2015 (12) TMI 302 - AT - Income Tax

Disallowance u/s 14A - CIT(A) has enhanced the disallowance u/s 14A to 3, 25, 89, 130/- as against the disallowance made by the AO at 9, 98, 374/- - Held that - The formula adopted by the Ld. CIT(A) for making the disallowance u/s 14A is quite akin to formula laid down in Rule 8D which admittedly cannot be held to be applicable at all in the AY 2004-05. What could be the reasonable basis for disallowance has to be worked out from the nature of expenses debited and overall accounts of the assessee. So far as disallowance of interest expenditure is concerned in the case of the assessee it is an admitted fact permeating from the earlier years that the investments which have yielded exempt income were out of assessee s own funds and no interest bearing funds were diverted for making the investments. Once that is so then in view of the ratio laid down by the Hon ble jurisdictional High Court in the case of CIT vs HDFC Bank (2014 (8) TMI 119 - BOMBAY HIGH COURT ) we hold that no disallowance on account of interest can be made in this case. As regards direct expenses are concerned the AO has given a categorical finding which has not been rebutted before us that Demat charges of 8, 25, 010/- were directly related to investment made in shares. Accordingly so far as disallowance of 8, 25, 010/- on account of demat charges made by the AO the same stands confirmed. Regarding balance disallowance we find that 5% of the exempt income appears to be quite reasonable having regard to the nature of expenses and accounts of the assessee. Accordingly we uphold the disallowance to the extent of 9, 98, 374/- which was made by the AO. - Decided partly in favour of assessee. Disallowance of professional fees paid to Majumdar and Co. for registration of copy rights of designs and engines - revenue v/s capital expenditure - Held that - It is an undisputed fact that payment has been made for getting the engine designs patented which the assessee produces/manufactures. Such a copyright and patent will only go to enhance the cost of such an intangible asset and accordingly it has been rightly disallowed as capital expenditure by the Ld. AO and CIT(A). However we agree with the alternate contention of the Ld. Counsel that if it is treated as capital expenditure for a capital asset then depreciation has to be allowed on such an intangible asset which specifically finds mention in section 32(1)(ii). Accordingly we direct the AO to allow depreciation as per relevant rules provisions on such a capital expenditure. - Decided partly in favour of assessee. Addition on account of contribution to employees welfare fund - Held that - Following the earlier years precedence wherein held not been able to produce any evidence in the form of the copy of agreement with the workers union to support and substantiate her stand taken on this issue and in the absence of the same we find no justifiable reason to interfere with the impugned order of the learned CIT(Appeals) confirming the disallowance made by the AO on this issue by invoking the provisions of section 40A(9). - Decided against assessee. Disallowance of various payments on the ground of infraction of law - Held that - so far as late payment of fee to Chennai Municipal Corporation is concerned it is on account of late payment of Health License it is not for any kind of penalty or infraction of law. Accordingly the payment made to Chennai Municipal Corporation is treated as business expenditure. As regards the payment on account of sales tax it was due to technical error wherein assessee has stated that the destination of consignee as Indore despite the fact that name of consignee destination and address were correctly written. This again cannot held to be in the nature of penalty or infraction of law. Next amount of charges of 32, 000/- for compliance of Weights and Measures is not for any violation which can be suggestive of any infringement of law hence it cannot be held to be punitive in nature and accordingly the same is held to be allowable. Lastly as regard the amount paid to the High Court for sum of 10, 00, 000/- this was on account of direction given by the High Court for granting Stay of demand on Company s Stay Petition in respect of appeal filed before the High Court. The said direction for depositing the amount was to be allowed in the year where it will get adjusted against the demand. Accordingly this payment cannot be held to be for any infraction of law or penalty. Accordingly the same is treated as allowed. - Decided in favour of assessee. Disallowance of claim of deduction of R 16, 10, 62, 604/- has been reduced by the amount transferred from revaluation reserve and only the net depreciation has been debited i.e. 6, 80, 317/- and accordingly this net depreciation which has been transferred and reduced from revaluation reserve credited to the P 6, 80, 317/- on account of depreciation from the book profit in view of Explanation (i) to section 115JB(2).- Decided in favour of assessee. Deduction u/s 80HHC should be allowed in the working of MAT and the export profit as per the books to be reduced - Held that - Now the decision of the Hon ble Supreme Court in the case of Ajanta Pharma reported in 2010 (9) TMI 8 - SUPREME COURT clinches this issue in favour of the assessee categorically held that for computing the book profit u/s 115JB the relief will be computed u/s 80HHC(3)/3A subject to conditions under sub-clauses (4) and (4A) of that section. Thus this issue is squarely covered by the decision of Hon ble Supreme Court - Decided in favour of assessee. MAT assessment - Direction by CIT(A) to AO to deduct book profit carried forward on loss or unabsorbed depreciation whichever is less - Held that - We agree with the contention of the Ld. Counsel that the loss or depreciation should be adjusted as per the earlier/past MAT assessment i.e. the book profit determined by the AO in the earlier years and not as per the book figures. The assessee has given the working. Accordingly the AO is directed to verify the working and give deduction of carried forward losses and unabsorbed depreciation on the basis of assessment completed by the AO under MAT in the earlier years - Decided in favour of assessee.

