2021 (4) TMI 1346 - AT - Income Tax

Depreciation on block of assets transferred on demerger - HELD THAT - This issue has attained finality in assessee s favor in AY 2000-01 2017 (7) TMI 1435 - ITAT MUMBAI wherein it have been held that the assessee would be eligible to claim depreciation on opening WDV of block of assets and the explanation 2A to Sec.43(6) would have no application. DR has submitted that the revenue has preferred further appeal in earlier years before Hon ble Bombay High Court and the same is pending for adjudication. However, we find that, as of now, the issue is covered by earlier decisions of the Tribunal. Hence, respectfully following the consistent view of the Tribunal, we direct Ld. AO to allow depreciation on same methodology as given in AY 2000-01 pursuant to the directions of the Tribunal. Ground No.5 of assessee s appeal stand allowed whereas Ground No.1 of revenue s appeal stand dismissed. Nature of expenses - Production of Advertisement Films - expenses incurred towards cost of purchase of films and other production expenses for producing advertisement films and commercials to be used as TV spots and promotional films - HELD THAT - CIT(A) correctly relying up Tribunal s decision for AY 1996-97 and the decision of Hon ble Bombay High Court in CIT V/s M/s Geoffery Manners Co. Ltd. 2009 (2) TMI 13 - BOMBAY HIGH COURT held that the expenditure would be revenue in nature and therefore, an allowable deduction. Inclusion of Freight Component on closing stock - HELD THAT - We find that this issue is squarely covered in assessee s favor by the various decisions of Tribunal right from AYs 1992-93 to AY 2000-01. The Ld. CIT(A) has also followed the appellate orders of earlier yearsTherefore, this adjudication in the impugned order, on this issue, would not require any interference on our part. Incremental VRS Interest - HELD THAT - As in Tribunal s order for AY 2000-01 2017 (7) TMI 1435 - ITAT MUMBAI deduction would be allowable to the assessee. Nature of expenses - Disallowance of Club membership fee - AO opined that the expenditure being enduring in nature, the same would be capital in nature - HELD THAT - We find that the findings that the expenditure was incurred by the assessee as a corporate entity remain undisputed before us. This being so, this issue is covered in assessee s favor by the decision of Hon ble Apex Court in CIT V/s United Glass Mfg. Co. Ltd. 2012 (9) TMI 914 - SUPREME COURT as held that club membership fees for employees incurred by the assessee is business expense under Section 37 of the Income Tax Act, 1961. We also find that none of the decisions have been challenged in this court - Decided against revenue. Purchase of Computer software and Software Development cost - HELD THAT - As following earlier years, held that the expenditure was revenue in nature. Upon perusal, we find that this ground is covered in assessee s favor in several earlier years and the department has accepted the ruling of the Tribunal in those years and has not preferred further appeal, on this issue. This being the case, we direct Ld. AO to allow the expenditure fully and reverse the depreciation adjustment thus made in the assessment order. Allowability of Foreign Travel Expenses - HELD THAT - As decided in earlier years directors and executives was devoted wholly and exclusively for business and not in connection with the business of the parent company or foreign shareholders. Thus we direct Ld. AO to delete the additions as sustained by Ld. CIT(A). Expenditure on foreign visitors - assessee claimed expenditure on foreign visitors by submitting that foreign visitors were worldwide financial specialist in pharmaceuticals, formulations, marketing, information and technology, members of Board etc. - HELD THAT - As decided in own case for earlier years senior executives coming to India and were experienced personnel to impart training and to conduct discussions on company s business, finance and marketing strategies, technical matters, solutions of computer related problems etc. Hence, the expenditure was incurred wholly and exclusively for the purpose of company s business. Unavailed Modvat Credit - CIT(A), relying upon appellate orders for AY 2000-01 confirmed the addition to closing stock and held that opening stock of subsequent year should be increased by MODVAT amount - HELD THAT - We find that this issue has been adjudicated in Tribunal s order for AY 2000-01 2017 (7) TMI 1435 - ITAT MUMBAI The bench, following the decision