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2017 (7) TMI 1435 - AT - Income TaxNature of expenses - Expenses relates to application of software packages - revenue or capital expenditure - HELD THAT - We find that this issue has been settled by Tribunal in all the earlier years and factually the expenses relates to application of software packages which get frequently outdated and have to be replaced. The expenditure is to be treated as Revenue in nature and we allow the same accordingly. Disallowing the expenses of foreign travel - HELD THAT - Tribunal in AY 1995-96 in 2013 (10) TMI 1039 - ITAT MUMBAI allowed the claim of the assessee. Deduction u/s 80HHC - holding that 90% of the net amount is machinery higher charges which required to be deducted from eligible profit for deduction under section 80HHC in term of explanation(baa) to section 80HHC - HELD THAT - Hon ble Bombay High Court in the case of CIT vs. Bangalore Clothing Co. 2003 (1) TMI 89 - BOMBAY HIGH COURT held that explanation (baa) to section 80HHC of the Act requires that 90% of the receipts by way of brokerage commission interest rent charges or any other receipt of a similar nature have to be reduced from the profits. The reason why the items like brokerage etc. have to be excluded is because they do not poses any nexus with export turnover and their inclusion in profits would result in a distortion of the figure of export profit. However some expenditure incurred for earning these incomes an adhoc deduction of 10% from such income is to be allowed under this provision. As in the present case the machinery hire charges are not in connection with export turnover and hence cannot be included in the profit and this will squarely fall under the clause (baa) to section 80 HHC of the Act and CIT(A) rightly directed AO to reduce 90% of net amount. We find no infirmity in the order of CIT(A) and hence the same is confirmed. This issue of assessee s appeal is dismissed. Value of closing stock on account of MODVAT - HELD THAT - Respectfully following the Hon ble Bombay High Court Decision in the case of Mahalakshmi Glass Works Private Limited 2009 (4) TMI 182 - BOMBAY HIGH COURT and also upon the decision of co-ordinate Bench of the tribunal in the case of Sunshield Chemicals Private Limited 2015 (12) TMI 767 - ITAT MUMBAI we hold that unutilized MODVAT credit shall be added to the closing stock of the assessee as at year end which will also necessitate similar adjustments to opening stock in light of the aforesaid decisions cited by us. Depreciation on assets transfer to Ciba Specialty Chemicals (India) Ltd. pursuant to scheme of demerger - HELD THAT - There is a newly inserted explanation 2A which is inserted by Finance Act 1999 with effect from 01-4-2000 to Section 43(6) of the 1961 Act which has not been considered by authorities below nor the assessee has brought the same to the notice of authorities below and hence we considered it appropriate to restore the issue to the file of the AO for de-novo adjudication of the issue in accordance with law in the light of newly inserted explanation as indicated above and also in the light of decision of the tribunal in assessee s own case for preceding AYs 1997-98 1998-99 and 1999-2000 as relied upon by the assessee. Disallowance of advertisement expenses and assessee is against not allowing depreciation applicable to plant and machinery at the rate of 25% - HELD THAT - As in assessee s own case 2016 (1) TMI 1491 - ITAT MUMBAI allowed the claim of the assessee. Addition of estimated freight component in the closing stock - HELD THAT - This issue is decided in earlier years wherein the Tribunal has dealt with this issue in 2016 (1) TMI 1491 - ITAT MUMBAI - Decided in favour of assessee. Calculation of liability - incremental liability accrued on account of payment of pension under voluntary retirement scheme in respect of the orders of the assessee s erstwhile Bhandup Unit - HELD THAT - We have carefully gone through the orders of the lower authorities and the order of the Tribunal. We find that the Tribunal in its order has followed the findings given by the Tribunal in A.Y. 1993-94 and has restored this issue back to the file of AO to examine and verify the actuary valuation certificate and the agreement with the company and the employee and if he finds that the liability has been calculated on a scientific basis may allow the claim of the assessee. Facts and circumstances being identical respectfully following the afore stated direction of the Tribunal in assessee s own case for A.Y. 1994-95 this issue is restored back to the file of AO. Exclude sale tax and excise duty and scrap sale from the total turnover for the purpose of computing deduction under section 80HHC - HELD THAT - Respectfully following the Hon ble Bombay High Court decision in the case of Sudarshan Chemicals Industries Ltd. 2000 (8) TMI 73 - BOMBAY HIGH COURT and Hon ble Supreme Court decision in the case of Punjab Stainless Steel Industries 2014 (5) TMI 238 - SUPREME COURT We allow the claim of the assessee and confirm the order of CIT(A). This issue of Revenue s appeal is dismissed. Disallowance u/s 14A - expenditure in relation to exempt income under section 14A - HELD THAT - In the instant year the end of justice will be met if the order of the AO is upheld as the disallowance u/s 14A made by the AO being 2% of exempt income (interest income and dividend income) falls within the arena of reasonability and Revenue s appeal is allowed.
