2015 (3) TMI 983 - AT - Income Tax

Revised return incorporating the merger - assessee's contention that the second revised return should be considered as a valid revised return cannot be accepted - Held that - the assessee has an option to furnish the revised return at any time before the expiry of one year from the end of the relevant assessment year or before completion of the assessment, whichever is earlier. The assessee's contention that the second revised return was filed before completion of the assessment may be technically correct, but that has to be filed before expiry of one year from the end of the relevant assessment year. In this case, as already stated earlier, the assessee had filed original return of income on November 29, 2006 and another revised return on October 29, 2007. In case, the assessee has to file another revised return the same could have been filed on or before March 31, 2008, as per the provisions of section 139(5). The words whichever is earlier puts limitation on filing of revised return beyond one year from the end of assessment year. Thus, the second revised return filed on December 24, 2009, was beyond the time-limit prescribed under the Act. Therefore, since there is a limitation provided under section 139(5) which cannot be ignored, we have to hold that the second revised return filed was beyond the time-limit prescribed. We cannot direct the Assessing Officer or the Dispute Resolution Panel to consider the same, when the law itself does not permit the same. - Decided against assessee. Capital gain on the sale of Goa unit of the assessee - short-term capital gain V/S long-term capital gain - Held that - the assessee can be considered as setting up the business only from the time it got allotment of the land, if not ready to commence manufacturing activity, and not before. In this case, even though actual manufacturing activity started much later, the setting up of the business can be considered only when the assessee is in position to occupy land to start the unit in Goa, Goa Industrial Development Corporation, as considered by authorities. The principles discussed above in fact consider the setting up much later. But the authorities even gave a benefit in considering the date of taking possession of land while deciding the date of set-up. Therefore, we are of the considered opinion that date of setting up of the business activity, as accepted by the Assessing Officer and the Dispute Resolution Panel as on April 10, 2003, does not require any modification, even though lease deed was entered into subsequently and unit was set up much later. In view of this, the gain can only be considered as short-term capital gain, as decided by authorities. - Decided against assessee. Expenditure incurred towards payment of interest to Department of Chemicals and Petrochemicals (DCP) disallowed - Held that - Considering the fact that the Assessing Officer allowed principal amount as deduction under section 37(1), we see no reason to disallow the interest as penal in nature. This interest arises not as penalty but as compensatory amount. Therefore, we hold that interest is allowable - Decided in favour of assessee. Disallowance expenditure incurred by the assessee towards honouring of bank guarantee in respect of bank loan taken by Pathnet - Held that - We are unable to decide the issue as facts are not completely brought on record. The loss on sale of investment in Pathnet was contested in ground No. 14. But what was not on record was whether the bank guarantee was given at the time of investment in Pathnet or subsequently in the course of business by that concern. This fact has a bearing on the decision. In case the assessee extended the guarantee at the time of investment itself the same can be considered as capital in nature as part of investment decision, the loss thereon will be capital loss to be considered under the head Capital gains . In case, the guarantee was extended later after the investment as part of business under taken by subsidiary, the principles of commercial expediency are to be considered. The Assessing Officer relied on the decision in the assessment year 2003-04 by the Commissioner of Income-tax (Appeals) which was confirmed by the Income-tax Appellate Tribunal in that year. But the facts in that case were that assessee advanced a loan directly to the subsidiary whereas in this case it was not a direct loan but a guarantee given to bank. So the facts are different. However, in the interest of justice, we restore the matter to the file of the Assessing Officer to examine the above aspect and decide afresh, keeping in mind the principle laid down in the above cases relied on by assessee and order of the Income-tax Appellate Tribunal in the assessment year 2003-04. - Decided in favour of assessee for statistical purposes. ESOP allotment claim disallowed - Held that - As decided in Biocon Ltd. v. Deputy CIT 2013 (8) TMI 629 - ITAT BANGALORE employee stock option plan discount (difference between market price and issue price) is a