of Hon ble Bombay High Court in CIT V/s Mahalaxmi Glass Works Pvt. Ltd. 2009 (4) TMI 182 - BOMBAY HIGH COURT held that unutilized MODVAT credit should be added to the closing stock of the assessee and the same would also necessitate similar adjustments to opening stock. Respectfully following the same, we direct Ld. AO to adopt the same methodology as adopted in AY 2000-01 pursuant to the aforesaid directions of the Tribunal. Disallowance u/s. 14A - assessee earned exempt dividendand interest on tax free bonds and claimed the same to be exempt u/s 10(33) and u/s.10(15) - HELD THAT - Also, it is settled position that the provisions of Rule 8D are not applicable to this year. Therefore, following the aforesaid adjudication of Tribunal for AY 2000-01 2017 (7) TMI 1435 - ITAT MUMBAI we confirm estimated disallowance of 2% as made by Ld. AO. The stand of Ld. CIT(A) stand reversed. Delayed ESIC payments - HELD THAT - We find this issue stood covered in assessee s favor by the decision of Hon ble Bombay High Court in the case of CIT V/s Hindustan Organic Chemical Ltd. 2014 (7) TMI 477 - BOMBAY HIGH COURT wherein Hon ble High Court, following the decision of Hon ble Apex Court in CIT V/s Alom Extrusions Ltd. 2009 (11) TMI 27 - SUPREME COURT held that amendments to the said section brought about by the Finance Act, 2003 with effect from 1st April, 2004 were retrospective in nature and would operate from 1st April, 1988. This being the case, the impugned disallowance stands deleted. Disallowance out of bad debts and advances written off - HELD THAT - The perusal of the details filed before us would show that the amounts written-off by the assessee was mostly in the nature of advance payments for procurement of goods from third parties, which have become irrecoverable over a period and are under dispute. Few of the write-offs represent MODVAT claims outstanding against third party manufacturers for more than 5 years. Majority of these amounts are stated to be outstanding prior to 01/04/1996. This being the case, we are of the considered opinion that the claim is allowable in terms of Sec. 37(1) as business expenditure or alternatively as business loss u/s 28. Depreciation on DLP projector - assessee claimed depreciation on DLP projector @ 60% on the reasoning that DLP projector unit was a unique projector used in conjunction with laptop computers for making display and presentation - AO restricted the depreciation to 25% which was the rate applicable to plant and machinery - HELD THAT - We find that DLP projector is a unique projector which is used in conjunction with Laptop computers for display and presentation. DLP projector is an output support device to the Laptop. Therefore, DLP projector was to be used with a computer and its functions were integrated with the computer. This being the case, the assessee would be entitle for depreciation at the same rate as applicable to computer systems as held by Mumbai (Special Bench) of Tribunal in DCIT V/s Datacraft India Ltd. 2010 (7) TMI 642 - ITAT, MUMBAI . Hence, we would hold that the assessee was entitled for depreciation of 60% against this item. Income from House Property or business income - Rental receipts - business was continuing, as a part of demerger arrangement, CSCIL was allowed to use the said premises on the basis that costs would be share - AO formed an opinion that part of assessee s immovable property was let out to third parties and accordingly show-caused assessee as to why rent receivable should not be taxed as rental income - HELD THAT - Not a case where the property was actually let out by the assessee to a third-party but was a case wherein to facilitate demerger and to ensure smooth running of existing business, an arrangement was made between the assessee and its demerged entity that the business premises would be shared with an understanding that the proportionate cost would be recovered from the demerged entity till the time an alternative facility was arranged by the demerged entity - premises was being used by the assessee only in furtherance of its business interest, the objective of which was to facilitate demerger. It is quite discernible that this similar arrangement is continuing since AYs 1997-98 onwards and such an arrangement has never been disturbed by Ld. AO while framing assessment for AYs 1997-98 to 2000-01 which is evident from extract of assessment orders of those years as placed on record. Therefore, rule of consistency would operate in assessee s favor - action