2011 (8) TMI 1343 - AT - Income Tax

Corporate Membership fee CSR Expenditure Deduction u/s 37(1) - Membership fee was not allowed as deduction by AO - HELD THAT - Following the decision in the case of, OTIS ELEVATOR COMPANY (INDIA) LIMITED VERSUS COMMISSIONER OF INCOME-TAX 1991 (4) TMI 53 - BOMBAY HIGH COURT , we are of the opinion that membership in clubs are taken with the expectation that it would enable the officers of assessee to meet persons in high social status which would result to the growth of the business of the assessee. The expenditure can be said to have been incurred is wholly and exclusively for the purpose of his profession and hence allowable u/s 37(1) - Decision in favour of Assessee. Undervaluation of closing stock - The AO made an addition to closing stock on the ground that the method followed by the assessee is not as per accounting principles and that date wise details of purchases and consumption of stock have not been furnished - HELD THAT - . As per the provisions of sec 145A, the value of purchase tax has to be taken into account while valuing the closing stock, but at the same time, as held by the jurisdictional, High Court In the case of COMMISSIONER OF INCOME-TAX VERSUS MAHALAXMI GLASS WORKS P. LTD. 2009 (4) TMI 182 - BOMBAY HIGH COURT , the opening stock valuation should be correspondingly adjusted. Therefore, we restore the matter back to AO to reconsider the facts as per the decision of HC - Matter restored back. Uninterrupted Power Supply system - Part of Computer System or not? - Ld. CIT(A) said that uninterrupted Power Supply system cannot be considered as part of the computer system and concluded they are not entitled to the rate of depreciation applicable to computer - HELD THAT - No doubt the UPS can be used for other purposes, in the present case they constitute an essential part of the computer system. The UPS is necessary for the computers to function smoothly and without interruption. The Delhi Tribunal in the case of DEPUTY COMMISSIONER OF INCOME-TAX VERSUS ORIENT CERAMICS AND INDUSTRIES LTD. 2010 (2) TMI 984 - ITAT DELHI , has held that UPS is an integral part of the computer and hence is entitled to the rate of depreciation applicable to computers. In following the ratio of the decision of the Delhi Tribunal we uphold the claim of the assessee on this issue - Decision in favour of Assessee. Depreciation on Plant and Machinery - CIT(A) restricted depreciation to half the year stating that assessee has appended certificates from the Plant Managers, but he should have produced further material in the nature of evidence of production for allowance of depreciation for the full year - HELD THAT - we are inclined to accept the submissions of the assessee that the Machinery in question were put to use prior to 30.9.2003. The certificates of installation issued by Plant Manager Cannot be ignored. The invoice for purchase were much prior to 30.9.2003 and it appears that only the capitalization entry was passed on 30.9.03. We uphold the claim of the assessee, for depreciation on the assets at the full rate. Computation of Book Profit u/s 115JB - CIT confirmed the taxation of profit on sale of undertaking and profit on sale of fixed assets while computing book profits u/s. 115JB -HELD THAT - We find that the decision in the case of RAIN COMMODITIES LTD. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-3(1), HYDERABAD 2010 (7) TMI 794 - ITAT HYDERABAD is against the assessee, whatever amount that have been credited to the Profit and Loss account will have to be taken into account in determining the Book profits u/s 115JB and only adjustments permitted are as per Explanation to the section 115 JB - Decision against Assessee. Diminution in Investments - Provision for loans and Advances - Computation of book profit u/s 115JB - CIT confirmed the taxation of provision for diminution in investments and provision for loans and advances written book while computing book profit u/s 115JB- HELD THAT;- We find that the Ld. CIT(A) has not considered the provision of Explanation (i) to Sec 115 JB. Under that explanation any amount withdrawn from a reserve or provision has to be excluded in computing the Book Profits u/s 115JB. The amount withdrawn can be excluded only if in the year in which Reserve was created or provision made the book profits were increased by the amount of Reserves/ Provisions. However, in this case the provisions were created in the earlier financial year 2002-03. - Matter restored back to AO. Levy of interest u/s 234B - CIT confirmed the levy of interest u/s 234B when the liability of the appellant arose only u/s 115JB(MAT) - HELD THAT - Following the decision of JTC. IT., MUMBAI VERSUS M/S ROLTA INDIA LTD. 2011 (1) TMI 5 - SUPREME COURT , where it was held