2016 (11) TMI 1751 - AT - Income Tax

Nature of expenses - Right to use technical know-how - Disallowance of claim u/s 37(1) and allowing only 1/6th u/s 35AB - HELD THAT - As decided in own case 2013 (1) TMI 1057 - ITAT MUMBAI there are overlapping areas between the donations given by the assessee and the business expenditure incurred by the assessee - there can be certain amounts though in the nature of donations and nonetheless these amounts may be deductible under section 37(1) as well. Therefore merely because an expenditure is in the nature of donation or to use the words of the CIT(A) promoted by altruistic motives it does not cease to be an expenditure deductible under section 37(1). Even if the contributions by the assessee is in the forms of donations but if it could be termed as expenditure of the category falling in section 37(1) then the right of the assessee to claim the whole of it as a deduction under section 37(1) cannot be defined. What is material in this context is whether or not the expenditure in question was necessitated by business considerations or not. Once it is found that the expenditure was dictated by commercial expediencies the deduction under section 37(1) cannot be declined - Decided in favour of assessee. Provision towards post retirement medical benefit - Disallowance u/s 37(1) - HELD THAT - As decided in 2013 (1) TMI 1057 - ITAT MUMBAI for AYs 2000-01 2001-02 and 2002-03 wherein held leave encashment is not a contingent liability. Taking the same cue that post retirement medical benefit is also a liability which gets attached to the company the moment the service contract is signed we hold that the revenue authorities erred in disallowing the provision under this head. Having held so in principle neither we have been able to gather the year wise breakup of the Actuarial valuation made by the Actuary as un 31.03.1997 nor the Senior Counsel was able to apprise us on the valuation pertaining to the year under consideration. Taking into account the above reason we deem it fit to restore the issue to the file of the AO who shall call for the year wise valuation and then allow the claim accordingly. We therefore set aside the order of the CIT(A) on this issue and direct the AO to allow the claim of provision after verification of the Actuary s report pertaining to the current year. Thus we set-aside the matter to the file of AO to verify the Actuarial Valuation Report and then allowed the claims of assessee in accordance with the order supra Notional disallowance u/s 14A against Income earned from an AOP - CIT(A) while considering this ground of appeal observed that while passing order for AY 1999-2000 confirmed the disallowance @ 3% of tax free interest - HELD THAT - The assessee received exempt income from AOP the assessee was required to associate with the activities of PIL (AOP) to spend its resources for its successful functioning therefore section 14A is squarely applicable but the CIT(A) descended regarding the interest expenditure attributable to earn exempt income and concluded that assessee invested out of composite fund and associated in functioning of AOP with its resources and granted the partial relief. We have seen that during the year the assessee has received an amount of Rs. 1, 62, 85, 873/- as a share of profit from PIL. PIL is being assessed separately as per the provisions of section 86 and as per proviso of section 86 the share of Member shall not be included in the total income as the AOP is charged at the maximum marginal rate thus no disallowance for earning from AOP/PIL was warranted thus we direct the AO to delete the entire addition. Disallowance of deduction claimed u/s 80M - HELD THAT - The assessee has made no expenses in relation to dividend income. Neither the AO nor the CIT(A) brought on record the actual expenditure if any incurred by assessee in relation to dividend income. The assessee is claiming throughout that the amount of investment was out of surplus available with them thus considering the peculiarity of the case the disallowance made by AO and sustained by ld. CIT(A) are deleted. In the result this ground of appeal raised by assessee is allowed. Correct head of income - Surrender of Tenancy rights treated as Income from other sources instead of capital Gain - HELD THAT - There is no dispute that the assessee was in possession of a Flat in Alt View Co-op. Housing Society and the possession of assessee was protected under the provisions of Rent Control Act. The assessee received a sum on account of surrender of Tenancy right to its owner. It is settled legal position that amount received on account of surrender of tenancy right is a Capital Gain and not to be taxed as business receipt. Thus this ground of appeal is also allowed in favour of the assessee. Nature of expenses - Expenditure on Railway Siding facilities - Disallowance u/s 37(1) - HELD THAT - The Hon ble Guwahati High Court in CIT vs. Bongaigon Refinery Petro Chemicals P. Ltd. 1996 (6) TMI 64 - GAUHATI HIGH COURT while dealing with almost on similar grounds base on similar facts held that expenditure as incurred on construction of Railway Track and siding is revenue expenditure and not a Capital expenditure. Thus respectfully following the decision of Hon ble Gujarat High Court this ground of appeal is allowed in favour of assessee. Denial of interest claimed u/s 36(1)(iii) - assessee argued that though the section was amended only from AY 2004-05 and was not applicable for the order under consideration and relied upon the decision of CIT vs. Core Health Care Ltd. 2008 (2) TMI 8 - SUPREME COURT - CIT(A) while considering this ground concluded that capitalized interest is an integral part of cost of capital work-in-progress and sustained the disallowance - HELD THAT - The Hon ble Supreme Court in DCIT vs. Core Health Care Ltd. 2008 (2) TMI 8 - SUPREME COURT held that section 36(1)(iii) is attracted when the assessee borrows the capital for the purpose of his business. It does not matter whether capital is borrowed in order to acquire a revenue asset or a capital asset because all that the section requires is that the assessee must borrowed the capital for the purpose of his business. This dichotomy between the borrowing of a loan and actual application thereof in the purchase of a capital asset seems to proceed on the basis that a mere transaction of borrowing does not by itself bring any new asset of enduring nature into existence and that it is