2023 (11) TMI 532 - AT - Income Tax

Differential unutilized MODVAT credit referable to closing stock invoking the provisions of Section 145A - HELD THAT - As decided in own case AY 2005-06 2023 (2) TMI 1210 - ITAT MUMBAI Tribunal has not committed any error. (underlined for emphasis by us) It is evident from the above that irrespective of the method of accounting followed by the assessee, i.e. 'Inclusive method', wherein the taxes are included in the opening stock, purchases, etc. or the 'Exclusive method', the MODVAT credit does not have any impact on the profit of the assessee. Thus, following the ratio laid down by the Hon'ble Supreme Court in the case of Indo Nippon Chemicals Co. Ltd. 2003 (1) TMI 8 - SUPREME COURT and followed by Diamond Dye Chem Ltd 2017 (7) TMI 616 - BOMBAY HIGH COURT we set-aside the order of the CIT (A) and direct the AO to delete the addition made on account of unutilised MODVAT credit. Club entrance/subscription fee is an expenditure was incurred on account of subscription to clubs for the purpose of promoting and fostering its business relationship and objective of the assessee was to enable its directors to meet various kinds of people in the clubs so that by such meeting they would develop business relationship. See Otis Elevator Co 1991 (4) TMI 53 - BOMBAY HIGH COURT Addition on account sales tax subsidy under the normal provisions and u/s 115JB - We uphold the plea of the assessee and direct the AO to exclude the sales tax incentive subsidy for computing book profit u/s 115 JB of the Act Additional gratuity while computing income under normal provision of the Act. - A.O. was not justified in making this disallowance. Thus, this ground of appeal is allowed. TDS u/s 194A - interest payment made to SBI Bank- Bahrain Branch - disallowance u/s.40(a) - HELD THAT - As decided in own case AY 2005-06 2023 (2) TMI 1210 - ITAT MUMBAI CIT(A) in his order has given finding that Bahrain Branch of State Bank of India (SBI) is part of SBI which is governed by the Banking Regulation Act and this fact is not disputed by LD DR. Further it is also a settled position that a branch office is part of the entire SBI and not a separate legal entity. Payment to foreign branch of Indian entity tantamount to payment made to Indian company only. Accordingly, provisions of Section 195 are not applicable in respect of payments made to foreign branch of Indian Bank. Deduction u/s 80IA on TG-2 and TG-3, Wadi unit allowed - As deduction u/s. 80-IB was granted for an initial assessment year, same could not be rejected for subsequent assessment years unless relief for initial year was withdrawn. Exclude the specific expense of cost audit fees and subscription to CMA in respect of Cement manufacturing units for the purpose of computing deduction u/s.80IA/ 80IB - We reject the grievance of the assessee against allocation of HO expenses, but we permit the assessee s plea to the limited extent that the allocation of HO expenses should be done on the basis of expenditure incurred by the units vis- vis overall expenditure - AO is directed to allocate Head office expenses (other than auditor fees and CMA expenses) on the basis of expenditure incurred by the units vis- -vis overall expenditure. Wealth tax provision is not required to be added back while computing Book Profits under Section 115JB. Provision for Normal/Additional Gratuity is in the nature of provision for an ascertained liability and is, therefore, not required to be added back while computing Book Profits in terms of Clause (c) of Explanation 1 to Section 115JB(2) . Addition of provision for leave encashment made while computing book profit u/s 115JB is deleted. Deduction u/s 80HHC computed on the basis of book profit u/s 115JB - above benefit to the assessee was denied by the Finance Act 2011 with retrospective effect 01-04-2005 - HELD THAT - Any amendment denying the benefit to the assessee cannot be brought under the statute with retrospective effect. There will be certain classes of assessee who must have claimed the benefit of clause (iv) of explanation 1 to section 115 JB of the Act prior to the amendment by the Finance Act as discussed above. But, assuming their case have not been selected under scrutiny, then such benefit cannot be denied to them. On the contrary the assessees who were subject to scrutiny assessment, if they are denied the benefit, there will be discrimination to them. It is for the reason that there will not be allowed the benefit granted under the statute but withdrawn by way of retrospective amendment. Thus, the impugned amendment will create disharmony among different taxpayers. In view of the above and after considering the facts in totality, we are of the view that the assessee cannot be deprived for the benefit granted to it under the statute by way of retrospective amendment in the given facts and circumstances. Hence, the ground of appeal of the assessee is allowed. Amount withdrawn from share premium account while computing book profit u/s 115JB - We confirm the order of Ld. CIT(A) holding that amount transferred from Share Premium Account to the profit loss account was correctly reduced from Book Profits by the Assessee while computing book profit as per the provisions of Clause (i) of Explanation to Section 115JB(2) of the Act. This ground of appeal in Departmental Appeal is dismissed. Addition of VRS expenditure pertaining to earlier years, capital expenditure debited and write down of value of assets while computing the book profit u/s.115JB - HELD THAT - CIT(A) has allowed the claim of the assessee on the basis of decision of the case titled as Apollo Tyres Ltd. 2002 (5) TMI 5 - SUPREME COURT We also noticed that the issue has already been covered in favour of the assessee in the assessee s own case for the A.Y. 2002-03 we are of the view that the CIT(A) has allowed the claim of the assessee rightly. Capital expenditure debited to Profit Loss Account is not required to be added back while computing book profits under Section 115JB Amount transferred to Debenture Redemption Reserve cannot be added back while computing Book Profits. Excise duty exemption received by assessee are capital receipts both for the purpose of computing income as per normal provision of the Act as well as book profit u/s 115JB and the addition made by Assessing Officer is deleted. Disallowance u/s 14A in connection with proportionate interest disallowance is deleted. Sale of Refractory Business as slump sale by invoking the provision of sec. 50B instead of item-wise sale - HELD THAT - AO has wrongly invoked provisions of Section 50B of the Act for computing Income from Capital gain on sale of undertaking in the year under consideration. The assessee has correctly treated transaction of sale as item wise sale in return of income and computed Income from capital gain as applicable to sale of Individual item of assets. Thus, addition made by Assessing Officer and sustained by Ld.CIT(A) cannot be upheld and related ground of appeal is allowed. Recompute taxable long term capital gains arising on transfer of fixed assets as well as investments after giving the benefit of indexed cost of acquisition (if applicable) while computing taxable profits u/s 115JB Addition of corporate tax paid at Saudi Arabia in computing Book Profit u/s 115JB - Assessee having earned profits/dividend on its operations in several countries, it will be allowed deductions in respect of taxes paid abroad, in respect of which no foreign tax credit was granted to assessee. Claim of assessee is found to be as per provisions of law and this ground of appeal is accordingly allowed. Payment to BIS Marking in the current assessment year and the same is eligible to claim as business expenditure - After considering the submissions, we are inclined to remit this issue back to the file of Assessing Officer to verify the claim of the assessee and allow the same on the payment basis as per law. Therefore, this additional ground raised by the assessee is allowed for statistical purpose.

