2024 (6) TMI 353 - AT - Income Tax

Correct head of income - Compensation received from RDG in out of court settlement - business income OR capital gains - HELD THAT - We are of the considered view that answer to questions framed is compensation received by the assessee from RDG in out of court settlement is a business income and not an income assessed to capital gains as claimed by the assessee and as such provisions contained u/s 28(ii)(c) r.w.s. 28(va)(a) are attracted. Hence, CIT(A) has rightly confirmed the addition as business income. Consequently ground No.1 is determined against the assessee. Addition on account of recalculation of capital gain on sale of Flat at Malbar Hill - computing the cost of acquisition - HELD THAT - Admittedly for the year under consideration the AO did not have the power to refer the matter for valuation to the Department Valuation Officer (DVO) rather he was having the power under section 50A of the Act to refer the case to the valuation officer in case the valuation adopted by the assessee was lower than the fair market value. But at the same time section 50A of the Act inserted by Finance Act, 2012 is prospective in nature as has been held by Hon ble Jurisdictional High Court in case of CIT vs. Pooja Print 2014 (1) TMI 764 - BOMBAY HIGH COURT So in view of the matter, we are of the considered view that the AO has no power to replace the valuer s opinion which is based upon facts and data available in public domain, with its own opinion, hence addition made by the AO and confirmed by the Ld. CIT(A) is ordered to be deleted. Disallowance of payments made to Piramal Enterprises Ltd (PEL) u/s 40A(2)(b) - disallowance on account of royalty and professional/management services on the ground that these payments are unreasonable, excessive and services are general in nature - AO has disallowed the royalty @ 0.2% of the turnover and 25% of the other fees paid on ad-hoc basis - HELD THAT - These payments have been made by the assessee in accordance with the agreement which is continuing since 1995. Services rendered have been duly described in the agreement available - The Tribunal passed order in favour of the assessee in its own case for A.Y. 2008-09 2018 (7) TMI 1887 - ITAT MUMBAI of the case law paper book qua payment of royalty to NPIL @ 0.5% of the turnover of the NPIL.So by following the order passed by the co-ordinate Bench of the Tribunal (supra) issue as to the payment of royalty is decided in favour of the assessee and the disallowance made by the AO and confirmed by the Ld. CIT(A) is ordered to be deleted. Payment of consultancy and professional charges made by the assessee to the NPIL and disallowance thereof made by the AO @ 25% - Findings to be complied with by the AO are qua disallowance of 25% of the consultancy and professional charges because issue as to the royalty has already been decided in favour of the assessee by the Tribunal vide order (supra). So the AO is directed to verify it and decide after providing opportunity of being heard to the assessee within a period of six months after receipt of the order. Ground is partly allowed in favour of the assessee. Disallowance of legal and professional charges incurred for system development - Addition made as same is towards purchase of software and as such capital in nature - HELD THAT - CIT(A) has partly decided the issue in favour of the assessee and also issued directions to the AO to verify the facts and allow the expenses if the same are made towards maintenance, however with respect to the other expenses the same is to be capitalized and depreciation @ 25% is to be ordered allowed. The assessee has not specifically challenged the allowance to the tune of 25% of other expenses restricted by the Ld. CIT(A). So far as remaining maintenance expenses are concerned, the AO has been directed to verify the facts and maintenance charges claimed by the assessee are concerned, the AO has been directed to verify and allow the same being in the nature of revenue expenses. In these circumstances we direct the AO to decide the maintenance charges claimed by the assessee after due verification as per directions given by the Ld. CIT(A) within six months from the date of receipt of the order. Disallowance of deduction u/s 35(2AB) and u/s 35(1)(iv) in respect of Chennai unit - HELD THAT - We have perused the order for A.Y. 2008-09 2018 (7) TMI 1887 - ITAT MUMBAI which is qua the identical issue of the co-ordinate Bench of the Tribunal restored the issue back to AO as held approval by the competent authority in Form no.3CM is mandatory for claiming deduction under section 35(2AB) of the Act. The same view has also been expressed in Vivimed Labs Ltd 2016 (2) TMI 418 - ITAT HYDERABAD However, considering the contention of the learned Sr. Counsel that the assessee has applied for approval in Form no.3CM which is still pending, we are inclined to restore the issue to the Assessing Officer for providing an opportunity to the assessee to furnish the approval of the competent authority