2022 (5) TMI 1673 - AT - Income Tax

Disallowance of interest on bonds issued at the time of amalgamation - HELD THAT - As decided in A.Y. 1995-96 disallowance of interest on the bonds issued to the shareholders of the Standard Pharmaceuticals Ltd. (SPL) on its amalgamation with the assesse-company. A.R. has very fairly conceded to this position of the matter so that the same admits of no difference of opinion. Respectfully following the orders of the Tribunal in the assessee s case for the earlier years we uphold the impugned disallowance for the current year as well. Disallowance u/s 43B(b) as employer s contribution to PF/ESIC - HELD THAT - It is pertinent to note that the assessee made suo moto disallowance but as regards the contribution in respect of employer the delay whether it is within the statutory limit or not has not been demonstrated by the assessee before the AO. CIT(A) has rightly set aside this issue to the file of the AO for verifying whether payment was made on or before the due date of filing the return or not. There is no need to interfere with the finding of the CIT(A). Ground No. 2 of the assessee s appeal is dismissed. Disallowance of damages levied u/s 14B of the Provident Fund Act - HELD THAT - In the present assessment year as well the facts are identical to that the earlier assessment years yet the excess disallowance needs to be verified and the alternative contentions of the assessee as to 40% of the amount paid as damages may be allowed as compensatory. Disallowance of salary and wages - HELD THAT - It is pertinent to note that this issue is set aside to the file of the Assessing Officer for proper verification and adjudication in A.Y. 1996-97 1997-98 1998-99 as well as in A.Y. 1999-2000. The Tribunal in A.Y. 1996-97 held that only the expenses which were incurred or has liability in terms of underlying contract stands accrued shall be allowed as an expenditure in the present assessment year as well. Thus we remand back this issue to the file of the AO for verification of the relevant facts and proper adjudication. Needless to say the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 4 of the assessee s appeal is partly allowed for statistical purpose. Allowance u/s 35DDA as claimed by the assessee in respect of terminal benefit under Section 37 as revenue expenditure - HELD THAT - The segregation done by the assessee that the entire leave salary and gratuity be allowed cannot be accepted as it is clearly a part of voluntary scheme of retirement as it is incidental to the retirement of employee. Thus the CIT(A) has rightly allowed the deduction under Section 35DDA and confirmed the other aspects. The CIT(A) has given a detailed finding and there is no need to interfere with the same. Hence Ground of assessee s appeal is dismissed. Disallowance of Sundry Balances written off - A.R. submitted that the said Sundry Balances written off should be allowed as business loss - HELD THAT - Though the issue is related to sundry creditors in this assessment year as well this is an issue which is factual centric as per each years sundry creditors therefore it will be appropriate to remand back this issue to the file of the Assessing Officer for adjudicating it afresh after looking into the evidences. Needless to say the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 6 is partly allowed for statistical purpose. Nature of receipt - transfer of trademark marketing rights - revenue receipt or capital receipt - assessee while submitting its contentions stated that the assessee has suffered significant loss of revenue after the transfer of trademarks and marketing rights appears to be superficial - HELD THAT - During the hearing before us as well as during the assessment proceedings and the appellate proceedings before the CIT(A) the assessee at no point of time submitted that the joint venture between the assessee and Cadila Healthcare Limited has totally taken over the trademark assignment as well as assignment of marketing rights exclusively from the assessee. There are clauses in those assignment agreements which established that the assessee has made business arrangement for the benefit of its manufacturing activities and for the generation of revenue to the joint venture entered between the assessee and Cadila Healthcare Limited. The observation of the CIT(A) appears to be correct and thus there is no need to interfere with the same. The joint venture though shown as separate legal entity has not defined the separate operations from the activities of the assessee and it has participated in the activities of the assessee which was carried out earlier. Decided against assessee. Disallowance of festival allowance Misc. expenses Telephone expenses Vehicle expenses - HELD THAT -Misc. expenses Telephone expenses and Vehicle expenses are properly allowed by the CIT(A). Adhoc disallowance of 5% out of selling expenses - Entire selling expenses incurred wholly and exclusively for the purposes of the business and therefore are of allowable nature. Moreover the Assessing Officer has also not any adverse cogent material on record to prove that some of these expenses are of disallowable nature. On the other hand the appellant itself has disallowed the expenses wherever the same were of disallowable nature. In view of this fact hold that the ad hoc disallowance of 5% out of the said selling expenses amounting is not justified. Addition of rent and insurance payment of Packart Press unit as unit was closed and there was no business activities - HELD THAT - This issue is remanded back to the file of the Assessing Officer for verification of the relevant facts and proper adjudication accordingly. Addition made u/s 40A(9) regarding the previous year s expenses and foreign travel - HELD THAT -Liability is crystallized during the year on account of settlement with those parties in current year as the assessee is follows mercantile system of accounting. The said expenses were also allowed in previous assessment years by the Tribunal as well. Hence the CIT(A) has rightly allowed the previous period expenses. As regards to foreign travel expenses the assessee placed on record all the details that the expenses were incurred for business purpose only and the same evidence was before the Assessing Officer. Thus the CIT(A) has rightly allowed foreign travel expenses. Transfer of Trademarks and Marketing rights allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

