2016 (6) TMI 1438 - AT - Income Tax

Nature of receipt - treatment to the compensation received by the assessee on termination of Joint Venture Agreement - revenue or capital receipt - HELD THAT - Firstly, the compensation received by the assessee which is attributable to negative/ restrictive covenant is a capital receipt; and secondly, the provision of section 28(va) brought w.e.f. 01.04.2003 in the Act will apply only from AY 2003-04. Thus, the aforesaid decision of the Hon ble Apex Court in GUFFIC CHEM PVT LTD 2009 (10) TMI 966 - HIGH COURT OF KARNATAKA CIRCUIT BENCH AT DHARWAD clearly clinches the issue in hand and respectively following the aforesaid principles, we hold that the amount of receipt of compensation received by the assessee on termination of an agreement and for consideration attributable to negative and restrictive covenants is to be treated as capital receipt and not business income or revenue receipt. Thus, ground no.1 is allowed in favour of the assessee. Addition on account of forfeiture of advance share application money by treating it as a capital receipt - HELD THAT - In the case of Solid Containers 2008 (8) TMI 156 - BOMBAY HIGH COURT the relevant fact was that the money was received by the assessee in course of carrying on his business. Although it was treated as deposit and was of capital nature at the point of time it was received, however by efflux of time the money has become the assessee's own money, because of unclaimed by the customers. What remains after adjustment of the deposits has not been claimed by the customers; hence the claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profit and loss account. There was no explanation from the assessee why the surplus money was taken to its profit and loss account even if it was somebody else's money. It was in light of these facts and background the Hon ble Bombay High Court held that it was the income of the assessee. Here in present case no deposits have received from customers nor it is a loan taken for trading activity and neither has it been transferred to P L Account, albeit here the share application money has been forfeited due to settlement by the share applicant and the assessee and the money has been transferred to capital reserve fund. Thus, such an amount cannot be taxed in either way under section 41(1). Accordingly, the finding of the Ld. CIT(A) on this score is confirmed and impugned issue raised by the revenue in ground no. 2 is treated as dismissed. Addition as legal expenses to defend itself in legal suits filed - AO held that the dispute was between the two promoters of the company and not with the assessee company - HELD THAT - The true test in respect of allowing the litigation/legal expenses is, whether the litigation was initiated while carrying on the business or during the conduct of the business or not. If litigation in any manner affects the working of the company or the source of its income or its dayto- day running or management, then such expenses has to be reckoned as incurred or expended for the purpose of the business. The test of immediate benefit or revenue is not criteria for allowing expenditure under section 37(1), albeit it has to seen, whether it has been incurred for the purposes of the assessee s business or not. The expression for the purpose of business has a very wide import and covers a situation where it affects the overall business of the assessee and commercial expediency. It has to be seen from this angle also, if the assessee would not have been dragged into such litigation and proceedings before the Company Law Board, then there would not have been any requirement for the assessee to incur such expenditure. Assessee got involved only because it was made one of the respondent and defendant in the suit and in order to save its business from possible liquidation the assessee had to incur the legal expenses. Thus, in our opinion, such expenditure on legal expenses is wholly and exclusively incurred for the purpose of the business and accordingly, same needs to be allowed. Accordingly, ground no.3 of the revenue s appeal stands dismissed. Disallowance of interest of attributable to the interest free advance to the associated concern - CIT(A) deleted the said disallowance on the ground that, now the VCCL Ltd. has paid the amount to the LML, therefore, the entire basis of making disallowance by the AO no longer stands - HELD THAT - If this amount would have been given to the LML then due amount could have been reduced and also the consequent interest to LML. On this premise he has made the disallowance of interest on the amount of ₹ 13.55 crores. Now, admittedly, it has been shown by the assessee before the CIT(A), which has not been disputed by the revenue before us that, VCCL Ltd has paid the amount of ₹ 13.55 crores to the assessee for which the necessary evidences were also filed before the CIT(A) and Xerox copy of the cheque is also appearing in the paper book. Thus, the entire premise on which the disallowance was made by the AO has no legs to stand. Hence, the ground raised by the revenue has been rendered baseless and without any basis or support from any material on record and accordingly, the same is dismissed. Disallowance of interest on dues - HELD THAT - As brought out by the assessee before the CIT(A), ₹ 17.59 crores represent the surplus on sale of undertaking which was credited to the P L Account and was offered as long-term-capital gain/loss whereas, the part of the amount was credited to the various block-of-assets and thereby reduce the WDV of those assets. Thus, there was no occasion for disallowance of any interest on the amount of ₹ 17.51 crores. A disallowance of interest in such cases can only be when the department/revenue makes out a case that interest bearing funds have been diverted to the sister concerns without any business purpose and without charging any interest. Ostensibly it is not the case here that any interest bearing funds have been diverted to the sister concern albeit certain sum was