Issues Involved:
1. Disallowance of software expenses as capital expenditure. 2. Disallowance of foreign travel expenses. 3. Disallowance of hotel and airfare expenses for foreign visitors. 4. Deduction of machinery hire charges from eligible profit under section 80HHC. 5. Addition to closing stock value on account of MODVAT. 6. Depreciation on assets transferred pursuant to a scheme of demerger. 7. Disallowance of advertisement expenses. 8. Addition of estimated freight component to closing stock. 9. Deduction of incremental liability for pension under VRS. 10. Exclusion of sales tax, excise duty, and scrap sale from total turnover for section 80HHC. 11. Disallowance of expenditure related to exempt income under section 14A. Issue-wise Detailed Analysis: 1. Disallowance of Software Expenses as Capital Expenditure: The Tribunal considered whether software expenses should be treated as capital or revenue in nature. The assessee argued that the software expenses were for application software packages that frequently become outdated and need replacement, thus should be treated as revenue expenditure. The Tribunal noted that similar issues in previous years had been decided in favor of the assessee, and the Revenue had accepted these decisions. Consequently, the Tribunal allowed the software expenses as revenue in nature. 2. Disallowance of Foreign Travel Expenses: The Tribunal examined the disallowance of 20% of foreign travel expenses. The assessee contended that this issue had been consistently resolved in its favor in previous years, with the Tribunal allowing the claim. The Tribunal agreed, noting that the Revenue had not appealed these decisions, and allowed the foreign travel expenses. 3. Disallowance of Hotel and Airfare Expenses for Foreign Visitors: The Tribunal reviewed the disallowance of Rs.1,54,201 for expenses incurred on foreign visitors. The assessee argued that these expenses were for business purposes, and similar disallowances in previous years had been overturned by the Tribunal. The Tribunal found the issue to be covered in favor of the assessee and deleted the disallowance. 4. Deduction of Machinery Hire Charges from Eligible Profit Under Section 80HHC: The Tribunal addressed the issue of whether 90% of the net amount of machinery hire charges should be deducted from eligible profit under section 80HHC. The Tribunal upheld the CIT(A)'s decision that only 90% of the net machinery hire charges should be deducted, in line with the Special Bench decision in Lalson's case. 5. Addition to Closing Stock Value on Account of MODVAT: The Tribunal considered the addition of Rs.97,99,187 to the closing stock value on account of MODVAT. The assessee argued that this issue was covered by the Supreme Court's decision in DCIT vs Indo Nippon Chemicals Co. Ltd. and the Bombay High Court's decision in CIT vs. Mahalakshmi Glass Works Private Limited. The Tribunal agreed and directed that the unutilized MODVAT credit be added to the closing stock, necessitating similar adjustments to the opening stock. 6. Depreciation on Assets Transferred Pursuant to a Scheme of Demerger: The Tribunal reviewed whether the assessee was eligible for depreciation on assets transferred to Ciba Specialty Chemicals (India) Ltd. The Tribunal noted that this issue had been decided in favor of the assessee in previous years and restored the matter to the AO for de-novo adjudication in light of the Tribunal's earlier decisions and the newly inserted explanation to Section 43(6). 7. Disallowance of Advertisement Expenses: The Tribunal addressed the disallowance of advertisement expenses of Rs.41,32,211. The Tribunal noted that this issue had been decided in favor of the assessee by the Bombay High Court in earlier years and allowed the claim. 8. Addition of Estimated Freight Component to Closing Stock: The Tribunal considered the addition of Rs.27,42,711 on account of estimated freight component in the closing stock. The Tribunal noted that this issue had been consistently decided in favor of the assessee in previous years and remitted the matter back to the AO for adjudication in line with earlier decisions. 9. Deduction of Incremental Liability for Pension Under VRS: The Tribunal reviewed the deduction of Rs.2,86,15,972 for incremental liability accrued on account of payment of pension under VRS. The Tribunal noted that this issue had been decided in favor of the assessee in previous years and restored the matter to the AO for adjudication according to earlier Tribunal directions. 10. Exclusion of Sales Tax, Excise Duty, and Scrap Sale from Total Turnover for Section 80HHC: The Tribunal examined whether sales tax, excise duty, and scrap sale should be excluded from total turnover for computing deduction under section 80HHC. The Tribunal noted that the issue was covered by the Bombay High Court's decision in CIT vs. Sudarshan Chemicals Industries Ltd. and the Supreme Court's decision in CIT vs Punjab Stainless Steel Industries. The Tribunal allowed the exclusion of these items from total turnover. 11. Disallowance of Expenditure Related to Exempt Income Under Section 14A: The Tribunal reviewed the disallowance of expenditure related to exempt income under section 14A. The CIT(A) had restricted the disallowance to 2% of the exempt income, following the Bombay High Court's decision in CIT v. General Insurance Corpn. of India. The Tribunal upheld the AO's disallowance of Rs.6,86,182, being 2% of the exempt income, as reasonable. Conclusion: The appeals of the assessee, Revenue, and the cross-objection of the assessee were partly allowed as indicated in the detailed analysis. The order was pronounced in the open court on 07-07-2017.
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