the transaction of investment of the borrowed capital in the purchase of a new asset which brings that asset into existence. The transaction of borrowing is not the same as the transaction of investment. Thus assessee is entitled for deduction u/s 36(1)(iii). Establishment expenditure - Disallowance u/s 37(1) - AO has treated the Administrative Expenses incurred on Engineering Project and the ld. CIT(A) while considering this ground of appeal concurred with the finding of AO - HELD THAT - Hon ble Supreme Court in Tuticorin alkali Chemicals and Fertilizers Ltd. v. Commissioner of Income-Tax 1997 (7) TMI 4 - SUPREME COURT held that when the question is whether a receipt of money is taxable or not or whether certain deduction from receipt are permissible in law or not. The question has to be decided according to the principle of law and not in accordance with the Accounting practice. Accounting Practices cannot be override section 56 or any other provisions of the Act. The assessee incurred expenses on various personnel/ employee in the project for supervision and monitoring the various project and marketing allocation and refineries which is certainly allowable as business expenditure u/s 37(1) of the Act. Expenses were made on account of salary Dearness Allowance (DA) Conveyance Expenses postal charges bank charges rent for housing accommodation Motorcar etc. which is certain of revenue expenditure. Thus the Ground No.8 raised by the assessee is allowed. Levy of interest u/s 234D - assessee argued that the assessee is entitled to interest u/s 244A on the excess tax paid @ % per month from 1st day of April to the date on which refund is granted - HELD THAT - We have seen that section 234D was introduced w.e.f. 01.06.2003. Thus the assessee is entitled for the interest as per section 234D w.e.f. 01.06.2003. Thus the AO is directed to calculate the interest in accordance with the provisions of section 234D of the Act. Thus this ground of appeal is allowed for statistical purpose Deduction u/s 35(1)(ii) Contribution to LERC - HELD THAT - As decided in 2013 (1) TMI 1057 - ITAT MUMBAI identical grounds of appeal was allowed in favour of assessee directing the AO to examine the issue and allowed the claim in accordance with the provisions of law. Thus this ground of appeal is allowed as mutatis mutandis passed by Tribunal. In the result this ground of appeal is allowed for statistical purpose. Admission of additional ground - Deduction u/s 37(1) towards Detailed Feasibility study expense - assessee argued that the assessee omitted to claim the relief in return of income - HELD THAT - We have seen that the similar grounds of appeal was raised by the assessee in AY 2001-02 by way of additional ground and the same was not admitted in 2013 (1) TMI 1057 - ITAT MUMBAI . Thus keeping in view the order of earlier years this ground of appeal is not admitted. Thus this ground of appeal is rejected as un-admitted. Nature of expenses - payment to club membership - HELD THAT - This Ground of Appeal is no more res-integra on the basis of series of judgment on various High Courts held that Club Membership Fees for employees incurred by assessee is Business Expenses u/s 37 - Decided against revenue. Adoption of value of power generated by the concerned captive power plant for the purpose of calculating deduction u/s 80IA - AO was not satisfied with the explanation held that APSEB would not be power at the rate from power producer and thereafter presumed margin @ 15% on the sale price of Rs.3.60 per unit charged by APSEB and accordingly reduced 15% from the value of electricity shown by assessee - HELD THAT - CIT(A) while considered this Ground of Appeal concluded that AO has not disputed that APSEB sales powers to its customer @ 3.60 per unit as assessee has deleted the rate to the value of power generated and consumed internally there is no reason for the AO to doubt the assessee and the AO has needlessly made the exercise for estimating the profit of 15%. CIT(A) further concluded that assessee has reasonably adopted the rate of value of power generation by assessee whereby and cancelled the same and direct the AO to adopt the value of power generated by assessee as disclosed by it for the purpose of calculating the deduction. We have seen that the order of ld. CIT(A) is based on sound reasoning and does not require our interference thus we affirmed the order of ld. CIT(A). In the result the Ground of Appeal raised by Revenue is dismissed. Deduction on Leave Encashment u/s 43B - lower authorities has not considered the claim of the assessee holding that the claim was filed without filing the revise return of income - HELD THAT - Hon ble Apex Court in Goetz India Ltd. 2006 (3) TMI 75 - SUPREME COURT held that whenever the assessee makes a mistake or omitted to lodge a legitimate claim the appellate authority be it first appellate authority or the second appellate authority has vide power to entertain the new grounds of appeal. Respectfully following the decision of Hon ble Apex Court which has a binding precedent by virtue of Article 141 of the Constitution of India we admits the grounds of appeal raised by the assessee and restore this ground of appeal to the file of AO to reconsider it afresh and pass order in accordance with law. Valuation of raw-material on an eligible business u/s 80IB (9) - assessee has given sufficient documentary evidence in support of their claim for the cost of VGO considered by them for inter-unit product purchased cost which was much higher as compared to market value of VGO - HELD THAT - As decided by CIT(A) since the market price is lower than the value adopted by the appellant there is no reduction of cost resulting in inflation of the profit of the eligible unit and thereby a claim of deduction under section 80I. In fact by adopting the value which is substantially higher than the market price the appellant has increased its cost reduced the profits of eligible unit and thereby has claimed a lesser reduction under section 80 IA then what could have been calculated if market price of the product was adopted. In such a scenario there was no region for the AO to disturb the calculation made by the appellant We have seen that the ld Commissioner (Appeals) granted the relief after considering the entire fact related with the claim of assessee. We do not find any reason to differ with the finding of learned Commissioner (Appeals). Thus this ground of appeal is dismissed.

