2016 (6) TMI 1388 - AT - Income Tax

Correct head of income - lumpsum consideration towards sale of Drum Plant (giving up right to manufacture) - business income or capital gains - HELD THAT - In an identical issue raised on similar facts and circumstances, by following the decision of the Hon ble Supreme Court in the case of Guffic Chem Pvt. Ltd 2011 (3) TMI 6 - SUPREME COURT the Ahmedabad Bench of the Tribunal has decided the issue in favour of the assessee in the case of DCIT v. M/s. Gufic Limited 2012 (1) TMI 379 - ITAT AHMEDABAD as held prior to April 1, 2003, when Parliament stepped in to specifically tax such receipts, the payment was in the nature of a capital receipt - Decided in favour of assessee. Capital gain computation - Adoption of guideline value for the purpose of computation of capital gain under section 50C - HELD THAT - When the provisions of section 50C of the Act was not at all available at the time of sale agreement dated 27.06.2002, the provisions of Chapter XXC of the Act was available with the avowed object of ensuring the payment of tax properly payable on the market value of the immovable property transferred inter-vivo and for the purpose of computation of capital gains, the consideration shown by the assessee in the sale agreement for which NOC was granted by the Appropriate Authority under Chapter XXC of the Act, both the penal provisions of Chapter XXC of the Act and the provisions of section 50C of the Act, which came into effect at a later date should not affect jointly. Under the above facts and circumstances, we are of the considered opinion that when the penal provisions of Chapter XXC of the Act was very much available at the time of transaction taken place and when the provisions of section 50C of the Act came into effect in the subsequent financial year, the Assessing Officer was not correct in applying the provisions of section 50C of the Act. Similar ratio was laid down by the Kolkata Benches of the Tribunal in the case of Neville De Noranha v. ACIT 2008 (2) TMI 447 - ITAT CALCUTTA-C . However, any final judgement against the stay on operation of the order of the Inspector General of Registration, which is pending before the Hon ble Jurisdictional High Court, would be final. The ground raised by the assessee is allowed subject to the decision of the Hon ble Madras High Court. Disallowance of provisions for gratuity - section 40A applicability - HELD THAT - Gratuity to be deductible, the conditions laid down in section 40A(7) had to be fulfilled. The deduction could not be allowed on general principles under any other section of the Act, because sub-section (1) of section 40A made it clear that the provisions of the section had effect notwithstanding anything to the contrary contained in any other provisions of the Act relating to the computation of income under the head Profits and gains of business or profession . In other words, section 40A had effect notwithstanding anything contained in ss. 30 to 39 of the Act. In view of the above observation, the Assessing Officer is directed to follow the decision in the case of Shree Sajjan Mills Ltd. v. CIT 1985 (10) TMI 2 - SUPREME COURT and also the decision in the case of South Madras Electric Supply Corporation Ltd. v. CIT 1998 (4) TMI 46 - MADRAS HIGH COURT and decide the issue afresh. Accordingly, we set aside the order of the ld. CIT(A) on this issue and the ground raised by the assessee is allowed for statistical purposes. Addition towards claim of ERP expenses - Allowable revenue expenses - diversified views - HELD THAT - Though the two Coordinate Benches of the Tribunal have observed that the ERP expenses incurred by the assessee is of revenue in nature, the Assessing Officer has not passed speaking order as to whether the software was an outright purchase of computer programme which relates to technical know-how . According to the Assessing the expenditure on computer software gives an enduring benefit to an assessee, but he has not stated the duration of time for which the assessee right to use the software or the software can be used permanently then it can be said that the assessee can enjoy enduring benefit, but if the life span of the software is shorter or less than two years, the expenditure incurred for the purchase of software should be treated as revenue expenditure. With the above observations, we set aside the order of the ld. CIT(A) and direct the Assessing Officer to examine the issue in line of the decisions of the Coordinate Benches of the Tribunal as referred herein above. Accordingly, the ground raised by the assessee for the assessment years 2006-07 and 2007-08 is allowed for statistical purposes. Contribution to benevolent fund under section 40A(9) - HELD THAT - by following his own order for earlier assessment years, the ld. CIT(A) has deleted the addition made by the Assessing Officer for the assessment year 2003-04 and for the assessment years 2004-05, 2005-06, 2006-07 and 2007-08 also the ld. CIT(A) deleted the addition