2019 (4) TMI 1867 - AT - Income Tax

Disallowance of Capital Expenditure - expenditure incurred in acquiring entities which are engaged in similar business in India and overseas - HELD THAT - Dispute Resolution Panel following the ITAT order for earlier years i.e., 2006-07 and 2007-08 2012 (10) TMI 1200 - ITAT MUMBAI has held that this expenditure is capital in nature and no intervention is required. On the issue of depreciation on those assets, the DRP had followed the order of DRP in A.Y.2008-09 2013 (12) TMI 139 - ITAT MUMBAI and has directed the assessee to suo-moto submit the details of capital assets that have come into existence on incurring the expenditure and the definite cost of acquisition of such capital asset, to the Assessing Officer within 7 days of the receipt of the directions so as to enable him to quantify the depreciation allowable correctly. ITAT on similar issue in the assessment year 2006-07 and 2007-08 has decided the matter in the favour of revenue. Accordingly, we hold the expenditure to be capital and leave the allowability of depreciation to results of the verification by the Assessing Officer . Since, issue is covered in favour of the revenue, we do not find any infirmity in the action of the DRP, accordingly, we uphold the same. Provision of Warranty - assessee has claimed the provision in respect of warranty made in certain products, the estimated cost of which accrued at the time of sale - HELD THAT - We find that ITAT in assessee s own case in earlier years remitted the issue to the file of the Assessing Officer and directed that the issue be decided in accordance with Hon ble Supreme Court decision in the case of Rotork Controls Ltd. 2009 (5) TMI 16 - SUPREME COURT . In our considered opinion, we should follow the principles of precedents and the earlier direction of ITAT in assessee s own case. It is not at all the case that the decision of ITAT consistently in assessee s own case has been reversed by the Hon ble Supreme Court. That in earlier years, pursuant to the ITAT direction AO has passed perfunctory cannot be a ground for us to deviate from following precedents as above. Disallowance u/s.40A(9) - Main contribution to Mahendra Academy - HELD THAT - After hearing both the parties and in view of the order of the Tribunal in assessee's own case for earlier years, we set aside the impugned order passed by the Assessing Officer and restore this issue back to his file for denovo adjudication and in accordance with the law. Thus, ground is allowed for statistical purposes. Disallowance as (ESOP) employee cost being the difference between the fair market value / the shares offered to employee on the date of the grant of option and the price at which they are offered to employee - HELD THAT - We find that issue has been considered and decided by ITAT Special Bench in the case of Biocon Ltd., vs. Dy. CIT 2014 (12) TMI 838 - ITAT BANGALORE . Accordingly, we remit the issue to the file of the Assessing Officer to consider the issue in light of the ITAT Special Bench in the case of Biocon Limited. Disallowance u/s.14A - assessee has claimed that no expenses have been incurred for earning exempt income has been rejected by the AO has applied rule 8D and accordingly computed the disallowance and DRP has confirmed the same - HELD THAT - We find that the request of the ld. Counsel of the assessee is cogent. The Assessing Officer is directed to make necessary factual verification and to consider the issue in this aspect afresh after considering the Hon ble Jurisdictional High Court decision quoted as above and also the decision of Special Bench of ITAT in the case of Vireet Investments 2017 (6) TMI 1124 - ITAT DELHI and assessee should be granted adequate opportunity of hearing. Adjustment for fee of Corporate Guarantee - HELD THAT - We decide on the basis of LIBOR rate prevailing at the relevant point of time. It was directed that in case LIBOR rate is less than 6% then charging of interest rate @ 6% by the assessee should be taken as arm s length price (ALP). Following the above said order in assessee s own case 2013 (12) TMI 139 - ITAT MUMBAI , we direct accordingly and restore the issue to the file of the Assessing Officer with similar direction. De termination of Loss on transfer of capital assets used for R D Activity - Assessee fairly accepted that ITAT has decided the issue against assessee in A.Y.2006-07 and A.Y.2007-08 2012 (10) TMI 1200 - ITAT MUMBAI Addition u/s.40(a)(ia) in respect of year end provision - HELD THAT - ITAT has allowed the assessee s claim in 2013 (12) TMI 139 - ITAT MUMBAI The DRP has also noted the same but has confirmed the AO s order by observing that matter has not reached its finality. Respectfully following the order of ITAT in assessee s own case, we set aside the order of the authorities below and decide in favour of the assessee. Weighted deduction u/s 35(2AB) with reference to expenditure incurred on scientific expenditure - HELD THAT - We note that in earlier year i.e., for A.Y.2008-09, Tribunal has noted the submission from assessee that once the R D facilities are approved and DSIR has not rejected the application submitted by the assessee, it could be presumed that the application has been accepted. Further that failure on the part of DSIR to confirm the authorities in time cannot be reason for taking back deduction to the assessee. Noting the above and following judicial precedents from earlier year, the Tribunal had directed that assessee is entitled to grant of better deduction u/s.35(2AB). Referring to these case laws from ITAT and also from Cummins India Ltd. 2019 (11) TMI 1182 - ITAT PUNE and Sri Biotech Laboratories India Ltd. 2015 (7) TMI 1340 - ITAT HYDERABAD assessee has requested that AO be directed to allow the claim for deduction u/s.35(2AB) as non-receipt of form 3CL from DSIR is not determinative of the issue. Respectfully following the decision as above, we accede to the assessee s request in the light of the above and directed accordingly. Disallowance of Dealer incentive and service coupon u/s.40a(ia) - HELD THAT - Following the precedents from ITAT in assessee s own case, we decide the issue of dealer incentives in favour of the assessee and the issue of disallowance on service coupons is remitted to the file of the Assessing Officer in accordance with the direction of ITAT in earlier years. Disallowance of Depreciation on intangible asset - HELD THAT - Assessee fairly agreed that ITAT has disallowed assessee s claim in