Summary

Issues Involved:
1. Enhancement of disallowance under section 14A.
2. Disallowance of professional fees paid for registration of copyrights.
3. Disallowance on account of contribution to employees' welfare fund.
4. Disallowance of various payments on the ground of infraction of law.
5. Disallowance of R&D expenses.
6. Addition on account of unutilized CENVAT credit.
7. Addition on account of interest waived by banks.
8. Transfer Pricing Adjustment on International Transactions.
9. Claim for carried forward losses and unabsorbed depreciation.
10. Tax treatment of capital gains arising from the sale of flats.
11. Addition to book profit under section 115JB on extraordinary items.
12. Deduction from book profit under section 115JB for revaluation reserve.
13. Deduction of the amount eligible for deduction under section 80HHC from book profit.
14. Deduction of carried forward losses and unabsorbed depreciation from book profit.

Issue-wise Detailed Analysis:

1. Enhancement of Disallowance under Section 14A:
The assessee challenged the enhancement of disallowance under section 14A by CIT(A) from Rs. 9,98,374/- to Rs. 3,25,89,130/-. The CIT(A) used a formula akin to Rule 8D, which was not applicable for the assessment year 2004-05. The Tribunal upheld the disallowance to the extent of Rs. 9,98,374/- made by the AO, confirming that no interest disallowance could be made as investments were from the assessee's own funds. However, demat charges of Rs. 8,25,010/- were confirmed as disallowable.

2. Disallowance of Professional Fees:
The professional fees of Rs. 1,18,350/- paid for registration of copyrights were treated as capital expenditure by the AO and CIT(A). The Tribunal agreed with this treatment but directed the AO to allow depreciation on the capitalized amount as per section 32(1)(ii).

3. Disallowance on Account of Contribution to Employees' Welfare Fund:
The disallowance of Rs. 1,73,543/- for contributions to various welfare funds was upheld, following the Tribunal's decision for the AY 2003-04, where such contributions were not allowed under section 40A(9).

4. Disallowance of Various Payments on the Ground of Infraction of Law:
The Tribunal allowed the payments made for late payment fee to Chennai Municipal Corporation, sales tax due to a technical error, and compliance fee for Weights and Measurement Rules as business expenditures. The amount paid to the High Court was also allowed as it was not for any infraction of law or penalty.

5. Disallowance of R&D Expenses:
The Tribunal remitted the issue back to the AO to verify the details of expenses incurred for the "Avatar Project" and allow the deduction under section 35(1)(iv) if the expenses were indeed for R&D purposes.

6. Addition on Account of Unutilized CENVAT Credit:
The Tribunal directed the AO to give effect to adjustments in the purchases made during the year and work out the relief, following the principle of full effect of section 145A.

7. Addition on Account of Interest Waived by Banks:
The Tribunal restored the matter to the AO to give effect to the CBDT's certificate if issued, exempting the interest amount waived by the banks from being taxed.

8. Transfer Pricing Adjustment on International Transactions:
The Tribunal rejected the internal comparability analysis by the TPO and CIT(A) and remitted the matter back to the TPO/AO to examine the external comparables and complete the gross profit margin analysis for benchmarking the assessee's transactions.

9. Claim for Carried Forward Losses and Unabsorbed Depreciation:
The Tribunal did not adjudicate on this general ground as it was not pressed during the hearing.

10. Tax Treatment of Capital Gains Arising from the Sale of Flats:
The Tribunal directed the AO to compute the capital gain from the sale of flats held for more than three years as long-term capital gain for the purpose of applying the appropriate tax rate, following the decision in Smita Conductors Ltd.

11. Addition to Book Profit under Section 115JB on Extraordinary Items:
The Tribunal admitted additional evidence and restored the matter to the AO to examine these and decide the issue afresh regarding the addition of extraordinary items to the book profit.

12. Deduction from Book Profit under Section 115JB for Revaluation Reserve:
The Tribunal directed the AO to reduce the net amount of Rs. 6,80,317/- on account of depreciation from the book profit as per Explanation (i) to section 115JB(2).

13. Deduction of the Amount Eligible for Deduction under Section 80HHC from Book Profit:
The Tribunal allowed the deduction for eligible profit under section 80HHC to be worked out based on book profit as per the decision of the Supreme Court in Ajanta Pharma.

14. Deduction of Carried Forward Losses and Unabsorbed Depreciation from Book Profit:
The Tribunal directed the AO to verify the working and give deduction of carried forward losses and unabsorbed depreciation based on the assessment completed by the AO under MAT in the earlier years.

Conclusion:
The appeal was partly allowed with specific directions for each issue, emphasizing the necessity of proper verification and adherence to legal precedents.