made by the Assessing Officer. The only contention of the Department is that the earlier order of the ld. CIT(A) in assessee s own case has not become final cannot be accepted since the Department has not filed any order of higher forum having modified or reversed the above decision of the Coordinate Bench of the Tribunal. Under the above facts and circumstances, we sustain the order of the ld. CIT(A) on this issue for all the above assessment years under appeal and dismiss the ground raised by the Revenue. Deduction u/s 80IA on captive power consumption - over 96% of the power generated has been captively consumed in the assessee s factory itself - HELD THAT - As relying on TANFAC INDUSTRIES LTD. 2009 (7) TMI 1260 - SUPREME COURT we confirm the order passed by the ld. CIT(A) holding that the assessee is entitled to claim deduction under section 80IA of the Act and accordingly, the ground raised by the Revenue for the assessment years 2003-04, 2004-05, 2005-06, 2006-07 and 2007-08 is dismissed. Upfront fee and guarantee commission paid by the assessee - allowable business expenditure - HELD THAT - In the case of CIT v. Meenakshi Mills Ltd. 2006 (9) TMI 139 - MADRAS HIGH COURT has held that the amount paid by the assessee to the Bank as upfront fees was deductible as business expenditure. In the case of DCIT v. Gujarat Alkalies and Chemicals Ltd. . 2008 (2) TMI 11 - SUPREME COURT has held that the commitment charges, which are in the nature of upfront fees are allowable as revenue expenditure. Further in the case of CIT v. Madras Cements Ltd. 2001 (11) TMI 62 - MADRAS HIGH COURT has allowed the appeal of the assessee, wherein the assessee has paid guarantee commission to the bank for purchase of machinery. Moreover, in the case of CIT v. Sivakami Mills Ltd. 1997 (2) TMI 13 - SUPREME COURT has also held that guarantee commission paid was allowable as business expenditure. CIT(A) has rightly allowed the ground raised by the assessee with regard to the claim of deduction of upfront fees and guarantee commission. - Decided against revenue MAT Computation - whether provision for gratuity made on actuarial basis should not be added back while computing the book profits - HELD THAT - In the case of DCIT Vs Eicher Motors Ltd 2002 (5) TMI 221 - ITAT INDORE has held that the provision for gratuity, made on actuarial valuation was an ascertained liability and the same could not be added back to the book profit. Also in case of Greaves Chitram Ud Vs DCIT 2006 (3) TMI 563 - ITAT MUMBAI also held that the gratuity liability, which was based on actuarial valuation, was deductible from the book profits as ascertained liability. CIT(A) not erred in holding that the provision for gratuity made on actuarial basis should not be added back while computing the book profits. Non compete fees paid - allowable deferred revenue expenditure - HELD THAT - As relying on CARBORANDUM UNIVERSAL LTD. VERSUS JCIT 2012 (10) TMI 178 - MADRAS HIGH COURT we find no infirmity in the order passed by the ld. CIT(A) CIT(A) directing the Assessing Officer to treat the non-compete fees paid as deferred revenue expenditure and allow 1/10th of the expenditure as deduction for every year. Repairs in the form of renovation to building - HELD THAT - In view of the ratio laid down by the Hon ble Jurisdictional High Court in the case of CIT v. Ooty Dasaprakash 1998 (2) TMI 77 - MADRAS HIGH COURT , we remit the issue back to the file of the Assessing Officer to segregate the total expenditure as capital and revenue and consider the same appropriately. This ground of appeal of the Revenue is remitted to the Assessing Officer for fresh consideration. Disallowance of royalty paid - HELD THAT - By following the decision in the case of Gotan Lime Syndicate v. CIT 1965 (11) TMI 35 - SUPREME COURT the ld. CIT(A) allowed the ground raised by the assessee as held in the absence of material to show that any part of the royalty had to be treated as premium and referable to the acquisition of the mining lease, the royalty payment, including the dead rent, had relation only the lime deposits to be gat and had therefore to be treated as revenue expenditure. Although the appellant did derive an advantage-assuming that that advantage was to last at least for a period of five years-there was no payment once for all. No lump sum payment was ever settled or paid; there was only an annual payment of royalty or dead rent. The royalty was not a direct payment for securing an enduring advantage; it had relation to the raw material to be obtained - ground raised by the Revenue is dismissed. Disallowance of expenditure related to Tsunami relief - Allowable revenue expenses - HELD THAT - CIT(A), clearly mentioning that The appellant fails on this ground , we are unable to understand as to how the Department is aggrieved by the above order of the ld. CIT(A), who has not allowed the ground raised by the assessee. Thus, the ground raised by the Revenue is not maintainable and accordingly, the same stands dismissed.

