2005 (2) TMI 451 - AT - Income Tax

Summary

Issues Involved:
1. Allowability of expenditure incurred to protect goodwill (Assessment Years 1998-99 and 1999-2000).
2. Disallowance of staff welfare expenses under Section 40A(9) of the Income Tax Act (Assessment Years 1998-99, 1999-2000, and 2000-01).
3. Set off of loss on export of trading goods against profits from export of manufactured goods for deduction under Section 80HHC (Assessment Year 1999-2000).
4. Computation of interest under Section 234C after giving full credit for TDS certificates (Assessment Year 2000-01).

Issue-wise Detailed Analysis:

1. Allowability of Expenditure Incurred to Protect Goodwill:
The appeals for the assessment years 1998-99 and 1999-2000 concern the allowability of expenditure incurred by the assessee to protect its goodwill. The assessee, a company engaged in various business activities, held a significant share in ITC Classic Finance Ltd. ("ITC Classic"), which faced financial turmoil in the mid-1990s. To protect its brand name "ITC," the assessee entered into a tripartite agreement with ITC Classic and ICICI, bearing the restructuring costs amounting to Rs. 52.79 crores and Rs. 2.02 crores for the respective years.

The Assessing Officer (AO) disallowed the claim, arguing it was an afterthought and not directly related to the assessee's business. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating the expenditure did not have a direct nexus with the assessee's business.

On appeal, the Tribunal considered the principles laid down by the Supreme Court in cases like CIT vs. Nainital Bank Ltd. and CIT vs. Delhi Safe Deposit Co. Ltd., which allow for the deduction of expenses incurred to protect goodwill. The Tribunal also referred to the House of Lords' decision in Lawson vs. Johnson Matthey Plc, which supported the assessee's claim that the expenditure was to protect its goodwill. The Tribunal concluded that the expenses were revenue in nature and incurred wholly and exclusively for the assessee's business, thus allowing the deduction under Section 37(1) of the Act.

2. Disallowance of Staff Welfare Expenses under Section 40A(9):
For the assessment years 1998-99, 1999-2000, and 2000-01, the assessee had initially offered certain sums as disallowances under Section 40A(9) before the AO but later claimed these as allowable expenses in appeals before the CIT(A). The CIT(A) refused to admit these claims, stating they were not raised at the assessment stage.

The Tribunal, considering the decisions of the Supreme Court in National Thermal Power Company Ltd. vs. CIT and Jute Corporation of India Ltd. vs. CIT, held that the assessee could raise new claims at the appellate stage. The Tribunal restored the issue to the AO for adjudication on merits, directing the AO to grant a reasonable opportunity of hearing to the assessee.

3. Set Off of Loss on Export of Trading Goods Against Profits from Export of Manufactured Goods for Deduction under Section 80HHC:
For the assessment year 1999-2000, the issue was whether the loss incurred on the export of trading goods should be set off against profits from the export of manufactured goods for computing the deduction under Section 80HHC. The Tribunal referred to the Supreme Court's judgment in IPCA Laboratory Ltd. vs. Dy. CIT, which held that such set-off is not permissible. Consequently, the Tribunal dismissed the assessee's claim.

4. Computation of Interest under Section 234C After Giving Full Credit for TDS Certificates:
For the assessment year 2000-01, the assessee sought relief regarding the computation of interest under Section 234C, requesting full credit for TDS certificates submitted during the assessment. The Tribunal restored this issue to the AO for recomputation of interest in accordance with the law, ensuring all prepaid taxes in the form of TDS and advance taxes are considered.

Conclusion:
The appeals for the assessment years 1998-99, 1999-2000, and 2000-01 were partly allowed. The Tribunal allowed the deduction of expenses incurred to protect goodwill, restored the issue of staff welfare expenses to the AO for adjudication, dismissed the claim regarding the set-off of export losses, and directed the AO to recompute interest under Section 234C after considering all prepaid taxes.