A.Y.2007-08 and 2008-09. Respectfully following the decision referred as above, we uphold the order of the Assessing Officer on this issue. Octroi Incentive treated as revenue receipt and not capital receipt - HELD THAT - We note that ITAT has remitted the matter to the file of the Assessing Officer with directions to follow the Hon ble Supreme Court decision in the case of Ponni Sugar and Chemicals Ltd 2008 (9) TMI 14 - SUPREME COURT and Chaphalkar Brothers 2017 (8) TMI 1411 - BOMBAY HIGH COURT . Now pursuant to said direction as claimed by the ld. Counsel of the assessee, if the AO decides perfunctorily the precedence from ITAT s decision does not cease to be a precedent for us. Accordingly, following the aforesaid precedent from ITAT, we remit the issue to the file of the AO for deciding the issue afresh in accordance with the same directions as by the ITAT in A.Y.2008-09. Addition to income on difference of rent received by Ridge Business Centre Ltd., from sub-letting of property - HELD THAT - Income from letting out the property to Ridge Business Centre has been assessed as business income right from the earlier years and the same position has been accepted by the Department. Once the income which has been derived from stock-in-trade and has been accepted as business income, then the computation has to be made under section 28 and not under section 23. The assessee has duly shown the income received / accrued from Ridge Business Centre as business income, then any further rent realized by Ridge Business Centre form the third party cannot be said to have been earned / received or accrued to the assessee company. Thus, we are inclined to agree with the contention of assessee that no further income can be attributed to the assessee once the rental income has been assessed as business income and not from the income from house property. Deduction u/s.80IC in respect of Rudrapur Unit which was restricted to gross total income - HELD THA - As regards the cost of inter unit transfers, the Dispute Resolution Panel is holding that proper detail has not been given to show that inter unit transfer has been properly done. The assessee s contention in this regard is that the details are given in audited accounts and audit report under section 80IC. In our considered opinion, this issue needs to be examined at the level of the Assessing Officer from detail as claimed by the ld. Counsel of the assessee to be available on record. DRP has found that assessee has incurred huge expenditure and claimed deduction also for Research and development expenditure. However, assessee has not allocated the same to this exempt unit. Assessee has not submitted the necessary details and has only submitted that these are mainly related to export models. We find that this general submission does not exonerate the assessee from submitting to the authorities below proper and cogent details of expenses to show that research and development expense not related with this unit. Further, the assessee submitted that employee cost of employee welfare expenditure need not be allocated to this unit is also not cogent. Whey these expenditure cannot relate to this unit need proper explanation. Further, other items of revenue expenditure in the profit and loss account which have not been allocated to the exempt unit also need to be examined by the Assessing Officer in light of the explanation being offered by the assessee s Counsel. Disallowance of difference in exchange loss claimed as revenue expenditure - AO has disallowed this expenditure stating that the same is a contingent liability - HELD THAT - In opinion the action of the authorities below in holding that foreign exchange gain or loss incurred on acquisition of capital asset has to be adjusted with the cost of capital asset is correct. Gain or loss of revenue account - From the perusal of CBDT Circular 10/2017 dated 23/03/2017, it is observed that ICDS shall be applicable with the transaction years held therein in relation to A.Y.2017-18 and subsequent assessment year. Admittedly, in the present assessment year the said ICDS is not applicable, hence, the exposition of Hon ble Apex Court decision in the case of Sutlej Cotton Mills 1978 (9) TMI 1 - SUPREME COURT as above duly holds the field. In these circumstances, we find that the observations of the DRP in this regards are in accordance with the above said expeditions. In this view of the matter, we do not find any infirmity in the order of DRP, hence, we are upholding the same. Deduction u/s.80-IC in respect of manufacturing unit at Haridwar - HELD THAT - As claimed that AO has erred in not assessing and quantifying the profits for the year and net loss suffered by the assessee in Haridwar Unit, profit for which are otherwise eligible for deduction u/s.80IC - assessee has submitted as ITAT has directed AO to quantify losses of the unit under section 80-IC in AY 2006-07 being the first year of the claim and followed in AY 2008-09. While giving effect to ITAT orders for AY 2006-07 2007-08 2008-09 AO has passed orders quantifying such losses. In accordance with the above, we direct the AO accordingly. Adjustment to closing stock - Section 145A adjustment - HELD THAT - It is claimed by the ld. Counsel of the assessee that A.Y₹ 2006-07, 2007-08 and 2008-09 2013 (12) TMI 139 - ITAT MUMBAI the AO has given effect to the order of the ITAT and has concluded that no addition is warranted u/s.145A. Furthermore, assessee s Counsel placed reliance upon in the case of Diamond Dye Chem Ltd. 2017 (7) TMI 616 - BOMBAY HIGH COURT - remit the issue to the file of the Assessing Officer with similar directions. Needless to add that the Assessing officer shall take into account the earlier orders passed in this regard Interest income - Correct head of income - whether business income or income from other sources - HELD THAT - We find that the impugned income has been shown as business income. The Assessing Officer has not tinkered the classification, however, the DRP has directed to treat the same as income from other sources by referring to the case laws in the context of deduction under chapter VI where issue related to income attributable to or derived from business income. The reliance of the assessee on Hon ble Bombay High Court decision in Lok Holding 2008 (1) TMI 365 - BOMBAY HIGH COURT and Swiss Jewel 2005 (9) TMI 47 - BOMBAY HIGH COURT duly support the case of assessee. Hence, in our considered opinion, the direction of the DRP is liable to be set aside

