2017 (12) TMI 570 - AT - Income Tax

Disallowance of interest expenditure payable to Micro, Small Medium Enterprises - Held that - Section 23 of MSMED Act has specifically prohibited the assessee from claiming the deduction from the income on account of interest paid to MSME. Section 24 is having overriding effect to the extent of any inconsistent provisions contained in any other law for the time being. We further note that as per the Section 15 of the MSMED Act, the liability of the buyer to make the payment to MSME within the period as agreed between the parties or in case there is a delay beyond 45 days from the date of acceptance or date of deemed acceptance the interest payable as per Section 16 shall be three times of the bank rate notified by the RBI. Thus as per Section 16 of the MSMED Act, the payment of interest on delayed payment is in the nature of penalty or it is penal interest. Therefore once the payment of interest on delayed payment to MSME is regarded as a penal in nature then the said expenditure is otherwise not allowable under Section 37. Hence, in view of the specific provisions under MSMED Act, 2006 for payment of interest to the MSME being penal in nature and having the overriding effect of Sections 15 to 23, we do not find any error or illegality in the orders of the authorities below in disallowing this claim of interest paid to the MSME. Addition on account of the amount received in respect of technical knowhow from M/s. Motogen under the head Business Income as against the claim of the assessee as 'Long Term Capital Gains (LTCG)' - Held that - The assessee after taking permissions from the Bosch has sub-licensed the right to use of patented technology which has not resulted extinguishing right vested with the assessee. The transfer of capital asset is necessarily ceases the ownership or right in the property in the hand of the transferor and it gets vested in the hand of transferee. Therefore, in the case of transfer the right or ownership of transferor is completely extinguished and it is vested with the transferee. In the case on hand, the assessee is vested with the right to use the patented technical know how / technology under the license agreement and the subsequent sublicensing to M/s. Motogen is only the sharing of the said right with the other party and not transferring of the right of the assessee to the said party. The assessee by virtue of this sub-license has not extinguished its right to use the said technology but it has only shared the technology with the M/s. Motogen. Accordingly, at the first place it is not a case of transfer of any capital asset giving rise to capital gain. Disallowance of deduction under Section 80JJA in respect of workman whose duration of work in a year was less than 300 days - Held that - As decided in favour of assessee for previous year as per provisions of section 80JJAA as reproduced above, the deduction is allowable for three years including the year in which the employment is provided. Hence, in each of such three years it has to be seen that the workmen was employed for at least 300 days during that previous year and that such work men was not a casual workmen or workmen employed through contract labour. Therefore, if some work men were employed for a period less than 300 days in the previous year then no deduction is allowable in respect of payment of wage to such work men in the present year even if such work men was employed in the preceding year for more than 300 days but in the present year, such work men was not employed for 300 days or more. In this view of the matter, we find no infirmity in the order of the ld. CIT (A) on this issue. Restriction of deduction under Section 35(2AB) of the Act on net expenditure as against the gross expenditure- Held that - As regards not raising objections before the DSIR we note that when there is no discrepancy or dispute about the gross expenditure as well as the receipts as claimed by the assessee and accepted by the DSIR then the question of raising any objection does not arise. Therefore we do not find any merits in the objections raised by the ld. DR. Disallowance under Section 14A - Held that - Accordingly, in case when the assessee s own fund is more than the investment made in the tax free securities then the disallowance on account of interest expenditure under Section 14A is not called for. Since the details filed by the assessee are pertaining to the F.Y. 2006-07 and not for the F.Y. 2007-08 relevant to the assessment year under consideration therefore, we set aside this issue to the record of the Assessing Officer for limited purpose of verification of relevant facts of availability of interest free assessee's own funds and then decide this issue in the light of various binding precedents. As regards the indirect administration expenses, we find that the Assessing Officer has applied Rule 8D(2)(iii) without examining the actual expenditure attributable to the exempt income. the case on hand, the assessee has worked out the disallowance on account of indirect administrative expenses by taking the man hours of the higher administration in proportion of the tax free income and taxable income. Therefore in case the quantum of expenditure worked out under Rule 8D is exceeding the actual expenditure then the workings under Rule 8D fails. Accordingly, when the Assessing Officer has not made an attempt to first find out the expenditure which is attributable to the earning of the exempt income and has directly applied Rule 8D then the matter requires a proper verification and reconsideration. Hence, we set aside this issue to the record of the Assessing Officer to verify and consider the attributable expenditure which is debited to the profit and loss account and relatable to the exempt income. Disallowance of depreciation on intangible assets - Held that - Identical issue was considered by this Tribunal in assessee's own case for the Assessment Year 2004-05 as held when the Assessing Officer itself has treated this expenditure as capital being intangible asset and allowed the depreciation then the claim of depreciation on the said intangible asset cannot be denied for the year under consideration. Further the issue of depreciation on intangible asset is covered by the decision of Hon'ble Supreme Court in the case of CIT Vs. Techno Ltd. 2010 (9) TMI 6 - SUPREME COURT OF INDIA Disallowance of expenditure being sublicense fees for SAP and other application software - Held that - When the expenditure in question has not resulted in bringing a new capital asset in existence then the same can be allowed as a revenue expenditure even if the expenditure can have the benefit to the assessee in the form of improvement in the efficiency. Hence we do not find any error or illegality in the order of CIT (Appeals) qua this issue. Deduction under Section 43B - Held that - Since this claim was not made in the return of income and therefore, it was not allowed by the Assessing Officer. However, this claim was remitted by the CIT (Appeals) and ask the Assessing Officer to verify the factual aspect of payment of the sales tax during the year and then allow the claim. Even for the sake of argument if it is accepted that the CIT (Appeals) has no jurisdiction to remand the issue, we are of the opinion that when the claim of the assessee is only in respect of payment of sales tax during the year under consideration then the only thing to be examined and verified by the Assessing Officer is to confirm the payment of sales tax as claimed by the assessee during the year under consideration. Accordingly, in the facts and circumstances of the case, we set aside this issue to the record of the Assessing Officer to verify the claim of the assessee

