2024 (5) TMI 833 - AT - Income Tax

Nature of expenses - Expenditure on registration of new and existing patents - revenue or capital - HELD THAT - The existing patents were registered in order to protect the assessee s interest in the said patents so that there is no infringement patents from any quarters. Similarly new patents were registered by the assessee to ensure the same are not used by any third party without any authorization and therefore these expenses has also been incurred by the assessee in order to protect the business interest. In our opinion, both these expenses were wholly and exclusively incurred for the purpose of business and are allowable u/s 37 of the Act. We are unable to understand as to how the expenses were split into relating to existing and new patents. See DALMIA JAIN AND COMPANY LIMITED VERSUS COMMISSIONER OF INCOME-TAX, BIHAR AND ORISSA 1971 (7) TMI 2 - SUPREME COURT . Thus the registration expenses incurred on the existing as well as new patents are wholly and exclusively incurred for the purpose of business and are revenue in nature. Decided in favour of assessee. TDS u/s 195 - non-deduction of tax at source u/s 40(a)(i) - payment made to the foreign parties for procurement and marketing of export orders - HELD THAT - Commission in the hands of foreign agents are not liable to tax in India as the same was paid in India in respect of services rendered abroad to non-resident commission agents. The case of the assessee finds support from the decision of Hon ble Apex Court in the case of GE India Technology Cen. Pvt. Ltd. 2010 (9) TMI 7 - SUPREME COURT as held that if the sum payable to the non-resident is not chargeable to tax in India , the payer is not liable to deduct tax at source as per Section 195 of the Act at the time of making the payment and therefore there is no question of invoking the provisions of Section 40a(i) of the Act. As perused the provisions of Section 9(1)(i) of the Act which deals with the income accruing or arising through or from any business connection in India which shall be deemed to accrue and arise in India. Further explanation (i) to Section9(1)(i) provides for income deemed to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. But in the present case, it is not in dispute that non-resident commission agents did not carry out any activity in India and the entire services by such agents were provided abroad Thus provisions of section 195 are not applicable to the assessee and therefore there no need for deduction of tax at source from payments made to foreign commission agents. Ground no. 2 accordingly is allowed. Addition u/s 40(a)(ia) on payments made to foreign parties for various services rendered - HELD THAT - We find that the assessee has not furnished the details/evidences before the authorities below and has harped on the issue that TDS Wing of International Taxation Department has examined these remittances in the light of various evidences furnished by the assessee and also relevant DTAA and having satisfied as to non deduction of TDS has not initiated any action u/s 201 of the Act. Therefore according to the assessee there is no default u/s 195 of the Act and no disallowance u/s 40a(i) could be made. We note that the assessee has made remittances to 8 foreign parties which need to be examined at the level of the AO in the light of DTAAs and ascertain whether the assessee is covered under the Treaties. Needless to mention that if the AO can also find out about the examination by the TDS Wing of International taxation Department to the effect of non applicability of TDS u/s 195 of the Act then all these expenses are to be allowed. Accordingly we restore this issue to the file of AO to examine and decide accordingly. The ground no. 3 is allowed for statistical purpose. Nature of receipt - liquidated damages - as per assessee these liquidate damages received by way of compensation for delay in the delivery and installation of plant and machineries/construction of building and they are to be treated as capital receipts and not liable to tax - AO held that these damages received has no nexus with the cost of fixed assets and cannot be said to have any relation to capital asset owned by the assessee and thus constitute a regular nature of business income - HELD THAT - The liquidated damages does not fall within the ambit of cost of assets met by any other person as these were not intended to the subsidize the cost of assets but on account of failure of the suppliers for delay in delivery/installation /completing construction of capital asset within the stipulated time. Besides the written down value is defined u/s 43(6)(c ) of the Act as the value to be computed only in the manner provided thereunder i.e. value computed by adding actual cost of assets falling within the block of assets acquired during the previous year or deducting the money payable in respect of any asset within the block which is sold, discarded or demolished or destroyed during the previous year together with the amount of the scrap value. The Act does not contemplate any