2016 (2) TMI 1221 - AT - Income Tax

Deduction u/s 35AB - whether expenditure in question was of capital in nature? - assessee incurred expenditure for the purpose of acquiring technical know how or not? - HELD THAT - Neither the AO nor the ld. CIT(A) has brought out any allegation against the assessee that the assessee incurred expenditure for the purpose of acquiring technical know how. In the light of the principles laid down by the Hon'ble Supreme Court in the case of Swaraj Engines 2008 (5) TMI 257 - SUPREME COURT then we find that it is pre condition for invocation of provisions of section 35AB of the Act that the AO has to bring out this allegation that the expenditure in question was of capital in nature and unless and until this fact brought out on record and established by cogent material, provisions of section 35AB of the Act cannot be invoked. In view of the above, we are inclined to hold that the AO made disallowance without any justified reason and basis and the ld. CIT(A) upheld part disallowance by observing incorrect facts and without bringing out any material to establish the fact that the expenditure was incurred by the assessee for acquiring technical know how. CIT(A) himself noted that the assessee has not incurred expenditure in question for the purpose of technical know how but the claimed expenditure was incurred for consultancy services which is obviously allowable u/s 37 of the Act as being incurred for the purpose of business of the assessee. Accordingly addition to be deleted - Decided in favour of assessee MAT computation - enhance book profit by depreciation in revalued assets for the purpose of section 115JA(2) - HELD THAT;- as per the claim of the assessee, the assessee transferred similar amount to the profit and loss account from revaluation account and thereafter, the assessee claimed reduction from the book profits of the same amount representing transfer from revaluation reserve. In this situation, the assessee was rightly held as eligible for reduction of book profits by the amount which was transferred from revaluation to profit and loss account. However, the CIT-DR has raised his dispute regarding above noted treatment claimed to have been made by the assessee. Therefore, firstly, we uphold that the assessee is eligible for reduction of amount of revaluation reserve which was transferred from revaluation account to profit and loss account. The AO is directed to verify the said claim of the assessee in the light of the decision of the Hon'ble Supreme Court in the case of CIT Vs. Apollo Tyres Ltd 2002 (5) TMI 5 - SUPREME COURT and Indo Rama Synthetics 2011 (1) TMI 1 - SUPREME COURT OF INDIA Ground of the Revenue are deemed to be allowed for statistical purposes for limited purposes of examination and verification of the entries made by the assessee in this regard and in the manner as indicated above. Nature of expenditure - installation expenses of software system - revenue or capital expenditure - HELD THAT - AO has noted that the necessary circulars requiring modernization and improvement of productivity of existing business of the assessee were filed during assessment proceedings. At this juncture, it is relevant to take respectful cognizance of the decision of DCIT Vs. Core Health Care Limited 2008 (2) TMI 8 - SUPREME COURT OF INDIA wherein it was held that the assessee was entitled to deduction u/s 36(1)(iii) of the Act prior to its amendment by the Finance Act, 2003 in relation to money borrowed for the purchase of machinery even though the assessee had not utilized the machinery in the year of borrowing - proviso inserted in section 36(1)(iii) w.e.f. 1.4.2004 will operate prospectively and the present case in hand before us is pertaining to A.Y 1998-99. Therefore - decided against revenue Disallowance of expense incurred on books and journals - Revenue or capital expenditure - Whether books are tools for its business activities? - HELD THAT - the monthly and other journals cannot be equated with the books having long life and which are used for the purpose of business of the assessee for several years to come. Therefore, we are of the considered opinion that this issue needs to be examined and verified afresh at the end of the AO and the AO is directed to examine the same in the light of the observations as noted above and therefore, Ground of the Revenue are deemed to be allowed for statistical purposes. Allowance of legal and consultancy expenses - allowable expense u/s 37 - HELD THAT - Undisputedly, this amount was not incurred for the purpose of acquiring technical know how and from para 11 of the assessment order it is clear that the expenses were incurred for legal and consultancy charges. Therefore, the same was allowable u/s 37 of the Act. Deduction u/s 80HH, 80I and 80IA on interest income - AR submitted that interest received on fixed deposits kept in bank as margin money is taxable under the head business income and is consequently eligible for deduction - and not income from other sources as per revenue - DR vehemently contended that the income from other sources was not derived from industrial undertaking therefore, the same was not eligible for deduction - HELD THAT - CIT(A) has treated the sum of ₹ 3,85,17,571/- as business income and directed the AO to allow deductions u/s 80HH, 80I and 80IA of the Act by following the decision in assessee s own case for A.Y 1996-97. We find no infirmity in the order of the ld. CIT(A) - revenue appeal dismissed. Disallowance u/s 40A(2) on account of excessive interest paid - HELD THAT - We find substance in the contention of the ld. AR that interest has been paid on the borrowings which have been utilized for the purpose of assessee s business. Further the assessee has borrowed funds from several other unrelated concerns on which interest @ 20-21% was paid. Thus, interest @ 24% cannot be termed as excessive to attract the provisions of section 40A(2) of the Act. This fact has not been controverted by the ld. DR. Accordingly, we uphold the first appellate order on this issue - Decided against revenue Computing the profits eligible for deduction u/s 80HH, 80I and 80IA - income and expenditure accounts of different units were filed alongwith the return of income while they were not based on individual books of accounts of different units but expenses were allocated on proportional basis of sales - HELD THAT - We find that the ld. CIT(A) has followed its order in assessee s own case for the A.Y 1996-97. In the case of CIT Vs. Bongaigon Refinery and Petrochemical Ltd 2012 (9) TMI 371 - SUPREME COURT relied upon by the ld. AR, we find that there is no requirement to maintain separate books of account. We find substance in the contention of the ld. AR that in any case, the formula/method applied by the AO for computing the profits eligible for deduction u/s 80HH, 80I and 80IA is the same as that followed by the assessee viz. profits of the undertaking are apportioned in the ratio of the gross total income as per the I.T. Act to the book profits of the assessee company. This fact has not been controverted by the ld. DR. - Decided against revenue Deduction u/s 80HH, 80IA and 80I on gross total income - non reducing the same by the amount of deduction u/s 80HHC as it will amount to double deduction - HELD THAT - We find that following its own order for A.Y 1996-97, the ld. CIT(A) has directed to allow deduction u/s 80HH, 80I and 80IA of the Act. We find no infirmity in the order of the ld. CIT(A) in view of the fact that there is no basis in law for reducing deduction admissible u/s 80HHC for the purpose of computing deduction u/s 80HH, 80I and 80IA of the Act. Accordingly, we decline to interfere with the order of the ld. CIT(A) - Decided against revenue

