2016 (6) TMI 456 - AT - Income Tax

Expenses incurred for business re-organization - revenue v/s capital - AO has disallowed the expenses comprising of VRS salary and other over-head cost of personnel by treating them as capital expenditure confirmed by CIT(A) - Held that - As decided in assessee s own case for earliear AY 2010 (11) TMI 766 - ITAT Kolkata for allowing the deduction of VRS expenses as revenue expenses. With regard to the expenses incurred in connection with the re-organisation expense which comprise mainly salary and overhead cost of personnel engaged in the restructuring exercise we find that all of these expenses are revenue in nature. These expenditures do not result into any fixed assets. See CIT v. JCT Electronics Ltd. 2011 (1) TMI 918 - Punjab and Haryana High Court . Finally we hold that the VRS expenses amounting to 421.24 lacs will be allowed in five equal instalments in the manner as laid down under section 35DDA of the Act. For the salary of the personnel along with their overhead cost amounting to 102.69 lacs engaged in the business reorganisation activity will be allowed in full as revenue expenditure. AO is directed accordingly. - Decided in favour of assessee Disallowance of excess depreciation on the WDV of the block of assets - Held that - The instant issue is already covered in favour of assessee in its own case for the assessment year 04-05 wherein held Depreciation claimed by the assessee was disallowed in earlier year based on WDV of the block of assets arrived at after adjusting sale consideration of the undertaking viz. fertilizer old fibres seeds Agro chemicals etc. transferred following which depreciation as per reduced WDV adopted by the Department works out at 22, 02, 10, 622/- as against claim of 24, 27, 86, 408/- keeping in view the practice adopted in the past assessment years the difference amount of depreciation (Rs.24, 27, 86, 408/- - 22, 02, 10, 622/-) being reduced to the extent of 2, 25, 75, 786- against the claim of the assessee - Decided in favour of assessee Disallowance of deduction for pharmaceutical revenue expenses - Held that - In the instant case assessee was having several other business units and the expenses were incurred for the running of the business units on continuous basis and the unit which was under consideration owned by the assessee till the actual date of transfer. In the similar facts and circumstances the Hon ble Supreme Court in the case of B.R. Ltd. v. V.P.Gupta CIT 1978 (5) TMI 3 - SUPREME Court wherein the head note Section 72 of the Income-tax Act, . 1961 Corresponding to section 24(2) of the Indian Income-tax Act 1922 Losses Carry forward and set off of business losses Assessment years 1954-55 to 1956-57 Whether test to determine whether two business constitute same business is unity of control and not nature of two lines of business Held. Yes Business of import of woolen goods carried on by assessee-company was stopped due to losses during assessment year 1953- 54 From assessment year 1954-55 it carried on business of exporting of cotton textiles and earned profits There was common control and common management of same board of directors of business of import and export Whether on facts it could be said that there was dovetailing or interlacing between business of import and business of export carried on by assessee and that they constituted same business Held yes. Respectfully following the decision of the Hon ble Supreme Court in the case of B.R. Ltd. (supra) we allow assessee s ground.- Decided in favour of assessee Accepting of valuation of Chowringhee property - on the basis of DVO report or taking the valuation made by the registered valuer engaged by the assessee - whether the valuation made by the DVO as on 01.04.1981 should be adopted for working out of capital gains in the instant case? - Held that - In the instant case assessee has shown fair market value more as determined by the DVO therefore in our considered view lower authorities have no power to refer the matter before DVO u/s. 55A of the Act.- Decided in favour of assessee Disallowance of expenses under section 14A - Held that - The assessee did not show any expenditure incurred by him for the purpose of earning the money which is exempted under the income tax. Computation of expenditure at 1 per cent of such dividend income which according to them is the thumb rule applied consistently. See COMMISSIONER OF INCOME TAX KOLKATA-IV KOLKATA Versus M/s. RR. SEN & BROTHERS (P) LTD. 2013 (7) TMI 260 - Calcutta High Court Disallowance of brought forward business loss and long term capital loss - Held that - Ground raised by the assessee is consequential in nature and will have the effect as per the order of the AO of the relevant years. Hence we allow assessee s ground for statistical purposes. Addition on account of custom duty paid before filing income tax return - addition by virtue of the provisions of section 43B of the Act which was not included in closing stock of finished goods in terms of provision of Sec. 145A of the Act - Held that - From the provision of the section we find the amount of any tax duty cess or fee which is actually paid or incurred to bring the goods to the place of its location and condition as on the date of valuation needs to be included in the valuation of closing stock. In the instant case the goods had not reached to the location of the assessee but are lying in the bounded warehouse which means that the liability for the custom duty has not accrued on the date of valuation. Therefore in our considered view such duty is not liable to be included in the value of the closing stock. - Decided against revenue Addition made on account of interest paid on borrowed fund which