of Ld.AO in bringing to tax notional rental value of the common premises was not justified. Deduction u/s. 80HHC - exclusion or inclusion of an item would be whether it was an independent income having no nexus with export turnover - Interest on employee s loan - HELD THAT - The interest arises from the fact that the assessee has granted loans to its employees as an incentive to retain their loyalty towards business enterprises. The employees are connected with the business of manufacture and sale of pharmaceuticals. Interest on overdue debtors - This income has arisen to the assessee because the customers have delayed the payment of debts within the stipulated credit period allowed to them. The interest so charged could not be said to be an independent source of income but could be said to have arisen only out of normal business operations only. Interest on deposit with MSEB MIDC - The income arises on account of deposit placed by the assessee with MSEB for obtaining power connections to run the manufacturing facility. Similarly, deposits with MIDC have been placed for obtaining land on which manufacturing facility would be set up. Unless the deposits are placed the assessee would not be able to manufacture the goods. Thus, the deposits have been placed only out of business compulsion. Insurance Claims - These represents claims allowed by insurance company in respect of loss of trading goods. A contract of insurance is in the nature of indemnity and indemnifies the assessee for loss of stock-in-trade. Had the goods not been destroyed, the same would have been sold at profits and therefore, the insurance claims are compensatory in nature. The claims could not be said to be an independent source of income for the assessee and could not be equated with receipts of similar nature‟ as mentioned in explanation (baa). Scrap Sales Income - This income arises from the sale of packing material and other material realized during manufacturing process and directly related with manufacturing activities of the assessee. Cash Discount - This represent discount received by the assessee on early payment to suppliers in respect of purchase of goods. These are directly related to normal trading operations and could not be said to be an independent source of income. Equipment lease rentals - It represent amount received by assessee on lease of packing machines other equipment to licensed manufacturers who are carrying on the manufacturing activity for the assessee. Conversion Charges - These charges are directly related to assessee s manufacturing activity. Write back of liabilities - These are the write-back of expenditure which were early shown payable but no longer required to be paid. The write-backs are not in the nature of actual receipts but reversal of early provisions. Cost of Services Recovered - The cost of services refers to recovery of costs in the nature of Municipal Taxes, Security and Electricity Charges of a shares premises between the assessee and CSCIL. These expenses have first been paid by the assessee and later on recovered from CSCIL. These are mere recoveries of expenses from associate concern. Profit u/s 41(3) on sale of R D Assets The research development activity is directly connected with manufacturing activities and could not be said to be independent source of income for the assessee. Misc. Claims - These are petty claims arising out of business activity. We are of the considered opinion that all these items would form part of Profits of business and accordingly, not required to be reduced while computing deduction u/s 80HHC. 18.4 The remaining items have been dealt with as under - Interest on Sales Tax Refund Income Tax Refund (Gross ) -I nterest on Income Tax Refund arises to the assessee only because it has paid more taxes than what was required to be paid. The same accrues to the assessee as compensation for excessive payment to the revenue and has nothing to do with business operations. Similar is the situation with interest on sales tax refund. Both these items, in our opinion, would be covered by explanation (baa) and accordingly, required to be reduced to the extent of 90% while computing profits of the business. However, as per the decision of Hon ble Apex Court in ACG Associates Capsules Pvt. Ltd. V/s CIT 2012 (2) TMI 101 - SUPREME COURT netting-off would be available to the assessee. The Ld. AO is directed to re-work the same. Sales Tax Set-off Excise Duty refund - These two items would stand excluded in view of the fact