other adjustment for computing the written down value such as liquidated damages of the block of assets. See Alpha Lab vs. ITO 2016 (6) TMI 560 - GUJARAT HIGH COURT wherein as affirmed the view taken by the tribunal, we are inclined to hold that liquidated damages are capital receipts not to be reduced from the cost of fixed assets. Accordingly ground no. 4 by the assessee is allowed. Disallowance u/s 14A r.w.r. 8D(2)(iii) - suo-motto disallowance made by assessee - assessee invested surplus fund generated from business activities in shares and securities and thus derived income by way of dividend and tax free interest - HELD THAT - Non-maintenance of separate books of account evidencing expenditure incurred in relation to non-taxable income cannot be a ground to reject the assessee apportionment of expenditure incurred in relation to exempt income. In the present case before us we are quite convinced with the calculation furnished by the assessee which worked out the expenditure u/s 14A read with Rule 8D(2)(iii) at Rs. 45,14,500/- and is a reasonable disallowance u/s 14A read with Rule 8D(2)(iii). This is line with the decision of the Coordinate bench in the case of M/S Ultratech Cement Ltd 2017 (12) TMI 1134 - ITAT MUMBAI . Accordingly we set aside the order of Ld. CIT(A) and direct the AO to restrict the disallowance of Rs. 45,14,500/-. Needless to say that the above disallowance come down based upon the stocks/securities yielding dividend income and hence the amount calculated of Rs. 45,14,500/- is less than the suo-motto disallowance in which the assessee has considered the securities yielded exempt income as well as those securities not yielding any income during the year. Adjustment of interest payment on income tax dues against the interest received on income tax refund - HELD THAT - As decided in the assessee s own case 2018 (11) TMI 1611 - ITAT KOLKATA wherein the decision of Bank of America 2014 (12) TMI 551 - BOMBAY HIGH COURT as followed, thus held the interest received on income tax refund and the interest paid on delayed payment of income tax both have the same character and as such if the interest received from the tax department exceeds the interest paid, then only net amount could be taxed. Accordingly ground no. 8 raised by the assessee is allowed. Issue raised for the first time before the Tribunal - Deduction of employees compensation cost on account of Employee Stock Option Plan (ESOP) - HELD THAT - As in assessee s own case in AY 2009-10 2018 (11) TMI 1611 - ITAT KOLKATA to hold that if a claim which is available in law is not raised either inadvertently or an account of erroneous plea of complex legal position, such a relief cannot be shut up for all the times to come merely because it is raised for the first time in appellate proceedings in absence of a revised return filed before the AO. We therefore accept assessee s instant additional ground in principle and leave it open for the AO to verify all the relevant facts as per law after affording adequate opportunity of hearing in consequential proceedings - Thus we admit the issue which is admittedly and undoubtedly allowable to the assessee and restore the same for adjudication before the AO after doing verification of the facts. Unexpired discounts on forward contract - assessee entered into forward exchange contract for hedging currency related risk in connection with various foreign currency exposure like import of raw materials, export of finished products etc - CIT(A) deleted addition - HELD THAT - We find that the assessee has been regularly following these contracts accounting standard 11 (AS-11) qua the premium/discount on forward exchange contracts over the period of contract in line with the principles of accrual and mercantile system of accounting and in line with the requirement of AS-11. The unexpired discount in respect of the period /of the forward contracts which fell in the subsequent year was not accounted for in the books in FY 2009-10 but was recognized /credited in the profit and loss account in the subsequent year i.e. FY 2010-11 and similar accounting as regards forward contracts was followed in the subsequent assessment years and the amount offered as premium/claimed as discount have been duly considered while assessing the income of the assessee. As decided in Woodward Governor India (P) Ltd. 2009 (4) TMI 4 - SUPREME COURT wherein it has been held that in absence of any provision to the contrary, the accounting standard have to be followed for ensuring that books are prepared in accordance with accounting standard/ principles Thus. we are inclined to uphold the order of Ld. CIT(A) and direct the AO to delete the addition. Accordingly ground no. 1 raised by the revenue is dismissed. Addition on account of marked to market loss on forward contracts - AO while relying upon CBDT s Instruction No. 3/2010 dated 28.09.2010 disallowed the loss on account of market to market revaluation on the ground that the said loss is notional and contingent in nature - CIT(A) deleted addition - HELD THAT - we observe that the claim