Summary

Issues Involved:

1. Validity of the order passed by the Dispute Resolution Panel (DRP) under section 144C.
2. Disallowance of capital expenditure of ?15,33,86,228.
3. Disallowance of pro-rata premium of ?74,11,35,248 payable on redemption of Foreign Currency Convertible Bonds (FCCBs).
4. Disallowance of provision for warranties of ?31,03,16,452.
5. Disallowance under section 40A(9) of ?2,59,650 and ?12,00,000.
6. Disallowance of ?5,86,81,405 for Employee Stock Option Plan (ESOP).
7. Disallowance under section 14A of ?47,54,00,000.
8. Adjustment to Arm's Length Price of international transaction of ?4,62,38,658.
9. Disallowance of capital loss on sale of R&D assets of ?2,29,79,716.
10. Disallowance under section 40a(ia) in respect of year-end provisions of ?18,37,00,791.
11. Disallowance of weighted deduction under section 35(2AB) of ?165,13,63,447.
12. Disallowance under section 40a(ia) of dealer incentive of ?128,09,72,000 and service coupon of ?38,92,51,000.
13. Disallowance of depreciation on intangible assets of ?18,34,496.
14. Disallowance of deduction of Octroi Incentive of ?44,89,56,000.
15. Addition of rental income on property let out to Ridge Business Centre P. Ltd. of ?18.69 crore.
16. Disallowance of deduction for difference in exchange of ?251.63 crores.
17. Disallowance of deduction under section 80IC for Rudrapur Unit.
18. Disallowance of deduction under section 80IC for Haridwar Unit.
19. Adjustment under section 145A for unutilized CENVAT credit of ?22,95,00,000.
20. Adjustment to business income and income from other sources of ?84.10 crores.