Summary

Issues Involved:
1. Disallowance of provision made towards interest payable to Customs Department.
2. Disallowance of interest expenditure payable to Micro, Small & Medium Enterprises.
3. Taxation of receipt towards technical know-how as business income instead of long-term capital gains.
4. Disallowance of deduction under Section 80JJAA for workmen employed for less than 300 days.
5. Restriction of deduction under Section 35(2AB) on net expenditure instead of gross expenditure.
6. Disallowance under Section 14A for indirect administrative expenses.
7. Disallowance of depreciation on intangible assets.
8. Treatment of sub-license fee for SAP R/3 systems and other application software as revenue expenditure.
9. Deduction under Section 43B for sales tax paid during the year.

Detailed Analysis:

1. Disallowance of Provision Made Towards Interest Payable to Customs Department:
The Tribunal noted that this issue was previously decided against the assessee in its own case for the Assessment Years 2000-01 and 2001-02. The Tribunal upheld the disallowance of the provision made towards interest payable to the Central Excise Department, following the earlier decisions. Consequently, the ground of the assessee's appeal was dismissed.

2. Disallowance of Interest Expenditure Payable to Micro, Small & Medium Enterprises:
The Tribunal held that Section 23 of the MSMED Act specifically prohibits the deduction of interest paid on delayed payments to MSMEs from income. The interest paid is considered penal in nature under Section 16 of the MSMED Act and is not allowable under Section 37 of the Income Tax Act. Therefore, the Tribunal upheld the disallowance of the interest expenditure.

3. Taxation of Receipt Towards Technical Know-How as Business Income Instead of Long-Term Capital Gains:
The Tribunal observed that the assessee was granted a non-exclusive, non-transferable right to use patented technology by Bosch. The subsequent sub-licensing to M/s. Motogen did not result in the extinguishment of the assessee's right. Thus, the sub-licensing was considered sharing of the right rather than a transfer of ownership. Consequently, the Tribunal upheld the classification of the receipt as business income.

4. Disallowance of Deduction Under Section 80JJAA for Workmen Employed for Less Than 300 Days:
The Tribunal noted that the deduction under Section 80JJAA is restricted to additional wages paid to workmen employed for more than 300 days during the relevant period. This interpretation was upheld based on the clear language of the statute and previous decisions. Therefore, the Tribunal upheld the disallowance of the deduction for workmen employed for less than 300 days.

5. Restriction of Deduction Under Section 35(2AB) on Net Expenditure Instead of Gross Expenditure:
The Tribunal held that income earned by the R&D center, which is part of the total income, should not be reduced from the gross expenditure for the purpose of deduction under Section 35(2AB). The Tribunal followed the decision of the Hon'ble jurisdictional High Court in the case of CIT Vs. Microlab and other precedents. The issue was set aside to the Assessing Officer for verification of the nature of the receipts.

6. Disallowance Under Section 14A for Indirect Administrative Expenses:
The Tribunal observed that if the assessee's own funds exceed the investment made, no disallowance on account of interest expenditure under Section 14A is warranted. The Tribunal set aside the issue to the Assessing Officer for verification of the availability of interest-free funds. Regarding indirect administrative expenses, the Tribunal directed the Assessing Officer to verify the actual expenditure attributable to the exempt income and reconsider the disallowance accordingly.

7. Disallowance of Depreciation on Intangible Assets:
The Tribunal upheld the allowance of depreciation on intangible assets, following the decision in the assessee's own case for previous years and the Supreme Court's decision in CIT Vs. Techno Ltd. The Tribunal dismissed the revenue's appeal on this ground.

8. Treatment of Sub-License Fee for SAP R/3 Systems and Other Application Software as Revenue Expenditure:
The Tribunal held that expenditure on application software, which does not result in the creation of a new capital asset, should be treated as revenue expenditure. The Tribunal relied on the decision of the Hon'ble Madras High Court in CIT Vs. Southern Roadways and the Special Bench decision in Amway India Enterprises Vs. DCIT. The Tribunal dismissed the revenue's appeal on this ground.

9. Deduction Under Section 43B for Sales Tax Paid During the Year:
The Tribunal noted that the CIT (Appeals) directed the Assessing Officer to verify the payment of sales tax during the year and allow the deduction if found correct. The Tribunal set aside the issue to the Assessing Officer for verification of the payment and to decide the claim as per law.

Conclusion:
The Tribunal provided a detailed analysis and upheld or dismissed the grounds of appeal based on previous decisions, statutory provisions, and judicial precedents. The issues were addressed comprehensively, ensuring that the legal principles and significant phrases from the original text were preserved.