2018 (4) TMI 691 - AT - Income Tax

Non granting depreciation and expenses on insurance pertaining to the Kavesar unit - Held that - As decided in assessee s own case for AY 2003-04 disallowance sustained by the Ld. CIT(Appeals) on account of depreciation and other expenses of Kavesar Factory was deleted by the Tribunal accepting the alternative contention of the assessee that the expenses incurred to protect the business assets should be allowed as deduction as held by Hon ble Bombay High Court in the case of Hindustan Chemical Works Ltd. 1979 (2) TMI 16 - BOMBAY High Court - also held by the Tribunal that the assets of Kavesar Unit having already entered the block of assets of the assessee, depreciation thereon could not be disallowed on the ground of non-user as the use of block of assets was to be considered and not the use of individual assets. - Decided in favour of assessee Disallowing the expenditure on purchase of application software - revenue or capital expenditure - Held that - the expenditure incurred by the assessee towards the purchase of application software is revenue in nature. See Amway India Enterprises case 2011 (11) TMI 4 - DELHI HIGH COURT . Non grating deduction claimed u/s 35D - Held that - As decided in assessee s own case for AY 2003-04 direct the AO to allow the deduction claimed by the assessee under section 35D for the year under consideration keeping in view the expenses eligible for such deduction as quantified by him in assessment year 1999-2000. Disallowance u/s 14A - allocating other expenditure and depreciation on H.O. assets to the exempt income - Held that - we direct the AO to restrict the disallowance u/s 14A to 2% of the total exempt income of the assessee, in place of the disallowance made by the AO and the enhancement done by the Ld. CIT(A). - Decided partly in favour of assessee Additions for unutilised Modvat Credit to the closing stock - Held that - There is no dispute that the purchases made by the assessee are accounted for net of MODVAT credit. In M/s Diamond Dye Chem Ltd. 2017 (7) TMI 616 - BOMBAY HIGH COURT held the income was not generated to the extent of Modvat credit or unconsumed raw-material. Merely because the Modvat credit was irreversible credit offered to manufacturers upon purchase of duty paid raw-materials, that would not amount to income which was liable to be taxed under the Act. It is also held that whichever method of accounting is adopted, the net result would be the same. - Decided in favour of assessee Disallowing lease rentals not debited to Profit & Loss Account - Held that - We have heard the rival submissions and perused the relevant materials on record. It is found that the assessee is not the owner of the leased cars. It has not claimed depreciation u/s 32 in respect of the said cars. In the facts of the case, there is merit in the contentions of the Ld. counsel that the principal amount of lease rentals be allowed as a deduction u/s 37(1) of the Act.- Decided in favour of assessee Disallowing professional fees by treating it as capital expenditure - Held that - We find that the aforesaid expenses do not create any new fixed asset or enhance the production capacity of the business. These expenses are for repairs and renovation of existing assets, hence should be allowed as deduction. Disallowance to be deleted - Decided in favour of assessee Computing deduction u/s 80HHC - AO held that for computing the deduction u/s 80HHC, the total turnover should include sales tax, excise duty and sale of raw materials - Held that - For the purposes of working out the formula and in order to avoid distortion of arriving export profits clause (baa) stood inserted to say that although incentive profits and independent incomes constituted part of gross total income, they had to be excluded from gross total income because such receipts had no nexus with the export turnover. Therefore, in the above formula, we have to read all the four variables. On reading all the variables it becomes clear that every receipt may not constitute sale proceeds from exports. That, every receipt is not income under the Income-tax Act and every income may not be attributable to exports. This was the reason for this Court to hold that indirect taxes like excise duty which are recovered by the taxpayers for and on behalf of the Government, shall not be included in the total turnover in the above formula - See CIT v. Ravindranathan Nair 2007 (11) TMI 10 - Supreme Court of India Disallowance on account of bad debts - Held that - As decided in TRF Ltd 2010 (2) TMI 211 - SUPREME COURT after 01.04.1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in accounts of the assessee. When bad debt occurs, the bad debts account is debited and the customer s account is credited, thus, closing the account of the customer. In the case of companies, the provision is deducted from sundry debtors. - Disallowance to be deleted - Decided in favour of assessee

Summary

Issues Involved:
1. Depreciation and insurance expenses for the Kavesar unit.
2. Expenditure on purchase of application software.
3. Deduction claimed under section 35D.
4. Disallowance under section 14A for exempt income.
5. Addition of unutilized MODVAT credit to closing stock.
6. Disallowance of lease rentals.
7. Disallowance of professional fees.
8. Inclusion of raw material sales in total turnover and exclusion of certain incomes for deduction under section 80HHC.
9. Disallowance of bad debts.