• Whether the disallowance of interest on bonds issued during the amalgamation of Standard Pharmaceuticals Limited was justified.
• The applicability of Section 43B(b) concerning employer's contributions to PF/ESIC and the timing of such payments.
• The nature and allowability of damages levied under Section 14B of the Provident Fund Act.
• The legitimacy of salary and wages disallowance for the Packart Press Unit employees.
• The treatment of gratuity and leave salary payments under Section 35DDA versus Section 37 of the Income Tax Act.
• The allowability of sundry debit balances written off as business losses.
• The characterization of consideration received for the transfer of trademarks and marketing rights as capital versus revenue receipts.
• The legitimacy of various expense disallowances, including buying commissions, festival allowances, and other operational expenses.
• The treatment of previous year's expenses and foreign travel expenses under Section 40A(9).

2. ISSUE-WISE DETAILED ANALYSIS

Disallowance of Interest on Bonds

• The relevant legal framework involves the Tribunal's previous decisions, which consistently ruled against the assessee for similar issues in prior assessment years.
• The Court upheld the disallowance based on established precedents, confirming that the interest on bonds issued during the amalgamation was not allowable as it was covered by previous Tribunal decisions.

Section 43B(b) and Employer's Contributions

• The legal framework requires that contributions to PF/ESIC be made within the statutory deadlines to be deductible.
• The Court agreed with the CIT(A) in remanding the issue to the Assessing Officer to verify if payments were made before the due date of filing returns, emphasizing the need for compliance with statutory timelines.

Damages under Section 14B of the Provident Fund Act

• The Court considered previous Tribunal decisions allowing a portion of such damages as compensatory and thus deductible.
• The Court partially allowed the appeal, directing verification of the compensatory nature of the damages.

Disallowance of Salary and Wages for Packart Press Unit

• The issue was remanded to the Assessing Officer for verification, following previous Tribunal decisions that required examination of the facts to determine if the expenses were incurred for business purposes.

Gratuity and Leave Salary Payments

• The Court upheld the CIT(A)'s decision to treat these payments as part of a voluntary retirement scheme under Section 35DDA, rejecting the assessee's claim for full deduction under Section 37.
• The Court emphasized that these payments were incidental to the voluntary retirement scheme.

Sundry Debit Balances Written Off

• The Court remanded the issue for verification by the Assessing Officer, aligning with previous decisions that required factual examination of each year's sundry balances.

Transfer of Trademarks and Marketing Rights

• The Court agreed with the CIT(A) that the consideration received was a revenue receipt, not a capital receipt, as the assessee retained manufacturing rights and the arrangement did not destroy the income-generating apparatus.
• The Court found no merit in the assessee's argument that the transfer was solely of trademarks without goodwill.

Expense Disallowances

• The Court upheld previous Tribunal decisions allowing the expenses, such as buying commissions and festival allowances, as the Revenue did not provide distinguishing facts for the current assessment year.
• The Court found the CIT(A)'s allowance of these expenses justified based on past precedents.

Previous Year's Expenses and Foreign Travel

• The Court upheld the CIT(A)'s decision allowing these expenses, emphasizing that they were incurred for business purposes and were not covered by Section 40A(9).
• The Court noted that the expenses were verified and consistent with previous Tribunal decisions.

3. SIGNIFICANT HOLDINGS

• The Court consistently applied previous Tribunal decisions to uphold or remand issues for further verification, emphasizing the importance of factual examination and adherence to statutory requirements.
• The judgment reinforced the principle that voluntary business arrangements, such as joint ventures, do not inherently alter the characterization of receipts unless they fundamentally change the income-generating apparatus.
• The Court affirmed that statutory compliance and factual accuracy are critical in determining the allowability of deductions and the characterization of receipts.
• On the issue of transfer of trademarks and marketing rights, the Court emphasized that the retention of manufacturing rights and the continued business operations under a joint venture framework did not constitute a capital receipt.