Summary

Issues Involved:
1. Deletion of addition on account of differential unutilized MODVAT credit.
2. Deletion of disallowance of club entrance/subscription fee.
3. Treatment of sales tax subsidy as capital receipt under normal provisions and u/s 115JB.
4. Allowance of provision for additional gratuity.
5. Disallowance u/s 40(a) for interest payment to SBI Bank-Bahrain Branch.
6. Deduction u/s 80IA for TG-2 and TG-3 power plants.
7. Allocation of indirect Head Office expenses for computing deduction u/s 80IA/80IB.
8. Inclusion of provision for wealth tax in book profit u/s 115JB.
9. Inclusion of provision for normal and additional gratuity in book profit u/s 115JB.
10. Inclusion of provision for leave encashment in book profit u/s 115JB.
11. Deduction u/s 80HHC in computing book profit u/s 115JB.
12. Exclusion of amount withdrawn from share premium account in computing book profit u/s 115JB.
13. Inclusion of VRS expenditure in computing book profit u/s 115JB.
14. Inclusion of capital expenditure debited to P&L account in computing book profit u/s 115JB.
15. Inclusion of expenditure incurred to earn dividend income in computing book profit u/s 115JB.
16. Exclusion of excise duty exemption in computing total income and book profit u/s 115JB.
17. Disallowance u/s 14A.
18. Treatment of sale of Refractory Business as slump sale.
19. Deduction in respect of Education Cess.
20. Exclusion of profit on sale of fixed assets and investments in computing book profit u/s 115JB.
21. Addition of corporate tax paid at Saudi Arabia in computing book profit u/s 115JB.

Detailed Analysis:

1. Deletion of Addition on Account of Differential Unutilized MODVAT Credit:
The Tribunal followed its previous decisions and those of higher courts, holding that unutilized MODVAT credit should not be added to the closing stock. The Tribunal reiterated that irrespective of the accounting method, MODVAT credit does not impact the profit of the assessee.

2. Deletion of Disallowance of Club Entrance/Subscription Fee:
The Tribunal upheld the CIT(A)'s decision, which relied on prior ITAT and High Court rulings, confirming that club fees for business promotion are allowable expenses. The Tribunal noted consistency in allowing such expenses in earlier years.

3. Treatment of Sales Tax Subsidy as Capital Receipt:
The Tribunal confirmed the CIT(A)'s decision to treat sales tax subsidies as capital receipts, referencing earlier ITAT decisions and the principle that the purpose of the subsidy determines its nature. The Tribunal dismissed the revenue's appeal, emphasizing that subsidies for industrial development are capital receipts.

