2020 (9) TMI 1165 - AT - Income Tax

Depreciation in respect of assets taken over on amalgamation - HELD THAT - As decided in own case no infirmity in the order of the CIT(A) who had directed the A.O to allow depreciation on the assets taken over on amalgamation. Disallowance of expenditure on closure of Thane Factory as business expenditure - HELD THAT - As decided in own case relying on M/S. NICHOLAS PIRAMAL (INDIA) LTD. 2016 (5) TMI 723 - BOMBAY HIGH COURT after deliberating on the assessee s claim of expenses pertaining to closure of its Thane Unit had observed that the business of manufacturing of drugs at different units constituted single business and closing down of one unit and shifting its activity to other units was an expenditure that was incurred by the assessee for purposes of its business. As the facts leading to the disallowance of Thane factory expenses by the A.O during the year under consideration remains the same as were involved in the aforesaid preceding years therefore respectfully following the view taken by the Hon ble High Court we uphold the order of the CIT(A) in context of the said issue during the year under consideration. Accordingly finding no infirmity in the order of the CIT(A) who had directed the A.O to delete the aforesaid disallowance. Depreciation on purchase of software application - CIT(A) erred in directing the AO to grant depreciation @ 60% as against 25% granted by the AO - HELD THAT - As decided in own case expenditure incurred by the assessee on purchase of software application and payment made for acquiring license to use those applications was to be allowed as a revenue expenditure. In the backdrop of the aforesaid settled position of law we are of the considered view that as the aforesaid software purchased by the assessee did not form part of its profit making apparatus and only facilitated carrying its business more efficiently therefore the same was rightly claimed by it as a revenue expenditure. We thus in terms of our aforesaid observations direct the A.O to allow the software expenses. Disallowance being professional fees paid to M/s. Brown Wood - HELD THAT - We notice that assessee has incurred consultancy charges to list the ADR in NYSE and later dropped this project. The AO treated the expenditure as capital and disallowed the same and simultaneously invoked provision of section 40(a)(i) and 195 of the Act. We notice that in the similar situation the Hon ble Bombay High Court in the case of Nimbus Communications Ltd. 2011 (12) TMI 696 - BOMBAY HIGH COURT has treated the capital expenditure of share issue expenses which ultimately aborted public issue. The expenditure does not have enduring benefit to the assessee and allowed these expenses as revenue expenditure by relying on CIT vrs. Essar Oil Ltd. case 2008 (10) TMI 649 - BOMBAY HIGH COURT since the issue before is similar. Therefore the ground raised by revenue is accordingly dismissed. Invoking provision of section 40(a)(i) we are in agreement with the submission of the Ld. AR that these services were rendered outside India and none of the income earned by M/s Brown Wood is taxable in India and there is no obligation on the assessee to deduct tax. Payment in foreign exchange for professional services rendered - Whether the payment is towards royalty covered u/s.40(a)(i) of the Act and relied upon the order of AO - HELD THAT - As decided in M/S. NGC NETWORKS (INDIA) PVT. LTD. 2018 (5) TMI 1148 - BOMBAY HIGH COURT under Section 40(a)(i) of the Act under which the expenditure has been disallowed by the Revenue meaning of royalty as defined therein is that as provided in Explanation 2 to Section 9(1)(vi) of the Act and not Explanation 6 to Section 9(1)(vi) of the Act. Thus the disallowance of expenditure under Section 40(a)(i) of the Act can only be if the payment is Royalty in terms of Explanation 2 to Section 9 (1)(vi) of the Act. Undisputedly the payment made for channel placement as a fee is not royalty in terms of Explanation 2 to Section 9(1)(vi) of the Act. Therefore no disallowance of expenditure under Section 40(a) (vi) of the Act can be made in the present facts. Amount transferred to Debenture Redemption Reserve - assessee made the reserve after determining the net profit as per the company s Act - Whether there is no provision in Sec. 115J to reduce such amount from the net profit - HELD THAT - As decided in own case 2012 (8) TMI 696 - ITAT MUMBAI As rightly held by the CIT(A) the amount in question cannot be said to be a reserve but was only a provision. The liability for which such provision was made was an ascertained or known liability and therefore amount was to be reduced from the profit as per P L a/c prepared in accordance with provisions of Companies Act 1956 to arrive at the book profits under s. 1I5JA of the Act.

