoted by the assessee.

5. Disallowance under Section 14A:
The assessee did not press this ground of appeal. Consequently, the disallowance of Rs. 33,820 under section 14A read with rule 8D was confirmed, and the ground was dismissed as not pressed.

6. Rental Income from Let Out Portion:
The assessee received rental income from its sister concern for a let-out portion at the corporate office. The Tribunal, consistent with earlier decisions, confirmed the order of the Commissioner of Income-tax (Appeals) that the assessee was not entitled to depreciation on the let-out portion of the property.

7. Transfer Pricing Adjustment on Reimbursement:
The assessee received reimbursement from Dunlop Tyres International Pty. Ltd. for expenses incurred on deputed employees. The Transfer Pricing Officer (TPO) made an adjustment by marking up 5% on the reimbursement, considering it an international transaction. The Tribunal found that the TPO did not consider comparable cases as per the method provided in the Act. The matter was remitted back to the Assessing Officer to determine the arm's length price after considering comparable cases and decide the issue in accordance with the law.

8. Income from Sale of Certified Emission Reduction (Carbon Credit):
The assessee received income from the sale of carbon credits and claimed it as a capital receipt or alternatively sought deduction under section 80-IA. The Tribunal ruled that carbon credits are an entitlement given in the course of business activity and not an accretion of capital asset. The income from the sale of carbon credits was treated as a trading receipt and not a capital receipt. The Tribunal also held that the income from the sale of carbon credits does not qualify for deduction under section 80-IA as it is not directly derived from the industrial undertaking but is attributable to the business of the assessee.

Conclusion:
The appeal of the assessee was partly allowed, with several issues remitted back to the Assessing Officer for reconsideration and decisions to be made afresh in accordance with the law.