Summary

Issues Involved:
1. Right to use technical know-how - Disallowance of claim u/s 37(1) and allowing only 1/6th u/s 35 AB.
2. Provision towards post-retirement medical benefit - Disallowance u/s 37(1).
3. Notional disallowance u/s 14A against income earned from an AOP.
4. Disallowance of deduction claimed u/s 80M.
5. Surrender of tenancy rights treated as income from other sources instead of capital gain.
6. Expenditure on railway siding facilities - Disallowance u/s 37(1).
7. Denial of interest claimed u/s 36(1)(iii).
8. Establishment expenditure - Disallowance u/s 37(1).
9. Levy of interest u/s 234D.
10. Deduction u/s 35(1)(ii) contribution to LERC.
11. Deduction u/s 37(1) towards detailed feasibility study expense.

Detailed Analysis:

1. Right to Use Technical Know-How:
The tribunal allowed the assessee's claim for deduction u/s 37(1) for expenditure on technical know-how, reversing the CIT(A)'s decision to allow only 1/6th u/s 35AB. The tribunal relied on its earlier orders favoring the assessee for similar disallowances in previous years.

2. Provision Towards Post-Retirement Medical Benefit:
The tribunal set aside the matter to the AO to verify the actuarial valuation report and allow the claim accordingly. This decision followed the tribunal's earlier orders for similar disallowances in previous years, where it was held that such provisions are integral to service contracts and thus allowable.

3. Notional Disallowance u/s 14A:
The tribunal directed the AO to delete the entire disallowance made u/s 14A, as the income from AOP (Petroleum India International) was not tax-free. The tribunal noted that the income was chargeable to tax as per section 86, and no expenditure was incurred to earn this income.

4. Disallowance of Deduction Claimed u/s 80M:
The tribunal allowed the assessee's claim for deduction u/s 80M, noting that the investment was made out of surplus funds and not from borrowed funds. The tribunal found no evidence of actual expenditure incurred to earn the dividend income and thus deleted the disallowance.

5. Surrender of Tenancy Rights:
The tribunal held that the amount received for surrendering tenancy rights should be treated as capital gain and not as business income. The tribunal noted that the assessee's possession was protected under the Maharashtra Rent Control Act, and the compensation received was for surrendering these rights.

6. Expenditure on Railway Siding Facilities:
The tribunal allowed the expenditure on railway siding facilities as revenue expenditure, following the decision of the Hon’ble Guwahati High Court in a similar case (CIT vs. Bongaigon Refinery & Petro Chemicals P. Ltd.).

7. Denial of Interest Claimed u/s 36(1)(iii):
The tribunal allowed the assessee's claim for interest deduction u/s 36(1)(iii), following the Hon’ble Supreme Court's decision in DCIT vs. Core Health Care Ltd., which held that interest on borrowed capital is deductible regardless of whether the capital is used to acquire a revenue or capital asset.

8. Establishment Expenditure:
The tribunal allowed the deduction for establishment expenditure, including salaries and administrative expenses incurred on project monitoring. The tribunal held that these expenses are allowable as business expenditure u/s 37(1), despite being capitalized in the books.

9. Levy of Interest u/s 234D:
The tribunal directed the AO to calculate the interest u/s 234D from 01.06.2003, the date the section was introduced. The tribunal allowed the ground for statistical purposes, as the interest calculation was consequential.

10. Deduction u/s 35(1)(ii) Contribution to LERC:
The tribunal allowed the additional ground for deduction u/s 35(1)(ii) for contributions to LPG Equipment Research Centre, directing the AO to examine and allow the claim as per the provisions of law.

11. Deduction u/s 37(1) Towards Detailed Feasibility Study Expense:
The tribunal rejected the additional ground for deduction u/s 37(1) for feasibility study expenses, following its earlier decision not to admit a similar ground in a previous year.

Conclusion:
The tribunal's consolidated order addressed multiple issues across different assessment years, providing relief to the assessee on several grounds, including deductions for technical know-how, post-retirement medical benefits, and establishment expenses. The tribunal's decisions were largely based on consistency with earlier orders and higher judicial precedents.