deductible expenditure at the time of vesting of the option. An adjustment has to be made if the market price is different at the time of exercise of the option. In that case also the assessee framed an Employee Stock Option Plan (ESOP) pursuant to which it granted options to its employees to subscribe for shares at the face value of ₹ 10. As the market price of each share was ₹ 919, the assessee claimed that it had given a discount of ₹ 909 which was allowable as a deduction as employee compensation. Though the options vested equally over four years, the assessee claimed a larger amount in the first year than was available under the Securities and Exchange Board of India guidelines, thus on facts, the assessee's method of claiming a larger deduction in the first year defies logic. As the options vest equally over a period of four years, the deduction ought to be claimed in four equal instalments on a straight line basis. - Thus in the present case also AO Is directed to work out the deduction keeping in mind the principle laid down by the Special Bench in the above referred case, after giving an opportunity to the assessee. - Decided in favour of assessee for statistical purposes. Disallowance of payment of sales commission and legal and professional charges made to the non-resident under section 40(a)(ia) - assessee has failed to make an application before the Assessing Officer under section 195(2) - Held that - the order for the assessment year 1997-98 applies to the facts squarely. The Assessing Officer has not established that the amounts paid are taxable under the Income tax Act 1961. Prima facie, the payments were made for services rendered abroad and as seen from the Assessing Officer's order the assessee has deducted tax on the payments made in India/for services rendered in India. Further, as submitted the conversion charges paid to a Mexican entity also cannot be taxed in India as that amount was a business income and that entity does not have any permanent establishment in India. Moreover, there seems to be no proceedings initiated under section 201 for recovery of taxes, even though the assessee applied for a certificate under section 195. Considering the above facts and order of the co-ordinate Bench extracted above, we hold that the amount cannot be disallowed in section 40(a)(i) as was done by the Assessing Officer without establishing that the amounts are taxable in India. The Assessing Officer is directed to allow the amounts. - Decided in favour of assessee. Disallowance of local doctors meet expenditure - Held that - It was submitted that expenditure was incurred on doctors for provision of various gifts in individual capacity including gifts, tickets, sponsorship, etc. It was contended that this was for business promotional expenses which are to be allowed as revenue expenditure. In the assessment year 2003-04, this issue was set aside to the file of the Assessing Officer for fresh consideration with the direction to the assessee to substantiate the business expediency to incur this expenditure. Respectfully following the above, in this year also, we modify the order of the Assessing Officer/Dispute Resolution Panel to that effect and direct the Assessing Officer to examine the nature of expenditure and whether the same can be allowed as incurred for the purpose of business. - Decided in favour of assessee for statistical purposes. For Individual doctors services ince the issue was set aside by the Commissioner of Income-tax (Appeals) to the file of the Assessing Officer to verify the nature of expenditure and disallow only that expenditure which is not incurred for the purpose of business, we also modify the order of the Assessing Officer/Dispute Resolution Panel and direct the Assessing Officer to examine the nature of expenditure and consider disallowance of expenditure which is not incurred for the purpose of business. The issue is restored to the file of the Assessing Officer. - Decided in favour of assessee for statistical purposes. Allocation of part of the head office expenditure against the profits of the units eligible for deduction under section 10B - whether Dispute Resolution Panel has erred in allocating a part of the head office expenditure against the profits of the units eligible for deduction under section 80-IB thereby reducing the deduction available to the assessee? - Held that - As decided in assessee's own case in assessment year 2003-04 wherein it was held that the assessee is rightly having allocated indirect expenses to the two units according to the wages and other expenses on the basis of sales for arriving respective profits of its two units. The Assessing Officer is directed to accept the assessee's working in relation to deduction under section 80-IA. In view of the above judgment, in our opinion, in the absence of identifying the expenditure of the export division, there is no basis other than allocating the total indirect cost on the basis of turnover. Accordingly, we direct the Assesing Officer to apportion the expenditure on the