that as per the impugned order, sales tax aswell as excise duty would not form part of total turnover in the denominator. When denominator has been reduced by these two components, similar connected items would stand excluded from the numerator also. AO is directed to re-compute the deduction available to the assessee u/s 80HHC in the light of our adjudication on various issues effecting computations u/s 80HHC. Ground No.9 of assessee s appeal stand partly allowed. Computation of book profit u/s. 115 JB - seeking reduction of Book-Profits Oof certain items viz. expenses disallowed u/s 43B, write-off of property, provision of debts expenses etc. has been disallowed by the assessee in earlier AYs 1999-2000 2000-01 while computing income under normal provisions - HELD THAT - We find that this issue was not dealt with by Ld. AO and adequate factual matrix of the issue is not discernible from the orders of lower authorities. Therefore, we restore this issue to the file of Ld. AO for adjudication after appreciating the facts of the issue. The assessee is directed to substantiate the same. This ground stand allowed for statistical purposes. Computation of book profit u/s. 115 JB - Wealth Tax debited to profit Loss Account - HELD THAT - CIT(A) opined that there was no provision to add back wealth tax and therefore, the same was not to be added back while computing Book-Profits. Reliance was placed, inter-alia, on the decision of Hon ble Bombay High Court in CIT V/s Echjay Forgings P. Ltd. 2001 (2) TMI 56 - BOMBAY HIGH COURT Provisions for diminution in value of investments - In view of insertion of clause (i) to Explanation- 1 to Section 115JB(2) by Finance Act, 2009 w.r.e.f. 01/04/2001 which envisages that book profits are to be increased by the amount or amounts set aside as provision for diminution in the value of any asset, we restore this issue back to the file of Ld.AO to ascertain the nature of provision and re-adjudicate the same considering the statutory provisions. Interest levied u/s 234C - CIT(A) correctly concurred with assessee s submission that tax would not include interest and therefore, interest u/s 234C was not to be added back in computing Book-Profits. Reliance was placed on the decision of this Tribunal in Insilco Ltd. V/s JCIT 2004 (6) TMI 285 - ITAT DELHI-F Adjustment of Book Profits vis- -vis deduction u/s 80HHC - We find that this issue is covered in assessee s favor by the decision of Hon ble Supreme Court in Ajanta Pharma Ltd. 2010 (9) TMI 8 - SUPREME COURT and therefore, no interference is required in the impugned order, on this issue. Applicability of the provisions of Sec.234D - HELD THAT - The provisions of Sec.234D would apply to the assessee. The interest would run from the date of grant of refund u/s 143(1). However, the interest would be chargeable at correct rates. Accordingly, we direct Ld. AO to compute interest u/s 234D at correct rates from the date of grant of refund u/s 143(1). Whether the assessee would be liable to pay interest u/s 234D on the interest granted in an intimation u/s 143(1) or not?- We find that as per the provisions of Sec.234D, where any refund is granted to the assessee u/s 143(1) and no refund is due on regular assessment or the amount refunded u/s 143(1) exceeds the amount refundable on regular assessment, the assessee would be liable to pay interest on the whole or the excess amount so refunded. We find that the expression used in Sec. 234D is 'amount refunded' and not 'tax refunded'. Clearly the intention is to charge interest on excess amount refunded to the assessee either by way of refund of tax or by way of interest. Our view is fortified by the provisions of Sec. 143(4) which provides that if no refund is due on regular assessment or the amount refunded under sub-section (1) exceeds the amount refundable on regular assessment, the whole or the excess amount so refunded shall be deemed to be tax payable by the assessee and the provisions of this Act shall apply accordingly. The expression again used is 'amount refunded' and not 'tax refunded'. This ground stands partly allowed for statistical purposes to the extent of application of correct rate of interest u/s 234D. AO is directed to re-compute assessee's total income under normal provisions as well as under Sec.115JB in terms of our above order. The interest u/s 234D would be charged as directed in the order. The deduction u/s 80HHC would be computed on the lines as directed in the order. Assessee's appeal stand partly allowed