to be received by the assessee as part of sale consideration and in such a case how the interest component can be imputed for making any disallowance is not understandable. Not only that, it has been brought on record that ESL has been ordered to be wound up by the Hon ble Allahabad High Court and once the amount itself is doubtful of recovery then how any amount of interest and that to be on the notional basis can be imputed for making the disallowance. The entire exercise done by the AO is very arbitrarily and we do not find any reason to deviate from the conclusion of the CIT(A) in deleting the said disallowance. Accordingly, the ground No.5 as raised by the revenue is dismissed. Disallowance u/s 40(a)(i) on account of technical know-how fees paid to M/s AVL Austria - disallowance had been made by the AO on the ground and on the footing that the payment of technical know-how fees to AVL Austria is taxable in India even if it has been rendered outside India and since, assessee has not deducted TDS on such payments, therefore, disallowance under section 40(a)(i) should be made - HELD THAT - If the amount is paid by an Indian enterprise for technical services furnished by enterprise in Austria then same shall not be subject to tax in India except in so far as such amount is attributable to the activities actually performed in India. This article is different from the new Article 7 applicable post September 2001 and, therefore, the benefit of old article has to be given to the assessee in the AY 2000-01. Here in this case admittedly, the activity of rendering of technical services has been performed by the Austrian Company in Austria and the amount has been paid by the Indian enterprise in Austria, therefore, by virtue of Article 7 of DTAA (as was prevalent prior to September, 2001), the amount was not taxable in India and consequently the assessee was not required to deduct TDS on payment. Thus, no disallowance under section 40(a)(i) can be made in the present case. In the result, ground No.6 as raised by the revenue is dismissed. Disallowance u/s 40A(9) - AO has disallowed the said amounts on the ground that, similar disallowance was made in the earlier years - HELD THAT - Before us, it has been admitted by both the parties that the Tribunal in assessee s own case for the AYs 1997-98, 1998-99 and 1999-00 in the appeal filed by the revenue has confirmed the similar disallowance made under section 40A(9). Accordingly, following the earlier year precedence which is applicable in this year also, this issue is decided against the assessee and in favour of the revenue. Thus, ground No.7 raised by the Department is allowed. Disallowance on account of pre-operative expenses claimed as revenue expenditure - HELD THAT - We need not to go into merits of the issue, because already assessee had reduced the said amount of ₹ 376.18 lakhs from the pre-operative expenditure which has been added by the AO separately. This is evident from the fact that total pre-operative expenditure was ₹ 1038.20 lakhs, out of which interest and other income of ₹ 376.81 lakhs has already been reduced and only ₹ 661.39 lakhs have been claimed in the P L A/c. Thus, there was no requirement by the AO to disallow once again the interest and other income of ₹ 376.81 lakhs. AO is accordingly is directed to rectify this mistake after verification that if the assessee has already reduced the said amount from the total pre-operative expenditure as stated before us, then no addition should be made. In the result, ground No.8 is treated as allowed in the manner indicated above. Nature of expenditure - Expenditure incurred on obtaining ISO 9002 and World Class Manufacture Certificate - Revenue or capital expenditure - HELD THAT - We do not find any merits in the contention of the AO that payment for getting such certificates for quality products or World Class Manufacturing Facility is in the nature of trademark and hence is capital in nature. We, thus, confirm the order of the CIT(A) that such an expenditure is revenue expenditure and is allowable under section 37(1). Accordingly we dismiss the ground raised by the revenue Disallowance of bad debt - HELD THAT - AO himself had admitted that, it is a sundry debt which is outstanding since 1987. Lastly, it is also not disputed that the said amount was receivable and was treated as loans and advances in the books of account which has been written off in the aforesaid manner. Thus, it has rightly been held that the same will be allowable as bad debt. Once the provision for doubtful debt has been debited to the P L Account and the corresponding provision has been reduced from the debtors account in the Balance-sheet then this would amount to writing off the debt and thus all the conditions laid down in section 36(1)(vii) r.w.s. 36(2) clearly gets fulfilled. This issue has been settled by the Hon ble Supreme Court in the case of Vijaya Bank Ltd 2010 (4) TMI 46 - SUPREME COURT - Thus the said amount would be allowed as a bad debt written off by the assessee and not as a long-term capital loss. Accordingly, we affirm the order of CIT(A) on this score. Addition on account of assessable value of goods imported for job work and re-export - assessee used to import certain components free of cost from M/s Piaggio BV, the collaborator for performing job work and thereafter such components were exported - HELD THAT - We are unable to appreciate as to how such a value of component can be brought to tax in the hands of the assessee, because to the extent assessee gets the benefit on the cost, it will be reflected in the price of the manufactured product and thereby giving a higher profit on the sale of the said product. There is no liability towards Piaggio and accordingly, it cannot be held that there is any extinguishment of any liability which needs to be taxed in this year. CIT(A) has held that the components received without any purchase price constitutes the income cannot be upheld, because the income or profit will result only if the said component is used