2020 (7) TMI 271 - AT - Income Tax

Disallowance of software expenses - Disallowance is in respect of expenditure claimed towards repairs - computers-annual maintenance and Repairs-computers-others - AO has treated it as capital expenditure on the reasoning that it was towards purchase of licenses and allowed depreciation at the rate of 25% - HELD THAT - While deciding identical issue in assessee s own case in Assessment Year 2009-10 2019 (5) TMI 689 - ITAT MUMBAI the Tribunal accepting assessee s claim has allowed the deduction claimed as revenue expenditure. The same view was reiterated by the Tribunal while deciding assessee s appeal in Assessment Year 2010-11 2020 (1) TMI 1200 - ITAT MUMBAI in the orders referred to above. Facts being identical, respectfully following the decisions of the co-ordinate Bench (supra), we allow assessee s claim of deduction. Resultantly, the disallowance made by the Assessing Officer is deleted. Consequently, the depreciation allowed by the Assessing Officer on the expenditure claimed is also reversed. Assessee is bound to succeed with regard to its alternative claim that even if the expenditure is treated as capital, depreciation would be allowable at the rate of 60%. As could be seen, while deciding similar issue in assessee s own case in Assessment Years 2009-10 and 2010-11 (supra), the Tribunal has allowed depreciation at the rate of 60%. This ground is allowed. Disallowance of deduction u/s 35(2)(AB) - AO disallowed weighted deduction at the enhanced rate only because the assessee failed to furnish approval of the competent authority in form 3CM - HELD THAT - While deciding identical issue in assessee s own case in Assessment Year 2008-09 2018 (7) TMI 1887 - ITAT MUMBAI the Tribunal while holding that furnishing of form 3CM is mandatory has however restored the issue to the AO for enabling the assessee to furnish the approval in form 3CM. Identical view was expressed by the Tribunal while deciding similar issue in Assessment Years 2009-10 and 2010-11. Before us, the learned Counsel has submitted that though the assessee had applied for approval in form 3CM, as yet, the competent authority has not granted the approval. Considering the above and keeping in view the decisions of the co-ordinate Bench in assessee s own case as referred to above, we restore the issue to the file of the Assessing Officer to enable the assessee to furnish the approval in from 3CM to be obtained from the competent authority. This ground is allowed for statistical purposes. Disallowance of depreciation on additions made to computer software claimed at the rate of 60% - HELD THAT - While deciding identical claim made by the assessee in Assessment Year 2009-10 2019 (5) TMI 689 - ITAT MUMBAI the Tribunal has held that the computer software purchased by the assessee is eligible for depreciation at the rate of 60%. The same view was reiterated while deciding assessee s appeal in Assessment Year 20099-10. Respectfully following the consistent view of the Tribunal in assessee s own case, we direct the Assessing Officer to allow depreciation on addition made to computer software at the rate of 60%. This ground is allowed. Disallowance of expenditure under section 14A of the Act read with Rule 8D - HELD THAT - Legal position is fairly well settled by various judicial precedent including the decision of Hon'ble Jurisdictional High Court in the case of CIT vs. HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT and HDFC Bank Ltd. vs. DCIT 2016 (3) TMI 755 - BOMBAY HIGH COURT that in case assessee has sufficient interest free surplus funds available with it, no disallowance of interest expenditure can be made under Rule 8D(2)(ii). The aforesaid ratio laid down by the Hon'ble Jurisdictional High Court is not only binding on the Tribunal, but also on departmental authorities including learned Dispute Resolution Panel and the Assessing Officer. Therefore, in case the aforesaid claim of the assessee regarding availability of surplus interest free funds is found to be correct, no disallowance of interest expenditure under Rule 8(D)(2)(ii) can be made - neither the AO nor Dispute Resolution Panel have properly appreciated the aforesaid contention of the assessee and have not verified the factual position with reference to the financial statements - restore the issue to the