2018 (9) TMI 64 - AT - Income Tax

Disallowance on account of unutilized Modvat credit - revaluation of closing stock including unutilized Modvat credit - Held that - Hon ble Bombay High Court in the case of CIT vs Indo Nippon Chemicals Co Ltd 2000 (8) TMI 69 - BOMBAY HIGH COURT held that where in the closing stock, unutilized Modvat credit is adjusted, similar adjustment should be made to opening stock also. - we are of the considered view that the AO was erred in making adjustment towards unutilized Modvat credit only in respect of closing stock. Therefore, we set aside the issue to the file of the AO to make necessary adjustments towards opening stock as well as closing stock. Treatment of capital expenditure on brand Epilex - Held that - As in assessee s own case for AY 1998-99 wherein the ITAT has deleted enhancement made by the Ld.CIT(A) towards treatment of capital expenditure on brand Epilex . CIT(A) also deleted addition made by the AO towards professional charges paid to DSP Meryll Lynch for the purpose of computation of deduction u/s 35AB of the Income-tax Act, 1961. CIT(A) was erred in making enhancements towards treatment of capital expenditure incurred on brand Epilex . Hence, we direct the AO to delete enhancement made by the Ld.CIT(A). Also delete addition made towards disallowance of professional charges while computing deduction u/s 35AB Exclusion of 90% of other income while computing deduction u/s 80HHC - Held that - CIT(A) for AY 2001-02 in assessee s own case has deleted addition made by the AO towards recomputation of eligible profit u/s 80HHC by excluding insurance claim and sale of scrap and such decision has been accepted by the department and no appeal has been filed before the ITAT. Once, the department has accepted the fact that these two items are part of other income eligible for inclusion in the computation of deduction u/s 80HHC, then by following the rule of consistency, the department ought to have accepted the assessee s claim for current year. Therefore, we are of the considered view that the AO was erred in excluding 90% of other income being insurance claim and sale of scrap for the purpose of computation of eligible profit u/s 80HHC of the Income-tax Act, 1961. Hence, we direct the AO to delete addition made towards re-computation of eligible profit u/s 80HHC excluding insurance claim and sale of scrap. Disallowance of interest income and cash discount while computing deductions u/s 80I & 80IA - Held that - Bombay High Court in the case of CIT vs Vidyut Corporation 2010 (4) TMI 229 - BOMBAY HIGH COURT held that interest from customers is eligible for computation of deductions u/s 80I& 80IA of the Income-tax Act, 1961. Insofar as cash discount is concerned though the issue has come up for our discussion for first time during the year under consideration, fact remains that the assessee has failed to furnish evidence to prove that cash discount is part of its core business activity of income eligible for deductions u/s 80I & 80IA of Income-tax Act. AO was right in disallowing cash discount while computing deductions u/s 80I & 80IA of the Income-tax Act, 1961. Accordingly, we uphold disallowance made by the AO and reject ground taken by the assessee. Sales turnover exclusive of sales-tax, excise duty, trade discount, etc. while computing deduction u/s 80HHC - Held that - AO was erred in including sales-tax & excise duty and also trade discount while computing sales turnover for the purpose of determination of deduction u/s 80HHC of the Income-tax Act, 1961. The Ld.CIT(A), after considering relevant submissions has rightly deleted addition made by the AO. We do not find any error in the order of Ld.CIT(A). Disallowance of interest expenditure u/s 14A - Held that - once assessee proved with necessary evidence that its own funds including interest free funds are more than the amount of investments, then no interest could be disallowed u/s 14A But, the facts are not emerging from the orders of the lower authorities that the assessee has filed evidence to prove that its interest free funds are more than the amount of investments in shares and securities. Therefore, we set aside the issue to the file of the AO and direct him to cause necessary enquiry to ascertain the position of funds as on the date of investment and if found that the assessee is having its own funds, then no disallowance could be made towards interest expenditure u/s 14A. Disallowance on computer software expenses on the ground that it is in the nature of capital expenditure - Held that - Assessee has incurred software expenses, which are in the nature of cost of service of personnel, licence fees for software and AMC expenses for various softwares including software for accounting sales and debtors, software support for pay roll division, software maintenance and support for marketing royalty obligations and other day to day obligations, which are in the nature of revenue expenditure. AO was erred in disallowing software expenses on the ground that it is in the nature of capital expenditure which gives enduring benefit to the assessee. Further, in the case of CIT vs Raichem RPG Ltd 2011 (7) TMI 953 - BOMBAY HIGH COURT has considered similar issue and held that amount paid for acquiring licence to use softwares which facilitate smooth carrying on of business operation, fees paid for said licence was revenue expenditure allowable u/s 37(1) Deduction u/s 80M in respect of dividend declared - Held that - In this case, the assessee has received dividend income of ₹ 1,68,13,000 and distributed dividend of ₹ 18,33,61,200. The dividend income received by the assessee is less than the amount of dividend declared by the assessee in the year under consideration. Therefore, as per the provisions of section 80M, the assessee is eligible for deduction u/s 80M to the extent of dividend income received or dividend income declared, whichever is less. Since the assessee has distributed dividend more than the amount of dividend income received for the year under consideration, it has rightly claimed deduction u/s 80M to the extent of dividend income received of ₹ 1,68,13,000. Thus the assessee is eligible for deduction u/s 80M in respect of dividend received from wholly owned subsidiary company Disallowance u/s 14A - Held that - isallowance should be worked out on reasonable basis having regard to the quantum of dividend income earned by the assessee and expenditure incurred for the relevant period. In this case, the assessee has earned huge dividend income of ₹ 6,84,37,043, therefore, considering the facts and circumstances of this case and also keeping in view of various judicial precedents, we are of the considered view that 5% of exempt income towards expenses incurred in relation to exempt income would meet the ends of justices. Therefore, we direct the AO to restrict the disallowance determined towards other expenses at 5% of exempt income. Disallowance of advertisement expenditure - AO has disallowed advertisement expenditure incurred by the assessee on the ground that the same was not spent wholly and exclusively for the purpose of business of the assessee and also such expenditure has benefited the parent company of the assessee - Held that - AO has recorded categorical finding any that assessee failed to file any evidence to justify such expenditure. Therefore, we are of the considered view that the issue needs to be re-examined by the AO in the light of claim of the assessee that it has furnished necessary evidence to prove advertisement expenses. Hence, we set aside the issue to the file of the AO and direct him to consider the explanation of the assessee in the light of our discussion in preceding paragraphs. If the assessee is able to file necessary evidence Disallowance of deferred sales-tax liability - addition u/s 41(1) - Held that - AO has misconstrued the facts to come to the conclusion that sales-tax, if any, payable in relation to the transfer of the said undertaking shall mean whatever taxes payable upto the date of transfer of the undertaking . On the other hand, the assessee has filed necessary evidence to prove that such liability continue to exist in its books of account, even after transfer of Jejuri undertaking and also the said liability has been discharged by the assessee to the department in subsequent period. AO was erred in making addition towards deferred sales-tax liability u/s 41(1) when such liability is existing in the books of account of the assessee