Summary

Issues Involved:
1. Depreciation on Computer Software
2. Disallowance of Foreign Travel Expenses
3. Disallowance of Hotel and Airfare Expenses Incurred on Foreign Visitors
4. Adjustment of MODVAT in Closing Stock
5. Depreciation of Assets as Vested in Ciba Specialty Chemicals (India) Ltd. (CSCIL)
6. Disallowance u/s. 14A Read with Rule 8D
7. Disallowance of ESIC u/s. 43B
8. Disallowance of Bad Debts & Advances Written-off
9. Exclusion of Certain Receipts u/s. 80HHC
10. Notional Rental Value under the Head Income from House Property
11. Depreciation on DLP Projectors
12. Exclusion of Certain Items from Book Profits u/s 115JB
13. Interest u/s 234D

Detailed Analysis:

1. Depreciation on Computer Software:
The assessee claimed that software expenses were for packages that get frequently outdated and should be treated as revenue in nature. However, the AO and CIT(A) treated these expenses as capital in nature, granting depreciation at 25%. The Tribunal, following earlier years' decisions, directed the AO to allow the expenditure fully and reverse the depreciation adjustment.

2. Disallowance of Foreign Travel Expenses:
The AO disallowed 25% of foreign travel expenses, suspecting that the time and energy spent by directors and executives were not exclusively for business purposes. CIT(A) reduced the disallowance to 20%. The Tribunal, following earlier years, fully allowed the claim of the assessee.

3. Disallowance of Hotel and Airfare Expenses Incurred on Foreign Visitors:
The AO disallowed expenses incurred for foreign visitors, considering them non-business expenses. CIT(A) upheld the disallowance. The Tribunal, following earlier years, deleted the disallowance.

4. Adjustment of MODVAT in Closing Stock:
The AO added unavailed MODVAT credit to the closing stock, which was confirmed by CIT(A). The Tribunal directed the AO to adopt the same methodology as in AY 2000-01, adding MODVAT credit to the closing stock and making similar adjustments to the opening stock.

5. Depreciation of Assets as Vested in Ciba Specialty Chemicals (India) Ltd. (CSCIL):
The AO disallowed depreciation on assets transferred to CSCIL, considering them not owned or used by the assessee. CIT(A) allowed depreciation based on Income Tax WDV. The Tribunal directed the AO to allow depreciation on the same methodology as in AY 2000-01.

6. Disallowance u/s. 14A Read with Rule 8D:
The AO disallowed 2% of exempt income as expenditure incurred for earning exempt income. CIT(A) enhanced the disallowance as per Rule 8D. The Tribunal confirmed the estimated disallowance of 2%, reversing CIT(A)'s stand.

7. Disallowance of ESIC u/s. 43B:
The AO disallowed ESIC contributions paid beyond the due date. CIT(A) upheld the disallowance. The Tribunal deleted the disallowance, following the decision of the Hon’ble Bombay High Court in CIT V/s Hindustan Organic Chemical Ltd.

8. Disallowance of Bad Debts & Advances Written-off:
The AO disallowed bad debts and advances written-off, not satisfying conditions of Sec. 36(2). CIT(A) confirmed the disallowance. The Tribunal allowed the claim under Sec. 37(1) as business expenditure or alternatively as business loss u/s 28.

9. Exclusion of Certain Receipts u/s. 80HHC:
The AO excluded 90% of certain receipts, considering them not directly related to export activities. CIT(A) upheld the exclusion. The Tribunal held that most items would form part of profits of business and directed the AO to re-compute the deduction u/s 80HHC.

10. Notional Rental Value under the Head Income from House Property:
The AO computed notional rent for property shared with CSCIL. CIT(A) confirmed the stand but allowed statutory deduction u/s 24(a). The Tribunal held that the premises were used for business purposes and the action of AO was not justified.

11. Depreciation on DLP Projectors:
The AO restricted depreciation on DLP projectors to 25%. CIT(A) confirmed the stand. The Tribunal held that DLP projectors, being used with computers, were eligible for 60% depreciation.

12. Exclusion of Certain Items from Book Profits u/s 115JB:
The assessee sought exclusion of certain items from book profits, which was not dealt with by AO. The Tribunal restored the issue to AO for adjudication.

13. Interest u/s 234D:
The AO charged interest u/s 234D on the entire refund amount, including interest granted u/s 244A. CIT(A) upheld the charge. The Tribunal directed the AO to compute interest u/s 234D at correct rates from the date of grant of refund and rejected the plea that interest should not be charged on the interest component of the refund.

Conclusion:
The assessee's appeal was partly allowed, the revenue's appeal was partly allowed for statistical purposes, and the assessee's cross-objections were dismissed as infructuous.