Assessing Officer with a direction to verify assessee s claim of availability of surplus interest free funds and delete the disallowance under Rule 8D(2)(ii) of the Rules, in case such funds are available. Disallowance of administrative expenditure under Rule 8D(2)(iii) - as held in Vireet Investment Pvt. Ltd 2017 (6) TMI 1124 - ITAT DELHI such disallowance has to be computed only taking into consideration the investments which have yielded exempt income during the year. Those investments which have not yielded any exempt income during the year have to be excluded from the average value of investments while computing the disallowance under Rule 8D(2)(iii) of the Rules. Disallowance of advertisement and business promotion expenses - expenditure incurred by the assessee was for providing gifts and travel facility to the doctors - AO has disallowed a part of expenditure on the allegation that it is in violation of the Indian Medical Council (Professional Conduct Etiquette and Ethics) Regulations - HELD THAT - While deciding the issue in assessment year 2009-10 2019 (5) TMI 689 - ITAT MUMBAI the Tribunal has allowed assessee s claim holding that the Indian Medical Council (Professional Conduct Etiquette and Ethics) Regulations does not apply to the assessee and further, the CBDT circular also applies prospectively. The same view was reiterated by the Tribunal while deciding the issue in assessment year 2010-11. Respectfully following the consistent view of the Tribunal in assessee s own case as discussed above, we allow assessee s claim by deleting the disallowance. Deduction claimed under section 80IC in respect of Baddi unit by allocating a part of interest and R D expenditure - HELD THAT - As could be seen from the facts on record, this is a recurring issue between the assessee and the Revenue. In Assessment Year 2008-09 2018 (7) TMI 1887 - ITAT MUMBAI on identical reasoning, the Assessing Officer had allocated a part of the interest and R D expenditure to the Baddi unit, thereby, reducing the deduction claimed by the assessee under section 80IC of the Act. While deciding assessee s appeal on the issue in Assessment Year 2008-09, the Tribunal has restored it to the Assessing Officer for fresh adjudication after considering assessee s claim in the context of facts and materials brought on record. Disallowance of deduction under section 80IC - conditions of section 80IC(4) of the Act have been violated, as the Baddi unit is not a completely new unit but came into existence by splitting up or reconstruction of a business already in existence - HELD THAT - While deciding assessee s appeal for Assessment Year 2008-09 on the disputed issue, the Tribunal deleted the disallowance though, of course, for a technical reason. However, in Assessment Year 2009-10, the Tribunal has dealt with the issue on merits. After exhaustively dealing with all factual aspects vis- -vis, the conditions of section 80IC(4) of the Act, the Tribunal ultimately concluded that the assessee has complied with all the conditions of section 80IC of the Act. Therefore, the Tribunal held that assessee is eligible to claim deduction under section 80IC of the Act. The same view was expressed by the Tribunal while deciding the issue in Assessment Year 2010-11 (supra). The material facts on the basis of which the Tribunal concluded in favour of the assessee in preceding years are no different in the impugned assessment yea - following the consistent view of the co-ordinate Bench in assessee s own case in Assessment Years 2009-10 and 2010-11, we hold that the assessee is eligible to claim deduction under section 80IC of the Act. More so, because this is the fourth year of claim of deduction and in the initial years the Tribunal has held that conditions of sub-section 4 of section 80IC of the Act have been fully complied with by the assessee. Accordingly, we allow assessee s claim of deduction under section 80IC of the Act. This ground is allowed. Transfer pricing adjustment of guarantee commission - HELD THAT - Similar nature of dispute arose in assessee s own case in Assessment Year 2008-09 2018 (7) TMI 1887 - ITAT MUMBAI Tribunal has accepted assessee s claim that guarantee commission for corporate guarantee provided should be charged at 0.5%. Similar view has been expressed by the Tribunal while deciding the issue