2017 (9) TMI 723 - AT - Income Tax

Disallowance u/s 14A - computation of claim - Held that - From the perusal of financial statement, we have noted that the interest free funds available with the assessee are more than the investment made during the year. The Hon ble Bombay High Court in Reliance Utility and Power Ltd (2009 (1) TMI 4 - BOMBAY HIGH COURT ) held that where both the interest free funds and interest bearing funds are available and the interest free funds are more than the investment made the presumption is that the investment is made out of interest free funds available with the assessee. The High Court further held that for the years for which Rule 8D is not applicable and in the event the AO is not satisfied with the working given by the assessee, the disallowance under section 14A has to be made on reasonable basis. The Hon ble jurisdictional High Court in HDFC Bank Ltd. ( 2016 (3) TMI 755 - BOMBAY HIGH COURT) held that while considering disallowance under Section 36(1)(iii) the application of Section 14A of the Act would apply. Considering the fact that no interest bearing funds were utilized in earning the exempt income. Thus, no interest disallowance can be made while disallowance u/s 14A of the Act. AO has not recorded his dissatisfaction about the claim of assessee, further the lower authority has not disputed that the majority investments are in group companies. Tribunal has taken a consistent view to allow reasonable disallowance and restricted the disallowance u/s 14A of the Act to 1% of the dividend income. See DCIT, Circle-4, Kolkata Versus Ashoka Trading Co. Pvt. Ltd. 2012 (3) TMI 494 - ITAT KOLKATA Disallowance u/s 14A (MAT) while determining book profit under section 115JA - Held that - In this regard the AO is directed to re-work the disallowance following our determination of disallowance u/s14A in the above paras under the normal provision of the Act. Thus, this ground of appeal is partly allowed. Disallowance of vendor development expenses - Held that - Identical ground of appeal was decided in favour of assessee in appeal for AY 1997-98 and 1998-99 wherein held the assessee had incurred an expenditure that in the books of account it had treated the expenditure as deferred revenue expenditure, that in the computation of income and during the assessment proceedings it claimed that expenditure was of revenue nature, that the AO had not given any finding about allowability of the expenditure, that the expenditure was incurred for developing the tools/components. In our opinion, the entries in the books of account do not decide allowability of expenditure as revenue expenditure. Nor are the books decisive to hold expenditure as capital expenditure. What has to be seen is the nature of expenditure. The FAA has given categorical finding of fact that expenditure did not add to the fixed capital of the assessee or helped it in acquiring the source of profit. FAA was justified in allowing the expenditure as revenue expenditure. Disallowance of consultancy fee for business process Re-engineering - Held that - Identical ground of appeal was decided in favour of assessee in appeal for AY 1997-98 and 1998-99 held that the expenditure incurred by the assessee on account of consultancy fee for business process re-engineering was revenue expenditure, that it had not started any new line of business, that the consultancy fee was also not paid for setting up any new business, that same was paid for purposes of improving the profitability of existing business. Disallowance of Product Development Expenses - Held that - It is noted that similar disallowance made by AO in assessment year 2003-04 onwards which were deleted by First Appellate Authority, and the revenue has not filed further appeal before the Tribunal. The orders in all subsequent years have attained finality. The product development expenses include expenses on development of new product and variants of existing product. It has been explained that such development takes a span of time before commercial production. In our view, such an expenditure is a regular developmental activity under taken by the assessee in its existing course of business and not a new line of business. Thus such expenditure is revenue in nature. Disallowance on feeder line for power supply by treating it as Capital expenditure - Held that - The expenditure incurred on feeder line for power supply is not capital expenditure as no asset was added in the asset of the assessee. The expenses incurred on feeder line are revenue in nature. Hence, this ground of appeal is also dismissed. Allowing the disallowance of contribution for Railway Bridge - Held that - Hon ble Gauhati High Court in CIT Vs Bongaigaon Refinery and Petrochemical Ltd (1996 (6) TMI 64 - GAUHATI High Court ) for expenses incurred for Railway track and siding. Further, the Hon ble Madras High Court in CIT Vs Coats Viyella India Ltd 2000 (11) TMI 24 - MADRAS High Court that expenditure incurred on construction of new bridge in place of old one for movement of goods and workmen is revenue expenditure. We are of the considered view that the assessee is neither the owner of the bridge nor new capital asset was added in the asset of the assessee. Thus, we do not find any illegality or infirmity in the order of the ld CIT(A). Admission of additional ground of appeal - Held that - Commissioner (Appeals) erred in law in not admitting the additional ground of appeal. Considering the facts of the case and the nature of additional grounds of appeal, we admit the additional grounds and restore the additional ground of appeal to the file of ld. CIT(A) to consider the claims of assessee afresh and passed the order in accordance with law. Deduction under section 80 HHC - Held that - Considering the fact that the assessee has raised additional ground of appeal related to deduction under section 80 HHC for the first time before the Tribunal, we admit the additional ground of appeal and restore the same to the file of assessing officer to consider these additional grounds of appeal as well and pass the order in accordance with law. The AO shall grant sufficient opportunity to the assessee before passing the order. With these observation the additional ground of appeal raised before us are allowed for statistical purpose. Disallowance u/s 43B in respect of Sales tax collected under UP State Government Scheme - AR of the assessee submitted that the ld CIT(A) has allowed deduction in AY 2001-02, being the assessment years in which the agreement for deferment of sale tax has been entered into with the UP 33 Government, thus this ground of appeal has become infructuous. Considering the contention of ld AR of the assessee that this ground of appeal is dismissed being infructuous.