was diverted for the purchase of shares - Held that - AR demonstrated that the investment was made out of the own funds and no borrowed funds was investment in that investment as such Ld. AR prayed for the disallowance of the addition made by AO on account of borrowed fund. From the aforesaid discussion we find that AO has disallowed the interest expenses on account of holding that the investment was made out of the borrowed fund however Ld.AR before us has demonstrated that no borrowed fund was utilized in making such investment. In rejoinder Ld. DR has not raised any objection to controvert the argument of Ld. AR. Now the question before us arises for adjudication so as to whether the borrowed fund has been utilized to make the investment in the sister concern. We find force from the submission of Ld. AR that there are sufficient funds available for the investment and as such no borrowed fund was utilized for the aforesaid investment. Therefore in our considered view no disallowance of interest on the borrowed fund required to be disallowed as contemplated u/s 36(1)(iii) of the Act.- Decided against revenue Disallowance of payment to organization not notified by the Director General exemption in official gazette - Held that - Deduction u/s. 35 of the Act is available if the donation is made to the notified organization by the Central Govt. of India in the Official Gazette. In the instant case assessee failed to provide the copy of the Notification to justify that the institution was approved. In view of this we reverse the order Ld. CIT(A) - Decided against assessee Addition made on account of delayed payment towards PF contribution - Held that - From the assessment order we find that all the payment of employees contribution were made before the due date of filing of Income Tax Return as specified u/s.139(1) of the Act. Now this issue stands covered in favour of assessee and against the Revenue by the decision of Hon ble jurisdictional High Court in the case of CIT v. M/s Vijay Shree Limited 2011 (9) TMI 30 - CALCUTTA HIGH COURT - Decided against revenue MAT credit in the same manner as in the case of TDS and Advance Tax for the purpose of calculation of interest u/s 234B and 234C - Held that - Similar issue in assessee s own case for AY 2002-03 decided by the Co-ordinate Bench of this Tribunal by restoring to the file of AO for fresh adjudication wherein held Entitlement of MAT credit is not dependent upon any action taken by the Department. However quantum of tax credit will depend upon the assessment framed by the Assessing Officer. Thus the right to set off arises as a result of the payment of tax under section 115JA(1) although quantification of that right depends upon the ultimate determination of total income for the first assessment year. - Decided in favour of assessee by way of remand. Capitalization of premium paid for premature redemption of debenture - Held that - As decided in f DCIT v. Core Health Care Ltd. 2008 (2) TMI 8 - SUPREME COURT OF INDIA wherein held Expression for the purpose of business occurring in s. 36(1)(iii) indicates that once the test of for the purpose of business is satisfied in respect of the capital borrowed the assessee would be entitled to deduction under s. 36(1)(iii)-This provision makes no distinction between money borrowed to acquire a capital asset or a revenue asset-What sub-cl. (iii) emphasizes is the user of the capital and not the user of the asset which comes into existence as a result of the borrowed capital- Sec. 36(1)(iii) is a code by itself-Determination of actual cost in s. 43(1) has relevancy in relation to ss. 32 32A 33 and 41- Actual cost of an asset has no relevancy in relation to s. 36(1)(iii)-Hence Expln. 8 to s. 43(1) has no relevancy to s. 36(1)(iii)-Proviso to s. 36(1)(iii) inserted by the Finance Act 2003 w.e.f. 1st April 2004 is only prospective and would not apply to assessment years in question - Decided in favour of assessee Disallowance of entrance fee paid to the club - Held that - This issue is squarely covered in favour of assessee by judgment of Hon ble jurisdictional High Court in the case of Assam Brook Ltd. v. CIT 2004 (1) TMI 46 - CALCUTTA High Court as held that if the management pays some amount for the upliftment/running of the club in question in an effective way then it must be held that the said payment was made in the interest of the company so that its employees remained happy and consequently the work of the company is not hampered in any way due to dissatisfaction on the part of its employees. As this payment was made by the company to the club keeping its business interest in mind the said payment must be held to be business expenditure and accordingly as per s. 37 the assessee-company is entitled to get deduction. - Decided in favour of assessee Disallowance of expenses incurred in relation to transfer of catalyst business undertaking as a going concern for a slum price - Held that - The provisions claimed by the assessee have not been crystallized during the year under consideration. All the provisions were depending on the outcome of the future event. There was a time limit of five years from the date of the agreement for the transfer of the undertaking and the period of five years have expired so in the interest of justice and fair play we are inclined to restore the issue to the file of AO for fresh adjudication as per law. Hence this ground of assessee appeal is allowed for statistical purpose. Disallowance u/s. 80IB - Held that - As observed that the assessee has failed to furnish the prescribed certificate in Form No. 10CCB duly certified by Chartered Accountant for claiming the deduction u/s. 80IB of the Act. - Decided in favour of revenue

