2014 (1) TMI 1899 - AT - Income Tax

Capital gain on sale of property at Bangalore - Correct assessment year - contention that same item of income cannot be taxed in two different assessment years - HELD THAT - On perusal of the order of the CIT(A), the CIT(A) seems to have accepted that out of ₹ 24.53 crores received by the assessee as a total consideration of Block-B1, ₹ 6.03 crores did not accrue during that year. Therefore, to that extent, the ground does not survive. However, whether the Order of the CIT(A) was accepted by the Revenue or not is not known to us. Therefore, A.O. is directed to consider exclusion of the amount brought to tax, to the extent included in this year in assessee computation, in case the same was assessed in A.Y. 2005-2006. With this direction, the ground is considered as allowed for statistical purposes. Disallowance u/s 14A - Major disallowance is on the issue of expenditure relatable to Floriculture business which was claimed as exempt - HELD THAT - We are of the opinion that the entire disallowance made by the A.O. cannot be sustained. However, keeping in view that assessee has earned substantial amount of dividend on investments and also keeping various Coordinate Bench decisions on similar issue in the relevant A.Y., we are of the opinion that 2% of the amount earned as dividends can be considered as expenditure related to exempt income. Accordingly, A.O. is directed to restrict the disallowance to 2% of the dividend income earned during the year. With this direction, grounds No.4 and 5 are partly allowed. Disallowance of royalty amount paid by the assessee to Gulf Oil International (Maritius) Inc . - HELD THAT - For royalty on domestic sales is concerned, as rightly pointed out by the learned Counsel, the DRP in later two years has examined the internal CUP and allowed the royalty on the domestic sales. Keeping in view the factual position as examined by the DRP and also the Order of the TPO for A.Y. 2009-2010, we are of the opinion that there is no need to disallow the royalty payment on domestic sales. Therefore, the claim is allowable based on the above facts. Coming to the export sales assessee relied on the various factors for allowing the entire claim. However, considering the fact that same issue was also examined by the DRP in A.Ys. 2007-2008 and 2008-2009 which the assessee/appellant seems to have accepted, we are of the opinion that the royalty on export sales can be restricted to 1% as was done in later years and accordingly, the royalty is restricted to an amount of ₹ 18,05,788/- as per the working furnisheded by assessee . Therefore, out of the amount of ₹ 62,29,972/- Assessing Officer is directed to allow royalty at ₹ 18,05,788/- and balance amount of ₹ 44,24,184/- stands disallowed. This is not a disallowance under section 37(1) but an adjustment made under Transfer Pricing Provisions where arms length price is to be determined, whether the agreement is approved or not. Keeping that in mind, we are of the opinion that the decision relied on by the learned Counsel, does not apply to the facts of the case. As decided earlier, the restriction on the royalty amount is limited to ₹ 44,24,184/-.

Summary

Issues Involved:
1. Inclusion of capital gain on sale of property.
2. Disallowance under section 14A for earning exempt income.
3. Disallowance of royalty amount paid to a foreign entity.

Issue 1: Inclusion of capital gain on sale of property:
The appellant contested the inclusion of capital gain on the sale of property at Bangalore, arguing that the same income cannot be taxed in two different assessment years. The Assessing Officer had held that the entire land was transferred in a previous assessment year, and the capital gains were taxed accordingly. The CIT(A) had accepted that a portion of the consideration did not accrue in the relevant year. The tribunal directed the Assessing Officer to consider excluding the amount already taxed in the previous year, allowing the ground for statistical purposes.

Issue 2: Disallowance under section 14A for earning exempt income:
The assessee challenged the disallowance under section 14A for earning exempt income, specifically related to dividend income. The tribunal considered previous years' orders and found that a major disallowance was related to expenditure on Floriculture business, which was exempt. The tribunal directed the Assessing Officer to restrict the disallowance to 2% of the dividend income earned during the year, based on various decisions and the facts of the case.

Issue 3: Disallowance of royalty amount paid to a foreign entity:
The appellant contested the disallowance of royalty paid to a foreign entity, citing agreements and changes in royalty rates approved by the government. The tribunal examined the royalty payments on domestic and export sales, considering previous years' orders. It allowed the royalty on domestic sales but restricted the royalty on export sales to 1%, directing the Assessing Officer to allow a specific amount based on calculations provided by the assessee. The tribunal differentiated the case from a precedent cited by the appellant, emphasizing the Transfer Pricing Provisions' applicability in determining the arms-length price.

The tribunal partially allowed the appeal, addressing each issue raised by the appellant in detail and providing reasoned judgments for each issue.