Summary

Issues Involved:
1. Validity of the assessment order.
2. Disallowance of legal and consultancy expenses.
3. Enhancement of book profit under section 115JA.
4. Treatment of software installation expenses.
5. Disallowance of interest on borrowed capital and upfront fee.
6. Disallowance of expenses on books and journals.
7. Allowance of relief on legal and consultancy expenses.
8. Classification of interest income and eligibility for deductions under sections 80HH, 80I, and 80IA.
9. Disallowance of excessive interest paid under section 40A(2).
10. Requirement to maintain separate books of accounts for different units.
11. Computation of deductions under sections 80HH, 80I, and 80IA without reducing by the amount of deduction under section 80HHC.

Detailed Analysis:

1. Validity of the Assessment Order:
The assessee challenged the assessment order, claiming it was "bad in law." However, the tribunal did not find any substantial argument or evidence from the assessee to support this claim. Therefore, the assessment order was upheld.

2. Disallowance of Legal and Consultancy Expenses:
The assessee incurred legal and consultancy expenses amounting to Rs. 97,22,819/-. The AO disallowed Rs. 22,83,200/- under section 35AB(1) of the Income-tax Act, 1961, which the CIT(A) partially confirmed to the extent of Rs. 19,88,753/-. The tribunal found that neither the AO nor the CIT(A) provided evidence that the expenses were for acquiring technical know-how, which is a prerequisite for invoking section 35AB. Therefore, the tribunal allowed the assessee's claim, directing the deletion of the disallowance.