Summary

Issues Involved:
1. Nature of business reorganization expenses (capital vs. revenue).
2. Disallowance of depreciation on WDV of block of assets.
3. Allocation of expenses related to corporate office for the period before business transfer.
4. Valuation of property for capital gains calculation.
5. Disallowance under Section 14A of the Income Tax Act.
6. Set-off of brought forward business and capital losses.
7. Custom duty inclusion in closing stock valuation.
8. Interest on borrowed funds used for share purchase.
9. Deduction under Section 35 for payments to scientific research associations.
10. Disallowance for delayed PF contributions.
11. MAT credit treatment for interest calculation under Sections 234B and 234C.
12. Premium paid for premature redemption of debentures.
13. Club entrance fee as business expense.
14. Expenses related to the transfer of business undertaking.
15. Deduction under Section 80IB without the prescribed certificate.

Issue-wise Detailed Analysis:

1. Nature of Business Reorganization Expenses:
The assessee claimed expenses for business reorganization as revenue in nature. The AO and CIT(A) treated these as capital expenses due to enduring benefits. The Tribunal found that similar expenses in earlier years were allowed as revenue expenses, specifically VRS expenses under Section 35DDA. For salary and overhead costs, the Tribunal held these as revenue expenses based on the Punjab and Haryana High Court's ruling in CIT v. JCT Electronics Ltd. The Tribunal directed the AO to allow VRS expenses in five equal installments and salary costs in full.

2. Disallowance of Depreciation on WDV of Block of Assets:
The AO disallowed depreciation by treating the sale of business undertakings under Section 50, affecting the WDV. The CIT(A) upheld this. The Tribunal referred to its earlier decision where it allowed the depreciation claim based on the assessee’s own case history, directing the AO to follow the same.

3. Allocation of Corporate Office Expenses:
The AO disallowed expenses related to the pharmaceutical business for the period before its actual transfer, claiming no income was shown for that period. The Tribunal, following the Supreme Court’s decision in B.R. Ltd. v. V.P. Gupta, held that the expenses were allowable as the pharmaceutical unit was part of the same business under common management.