Summary

Issues Involved:
1. Depreciation on assets taken over on amalgamation.
2. Disallowance of expenditure on the closure of Thane Factory.
3. Depreciation rate on certain assets.
4. Disallowance of professional fees paid to M/s. Brown & Wood.
5. Payment in foreign exchange for professional services and its treatment under Section 40(a)(i).
6. Amount transferred to Debenture Redemption Reserve and its treatment under Section 115J.

Issue-wise Detailed Analysis:

1. Depreciation on assets taken over on amalgamation:
The revenue contended that the Ld. CIT(A) erred in accepting the assessee's devise of not claiming depreciation on assets taken over during the amalgamation, citing the omission of Section 34(1) w.e.f. 01.04.88 and relying on the Supreme Court judgment in Mahindra Mills. The Tribunal observed that this issue had already been decided in favor of the assessee in previous years by the Coordinate Bench of ITAT. The Tribunal upheld the CIT(A)'s order, confirming that the assessee's claim for depreciation on the assets taken over on amalgamation was in order, dismissing the revenue's ground.

2. Disallowance of expenditure on the closure of Thane Factory:
The revenue challenged the deletion of disallowance of ?25.54 lakhs on the closure of the Thane Factory. The Tribunal noted that this issue was previously decided in favor of the assessee by the Coordinate Bench of ITAT and the Hon’ble High Court of Bombay, which held that the expenses incurred on the closure of the Thane Unit were for the purposes of business and constituted a revenue expenditure. The Tribunal upheld the CIT(A)'s decision, dismissing the revenue's ground.

3. Depreciation rate on certain assets:
The revenue argued that the Ld. CIT(A) erred in directing the AO to grant depreciation at 60% instead of 25%. The Tribunal referred to the Coordinate Bench's decision in the assessee's own case for AY 2000-01, which was in favor of the assessee. The Tribunal upheld the CIT(A)'s order, confirming the grant of depreciation at 60%, and dismissed the revenue's ground.

4. Disallowance of professional fees paid to M/s. Brown & Wood:
The revenue contended that the CIT(A) erred in deleting the disallowance of ?1,34,80,125/- paid as professional fees to M/s. Brown & Wood. The Tribunal observed that the expenditure was incurred for a proposed ADR issue that was ultimately dropped, and thus, no capital asset came into existence. The Tribunal relied on the Hon’ble Bombay High Court decisions in similar cases, treating the expenditure as revenue expenditure. The Tribunal also agreed that the services were rendered outside India, and hence, Section 40(a)(i) and Section 195 were not applicable. The Tribunal upheld the CIT(A)'s order, dismissing the revenue's ground.

5. Payment in foreign exchange for professional services:
The revenue argued that the payment of ?18,00,862/- in foreign exchange for professional services was towards royalty covered under Section 40(a)(i). The Tribunal noted that the payment was made to non-residents with no PE in India, and the services were rendered outside India. The Tribunal referred to the Hon’ble Bombay High Court decision in CIT vrs. NCG Networks (India) Pvt. Ltd., which held that such payments were not taxable in India and thus not subject to TDS. The Tribunal upheld the CIT(A)'s order, dismissing the revenue's ground.

6. Amount transferred to Debenture Redemption Reserve:
The revenue contended that the CIT(A) erred in allowing relief of ?5,61,25,000/- transferred to Debenture Redemption Reserve, arguing that there is no provision in Section 115J to reduce such amounts from net profit. The Tribunal referred to the Coordinate Bench's decision in the assessee's own case for AY 1997-98, which held that the amount in question was a provision for an ascertained liability and should be reduced from the net profit to arrive at book profits under Section 115JA. The Tribunal upheld the CIT(A)'s order, dismissing the revenue's ground.

Conclusion:
The appeal filed by the revenue was dismissed in its entirety, with the Tribunal upholding the CIT(A)'s order on all grounds. The Tribunal's decision was consistent with previous rulings in the assessee's own case and relevant High Court judgments.