in the prescribed manner for claiming deduction under section 35(2AB) of the Act. Thus ground is allowed for statistical purposes. Disallowance of depreciation on capital expenses of R D unit - depreciation claimed by the assessee on opening WDV of computer software - HELD THAT - Since the AO has followed his finding returned on this issue of A.Y. 2004-05 which has been overturned by the Tribunal by directing the AO to consider software and computer as one block the issue is remitted back to the AO to decide within six months from the receipt of copy of order as per findings returned by the Tribunal in assessee s own case for A.Y. 2004-05 2022 (6) TMI 1460 - ITAT MUMBAI Accordingly, ground Nos.8 9 are determined in favour of the assessee for statistical purposes. Recomputing the value of closing stock - addition of net unutilized modvat credit in closing stock - HELD THAT - . We have perused the order passed by the Tribunal in assessee s own case for A.Y. 2002-03 2020 (4) TMI 812 - ITAT MUMBAI wherein as held it is the claim of the assessee that the impact of grossing up of tax, duty, cess etc. by restating the values of purchases and inventories by inter alia including the effect of CENVAT credit will be Nil, subject to Sec. 43B that the duty, taxes, cess etc. is paid before the due date‟ of filing of the return of income. As the ld. D.R had submitted that the aforesaid working of the assessee would require to be verified, we therefore, in all fairness restore the matter to the file of the A.O for readjudication. Needless to say, the A.O shall in the course of the set aside proceedings afford a reasonable opportunity of being heard to the assessee, who shall remain at a liberty to substantiate its claim before him. Ground is allowed for statistical purposes. Addition on account of insurance claim received during the year - assessee has made a claim with the insurance company on the basis of insurance cover purchased by it in respect of its corporate office where fire took place - HELD THAT - All the four policies purchased by the assessee was for plant machinery. The Ld. A.R.s for the parties to the appeals unanimously contended that the issue be remitted back to the AO to decide afresh on verifying the actual loss incurred by the assessee due to accidental fire. In view of the matter for cause of substantive justice the issue is remitted back to the AO to decide afresh within six months from the date of receipt of the order on filing actual loss suffered due to accidental fire Capital Gain on sale of RP House property on protective basis - assessee contended that the assessee has transferred house property namely RP house over a period of four years and offered the capital gain to tax over the respective period whereas the AO has assessed the entire amount in A.Y. 2002-03 - HELD THAT - We have perused the order passed by the Tribunal in assessee s own case for A.Y. 2002-03 2020 (4) TMI 812 - ITAT MUMBAI wherein the Tribunal has ordered that capital gain on sale of RP house is to be taxed over four years. So in view of the matter ground has become infructuous. Correct head of income - Treating Rental Income from RPIL House as Income from other sources or income from house property - HELD THAT - Accordingly following the order passed by the co-ordinate Bench of the Tribunal on the identical issue in for A.Y. 2003-04 2021 (10) TMI 505 - ITAT MUMBAI 2004-05 2022 (6) TMI 1460 - ITAT MUMBAI .AO is directed to assess the rental income of let out portion of RP house as income from house property. This ground is decided in favour of the assessee. Taxability of gain on repayment of Sales Tax Deferral Loan - AO has not considered the claim made by the assessee that gain on repayment of sale tax differential loan as capital receipt on the ground that no fresh claim can be made by the assessee except by filing revised return - HELD THAT - Where the assessee has made premature payment of deferred sales tax at present value of certain amount against the total liability as in the instant case, and credited balance amount to its capital reserve account, the said credited amount was a capital receipt. In view of the matter the Ld. CIT(A) has erred in treating the receipt as revenue receipt. The AO is accordingly directed to treat the same as capital receipt. Accordingly ground is decided in favour of the assessee. Deduction u/s 35A of the Act has been allowed, applying the rule of consistency also assessee's claim of deduction in the impugned assessment year cannot be disallowed. Deduction u/s 80HHC for the purpose of section 115JB to be worked out on the basis of adjusted book profit following the decision of DCIT vs. Syncom Formulations (I) Ltd 2007 (3) TMI 288 - ITAT BOMBAY-H Special Bench of the Tribunal in the case (supra) while allowing the deduction under section 115JB held that deduction under section 80HHC should be based on amount eligible as per books of account and not based on amount of deduction under section 80HHC under chapter VI-a while computing normal income.