that, the pre-requisite condition for applicability of section 234B is that the assessee is liable to pay tax u/s 208 and the expression assessed tax is defined to mean the tax on the total income determined under section 143(1) or under section 143(3) as reduced by the amount of tax deducted or collected at source. Thus, there is no exclusion of section 115J / 115JA in the levy of interest under section 234B - Decision against assessee. Payment to Scientific institutions as Business Expenditure - AO allowed payments made to various scientific institutes as a business expenditure by admitting additional evidence in violation of Rule 46A - HELD THAT - The issue is remitted back to the Assessing Officer for verification of the additional evidence filed by the assessee before the Ld. CIT(A) and if found in order allow the claim of the assessee. Expenditure incurred in installation -CIT held that fees paid to agency which installed and implemented SAP software to be part and parcel of the acquisition of software itself and thereby allowing 60% depreciation on the same - HELD THAT - Expenditure incurred in installation/commissioning an asset should be considered as part of cost of acquisition of asset and depreciation allowed thereon. The Ld. CIT(A) had correctly allowed depreciation at 60% on the expenditure on installation treating it as part of cost of acquisition of software. Business Disallowance u/s 40A(9) - CIT deleted the disallowance of some amount considering them as Staff and sports welfare expenses - HELD THAT - Following the decision of High Court in the case of COMMISSIONER OF INCOME TAX. VERSUS BHARAT PETROLEUM CORPORATION LTD. 2001 (3) TMI 20 - BOMBAY HIGH COURT , where it was held that such expenditure can't be covered under Section 40A(9), revenue ground was dismissed. Utilization of CENVAT Credit - CIT deleted the addition made to the total income of the assessee on account of CENVAT credit was obtained during the amalgamation. This CENVAT credit balance was treated as an opening CENVAT credit balance in the books of the assessee post merger - HELD THAT - As held by CIT(A), as a result of grossing up u/s. 145A, there is an increase in the closing stock for A.Y. 2003-04 - This increase in closing stock has resulted in increase in the opening stock for the current A.Y. which has been brought out by the Tax Auditor. The increase in opening stock consequent to increase in closing stock in the previous year does not result in any reduction in the income. The Auditor has also clarified in the Tax Audit report that consequent to the application of Sec. 145A there is no impact on the profit before taxation. We confirm the finding of the Ld. CIT(A) that the utilization of CENVAT credit is completely revenue neutral and does not call for addition to the profit and loss account - Revenue Appeal Dismissed. Contribution Towards the Brand Equity and Business Promotion Scheme - AO stated that the company has made huge business losses and since there is no profit before tax the brand equity payment was disallowed by him - HELD THAT - We find that the issue is covered by the decision in the case of HARRISONS MALAYALAM LTD. VERSUS ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1(1), ERNAKULAM 2007 (5) TMI 372 - ITAT COCHIN , where such expenditure was allowed u/s 37(i) - Respectfully following the ratio of the decision in the case of Harrisons Malayalam (supra) we dismiss the revenue s appeal. Disallowance for Brokerage Paid -The assessee submitted that the AO has disallowed certain payments made as brokerage by relying on conjectures and surmises which are unjustified in fact and in law - HELD THAT - The Ld. CIT(A) observed that the debit notes raised indicates the nature of work done. He further observed that the rate of brokerage charged is reasonable and the market reality is such that loans and borrowing cannot be obtained without brokerage expenses. We find that the Ld. CIT(A) was correct in holding that the payments have been made for services rendered to the assessee and due to commercial expediency hence allowable as a deduction in the hands of the assessee. This ground of the Revenue is dismissed. Bad Debts written off when not proved as actually bad - Revenue raised that CIT(A) has erred in deleting the Bad debts when the assessee has not proved them to be actually bad - HELD THAT - We find that the issue is covered by the decision of Hon ble Supreme Court in the case of TRF. LTD. VERSUS COMMISSIONER OF INCOME-TAX 2010 (2) TMI 211 - SUPREME COURT , wherein it has been held that, this position in law is well-settled. After 1st April, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. In the instant case there is no controversy about the write off, therefore we respectfully follow the decision of SC.