Summary

Issues Involved:
1. Disallowance on account of unutilized Modvat credit.
2. Treatment of capital expenditure on brand 'Epilex'.
3. Exclusion of 90% of other income while calculating deduction u/s 80HHC.
4. Disallowance of interest income and cash discount while granting deductions u/s 80I & 80IA.
5. Disallowance of expenditure incurred in relation to exempt income u/s 14A.
6. Disallowance of computer software expenses being capital in nature.
7. Allowing deductions towards professional fees paid to DSP Merryll Lynch while calculating deduction u/s 35AB.
8. Calculation of sales turnover exclusive of sales-tax, excise duty, trade discount, etc. while calculating deduction u/s 80HHC.

Detailed Analysis:

1. Disallowance on account of unutilized Modvat credit:
The Tribunal noted that the issue of addition towards revaluation of closing stock including unutilized Modvat credit has been previously decided in favor of the assessee by the ITAT, Mumbai Bench in the assessee’s own case for AY 1998-99. It was held that if unutilized Modvat credit is adjusted in the closing stock, similar adjustments should be made to the opening stock. Consequently, the Tribunal set aside the issue to the file of the AO to make necessary adjustments to both opening and closing stock.

2. Treatment of capital expenditure on brand 'Epilex':
The Tribunal observed that the issue was covered in favor of the assessee by the decision of ITAT, Mumbai Bench in the assessee’s own case for AY 1998-99. It was held that marketing know-how expenses for the brand 'Epilex' should be treated as revenue expenditure. The Tribunal directed the AO to delete the enhancement made by the CIT(A) towards the treatment of capital expenditure on brand 'Epilex'.

3. Exclusion of 90% of other income while calculating deduction u/s 80HHC:
The Tribunal held that insurance claims and sale of scrap should not be excluded from business profits while computing deduction u/s 80HHC, following the decisions of the Hon’ble Bombay High Court in CIT vs Pfizer Ltd and Bangalore Clothing Co vs CIT. The AO was directed to delete the addition made towards re-computation of eligible profit u/s 80HHC by excluding insurance claims and sale of scrap.

4. Disallowance of interest income and cash discount while granting deductions u/s 80I & 80IA:
The Tribunal noted that interest from customers on delayed payments qualified for deductions u/s 80I & 80IA, following the decision of the Hon’ble Bombay High Court in CIT vs Vidyut Corporation. However, the Tribunal upheld the AO's disallowance of cash discounts due to lack of evidence proving that cash discounts were part of the core business activity.

5. Disallowance of expenditure incurred in relation to exempt income u/s 14A:
The Tribunal held that if the assessee’s own funds, including interest-free funds, are more than the amount of investments in shares and securities yielding exempt income, no interest expenditure could be disallowed u/s 14A. The issue was set aside to the file of the AO to verify the availability of interest-free funds.

6. Disallowance of computer software expenses being capital in nature:
The Tribunal found that software expenses incurred for acquiring licenses to use software and annual maintenance expenses were in the nature of revenue expenditure, following the decision of the Hon’ble Bombay High Court in CIT vs Raichem RPG Ltd. The AO was directed to delete the addition made towards software expenses.

7. Allowing deductions towards professional fees paid to DSP Merryll Lynch while calculating deduction u/s 35AB:
The Tribunal upheld the CIT(A)'s decision that professional fees paid to DSP Merryll Lynch for acquiring brand 'Epilex' should be included while computing deduction u/s 35AB, following the ITAT’s decision in the assessee’s own case for AY 1998-99. The AO was directed to include these professional fees in the computation.

8. Calculation of sales turnover exclusive of sales-tax, excise duty, trade discount, etc. while calculating deduction u/s 80HHC:
The Tribunal upheld the CIT(A)’s decision to exclude sales-tax, excise duty, and trade discounts from the total turnover for the purpose of calculating deduction u/s 80HHC, following the decision of the Hon’ble Bombay High Court in CIT vs Sudarshan Chemicals Industries Ltd.

Conclusion:
The appeals filed by the assessee were partly allowed for statistical purposes, and the appeals filed by the revenue were dismissed or partly allowed for statistical purposes. The Tribunal directed the AO to make necessary adjustments and recomputations as per the detailed analysis provided for each issue.