Issue-wise Detailed Analysis:

1. Depreciation and Insurance Expenses for Kavesar Unit:
The CIT(A) disallowed depreciation and insurance expenses for the Kavesar unit, which had discontinued operations. The ITAT followed its earlier decisions for AY 2002-03 and AY 2003-04, where it was held that expenses incurred to protect business assets should be allowed as deductions. Additionally, depreciation on assets already in the block of assets could not be disallowed due to non-use. The ITAT allowed the appeal, granting the depreciation and insurance expenses.

2. Expenditure on Purchase of Application Software:
The AO treated the expenditure on application software as a capital asset, allowing only depreciation. The ITAT referred to the Delhi High Court decisions in CIT v. Amway India Enterprises and CIT v. Asahi India Safety Glass Ltd., which held that software expenses are revenue expenditures. Accordingly, the ITAT allowed the expenditure as revenue in nature.

3. Deduction Claimed Under Section 35D:
The AO disallowed the claim under section 35D for expenses related to a rights issue of shares. The ITAT, following its earlier decision for AY 2003-04, directed the AO to allow the deduction, as the Tribunal had previously ruled in favor of the assessee for similar claims in earlier years.

4. Disallowance Under Section 14A for Exempt Income:
The AO and CIT(A) made disallowances under section 14A for expenses related to earning exempt income. The ITAT referred to the decision in M/s Godrej Agrovet Ltd. v. ACIT, where disallowance under section 14A was restricted to 2% of the total exempt income for years prior to the applicability of Rule 8D (i.e., before AY 2008-09). The ITAT directed the AO to restrict the disallowance to 2% of the total exempt income.

5. Addition of Unutilized MODVAT Credit to Closing Stock:
The AO added unutilized MODVAT credit to the closing stock. The ITAT referred to the Supreme Court decision in Indo Nippon Chemicals Co. Ltd., which held that MODVAT credit should not be added to the closing stock as it does not generate income. The ITAT deleted the addition of unutilized MODVAT credit.

6. Disallowance of Lease Rentals:
The AO disallowed lease rentals for finance lease transactions. The ITAT found that the assessee was not the owner of the leased cars and had not claimed depreciation. Following the CBDT Circular No. 2/2001, the ITAT allowed the principal amount of lease rentals as a deduction under section 37(1).

7. Disallowance of Professional Fees:
The AO and CIT(A) treated professional fees for consultancy and redesigning as capital expenditure. The ITAT found that these expenses were for repairs and renovation of existing assets, not for creating new fixed assets or enhancing production capacity. The ITAT allowed the professional fees as revenue expenditure.

8. Inclusion of Raw Material Sales in Total Turnover and Exclusion of Certain Incomes for Deduction Under Section 80HHC:
The AO included raw material sales in total turnover and excluded 90% of certain incomes from business profits for computing deduction under section 80HHC. The ITAT followed the Supreme Court decision in CIT v. Ravindranathan Nair, which held that receipts not having a nexus with export turnover should be excluded from business profits. The ITAT dismissed the appeal on this ground.

9. Disallowance of Bad Debts:
For AY 2005-06, the AO disallowed bad debts written off, questioning their recoverability within a short period. The ITAT referred to the Supreme Court decision in TRF Ltd. v. CIT, which held that post-01.04.1989, it is sufficient if bad debts are written off in the accounts. The ITAT deleted the disallowance of bad debts.

Conclusion:
The appeals for AY 2004-05, AY 2005-06, and AY 2006-07 were partly allowed, with several disallowances deleted and certain claims allowed based on precedents and relevant legal provisions.