basis of turnover of various units. The issue is set aside to the file of the Assessing Officer for fresh consideration - Decided in favour of assessee for statistical purposes. Payment made to get the existing customers contracts of Falcon assigned in favour of the assessee - capital expenditure or revenue expenditure - Held that - he agreement is for purchase and sale of a business. Preamble states the M/s. Roach manages the business of Falcon and this business consist of number of third party agreements for supply of naproxen and steroids manufactured under the Falcon business, termed as transferred business in the agreement and the assessee acquired the transferred business. Clause 2.1 clearly states that the agreement was for purchase and sale of assets which are listed in (a) to (c). Terms also include that seller has to renegotiate contracts with the third parties to the extent of transferred business. The assessee also treated the same as purchase of intangible assets in the books. All these indicate that what the assessee purchased are intangible assets of transferred business and the Assessing Officer and the Dispute Resolution Panel were correct in treating it as capital expenditure and allowing depreciation under section 32 of the Act. - Decided against assessee. Disallowance of contribution towards the projects of ILS as revenue expenditure under section 37(1) - Held that - the Assessing Officer and the Dispute Resolution Panel considered the claim only under section 35AC. Since the same was not admissible, to that extent the order of the Assessing Officer and the Dispute Resolution Panel is sustained. The alternate claim under section 37(1) was not made before the Revenue authorities. Therefore in the interest of justice we restore the claim under section 37(1) to the file of the Assessing Officer to examine the same afresh, keeping in mind the order of the Income-tax Appellate Tribunal in the assessment year 2003-04 and other cases relied on by the assessee - Decided in favour of assessee for statistical purposes. Disallowance of loss incurred on transfer of investment in Pathnet, joint venture by treating the same as capital loss - Held that - The authorities are justified in disallowing the same as capital loss and not as revenue loss to be set off under the head Business . However, they are not correct in disallowing the same without considering the same under the head Capital gains or loss . The assessee no doubt treated the same as investments and sale of investments resulted in loss. This should be considered as long-term/short-term capital loss as the case may be and allowed set off or carried forward to be set off later as per the provisions of Act. This was not done by the authorities. Therefore, we allow the alternate claim of assessee and direct the Assessing Officer to compute the same and allow benefit of set off as per the provisions of Act - Decided partly in favour of assessee. Disallowance of the loss incurred in write off of investment in Aurantis - Held that - This claim is similar to the claim made with reference to investment in Pathnet discussed in Ground No. 14 above. For the reasons stated above, this should be considered as long-term/short-term capital loss as the case may be and allowed set off or carried forward to be set off later as per the provisions of Act. This was not done by the authorities. Therefore, we allow the alternate claim of the assessee and direct the Assessing Officer to compute the same and allow benefit of set off as per the provisions of Act. - Decided partly in favour of assessee. Transfer pricing adjustment - Held that - Following the findings in the assessment year 2004- 05 in the assessee's own case, we direct the Assessing Officer to modify the arm's length price adjustment on the basis of rate of interest received on deposits made with banks and public companies, for which the assessee also has no objection - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Validity of considering the second revised return filed by the assessee.
2. Classification of capital gain on the sale of Goa unit.
3. Disallowance of expenditure towards payment of interest to the Department of Chemicals and Petrochemicals (DCP).
4. Disallowance of expenditure incurred by the assessee towards honoring a bank guarantee for Pathnet.
5. Disallowance of expenditure on Employee Stock Option Plan (ESOP).
6. Disallowance of payments to non-residents under section 40(a)(ia).
7. Disallowance of various business promotion expenditures.
8. Allocation of part of the head office expenditure against profits of units eligible for deductions under sections 10B and 80-IB.
9. Treatment of payment made for acquiring customer contracts of Falcon as capital expenditure.
10. Disallowance of contribution to ILS as revenue expenditure.
11. Disallowance of loss incurred on transfer of investment in Pathnet.
12. Disallowance of loss incurred in write-off of investment in Aurantis.
13. Transfer pricing adjustment on interest charged on advances to subsidiaries.