4. Valuation of Property for Capital Gains Calculation:
The AO used DVO’s valuation of land at ?5 lakhs per kottah instead of the assessee’s registered valuer's ?20 lakhs per kottah. The Tribunal held that the AO’s reference to DVO was not justified as the assessee’s claimed value was not less than the fair market value, citing the Calcutta High Court's decision in CIT v. Umedbhai International P. Ltd. The Tribunal reversed the lower authorities' orders and accepted the assessee’s valuation.

5. Disallowance under Section 14A:
The AO disallowed ?10 lakhs for expenses related to exempt dividend income. The CIT(A) restricted this to 1% of the total dividend income. The Tribunal upheld this, referring to the jurisdictional High Court’s decision in CIT v. M/s R.P. Sen & Brothers (P) Ltd., which consistently applied a 1% disallowance.

6. Set-off of Brought Forward Losses:
The AO disallowed set-off of brought forward business and capital losses due to pending reassessment for AY 2000-01 and no assessed loss for AY 2001-02. The CIT(A) directed verification and allowance as per law. The Tribunal allowed the ground for statistical purposes, pending verification.

7. Custom Duty Inclusion in Closing Stock Valuation:
The AO included custom duty in closing stock valuation under Section 145A. The CIT(A) deleted this addition, stating it would distort the consistent accounting method. The Tribunal upheld the CIT(A)’s decision, noting that the duty liability had not accrued as the goods were in bonded warehouse, referencing the Bombay High Court’s decision in CIT v. Loknete Balasaheb Desai S.S.K. Ltd.

8. Interest on Borrowed Funds Used for Share Purchase:
The AO disallowed interest on borrowed funds used for share investment. The CIT(A) deleted this, finding the investment was made from own funds. The Tribunal upheld this, referencing the Bombay High Court’s decision in CIT v. Reliance Utilities & Power Ltd., which presumes own funds are used if available.

9. Deduction under Section 35 for Payments to Scientific Research Associations:
The AO disallowed weighted deduction due to lack of notification for the research center. The CIT(A) allowed the deduction, finding the contribution valid based on existing certificates. The Tribunal reversed this, requiring a valid notification for the deduction.

10. Disallowance for Delayed PF Contributions:
The AO disallowed late PF payments. The CIT(A) deleted this, finding payments were made before the due date for filing returns. The Tribunal upheld this, following the jurisdictional High Court’s decision in CIT v. M/s Vijay Shree Limited.

11. MAT Credit Treatment for Interest Calculation:
The CIT(A) directed AO to give MAT credit like TDS and advance tax for interest calculation under Sections 234B and 234C. The Tribunal restored the issue to AO for fresh adjudication, referencing the Supreme Court’s decision in Sage Metals Limited.

12. Premium Paid for Premature Redemption of Debentures:
The AO treated the premium as capital expenditure. The CIT(A) directed verification of the purpose of debentures. The Tribunal allowed the premium as revenue expenditure, following the Supreme Court’s decision in DCIT v. Core Health Care Ltd.

13. Club Entrance Fee as Business Expense:
The AO disallowed the entrance fee as personal benefit. The CIT(A) upheld this. The Tribunal allowed it as a business expense, referencing the jurisdictional High Court’s decision in Assam Brook Ltd. v. CIT.

14. Expenses Related to Transfer of Business Undertaking:
The AO disallowed transaction costs as contingent liabilities. The CIT(A) upheld this. The Tribunal restored the issue to AO for fresh adjudication, noting the provisions had not crystallized during the year.

15. Deduction under Section 80IB Without Prescribed Certificate:
The AO disallowed the deduction due to lack of Form 10CCB. The Tribunal upheld this disallowance, requiring the prescribed certificate for the deduction.

Conclusion:
The appeals were partly allowed, with specific directions for fresh adjudication on certain issues. The Tribunal’s decisions were largely based on precedents and consistent application of legal principles.