2006 (11) TMI 272 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of depreciation on assets transferred to the Clutch Unit.
2. Disallowance of royalty payments.
3. Restriction of deduction u/s 80HH.
4. Inclusion of excise duty, sales-tax, and scrap sales in total turnover for computing relief u/s 80HHC.
5. Exclusion of 90% of interest, rent, and other income for computing relief u/s 80HHC.
6. Deletion of addition for expenditure on consultancy, training, and structural changes.

Summary:

Ground No. (1): Disallowance of Depreciation on Assets Transferred to the Clutch Unit
The assessee transferred the Clutch Unit to its subsidiary and claimed depreciation on these assets. The AO disallowed the depreciation, noting that the sale consideration was not credited to the block of assets. The CIT(A) confirmed the disallowance, and the Tribunal upheld this decision, stating that the assessee cannot claim depreciation on assets no longer owned or used for business purposes, as per s. 32 and s. 43(6).

Ground No. (2): Disallowance of Royalty Payments
The AO disallowed Rs. 2,29,500 of royalty payment due to late TDS payment and Rs. 20,000 for royalty on trademark as capital expenditure. The CIT(A) confirmed the disallowance, and the Tribunal upheld this decision, citing non-compliance with r. 30 r/w s. 40(a)(i) and the capital nature of the trademark royalty.

Ground No. (3): Restriction of Deduction u/s 80HH
The AO excluded interest receipts and other items from the deduction u/s 80HH, which was confirmed by the CIT(A). The Tribunal upheld this decision, referencing the Supreme Court's ruling in Pandian Chemicals Ltd. vs. CIT, which states that such income is not derived from the industrial undertaking.

Ground No. (4): Inclusion of Excise Duty, Sales-Tax, and Scrap Sales in Total Turnover for Computing Relief u/s 80HHC
The Tribunal directed the AO not to include excise duty and sales-tax in the total turnover for computing relief u/s 80HHC, following the jurisdictional High Court's decision in CIT vs. Sundaram Fasteners Ltd. However, scrap sales were to be included in total turnover and business profits, as per the Chennai Bench's decision in Jt. CIT vs. Virudhunagar Textiles Mills Ltd.

Ground No. (5): Exclusion of 90% of Interest, Rent, and Other Income for Computing Relief u/s 80HHC
The AO excluded various incomes from business profits for deduction u/s 80HHC. The CIT(A) directed the AO to exclude only 90% of net interest and examine other items. The Tribunal, referencing CIT vs. V. Chinnapandi, held that 90% of gross interest and rent must be excluded from business profits for deduction u/s 80HHC, and upheld the CIT(A)'s remittance of other items to the AO.

Ground No. (6): Deletion of Addition for Expenditure on Consultancy, Training, and Structural Changes
The AO treated the expenditure as capital in nature, but the CIT(A) allowed it as revenue expenditure. The Tribunal confirmed the CIT(A)'s decision, referencing its earlier ruling in Rane Madras Ltd., stating that such expenditures are revenue in nature.

Conclusion:
The appeals by the assessee and the Revenue were partly allowed, with specific directions provided for each ground.