4. Allowance of Provision for Additional Gratuity:
The Tribunal upheld the CIT(A)'s decision, which followed earlier ITAT rulings allowing additional gratuity provisions as deductible expenses. The Tribunal emphasized consistency in its decisions across different assessment years.

5. Disallowance u/s 40(a) for Interest Payment to SBI Bank-Bahrain Branch:
The Tribunal dismissed the revenue's appeal, holding that payments to foreign branches of Indian banks are not subject to TDS under Section 195. The Tribunal relied on the principle that foreign branches are part of the Indian entity.

6. Deduction u/s 80IA for TG-2 and TG-3 Power Plants:
The Tribunal allowed the deduction for both TG-2 and TG-3 units, rejecting the CIT(A)'s partial disallowance. The Tribunal emphasized that the deduction is available to the undertaking, not the entity, and cited previous ITAT decisions supporting this view.

7. Allocation of Indirect Head Office Expenses:
The Tribunal directed the AO to allocate indirect expenses based on the expenditure incurred by the units, not turnover, aligning with the principle that eligible units should be treated as profit centers. The Tribunal upheld the exclusion of specific expenses like cost audit fees and CMA subscriptions.

8. Inclusion of Provision for Wealth Tax in Book Profit u/s 115JB:
The Tribunal upheld the CIT(A)'s decision, which followed earlier ITAT rulings and High Court decisions, confirming that wealth tax provisions should not be added back while computing book profits.

9. Inclusion of Provision for Normal and Additional Gratuity in Book Profit u/s 115JB:
The Tribunal upheld the CIT(A)'s decision, which followed earlier ITAT rulings allowing gratuity provisions as ascertained liabilities, not to be added back while computing book profits.

10. Inclusion of Provision for Leave Encashment in Book Profit u/s 115JB:
The Tribunal upheld the CIT(A)'s decision, following earlier ITAT and Supreme Court rulings, confirming that leave encashment provisions are ascertained liabilities and should not be added back in book profit computation.

11. Deduction u/s 80HHC in Computing Book Profit u/s 115JB:
The Tribunal allowed the deduction, referencing the retrospective amendment and judicial precedents, confirming that profits eligible for deduction under Section 80HHC should be excluded from book profits.

12. Exclusion of Amount Withdrawn from Share Premium Account in Computing Book Profit u/s 115JB:
The Tribunal upheld the CIT(A)'s decision, which followed earlier ITAT rulings, confirming that amounts transferred from share premium account to the profit & loss account should be excluded from book profits.

13. Inclusion of VRS Expenditure in Computing Book Profit u/s 115JB:
The Tribunal upheld the CIT(A)'s decision, which followed earlier ITAT rulings, confirming that VRS expenditure should not be added back while computing book profits.

14. Inclusion of Capital Expenditure Debited to P&L Account in Computing Book Profit u/s 115JB:
The Tribunal upheld the CIT(A)'s decision, following earlier ITAT rulings, confirming that capital expenditure debited to the P&L account should not be added back in book profit computation.

15. Inclusion of Expenditure Incurred to Earn Dividend Income in Computing Book Profit u/s 115JB:
The Tribunal upheld the CIT(A)'s decision, following earlier ITAT rulings, confirming that disallowance under Section 14A should not be made while computing book profits.

16. Exclusion of Excise Duty Exemption in Computing Total Income and Book Profit u/s 115JB:
The Tribunal allowed the exclusion, referencing judicial precedents and earlier ITAT decisions, confirming that excise duty exemptions are capital receipts and should not be included in total income or book profits.

17. Disallowance u/s 14A:
The Tribunal directed the AO to re-compute disallowance under Section 14A, considering only those investments that yielded exempt income, aligning with judicial precedents.

18. Treatment of Sale of Refractory Business as Slump Sale:
The Tribunal held that the sale of the refractory business was not a slump sale, as values were assigned to individual assets. The Tribunal directed the AO to compute capital gains accordingly.

19. Deduction in Respect of Education Cess:
The Tribunal allowed the deduction, referencing judicial precedents confirming that education cess is allowable as a business expenditure.

20. Exclusion of Profit on Sale of Fixed Assets and Investments in Computing Book Profit u/s 115JB:
The Tribunal directed the AO to re-compute book profits, allowing the benefit of indexed cost of acquisition for capital gains on the sale of fixed assets and investments.

21. Addition of Corporate Tax Paid at Saudi Arabia in Computing Book Profit u/s 115JB:
The Tribunal allowed the exclusion, referencing judicial precedents confirming that foreign taxes paid should not be added back while computing book profits.