in the manufacturing of the product and when the product is ultimately sold. The profit imbedded on account of such free component would only be determined at the time of sale of the product and then profit would be taxed and not when the said component (free of cost) has been used, that is, at the time of the purchase itself. Thus, in our opinion, such an addition is not called and same is directed to be deleted. Resultantly ground No. 1 as raised by the assessee is treated as allowed. Disallowance of provision for doubtful debts and provision for Doubtful Advance - HELD THAT - We agree with the contention of the Ld. Counsel that if a provision for doubtful debt is debited to the P L account and simultaneous reduction from the debtors account is made, then same amounts to writing off in the books of account and should be allowed as deduction under section 36(1)(vii). This principle has been reiterated by the Hon ble Bombay Court in the case Tainwalla Chemicals and Plastics 2013 (4) TMI 211 - BOMBAY HIGH COURT - However neither the AO nor the CIT(A) has discussed this issue in detail, accordingly, we direct the AO to examine the issue on merits - Assessee in ground No.3 is treated as allowed for statistical purposes. Addition of bad debts written off - HELD THAT - The assessee could not establish or bring any proof, under what circumstances, the assessee could not use the license and for what purpose it was purchased and why the desired import on these licenses could not be affected. For any claim of business expenditure or claim of write off or a business loss, the onus is on the assessee as to how it related to his business and also has to give genuine reasons with evidence for incurring the expenses and why it has been written off. In our opinion, without there being any material on record and any satisfactory explanation, we agree with the finding of the lower authorities that to the extent of amount written off there is no material to substantiate the assessee s claim and onus cast upon the assessee has not been discharged therefore, it has rightly been disallowed. As regards the various debit balances we find that assessee could not establish the reason for writing off and could not establish the genuineness of the entire transaction. Thus, on this score also, the order of the CIT(A) is confirmed. Custom duty written off on export of certain scooters for exhibiting the same in Indian market - We find that assessee could not reexport the scooters as it was used in the Indian market and as such excise duty could not be recovered. Thus, custom duty which was paid by the assessee in the course of its business and once it was not recovered; then the same has to be allowed as deduction or loss while computing the income from profits and gains under section 28. The assessee had taken a business decision for importing of certain scooters for exhibiting the same in the Indian market for which it had to pay the custom duty. Thus, the said amount incurred was during the course of the business and write off of such amount which was not recoverable is to be allowed as deductible expense. Thus, the claim is clearly allowable and we order accordingly. Thus, ground no.4 is partly allowed. Disallowance of payment made towards Royalty and Technical Know-how - HELD THAT - Both the conditions have to be satisfied, that is, the services that the source of income should be in India and services have been rendered in India. However, if the services have been rendered outside India then same was held to be outside the purview of taxable in India. Once this is the admitted position, then it is very difficult to hold that, assessee should have deducted TDS on such a payment when there was no law that the payment is taxable in India. Here, the maxim of lex non cogit ad impossplia, that is, the law of the possibly compelling a person to do something which is impossible, that is, when there is no provision for taxing an amount in India then how it can be expected that a tax should be deducted on such a payment. This view has been upheld by in catena of decisions wherein, it has been held that, assessee cannot held to be liable for deducting TDS in view of the retrospective amendment which has come at a much later date. Thus, without going into the aspect of FTS clause in DTAAs, we hold that, at the relevant time while making the payment, assessee was not liable to deduct TDS under the domestic law. Accordingly, disallowance under section 40(a)(i) could not have been made by the AO. Disallowance of prior period expenses - HELD THAT - The assessee has given the reasons as to why these liabilities have been crystallized in this year. However, neither the AO nor the CIT(A) have discussed this issue in proper perspective, therefore, we are of the opinion that matter should be restored back to the AO to examine this issue afresh after considering assessee s submission and also in the light of the decision laid down by the Hon ble Supreme Court in the case of Taparia Tools Ltd 2015 (3) TMI 853 - SUPREME COURT . Accordingly, ground No.8 is allowed for statistical purposes. Addition on account of gift to various employees on various occasions - AO has disallowed 10% of the expenses which has been confirmed by the AO on ad-hoc basis - HELD THAT - There is some degree of adhocism in such a disallowance, however, the onus was on the assessee to show that entire expenditure debited is wholly and exclusively for the purpose of business and there is no element of nonbusiness- purpose or for any personal nature expenditure. In case of the company though there cannot be any expenses of personal nature, however, in the present case assessee has mainly stated that the gifts have been given to the guests but why such an expensive gifts were given to the guests has not been specified. Thus, the element of non-business purpose is inherent in such an explanation, therefore, we do not find any reason to deviate from the disallowance as confirmed by the CIT(A). Accordingly, ground no.11 is dismissed.