Detailed Analysis:

1. Validity of Considering the Second Revised Return Filed by the Assessee:
The assessee filed a second revised return on December 24, 2009, to give effect to the merger order of the Andhra Pradesh High Court. The Dispute Resolution Panel (DRP) rejected this return, stating that it was beyond the time-limit prescribed under section 139(5) of the Income-tax Act, which allows filing a revised return before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier. The Tribunal upheld this view, rejecting the assessee's contention that the second revised return should be considered valid.

2. Classification of Capital Gain on the Sale of Goa Unit:
The issue was whether the capital gain arising from the sale of the Goa unit was a short-term or long-term capital gain. The Tribunal examined the dates of application, allotment, and possession of the land. It concluded that the unit was set up only when the assessee got possession of the land on April 10, 2003. Since the sale occurred within 36 months of this date, the gain was classified as a short-term capital gain.

3. Disallowance of Expenditure Towards Payment of Interest to the Department of Chemicals and Petrochemicals (DCP):
The assessee paid an amount towards overcharged sales and interest for violating the norms of the Drugs (Prices Control) Order (DPCO). The Tribunal held that while the principal amount was allowed as a deduction under section 37(1), the interest was compensatory and not penal in nature, thus allowable as a deduction.

4. Disallowance of Expenditure Incurred by the Assessee Towards Honoring a Bank Guarantee for Pathnet:
The Tribunal restored this issue to the Assessing Officer (AO) to examine whether the bank guarantee was given at the time of investment or subsequently in the course of business. If given at the time of investment, it would be capital in nature; otherwise, it could be considered under commercial expediency.

5. Disallowance of Expenditure on Employee Stock Option Plan (ESOP):
The Tribunal referred to the Special Bench decision in the case of Biocon Ltd., which held that the discount on ESOPs is a deductible expenditure. The AO was directed to work out the deduction based on the principles laid down by the Special Bench.

6. Disallowance of Payments to Non-Residents Under Section 40(a)(ia):
The Tribunal held that the AO must establish that the payments made to non-residents were taxable in India before disallowing them under section 40(a)(i). Since the AO did not establish this, the disallowance was not justified.

7. Disallowance of Various Business Promotion Expenditures:
The Tribunal upheld the disallowance of business promotion expenditure, gifts, and compliments, and individual doctor services, as these were not satisfactorily explained as related to business. However, the issue of local doctors' meet expenditure was set aside to the AO for fresh consideration.

8. Allocation of Part of the Head Office Expenditure Against Profits of Units Eligible for Deductions Under Sections 10B and 80-IB:
The Tribunal set aside this issue to the AO to re-examine the claim, following the principles laid down in the assessee's own case for the assessment year 2003-04.

9. Treatment of Payment Made for Acquiring Customer Contracts of Falcon as Capital Expenditure:
The Tribunal agreed with the AO and the DRP that the payment made to acquire customer contracts of Falcon was capital in nature and allowed depreciation under section 32.

10. Disallowance of Contribution to ILS as Revenue Expenditure:
The Tribunal restored this issue to the AO to examine the alternate claim under section 37(1), as the claim under section 35AC was not admissible.

11. Disallowance of Loss Incurred on Transfer of Investment in Pathnet:
The Tribunal held that the loss on transfer of investment in Pathnet should be considered as a capital loss and allowed set off or carry forward as per the provisions of the Act.

12. Disallowance of Loss Incurred in Write-off of Investment in Aurantis:
Similar to the Pathnet issue, the Tribunal directed the AO to consider the loss as a capital loss and allow set off or carry forward as per the provisions of the Act.

13. Transfer Pricing Adjustment on Interest Charged on Advances to Subsidiaries:
The Tribunal directed the AO to modify the arm's length price adjustment based on the rate of interest received on deposits made with banks and public companies, following the findings in the assessee's own case for the assessment year 2004-05.