3. Enhancement of Book Profit under Section 115JA:
The AO enhanced the book profit by Rs. 3,39,69,000/- representing depreciation on revalued assets. The CIT(A) deleted this enhancement, following the Supreme Court's decision in Apollo Tyres Ltd. v. CIT, which held that the AO cannot recompute profits shown in the profit and loss account prepared as per the Companies Act. The tribunal upheld the CIT(A)'s order, directing the AO to verify the entries and ensure compliance with the Supreme Court's dicta.

4. Treatment of Software Installation Expenses:
The AO treated software installation expenses of Rs. 1,16,00,000/- as capital expenditure. The CIT(A) treated it as revenue expenditure, supported by the Supreme Court's decision in Empire Jute Co. Ltd. v. CIT and the Delhi High Court's decision in DCIT v. Amway India Enterprises. The tribunal upheld the CIT(A)'s conclusion, recognizing the short life span of software.

5. Disallowance of Interest on Borrowed Capital and Upfront Fee:
The AO disallowed interest on borrowed capital and upfront fee, totaling Rs. 5,70,71,122/- and Rs. 91,69,866/-, respectively. The CIT(A) allowed these expenses as revenue expenditure under section 36(1)(iii), supported by the Supreme Court's decision in DCIT v. Core Health Care Ltd. The tribunal upheld the CIT(A)'s decision, noting the borrowed funds were used for modernization and productivity improvement.

6. Disallowance of Expenses on Books and Journals:
The AO treated expenses on books and journals, totaling Rs. 54,01,557/-, as capital expenditure. The CIT(A) allowed these expenses as revenue expenditure. The tribunal partially agreed, distinguishing between books with long life and journals. The tribunal directed the AO to bifurcate and treat the expenses accordingly.

7. Allowance of Relief on Legal and Consultancy Expenses:
The CIT(A) allowed relief of Rs. 2,94,447/- out of the total disallowance of legal and consultancy expenses. The tribunal upheld this decision, noting that the expenses were not for acquiring technical know-how and were allowable under section 37.

8. Classification of Interest Income and Eligibility for Deductions under Sections 80HH, 80I, and 80IA:
The AO classified interest income as "income from other sources," disallowing deductions under sections 80HH, 80I, and 80IA. The CIT(A) treated the interest income as business income, eligible for deductions, following the Supreme Court's decision in CIT v. Alfa Laval India Ltd. The tribunal upheld the CIT(A)'s decision, noting the interest income was inextricably linked to the business.

9. Disallowance of Excessive Interest Paid under Section 40A(2):
The AO disallowed interest paid to certain parties, considering it excessive. The CIT(A) deleted the disallowance, noting the AO failed to prove the interest was excessive. The tribunal upheld the CIT(A)'s decision, recognizing the interest rates were reasonable and comparable to unrelated parties.

10. Requirement to Maintain Separate Books of Accounts for Different Units:
The AO questioned the allocation of expenses on a proportional basis of sales. The CIT(A) followed its order for the previous year, accepting the allocation method. The tribunal upheld the CIT(A)'s decision, supported by the Supreme Court's decision in CIT v. Bongaigaon Refinery and Petrochemical Ltd., which held no requirement for maintaining separate books.

11. Computation of Deductions under Sections 80HH, 80I, and 80IA without Reducing by the Amount of Deduction under Section 80HHC:
The AO reduced deductions under sections 80HH, 80I, and 80IA by the amount of deduction under section 80HHC. The CIT(A) directed allowing the deductions without such reduction. The tribunal upheld the CIT(A)'s decision, noting no legal basis for the reduction.

Conclusion:
The tribunal allowed the assessee's appeal regarding the disallowance of legal and consultancy expenses and upheld the CIT(A)'s decisions on various other grounds, including the treatment of software installation expenses, interest on borrowed capital, and classification of interest income. The tribunal directed the AO to verify certain claims and bifurcate expenses on books and journals. The appeals were partly allowed for statistical purposes.