Summary

Issues Involved:
1. Classification of lumpsum consideration as business income or capital gains.
2. Adoption of guideline value for the purpose of computation of capital gain under section 50C.
3. Disallowance of provision for gratuity.
4. Classification of ERP expenses as capital or revenue expenditure.
5. Deduction of contribution to benevolent fund under section 40A(9).
6. Deduction under section 80IA for captive power consumption.
7. Allowability of upfront fee and guarantee commission as revenue expenses.
8. Addition of provision for gratuity to book profits.
9. Allowability of non-compete fees as deferred revenue expenditure.
10. Classification of expenses for building renovation as capital or revenue.
11. Allowability of royalty payments as revenue expenditure.
12. Allowability of Tsunami relief expenses as revenue expenditure.

Detailed Analysis:

1. Classification of lumpsum consideration as business income or capital gains:
The Tribunal considered whether the lumpsum consideration of ?65,00,000 received for giving up the right to manufacture should be treated as business income or capital gains. The CIT(A) upheld the AO's decision to treat it as business income under Section 28(va) but rejected the alternative submissions of the assessee. The Tribunal, following the Supreme Court decision in Guffic Chem Pvt. Ltd. v. CIT, ruled in favor of the assessee, stating that such receipts prior to April 1, 2003, were capital receipts.

2. Adoption of guideline value for the purpose of computation of capital gain under section 50C:
The AO used the guideline value determined by the Stamp Valuation Authority to compute capital gains, which was higher than the actual sale consideration. The CIT(A) confirmed this. However, the Tribunal held that since the provisions of Section 50C came into effect after the transaction date, the AO should not have applied these provisions. The Tribunal allowed the assessee's appeal subject to the final decision of the Madras High Court.

3. Disallowance of provision for gratuity:
The AO disallowed the provision for gratuity, stating it was not an actual payment. The CIT(A) upheld this disallowance. The Tribunal, referencing the decision in ACIT v. Tyco Sanmar Ltd., directed the AO to reconsider the issue, noting that provisions for approved gratuity funds are allowable under Section 40A(7).

4. Classification of ERP expenses as capital or revenue expenditure:
The AO treated ERP expenses as capital expenditure, allowing depreciation. The CIT(A) upheld this. The Tribunal, referencing decisions in ACIT v. Torrent Pharmaceuticals Ltd. and Escort Ltd. v. ACIT, directed the AO to examine if the ERP software provided enduring benefits or had a shorter lifespan, thus determining if it should be classified as revenue expenditure.

5. Deduction of contribution to benevolent fund under section 40A(9):
The AO disallowed contributions to a benevolent fund. The CIT(A) allowed the deduction, referencing past decisions in the assessee's favor. The Tribunal upheld the CIT(A)'s decision, noting that contributions made under a memorandum of settlement are statutory and deductible.

6. Deduction under section 80IA for captive power consumption:
The AO disallowed the deduction under Section 80IA for power generated and captively consumed. The CIT(A) allowed it, following the Tribunal's decision in ACIT v. TANFAC Industries. The Tribunal upheld the CIT(A)'s decision, noting that the Supreme Court had dismissed the Department's appeal against this decision.

7. Allowability of upfront fee and guarantee commission as revenue expenses:
The AO treated upfront fees and guarantee commissions as prepaid expenses. The CIT(A) allowed these as revenue expenses, referencing decisions in CIT v. Meenakshi Mills Ltd. and CIT v. Madras Cements Ltd. The Tribunal upheld the CIT(A)'s decision.

8. Addition of provision for gratuity to book profits:
The AO added the provision for gratuity to book profits, treating it as an unascertained liability. The CIT(A) allowed the assessee's claim, referencing decisions in DCIT v. Eicher Motors Ltd. and Greaves Chitram Ud v. DCIT. The Tribunal upheld the CIT(A)'s decision.

9. Allowability of non-compete fees as deferred revenue expenditure:
The AO disallowed the non-compete fees paid by the assessee. The CIT(A) allowed it as deferred revenue expenditure, referencing decisions in Orchid Chemicals & Pharmaceuticals v. ACIT and ITO v. Seafil Leasing. The Tribunal upheld the CIT(A)'s decision, also referencing the Madras High Court decision in Carborandum Universal Limited v. JCIT.

10. Classification of expenses for building renovation as capital or revenue:
The AO treated renovation expenses as capital expenditure. The CIT(A) allowed these as revenue expenses, referencing a decision in the assessee's group company. The Tribunal remitted the issue back to the AO to segregate the expenses as capital and revenue.

11. Allowability of royalty payments as revenue expenditure:
The AO treated royalty payments for leasehold lands as capital expenditure. The CIT(A) allowed these as revenue expenses, referencing the Supreme Court decision in Gotan Lime Syndicate v. CIT. The Tribunal upheld the CIT(A)'s decision.

12. Allowability of Tsunami relief expenses as revenue expenditure:
The AO disallowed Tsunami relief expenses. The CIT(A) allowed these as revenue expenses, referencing the Madras High Court decision in CIT v. Madras Refineries Ltd. The Tribunal noted that the CIT(A) had allowed the expenses and dismissed the Revenue's appeal.

Conclusion:
The Tribunal allowed the assessee's appeals on various grounds, remitted some issues back to the AO for reconsideration, and dismissed the Revenue's appeals, upholding the CIT(A)'s decisions in favor of the assessee.