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2005 (8) TMI 301 - AT - Income TaxBusiness Expenditure - Business disallowance - administration expenses - allocation of expenses - royalty income on sale of Horlicks - Deduction u/s 80HHC - claimed deduction u/s 43B - difference of excise duty paid on closing stock and embedded in the opening stock - Exporter - Refunds - Interest on excess - HELD THAT - The conclusion of CIT(A) that 'level of effort' factor cannot be validly applied for taxation or even accounting purposes, in our view, is without any basis. The finding that the assessee and SBCH were not working at arm's length is again not sustainable and in any event not a relevant consideration to disallow expenditure. The Revenue if it wants to disallow an expenditure on the ground that it is excessive or unreasonable having regard to FMV of the goods, services or facilities for which the payment is made and the legitimate needs of the business of an assessee or the benefit derived or accruing to an assessee has to establish that the person to whom the payment is made is a person falling within the provisions of s. 40A(2)(b). Admittedly, SBCH, the recipient, is not a person falling within the ambit of provisions of s. 40A(2)(b) of the Act. Therefore, the finding with regard to the dealings between assessee and SBGH not being at arm's length is neither correct nor sustainable and was irrelevant while sustaining disallowance made by the AO. The fact that the recipient viz., SBCH had duly shown the sums received from the assessee as its receipts is also not in dispute. In such circumstances, we are of the view that disallowance of expenses was not warranted. The allegation against the assessee that the charges paid by the assessee to SBGH was excessive is without any basis. We, therefore, conclude that none of the reasons assigned by the CIT(A) to conclude that the decision of the Tribunal for asst. yrs. 1998-99 and 1999-2000 is not applicable to the facts as it existed in asst. yr. 2001-02 can be sustained and, therefore, the said decision of Tribunal will apply to this assessment year i.e., the asst. yr. 2001-02 also. Respectfully following the order of the Tribunal, we direct that the disallowance of expenses made by the AO and sustained by the CIT(A) should be deleted and same is directed to be deleted. Grounds asst. yr. 2001-02 are allowed. In the present case, the assessee has made a claim for deduction which was in conformity with a view accepted by the Hon'ble Gujarat High Court in the case of Lakhanpal National Ltd 1986 (3) TMI 42 - GUJARAT HIGH COURT . The AO had placed reliance on the decision of the Hon'ble Supreme Court in the case of Berger Paints 2004 (2) TMI 4 - SUPREME COURT wherein it had held that excise duty was to be included in the valuation of closing stock of finished goods. The AO has overlooked the fact that by including the excise duty in the valuation of the closing stock, deduction for the said duty is not allowed to that extent as required u/s 43B of the Act. The disallowance made by the AO and confirmed by the CIT(A) cannot be sustained and is, therefore, directed to be deleted. Ground are allowed. Deduction u/s 80HHC - From a reading of Expln. (baa) of s. 80HHC provisions, it is clear that royalty income is not income of the nature of brokerage, commission, interest, rent or charges. The royalty income is clearly in the nature of profits and gains of business. The royalty income is not receipt of a similar nature as that of brokerage, commission, etc. The expression of any other receipt of a similar nature occurring in cl. (1) of Expln. (baa) has to be construed ejusdem generis with the words appearing immediately preceding that expression. The plea of the assessee also finds support from the decision of the Hon'ble Bombay High Court in the case of CIT vs. Bangalore Clothing Co. 2003 (1) TMI 89 - BOMBAY HIGH COURT and the Delhi Bench of the Tribunal in the case of Smt. Sujatha Grover vs. Dy. CIT 2001 (11) TMI 232 - ITAT DELHI-E . The action of the Revenue authorities in excluding 90 per cent of royalty income cannot, therefore, be sustained. The AO is, therefore, directed to recompute the income u/s 80HHC by considering the royalty income as profits of the business. Interest u/s 234D - The learned counsel for assessee submitted that the provisions of s. 234D do not apply to assessment year in question especially when the amount of refund had been granted earlier to1st June, 2003. The learned Departmental Representative submitted charging of interest u/s 234D is compensatory and the provisions of s. 234D are clarificatory and, therefore, applicable retrospectively. According to the learned Departmental Representative, the provisions being purely procedural and machinery provisions can be applied to pending assessment proceedings. In our view, the law dealing with imposition of interest is substantive and not procedural law and, therefore, interest u/s 234D cannot be charged in respect of assessment years prior to coming into force of these provisions. The levy of interest u/s 234D is, therefore, directed to be deleted. The 5th ground of appeal of the assessee is allowed. In the result, both the appeals are partly allowed.
Issues Involved:
1. Disallowance of administrative expenses. 2. Deduction of excise duty under Section 43B. 3. Disallowance of consumer product research expenses. 4. Disallowance of research and product development expenses. 5. Allocation of administrative expenses for Section 80HHC deduction. 6. Exclusion of royalty income from business profits for Section 80HHC. 7. Charging of interest under Section 234D. Detailed Analysis: 1. Disallowance of Administrative Expenses: The primary issue was the disallowance of administrative expenses paid by the assessee to SBCH. The appellant claimed administrative expenses based on a formula suggested by PWC, which was previously accepted by the Tribunal for assessment years 1998-99 and 1999-2000. The Tribunal found that the method of allocation suggested by PWC was scientific and bona fide. The Revenue's disallowance was not justified as the method was based on a valid report by a reputed firm. The Tribunal directed the deletion of the disallowance for both assessment years 2000-01 and 2001-02, following its earlier decisions. 2. Deduction of Excise Duty under Section 43B: The assessee claimed deduction of excise duty on closing stock under Section 43B. The AO disallowed it, arguing it resulted in double deduction. The Tribunal, referencing the Gujarat High Court's decision in Lakhanpal National Ltd. and other cases, held that Section 43B allows deduction of statutory liabilities in the year of payment, overriding the method of accounting. The Tribunal directed the deletion of the disallowance. 3. Disallowance of Consumer Product Research Expenses: The AO disallowed 4/5th of the consumer product research expenses, treating it as capital expenditure. The Tribunal noted that similar issues were remanded for fresh adjudication in earlier years, directing the AO to reconsider the nature and impact of the expenditure vis-a-vis the running of the existing business in light of Section 37 of the Act. 4. Disallowance of Research and Product Development Expenses: The AO treated research and product development expenses as capital expenditure. The Tribunal, following its earlier decision, remanded the issue for fresh consideration, directing the AO to reassess the nature of the expenditure. 5. Allocation of Administrative Expenses for Section 80HHC Deduction: The AO allocated the entire administrative expenses in the ratio of export turnover to total turnover for computing deduction under Section 80HHC. The Tribunal held that only indirect costs attributable to the export of trading goods should be allocated, not all indirect costs. The AO was directed to recompute the deduction, excluding expenses not related to the export of trading goods. 6. Exclusion of Royalty Income from Business Profits for Section 80HHC: The AO excluded 90% of the royalty income by applying Explanation (baa) to Section 80HHC. The Tribunal held that royalty income is not similar to brokerage, commission, etc., and should be considered as profits of the business. The AO was directed to include royalty income in the computation of business profits for Section 80HHC. 7. Charging of Interest under Section 234D: The AO charged interest under Section 234D for excess refund granted. The Tribunal held that Section 234D, effective from 1st June 2003, does not apply retrospectively to refunds granted before this date. The levy of interest under Section 234D was directed to be deleted. Conclusion: The Tribunal allowed the appeals partly, directing the deletion of disallowances and remanding certain issues for fresh consideration by the AO, in line with its earlier decisions and judicial precedents.
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