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance under Section 14A for the purpose of MAT computation.
3. Disallowance of warranty expenses.
4. Disallowance of vendor development expenses.
5. Disallowance of consultancy fees for business process reengineering.
6. Disallowance of product development expenses.
7. Disallowance of expenditure on feeder line for power supply.
8. Disallowance of contribution for railway overbridge.
9. Non-admission of additional grounds of appeal.
10. Deduction under Section 80HHC.
11. Disallowance under Section 43B in respect of sales tax collected under U.P. State Government scheme.
12. Disallowance of software license fees.
13. Disallowance of retirement benefit payments.

Detailed Analysis:

1. Disallowance under Section 14A:
The Tribunal addressed the disallowance under Section 14A, which pertains to expenses incurred in relation to exempt income. The Tribunal noted that the assessee had sufficient interest-free funds, and the majority of investments were historical and static. The Tribunal followed precedents set by the Bombay High Court and various ITAT decisions, restricting the disallowance to 1% of the exempt income instead of the 5% disallowed by the AO.

2. Disallowance under Section 14A for the purpose of MAT computation:
The Tribunal directed the AO to re-compute the disallowance under Section 14A while determining book profits under Section 115JA, following the same principles applied for normal disallowance under Section 14A.

3. Disallowance of warranty expenses:
The Tribunal dismissed the revenue's appeal on disallowance of warranty expenses, citing consistent decisions in favor of the assessee in previous years and Supreme Court rulings that allowed such provisions as deductible expenses.

4. Disallowance of vendor development expenses:
The Tribunal upheld the CIT(A)'s decision to allow vendor development expenses as revenue expenditure, following consistent decisions in the assessee's favor in previous years.

5. Disallowance of consultancy fees for business process reengineering:
The Tribunal upheld the CIT(A)'s decision to allow the consultancy fees as revenue expenditure, noting that the fees were paid to improve existing business processes and not for starting a new business.

6. Disallowance of product development expenses:
The Tribunal upheld the CIT(A)'s decision to allow product development expenses as revenue expenditure, following consistent decisions in the assessee's favor in previous years and noting that such expenses were part of regular business activities.

7. Disallowance of expenditure on feeder line for power supply:
The Tribunal upheld the CIT(A)'s decision to treat the expenditure on the feeder line as revenue expenditure, noting that no capital asset was acquired by the assessee and the expenditure was necessary for business operations.

8. Disallowance of contribution for railway overbridge:
The Tribunal upheld the CIT(A)'s decision to treat the contribution for the railway overbridge as revenue expenditure, citing precedents where similar contributions were allowed as deductible expenses.

9. Non-admission of additional grounds of appeal:
The Tribunal admitted the additional grounds of appeal raised by the assessee, noting that legal claims can be raised at the appellate stage if they are based on facts already on record. The Tribunal restored these grounds to the CIT(A) for fresh consideration.

10. Deduction under Section 80HHC:
The Tribunal admitted the additional ground related to deduction under Section 80HHC and restored it to the AO for consideration, following consistent decisions in favor of the assessee in previous years.

11. Disallowance under Section 43B in respect of sales tax collected under U.P. State Government scheme:
The Tribunal dismissed this ground as infructuous, noting that the AO had allowed the deduction in the subsequent assessment year when the agreement for deferment of sales tax was entered into.

12. Disallowance of software license fees:
The Tribunal dismissed this ground as infructuous, noting that the AO had allowed depreciation on the software license fees in subsequent years.

13. Disallowance of retirement benefit payments:
The Tribunal dismissed this ground as infructuous, noting that the AO had allowed the deduction under Section 35DDA over a period of five years.

Conclusion:
The Tribunal provided a detailed analysis and consistent application of precedents, resulting in partial relief for the assessee on various grounds, while dismissing the revenue's appeals on others. The Tribunal emphasized the principle of consistency and adherence to legal precedents in its judgments.

← Previous Next →