of marked to market loss is allowable business expenditure and a settled issue the Hon ble Supreme Court in the case of CIT vs. Woodward Governor India (P) Ltd. 2009 (4) TMI 4 - SUPREME COURT and ONGC Ltd 2010 (3) TMI 81 - SUPREME COURT - AO has simply made the disallowance by following CBDT Instruction No. 3/ 2010 dated 28.09.2010 which in our opinion is not binding on appellate authorities particularly in case the deduction is allowable in line with the provisions of the Act and in view of the decisions of judicial forum - Decided against revenue. Nature of expenses - design charges - revenue or capital - HELD THAT - We find that in the remand report the AO has not objected the nature of expenses but simply stated that the expenses has resulted into in the benefit of capital in nature. We note that the Ld. CIT(A) has allowed the appeal by recognizing the fact that expenses has been charged to profit and loss account based on the existing accounting standard and by recording a finding that similar expenses have been allowed in preceding assessment years - Decided against revenue. Nature of expenses - revenue or capital - information technology expenses - HELD THAT - These expenses were incurred to maintain the information technology assets and related consumables and were paid to various parties. Case of the assessee finds support from the decision of Hon ble Apex Court in the case of Empire Jute Co. Ltd. 1980 (5) TMI 1 - SUPREME COURT wherein as held that if the advantage consists merely in facilitating the assessee s trading operations or enabling the management and conduct of the assessee s business to be carried on more efficiently or more profitably, while leaving the fixed capital untouched, the expenditure would be of revenue account, even though the advantage may endure for an indefinite future. Decided against revenue. Addition of advances written off - CIT(A) deleted addition - HELD THAT - We note undisputedly these advances were given to the farmers against supply of materials/crops which could not be adjusted due to failure of crop or quality issues. In our opinion these advances were undoubtedly given in the ordinary course of business and has rightly been allowed by the CIT(A). Accordingly we dismiss ground no. 6 raised by the revenue by upholding the order of Ld. CIT(A). Double deduction claimed in respect of excise duty on closing stock - As per AO when the excise duty included in closing stock is already profit neutral then the additional claim of deduction in respect of excise duty on closing stock amounts to double deduction - HELD THAT - As we find that the issue has been decided by the Hon ble Calcutta High Court in the assessee s own case 2021 (7) TMI 1453 - CALCUTTA HIGH COURT and 2019 (6) TMI 1723 - CALCUTTA HIGH COURT we are inclined to dismiss the ground raised by the revenue by upholding the order of Ld. CIT(A). Bogus purchases - CIT(A) deleted addition - HELD THAT - As assessee has purchased petty gift items such as key chain-cum- torch from Heta Sales Pvt. Ltd. and duly furnished the details comprising number of goods received, copies of invoices and delivery challans, photograph of the products purchased which were given as free along with Food products, copies of bank statements reflecting the payment made. Similarly the assessee has purchased Rangoli powder for internal use from M/s Sambhav Traders of Rs. 731/- qua which the receipt was produced before the AO - considering the volume of operation and the documents placed on record, the addition with reference to Investigation Wing report without carrying on any further investigation by the AO is unreasonable and was rightly deleted by the Ld. CIT(A) - Decide against revenue. Deduction u/s 80IA - captive power plant - AO denied claim as units in respect of which deduction had been claimed by the assessee were not separate undertakings and that the notional profit from such undertakings had not been included in the profit and loss account of the assessee - CIT(A) allowed the appeal of the assessee - HELD THAT - We note that the issue has been settled in assessee s own case for AY 2007-08 2016 (3) TMI 1005 - ITAT KOLKATA by the Hon ble Calcutta High Court as well as by the Co-ordinate Bench in AY 2007-08, 2008-09 and 2009-10. Now the issue of CCP has been finally settled by the Hon ble Apex Court in the case of CIT Vs M/S Jindal Steel Power Ltd 2023 (12) TMI 417 - SUPREME COURT . Accordingly the issue is squarely covered in favour of the assessee and the ground raised by the revenue is dismissed by upholding the order of ld. CIT(A). Characterization of receipts - Income from sale of carbon credit units - capital receipt or regular business income -HELD THAT - Considering the decision of the Hon ble High Courts My home Power Limited 2014 (6) TMI 82 - ANDHRA PRADESH HIGH COURT , Subhash Kabini Power Corporation Ltd 2016 (5) TMI 793 - KARNATAKA HIGH COURT and Co-ordinate Bench in assessee s own case 2018 (11) TMI 1611 - ITAT KOLKATA we are inclined to hold that the sale of carbon credit units is a capital receipt and is not taxable.

