2015 (2) TMI 1365 - AT - Income Tax

Deduction u/s.80HHC - HELD THAT - It is the assessee who had preferred the appeal before the Tribunal for claim of netting of the expenditure in relation to other income. Tribunal had remanded the matter to the AO for the limited purpose of verifying the claim of the assessee. In this respect, the AO has observed that assessee has failed to furnish convincing evidences, under such circumstances, the proper course for the AO was to make/uphold the disallowance to that extent only. There was no jurisdiction to the AO to further enhance the income of the assessee on some other ground while computing the deduction u/s.80HHC. The issue relating to the deduction except on the ground agitated by the assessee before the Tribunal, had become final. Hence the action of the AO enhancing the income on some other issue, while giving effect to the order of the ITAT, was not justified. By doing so, the AO in this case has exceeded his jurisdiction. Hence the enhancement of the income of the assessee on this issue is hereby set aside. Disallowance of claim of weighted portion u/s. 35(2AB) - HELD THAT - Tribunal has held that cut-off date mentioned in the certificate issued by the DSIR would be of no relevance. Once a certificate by DSIR is issued and it is proved that the assessee is indulging in R D activity and had incurred the expenditure thereupon, then the assessee is entitled to deduction u/s.35(2AB). The Ld. Counsel has further invited our attention to the another order of the ITAT relevant to assessment year 2003-04 where in the Tribunal while adjudicating the identical issue has observed that the assessee since then has got formal approval from DSIR in form 3CM, in respect of Vapi unit, has been received on 5th August 2011 and hence the assessee has been entitled for weighted deduction under section 35(2AB) for said unit. It has also been directed that since certificate has been received after passing of orders of the CIT(A), therefore, the matter has been remanded to the AO for the limited purpose of verification of the certificate. As regards Thane unit, since no such order of approval in form no. 3CM was available with the assessee, therefore, disallowance of the weighted deduction under section 35(2AB) with respect to Thane unit has been upheld. As brought our attention to the copy of the certificate dated 5th August 2011 wherein a composite approval for the purpose of section 35(2AB) has been issued by the department from 06.07.2001 to 31.03.2012 for the Vapi unit. In view of above we accordingly restore the matter to the AO for the limited purpose of verification of the above stated certificated dated 05.08.2011 and if verified to be correct, the AO to allow the claim of the assessee accordingly. Since no such certificate is available for the Thane unit hence, the claim for Thane unit on this issue is not allowable. Depreciation on assets purchased from Pravin Metal Corporation - HELD THAT - The issue for this year is accordingly restored to the file of the AO to decide it in the light of the directions as reproduced above and after providing due opportunity of being heard to the assessee. Disallowance u/s.14A - HELD THAT - As in the earlier assessment years i.e. A.Y.1999-2000, 2001-02 2002-03 and A.Y. 2005-06 disallowances have been restricted by the Tribunal to 2% of dividend income received by the assessee. The relevant year before us being 2005-06, rule 8D of the income Tax Rules is not applicable for this year as has been held in the case of Godrej Boyce Mfg. Co. Ltd. 2010 (8) TMI 77 - BOMBAY HIGH COURT that the same is applicable from assessment year 2008-09 on words. In view of the consistent finding of the Tribunal for earlier assessment years, restricting disallowance u/s.14A to the extent of 2% of dividend income, we accordingly restrict the disallowance of the expenditure u/s.14A to 2% of dividend income accordingly. Depreciation claimed under rule 5(2) - AO and CIT(A) have disallowed the claim of additional depreciation solely on the ground that no certificate was produced as required under rule 5(2) - The said certificate dated 10.10.2011 has now been received by the assessee from department of Scientific and Industrial Research (DSIR). The matter is accordingly restored back to the file of the AO for limited purpose of verification of certificate and if verified to be correct, to allow the claim accordingly. Disallowance of bad debts - HELD THAT - We find that the Ld. CIT(A) has deleted the disallowance on account of bad debts while relying on the decision in the case of TRF Limited vs. CIT 2010 (2) TMI 211 - SUPREME COURT , wherein the Hon ble Supreme Court has held that 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. We are also in agreement with the finding of the CIT(A) that it is the assessee who as a prudent business man has to decide as to whether there are any chances of the recovery of debts or the same has actually become bad. In view of this, we do not find any infirmity in the order of CIT(A) on this issue. This appeal of the Revenue is accordingly dismissed. Treatment of Computer software expenses as capital in nature - HELD THAT - The software purchased vide/Bill dated 7.9.06 was valid from 7th Sept. 06 to 6th Oct. 06, whereas, the software purchased vide invoice dated 31st July 2006 was for one year auto updates. The Ld. Counsel has further invited our attention to other bills to show that the relevant software expenses, in fact, were for the annual or monthly support services and thus were periodical expenditure. It was not for long term having enduring benefit. Even otherwise, it is commonly known that now a days, the software version has short duration value, as the moment, new software comes into market, old software loses its value in this developing scenario especially in the software market. It cannot be said that said expenses incurred by the assessee were on long term basis giving enduring benefit. In view of above, this ground is allowed in favour of the assessee and it is directed that the software expenses be treated as Revenue in nature. Disallowance of weighted deduction u/s.35(2AB) - AO has disallowed the claim of deduction u/s 35(2AB) of the Act on the ground that no approval was obtained from the prescribed authority in form No.3CL and 3CM - HELD THAT - The said forms were received by the assessee during the course of appellate proceedings and were submitted to the CIT(A). At the same time, assessee filed an application u/s.154 of the Act with the AO to allow the said deprecation. However, the same has not been disposed off by the AO. In view of our finding given above, this ground is decided accordingly. If the assessee has moved any application u/s.154 on this issue, the AO will dispose off the said application also while giving effect to our order on this issue. Interest on loans and advances given to subsidiary company - HELD THAT - No infirmity in the order of the Ld. CIT(A) in deleting this disallowance. This issue is accordingly decided against the Revenue.