Summary

Issues Involved:
1. Treatment of compensation received on termination of Joint Venture Agreement.
2. Treatment of forfeiture of advance share application money.
3. Disallowance of legal expenses.
4. Disallowance of interest on interest-free advances to associated concerns.
5. Disallowance of interest on dues from associated concerns.
6. Disallowance of technical know-how fees under section 40(a)(i).
7. Disallowance under section 40A(9) for contributions to clubs and funds.
8. Disallowance of pre-operative expenses.
9. Treatment of expenditure on obtaining ISO 9002 and World Class Manufacturing certificates.
10. Treatment of bad debts as capital loss.
11. Addition on account of assessable value of goods imported for job work.
12. Disallowance of provision for doubtful debts and advances.
13. Disallowance of prior period expenses.
14. Disallowance of gifts to employees and guests.
15. Disallowance of payments of royalty and technical know-how fees.

Detailed Analysis:

1. Treatment of Compensation Received on Termination of Joint Venture Agreement:
The compensation received by the assessee on the termination of the Joint Venture Agreement with Piaggio was treated as a capital receipt. The Tribunal held that the compensation was attributable to restrictive covenants imposed on the assessee, adversely affecting its business and profitability. The Tribunal agreed with the CIT(A) that the compensation was for the impairment of the profit-making apparatus and hence was a capital receipt, not liable for taxation as business income or capital gain.

2. Treatment of Forfeiture of Advance Share Application Money:
The amount of ?8.80 crores received as advance share application money from Piaggio was treated as a capital receipt. The Tribunal upheld the CIT(A)'s decision, noting that the amount was received as share application money and not as a loan or advance for trading purposes. The Tribunal also noted that the amount was not taxable under section 41(1) as it was not a trading liability.