Summary

Issues Involved:
1. Disallowance of Corporate Membership Fee
2. Valuation of Closing Stock and Purchase Tax
3. Depreciation on Uninterrupted Power Supply System (UPS)
4. Depreciation on Plant and Machinery
5. Taxation of Profit on Sale of Undertaking and Fixed Assets under Section 115JB
6. Provision for Diminution in Investments and Loans and Advances Written Off under Section 115JB
7. Levy of Interest under Section 234B
8. Weighted Deduction for Payments to Scientific Institutes
9. Depreciation on SAP Software Installation Fees
10. Disallowance under Section 40A(9)
11. Addition of CENVAT Credit during Amalgamation
12. Brand Equity Contribution to Tata Sons
13. Brokerage Paid to Tata Sons
14. Bad Debts Write-off
15. Cost of Acquisition of Ralli House

Issue-wise Detailed Analysis:

1. Disallowance of Corporate Membership Fee:
The Tribunal allowed the assessee's appeal, holding that club membership fees paid to promote business interests are allowable expenditure under Section 37(1) of the Income Tax Act, as they help officers meet influential persons, fostering business growth.

2. Valuation of Closing Stock and Purchase Tax:
The Tribunal upheld the CIT(A)'s decision that purchase tax must be included in the closing stock valuation per Section 145A. However, it directed the AO to also adjust the opening stock valuation, following the jurisdictional High Court's decision in the case of Mahalaxmi Glass Works P. Ltd.

3. Depreciation on Uninterrupted Power Supply System (UPS):
The Tribunal reversed the CIT(A)'s decision, allowing a 60% depreciation rate for UPS, considering it an integral part of the computer system, essential for its smooth operation, aligning with the Delhi Tribunal's decision in the case of DCIT v Orient Ceramics.

4. Depreciation on Plant and Machinery:
The Tribunal accepted the assessee's claim that the plant and machinery were put to use before 30.09.2003, based on installation certificates and purchase invoices, and allowed full depreciation.

5. Taxation of Profit on Sale of Undertaking and Fixed Assets under Section 115JB:
The Tribunal upheld the CIT(A)'s decision that capital profits credited to the Profit and Loss account must be included in book profits under Section 115JB, following the Supreme Court's decision in Apollo Tyres.

6. Provision for Diminution in Investments and Loans and Advances Written Off under Section 115JB:
The Tribunal remitted the issue to the AO to consider the provisions of Explanation (i) to Section 115JB, which allows exclusion of amounts withdrawn from reserves or provisions if they were included in book profits in the year of creation.

7. Levy of Interest under Section 234B:
The Tribunal dismissed the assessee's appeal, affirming the CIT(A)'s decision that interest under Section 234B applies to companies liable under Section 115JB, as held by the Supreme Court in JCIT vs Rolta India Ltd.

8. Weighted Deduction for Payments to Scientific Institutes:
The Tribunal remitted the issue back to the AO to verify the additional evidence submitted by the assessee regarding payments to scientific institutes and allow the claim if found in order.

9. Depreciation on SAP Software Installation Fees:
The Tribunal upheld the CIT(A)'s decision to allow 60% depreciation on fees paid for the installation and implementation of SAP software, treating it as part of the software acquisition cost.

10. Disallowance under Section 40A(9):
The Tribunal dismissed the Revenue's appeal, following the Bombay High Court's decision in CIT Vs Bharat Petroleum Corpn. Ltd., which held that staff welfare expenses are not disallowable under Section 40A(9).

11. Addition of CENVAT Credit during Amalgamation:
The Tribunal upheld the CIT(A)'s decision that the utilization of CENVAT credit from the amalgamated company was revenue neutral and did not warrant an addition to the profit and loss account.

12. Brand Equity Contribution to Tata Sons:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision that the brand equity payment was allowable as a business expenditure under Section 37(1), as it was incurred for business expediency.

13. Brokerage Paid to Tata Sons:
The Tribunal upheld the CIT(A)'s decision, allowing the brokerage paid to Tata Sons for arranging loans, as it was incurred for services rendered and commercial expediency.

14. Bad Debts Write-off:
The Tribunal allowed the assessee's appeal, following the Supreme Court's decision in TRF Ltd. Vs CIT, which held that it is sufficient if bad debts are written off as irrecoverable in the accounts.

15. Cost of Acquisition of Ralli House:
The Tribunal upheld the CIT(A)'s decision to adopt the value of Rs. 4,50,50,775 as on 1st April 1981, as determined by the registered valuer, for the plot of land with an existing building, and directed the AO to index this value accordingly.

Conclusion:
The Tribunal partly allowed the assessee's appeal for statistical purposes and dismissed the Revenue's appeal, providing detailed directions on each issue based on legal precedents and factual evidence.