Summary

Issues Involved:
1. Disallowance of expenses for registration of patents.
2. Disallowance for non-deduction of tax at source u/s 40a(i).
3. Disallowance u/s 40a(ia) for payments to foreign parties.
4. Taxability of liquidated damages.
5. Disallowance u/s 14A read with Rule 8D.
6. Adjustment of interest on income tax dues against interest on income tax refund.
7. Deduction of employees compensation cost on account of ESOP.
8. Addition on account of unexpired discounts on forward contracts.
9. Addition of marked to market loss on forward contracts.
10. Addition of design charges as capital expenditure.
11. Addition of information technology expenses as capital expenditure.
12. Addition of advances written off.
13. Addition for double deduction of excise duty on closing stock.
14. Addition for bogus purchases.
15. Deduction u/s 80IA for captive power plant.
16. Taxability of income from sale of carbon credit units.

Summary of Judgment:

1. Disallowance of expenses for registration of patents:
The Tribunal held that the expenses incurred for registration of both existing and new patents are wholly and exclusively for business purposes and are allowable u/s 37 of the Act. Consequently, the disallowance of Rs. 27,095/- for new patents was deleted, and the appeal of the assessee was allowed while the revenue's appeal was dismissed.

2. Disallowance for non-deduction of tax at source u/s 40a(i):
The Tribunal found that the commission paid to foreign agents for services rendered outside India is not chargeable to tax in India, and thus, no TDS was required u/s 195. The disallowance of Rs. 7,28,07,989/- was deleted, and the appeal of the assessee was allowed.

3. Disallowance u/s 40a(ia) for payments to foreign parties:
The Tribunal restored the issue to the AO for examination of the remittances in light of DTAA and verification of whether TDS was required. The appeal was allowed for statistical purposes.

4. Taxability of liquidated damages:
The Tribunal held that liquidated damages received for delay in supply/installation of capital assets are capital receipts and not taxable. The appeal of the assessee was allowed.

5. Disallowance u/s 14A read with Rule 8D:
The Tribunal directed the AO to accept the assessee's computation of disallowance on a pro-rata basis, considering only the investments yielding exempt income. The appeal of the assessee was allowed, and the revenue's appeal was dismissed.

6. Adjustment of interest on income tax dues against interest on income tax refund:
The Tribunal allowed the adjustment, following the decision in the assessee's own case and other precedents. The appeal of the assessee was allowed.

7. Deduction of employees compensation cost on account of ESOP:
The Tribunal restored the issue to the AO for verification of facts and allowed the appeal for statistical purposes.

8. Addition on account of unexpired discounts on forward contracts:
The Tribunal upheld the deletion of the addition, following the principles of accrual accounting and AS-11. The revenue's appeal was dismissed.

9. Addition of marked to market loss on forward contracts:
The Tribunal upheld the deletion of the addition, recognizing the loss as a deductible business expenditure. The revenue's appeal was dismissed.

10. Addition of design charges as capital expenditure:
The Tribunal upheld the deletion of the addition, recognizing the expenses as revenue in nature. The revenue's appeal was dismissed.

11. Addition of information technology expenses as capital expenditure:
The Tribunal upheld the deletion of the addition, recognizing the expenses as revenue in nature. The revenue's appeal was dismissed.

12. Addition of advances written off:
The Tribunal upheld the deletion of the addition, recognizing the advances as trade advances given in the ordinary course of business. The revenue's appeal was dismissed.

13. Addition for double deduction of excise duty on closing stock:
The Tribunal upheld the deletion of the addition, following the decision in the assessee's own case and other precedents. The revenue's appeal was dismissed.

14. Addition for bogus purchases:
The Tribunal upheld the deletion of the addition, recognizing the genuineness of the purchases based on the evidence provided. The revenue's appeal was dismissed.

15. Deduction u/s 80IA for captive power plant:
The Tribunal upheld the deduction, following the decision in the assessee's own case and other precedents. The revenue's appeal was dismissed.

16. Taxability of income from sale of carbon credit units:
The Tribunal held that the income from the sale of carbon credit units is a capital receipt and not taxable. The appeal of the assessee was allowed.

Conclusion:
The appeals of the assessee were partly allowed for statistical purposes, and the appeals of the revenue were dismissed.