3. Disallowance of Legal Expenses:
The Tribunal upheld the CIT(A)'s decision to allow the legal expenses of ?574.96 lakhs incurred by the assessee to defend itself in legal suits filed by Piaggio. The Tribunal noted that the expenses were incurred to protect the assessee's business interests and were therefore allowable as business expenses.

4. Disallowance of Interest on Interest-Free Advances to Associated Concerns:
The Tribunal upheld the CIT(A)'s decision to delete the disallowance of ?2.03 crores made by the AO on account of interest-free advances to VCCL Ltd. The Tribunal noted that the amount of ?13.55 crores was repaid by VCCL to the assessee, rendering the AO's premise for disallowance baseless.

5. Disallowance of Interest on Dues from Associated Concerns:
The Tribunal upheld the CIT(A)'s decision to delete the disallowance of ?4.05 crores made by the AO on account of interest on dues from Esslon Synthetics Ltd. The Tribunal noted that the amount was part of the sale consideration for the transfer of the Fibre Business and was not an advance or loan given to the associated concern.

6. Disallowance of Technical Know-How Fees under Section 40(a)(i):
The Tribunal upheld the CIT(A)'s decision to delete the disallowance of technical know-how fees paid to AVL Austria. The Tribunal noted that the services were rendered outside India and were not taxable in India under the old India-Austria DTAA.

7. Disallowance under Section 40A(9) for Contributions to Clubs and Funds:
The Tribunal reversed the CIT(A)'s decision and upheld the disallowance of ?5,81,936/- under section 40A(9) for contributions to LML Executive Club, LML Officers Club, LML Ladies Club, and Workers Benevolent Fund, following the precedent set in earlier years.

8. Disallowance of Pre-Operative Expenses:
The Tribunal directed the AO to verify whether the amount of ?3,76,81,000/- had already been reduced from the pre-operative expenditure and to rectify the mistake if the amount had already been reduced.

9. Treatment of Expenditure on Obtaining ISO 9002 and World Class Manufacturing Certificates:
The Tribunal upheld the CIT(A)'s decision to treat the expenditure on obtaining ISO 9002 and World Class Manufacturing certificates as revenue expenditure, noting that the expenditure was incurred wholly and exclusively for the purpose of business.

10. Treatment of Bad Debts as Capital Loss:
The Tribunal upheld the CIT(A)'s decision to allow the amount of ?17.59 crores as a bad debt written off, noting that the amount was a sundry debt and not a capital asset.

11. Addition on Account of Assessable Value of Goods Imported for Job Work:
The Tribunal deleted the addition of ?1,20,93,180/- made by the AO on account of the assessable value of components imported for job work, noting that the components were received free of cost and used in the assessee's business.

12. Disallowance of Provision for Doubtful Debts and Advances:
The Tribunal directed the AO to examine whether the provision for doubtful debts and advances had been debited to the profit and loss account and simultaneously reduced from the debtors' account, and to allow the deduction if the conditions were met.

13. Disallowance of Prior Period Expenses:
The Tribunal restored the issue of prior period expenses of ?26.27 lakhs to the AO for fresh examination, directing the AO to consider the assessee's submissions and the decision of the Supreme Court in Taparia Tools Ltd.

14. Disallowance of Gifts to Employees and Guests:
The Tribunal upheld the disallowance of 10% of the expenses on gifts to employees and guests, noting that the onus was on the assessee to show that the entire expenditure was incurred wholly and exclusively for business purposes.

15. Disallowance of Payments of Royalty and Technical Know-How Fees:
The Tribunal upheld the disallowance of royalty payments to M/s Daelim Motors Co. Ltd, Korea, and M/s China Terminal & Electrical Co Ltd., Taiwan, as not pressed by the assessee. However, the Tribunal deleted the disallowance of payments for technical know-how fees, noting that the services were rendered outside India and were not taxable in India at the time of payment.