Summary

Issues Involved:
1. Restriction of deduction u/s. 80HHC by invoking provisions of section 80IA(9).
2. Disallowance of weighted deduction u/s. 35(2AB).
3. Disallowance of depreciation on assets purchased from Pravin Metal Corporation.
4. Disallowance u/s. 14A.
5. Disallowance of depreciation claimed under Rule 5(2).
6. Levy of interest u/s 234B in respect of 14A disallowance.
7. Treatment of computer software expenses as capital in nature.
8. Disallowance of bad debts.
9. Interest on loans and advances given to subsidiary company.

Detailed Analysis:

1. Restriction of Deduction u/s. 80HHC by Invoking Provisions of Section 80IA(9):
The assessee contended that the AO exceeded his jurisdiction by restricting the deduction u/s. 80HHC while giving effect to the ITAT order. The Tribunal had previously remanded the issue to the AO to exclude only net other income after examining the nexus between the expenditure incurred and the income earned. The AO disallowed the claim due to lack of convincing evidence from the assessee. However, the AO further disallowed an additional amount by invoking section 80IA, which was beyond his jurisdiction. The Tribunal set aside this enhancement, stating that the AO exceeded his jurisdiction.

2. Disallowance of Weighted Deduction u/s. 35(2AB):
The CIT(A) upheld the disallowance of weighted deduction u/s. 35(2AB) on the ground that the agreement was not entered into between the appellant and DSIR. The Tribunal noted that in previous years, the assessee was granted recognition from DSIR, and the cut-off date mentioned in the certificate was irrelevant. The Tribunal restored the matter to the AO for verification of the certificate dated 05.08.2011 and allowed the claim if verified. The claim for the Thane unit was not allowable due to the absence of a certificate.

3. Disallowance of Depreciation on Assets Purchased from Pravin Metal Corporation:
The Tribunal restored the issue to the AO for re-examination, following the precedent set in previous assessment years. The AO was directed to decide the issue afresh after providing the assessee with an adequate opportunity to be heard.

4. Disallowance u/s. 14A:
The Tribunal restricted the disallowance u/s. 14A to 2% of the dividend income, consistent with its findings in earlier assessment years. The Tribunal noted that Rule 8D was not applicable for the relevant year (2005-06), as held by the Hon'ble Bombay High Court in "Godrej & Boyce Mfg. Co. Ltd. vs. DCIT".

5. Disallowance of Depreciation Claimed under Rule 5(2):
The AO and CIT(A) disallowed the claim due to the absence of a required certificate. The assessee later received the certificate dated 10.10.2011. The Tribunal restored the matter to the AO for verification of the certificate and allowed the claim if verified.

6. Levy of Interest u/s 234B in Respect of 14A Disallowance:
The Tribunal did not specifically address this issue, as it was related to the disallowance u/s. 14A, which was restricted to 2% of the dividend income.

7. Treatment of Computer Software Expenses as Capital in Nature:
The AO treated software expenses as capital expenditure and allowed depreciation at 60%. The Tribunal, after examining the invoices, found that the software was for limited use and did not provide long-term enduring benefits. The Tribunal directed that the software expenses be treated as revenue in nature.

8. Disallowance of Bad Debts:
The AO disallowed the claim for bad debts, but the CIT(A) deleted the disallowance based on the Supreme Court's decision in "TRF Limited vs. CIT", which stated that it is sufficient if the bad debt is written off as irrecoverable in the accounts. The Tribunal upheld the CIT(A)'s decision, agreeing that the assessee, as a prudent businessman, decides the recoverability of debts.

9. Interest on Loans and Advances Given to Subsidiary Company:
The AO added notional interest income to the assessee's income, but the CIT(A) deleted the disallowance, relying on previous orders. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had sufficient own funds and that the advances were made out of commercial expediency, referencing the Bombay High Court decision in "Reliance Utilities".

Conclusion:
The appeals of the assessee were partly allowed for statistical purposes, and the appeals of the Revenue were dismissed. The Tribunal directed the AO to verify certain claims and certificates and to provide the assessee with an opportunity to substantiate their claims. The order was pronounced in the open court on 06.02.2015.