Summary

Issues Involved:
1. Taxability of compensation received on termination of agreement.
2. Recalculation of capital gain on sale of flat.
3. Disallowance of payments made to Piramal Enterprises Ltd. (PEL) u/s 40A(2)(b).
4. Disallowance of legal and professional charges incurred for system development.
5. Disallowance of advertising and business promotion expenses.
6. Disallowance of deduction u/s 35(2AB) and u/s 35(1)(iv) in respect of Chennai unit.
7. Disallowance of depreciation on capital expenses of R&D unit.
8. Disallowance of depreciation on opening WDV of computer software.
9. Disallowance of depreciation on additions to computer software.
10. Addition on account of increase in the value of closing stock.
11. Addition on account of insurance claim received during the year.
12. Capital Gain on sale of RP House property.
13. Depreciation on RP House Property building.
14. Treating Rental Income from RPIL House as "Income from other sources".
15. Taxability of gain on repayment of Sales Tax Deferral Loan.

Summary:

Issue 1: Taxability of Compensation Received on Termination of Agreement
The Tribunal upheld the decision of the AO and CIT(A) that the compensation of Rs. 92,76,62,688/- received by the assessee from Roche Diagnostics Gmbh (RDG) is taxable as "Business Income" u/s 28(ii)(c) read with section 28(va)(a) of the Income-tax Act, 1961, and not as "Long Term Capital Gain" u/s 45(1).

Issue 2: Recalculation of Capital Gain on Sale of Flat
The Tribunal deleted the addition of Rs. 2,98,680/- made by the AO and upheld by the CIT(A), noting that the AO has no power to replace the government-approved valuer's opinion with his own.

Issue 3: Disallowance of Payments Made to PEL u/s 40A(2)(b)
The Tribunal upheld the payment of royalty to NPIL but directed the AO to verify and decide on the consultancy and professional charges after providing the assessee an opportunity of being heard.

Issue 4: Disallowance of Legal and Professional Charges Incurred for System Development
The Tribunal directed the AO to verify the maintenance charges claimed by the assessee and allow them as revenue expenses, while other expenses were to be capitalized and depreciation allowed.

Issue 5: Disallowance of Advertising and Business Promotion Expenses
The assessee did not press this ground, and it was dismissed.

Issue 6: Disallowance of Deduction u/s 35(2AB) and u/s 35(1)(iv) in Respect of Chennai Unit
The Tribunal restored the issue to the AO to allow the deduction after verifying the approval in Form No.3CM and providing an opportunity of being heard to the assessee.

Issue 7: Disallowance of Depreciation on Capital Expenses of R&D Unit
The Tribunal directed the AO to decide this issue in light of the findings on Issue 6.

Issue 8: Disallowance of Depreciation on Opening WDV of Computer Software
The Tribunal remitted the issue back to the AO to decide as per the findings in the assessee's own case for A.Y. 2004-05.

Issue 9: Disallowance of Depreciation on Additions to Computer Software
Similar to Issue 8, the Tribunal remitted the issue back to the AO for reconsideration.

Issue 10: Addition on Account of Increase in the Value of Closing Stock
The Tribunal remitted the issue back to the AO to decide in light of the directions issued by the Tribunal in the assessee's own case for A.Y. 2009-10.

Issue 11: Addition on Account of Insurance Claim Received During the Year
The Tribunal remitted the issue back to the AO to decide afresh after verifying the actual loss incurred by the assessee due to accidental fire.

Issue 12: Capital Gain on Sale of RP House Property
The Tribunal noted that this ground has become infructuous in view of the order passed in the assessee's own case for A.Y. 2002-03.

Issue 13: Depreciation on RP House Property Building
The Tribunal directed the AO to verify and allow depreciation on the portion of the building not considered transferred during the year under consideration.

Issue 14: Treating Rental Income from RPIL House as "Income from Other Sources"
The Tribunal directed the AO to assess the rental income as "Income from House Property" following the order in the assessee's own case for A.Y. 2003-04 & 2004-05.

Issue 15: Taxability of Gain on Repayment of Sales Tax Deferral Loan
The Tribunal directed the AO to treat the gain on repayment of sales tax deferral loan as a capital receipt, not chargeable to tax, following the decision of the Hon'ble Jurisdictional High Court in CIT vs. Suzler India Ltd.

Revenue's Appeal:
The Tribunal dismissed all grounds raised by the Revenue, including issues related to depreciation on assets of BMIL, rental income from the property located in Centre Point, deduction u/s 35A, and deduction u/s 80HHC for the purpose of section 115JB.

Final Order:
The appeal filed by the assessee (ITA No. 3706/M/2010) was partly allowed, and the appeal filed by the Revenue (ITA No. 5091/M/2010) was dismissed.