Issue-wise Detailed Analysis:

1. Validity of DRP Order:
The assessee's ground regarding the invalidity of the DRP order was dismissed as not pressed.

2. Disallowance of Capital Expenditure of ?15,33,86,228:
The ITAT upheld the DRP's and AO's decision that the expenditure was capital in nature, referencing previous ITAT decisions for earlier years. The expenditure should form part of the cost of investment, and the allowability of depreciation was left to the AO's verification.

3. Disallowance of Pro-rata Premium of ?74,11,35,248:
Following the ITAT's previous decisions in the assessee's favor for earlier years, the ITAT set aside the disallowance and decided the issue in favor of the assessee.

4. Disallowance of Provision for Warranties of ?31,03,16,452:
The ITAT remitted the issue back to the AO to be decided in accordance with the Supreme Court's decision in Rotork Controls Ltd., emphasizing the need for scientific basis in the provision calculation.

5. Disallowance under Section 40A(9) of ?2,59,650 and ?12,00,000:
The ITAT remitted the issue to the AO for fresh consideration, following the precedent set in the assessee's own case for earlier years.

6. Disallowance of ?5,86,81,405 for ESOP:
The ITAT remitted the issue to the AO to be considered in light of the ITAT Special Bench decision in Biocon Ltd. vs. Dy. CIT.

7. Disallowance under Section 14A of ?47,54,00,000:
The ITAT directed the AO to re-compute the disallowance after reducing investments on which no exempt income was received, following the jurisdictional High Court decisions and ITAT precedents.

8. Adjustment to Arm's Length Price of International Transaction of ?4,62,38,658:
The ITAT upheld the adjustment for corporate guarantee fees at 3% as per earlier ITAT decisions and remitted the issue of notional interest to the AO to be decided based on the LIBOR rate.

9. Disallowance of Capital Loss on Sale of R&D Assets of ?2,29,79,716:
The ITAT upheld the AO's decision, following the precedent set in the assessee's own case for earlier years.

10. Disallowance under Section 40a(ia) in Respect of Year-end Provisions of ?18,37,00,791:
The ITAT set aside the disallowance, following the ITAT's decisions in the assessee's own case for earlier years.

11. Disallowance of Weighted Deduction under Section 35(2AB) of ?165,13,63,447:
The ITAT directed the AO to allow the deduction, following judicial precedents and emphasizing that non-receipt of form 3CL from DSIR was not determinative.

12. Disallowance under Section 40a(ia) of Dealer Incentive of ?128,09,72,000 and Service Coupon of ?38,92,51,000:
The ITAT decided the issue of dealer incentives in favor of the assessee and remitted the issue of service coupons to the AO for fresh adjudication.

13. Disallowance of Depreciation on Intangible Assets of ?18,34,496:
The ITAT upheld the AO's decision, following the precedent set in the assessee's own case for earlier years.

14. Disallowance of Deduction of Octroi Incentive of ?44,89,56,000:
The ITAT remitted the issue to the AO for fresh consideration, following the directions given in the assessee's own case for earlier years.

15. Addition of Rental Income on Property Let Out to Ridge Business Centre P. Ltd. of ?18.69 Crore:
The ITAT decided the issue in favor of the assessee, following the precedent set in the assessee's own case for earlier years.

16. Disallowance of Deduction for Difference in Exchange of ?251.63 Crores:
The ITAT upheld the DRP's decision, emphasizing that foreign exchange gain or loss related to capital assets should be adjusted with the cost of the asset, while those on revenue account should be treated accordingly.

17. Disallowance of Deduction under Section 80IC for Rudrapur Unit:
The ITAT remitted the issue to the AO for fresh examination, directing the AO to consider the detailed submissions and explanations provided by the assessee.

18. Disallowance of Deduction under Section 80IC for Haridwar Unit:
The ITAT directed the AO to assess and quantify the profits and net losses of the Haridwar Unit, following the ITAT's directions in the assessee's own case for earlier years.

19. Adjustment under Section 145A for Unutilized CENVAT Credit of ?22,95,00,000:
The ITAT remitted the issue to the AO for fresh consideration, directing the AO to take into account the earlier orders and relevant judicial precedents.

20. Adjustment to Business Income and Income from Other Sources of ?84.10 Crores:
The ITAT set aside the DRP's direction to treat the income as "income from other sources" and upheld the classification of the income as "business income," following the relevant judicial precedents.