in assessment years 2009-10 and 2010-11. Facts being identical, respectfully following the view expressed by the Tribunal in the preceding assessment years, we direct the Assessing Officer to compute the ALP of the guarantee commission for providing corporate guarantee to the AEs at 0.5%. Disallowance of deduction claimed u/s 48 - assessee has sold its stake (shares) in PDSPL, erstwhile subsidiary of the assessee engaged in medical diagnostic activities, by entering into a share purchase agreement with SRL - computing capital gain arising out of such transaction assessee has claimed deduction of an amount under section 48 of the Act towards expenditure incurred wholly and exclusively for the purpose of transfer - HELD THAT - when the deal has been ultimately struck with SRL, why services of three persons was required to broker such deal and secondly, what is the necessity of employing three persons for the very same work. Further, the assessee has to explain the parameters on the basis of which different fee structure was fixed for making payment to the concerned persons. All these factors have not been explained properly by the assessee through credible evidence. Of course, as it appears, aforesaid aspects were also neither examined nor enquired into in earlier stages - issue has to be restored back to the Assessing Officer for fresh adjudication after verifying all relevant facts and if necessary conducting adequate enquiry to ascertain the true nature and character of the expenditure claimed by the assessee.AO must decide the issue after considering all the facts and materials on record, submissions of the assessee and only after providing due and reasonable opportunity of being heard to the assessee. This ground is allowed for statistical purposes. Disallowance of exemption claimed in respect of interest on tax free bonds - HELD THAT - if an item of income is not taxable under the provisions of the Act and cannot form part of the computation of total income, merely because the assessee has mistakenly offered it as income it will be forbidden from claiming exemption afterwards during the course of the proceeding. It is trite law, there cannot be any estoppel against law. It is more so in respect of an item of income exempt under section 10 of the Act. The Assessing Officer as per the statutory mandate is duty bound to compute the real and correct income of the assessee. Though, on one hand he is empowered to disallow any wrongful claim made by the assessee, on the other hand, he is also required to allow deduction/exemption/benefit the assessee is legally entitled to. Therefore, keeping in view the aforesaid legal principle, disallowance of assessee s claim purely on technical reason is unsustainable -we restore the issue to the Assessing Officer with a direction to factually verify assessee s claim and allow exemption under section 10(15) . Disallowance u/s 14A read with Rule 8D of the Rules while computing book profit under section 115JB - HELD THAT - ITAT Special Bench Delhi in ACIT vs. Vireet Investment P. Ltd. 2017 (6) TMI 1124 - ITAT DELHI has held that no adjustment/disallowance can be made under section 115JB of the Act with reference to section 14A read with Rule 8D of the Rules. However, the Tribunal has directed the Assessing Officer to compute the book profit in consonance with the provisions of section 115JB of the Act read with explanation (1)(f) - we direct the Ld. AO to delete additions made towards book profit computed u/s. 115JB of the Act, in respect of disallowances made u/s. 14A Short grant of credit of TDS - mis-calculation of dividend distribution tax payable and grant of short credit thereof - HELD THAT - Direct the Assessing Officer to factually verify assessee s claim and allow credit in accordance with law. Disallowance under section 35A relating to Sarabhai Piramal Pharmaceuticals Ltd. (SPPL) - AO continued to disallow the expenditure claimed on the reasoning that trademark does not come within the purview of section 35A of the Act, as it only speaks patents and copyrights - HELD THAT - Considering the fact that in the preceding assessment years assessee's claim of deduction under section 35A of the Act has been allowed, applying the rule of consistency also assessee's claim of deduction in the impugned assessment year cannot be disallowed.

Summary

Issues Involved:
1. Disallowance of software expenses.
2. Disallowance of deduction claimed under section 35(2AB).
3. Disallowance of depreciation on additions made to computer software.
4. Disallowance of expenditure under section 14A read with Rule 8D.
5. Disallowance of advertisement and business promotion expenses.
6. Reduction of deduction claimed under section 80IC by allocating a part of interest and R&D expenditure.
7. Disallowance of deduction under section 80IC.
8. Transfer pricing adjustment of guarantee commission.
9. Disallowance of deduction claimed under section 48.
10. Disallowance of exemption claimed in respect of interest on tax-free bonds.
11. Disallowance under section 14A read with Rule 8D while computing book profit under section 115JB.
12. Short grant of credit of TDS.
13. Mis-calculation of dividend distribution tax payable and grant of short credit.
14. Deletion of disallowance under section 35A relating to Sarabhai Piramal Pharmaceuticals Ltd.

Detailed Analysis:

1. Disallowance of Software Expenses:
The assessee challenged the disallowance of software expenses amounting to ?17,38,400/-. The Assessing Officer treated it as capital expenditure and allowed depreciation at 25%. The Tribunal, following its decisions in the assessee’s own case for previous years, allowed the deduction as revenue expenditure and reversed the depreciation allowed by the Assessing Officer. Alternatively, it held that if treated as capital, depreciation at 60% would be allowable.

2. Disallowance of Deduction under Section 35(2AB):
The assessee claimed a weighted deduction of ?27,82,95,269/- for R&D expenses. The claim was disallowed due to the absence of form 3CM approval. The Tribunal restored the issue to the Assessing Officer to allow the assessee to furnish the necessary approval, following its earlier decisions.

3. Disallowance of Depreciation on Computer Software:
The assessee claimed 60% depreciation on new software purchases. The Assessing Officer restricted it to 25%. The Tribunal, following its earlier decisions, directed the Assessing Officer to allow 60% depreciation.

4. Disallowance under Section 14A Read with Rule 8D:
The assessee’s disallowance of ?2,33,84,000/- under section 14A was challenged. The Tribunal restored the issue to the Assessing Officer to verify the availability of surplus interest-free funds and to compute administrative expenditure disallowance only on investments yielding exempt income, following its earlier decisions.

5. Disallowance of Advertisement and Business Promotion Expenses:
The assessee’s claim of ?115,44,22,171/- was disallowed for being in violation of Indian Medical Council Regulations. The Tribunal, following its earlier decisions, allowed the claim, holding that the regulations do not apply to the assessee and the CBDT circular is not retrospective.

6. Reduction of Deduction under Section 80IC:
The Assessing Officer allocated part of interest and R&D expenditure to the Baddi unit, reducing the deduction claimed under section 80IC. The Tribunal restored the issue to the Assessing Officer for fresh adjudication, following its earlier decisions.

7. Disallowance under Section 80IC:
The assessee’s claim was disallowed on the grounds of splitting up or reconstruction of an existing business. The Tribunal, following its earlier decisions, held that the assessee complied with section 80IC conditions and allowed the deduction.

8. Transfer Pricing Adjustment of Guarantee Commission:
The assessee charged 0.5% guarantee commission, which the Transfer Pricing Officer adjusted to 3%. The Tribunal, following its earlier decisions, directed the Assessing Officer to compute the ALP at 0.5%.

9. Disallowance under Section 48:
The assessee claimed ?18,96,00,000/- as expenditure for brokering a deal. The Tribunal restored the issue to the Assessing Officer for fresh adjudication and verification of the services rendered and the necessity of employing three persons.

10. Disallowance of Exemption on Tax-Free Bonds:
The assessee claimed exemption on interest from tax-free bonds, initially offered to tax. The Tribunal restored the issue to the Assessing Officer to verify the claim and allow the exemption.

11. Disallowance under Section 14A Read with Rule 8D for Book Profit:
The Tribunal, following its earlier decisions, directed the Assessing Officer to compute book profit under section 115JB without adjustments under section 14A read with Rule 8D.

12. Short Grant of Credit of TDS:
The Tribunal directed the Assessing Officer to verify and allow the correct credit of TDS.

13. Mis-calculation of Dividend Distribution Tax:
The Tribunal directed the Assessing Officer to verify and allow the correct credit of dividend distribution tax.

14. Deletion of Disallowance under Section 35A:
The Tribunal upheld the deletion of disallowance under section 35A relating to Sarabhai Piramal Pharmaceuticals Ltd., following its earlier decisions and the High Court’s decision in favor of the assessee.

Conclusion:
The assessee's appeal was partly allowed, and the department's appeal was dismissed. The Tribunal directed the Assessing Officer to follow its earlier decisions and verify the claims and deductions as per the law.