2024 (9) TMI 270 - AT - Income Tax

Deduction u/s 80IB - assessee company owns an industrial unit in Belur, West Bengal - as per AO assessee had not maintained separate profit and loss account for the Belur unit and secondly, following the earlier year, he has held that global profit of the entire company should be applied on the profit of the Belur unit - HELD THAT - From the records it is seen that assessee had filed audit report in Form 10CCB which was part of the return of income. Auditor has duly verified the deduction u/s.80IB and profitability statement of the Belur unit was also filed before the ld. AO. Thus, in this year unlike in A.Y.2002-03, assessee did filed separate profit and loss account for the Belur unit duly certified by the Auditor in Form 10CCB. In A.Y 2001-02, this matter was remanded back to the ld. AO and as stated by the ld. Counsel, AO has accepted the profitability as shown by the assessee. Thus, the net profit of 11.66% of the turnover of the Belur unit is to be accepted and global profit cannot be applied. This principle has been upheld in the case of Delhi Press Patra Prakashan 2013 (6) TMI 71 - DELHI HIGH COURT wherein under similar facts, the AO had sought to impose the overall margin of the assessee s units (9.92% in that case) against the profit rate of 62.31% of the concerned unit declared by the assessee therein. The Hon ble High Court held that the assessee was entitled to a deduction u/s 80IA and 80IB of the Act on the profits of the concerned unit. It has been informed that the decision of the Tribunal for A.Y.2002-03 partially disallowing assessee s claim u/s.80IB which has been relied upon by the ld. CIT(A) has been subsequently set aside by the Hon ble Calcutta High Court and therefore, the stand taken by the CIT(A) now gets vitiated. Accordingly, the claim made by the assessee in the return of income which is as per the certificate in Form 10CCB is allowed in full. Deduction u/s 80HHC - AO has disallowed the claim as the assessee has received money from the sale of DEPB license - AO has relied on the retrospective amendment made in section 80HHC which denied deduction to company having export turnover in excess of Rs. 10 crores on account of sale of DEPB license - HELD THAT - We find that reliance placed by the AO and CIT(A) on the retrospective amendment has now been struck down in the case of Avani Exports 2012 (7) TMI 190 - GUJARAT HIGH COURT wherein as quash the impugned amendment only to this extent that the operation of the said section could be given effect from the date of amendment and not in respect of earlier assessment years of the assessees whose export turnover is above Rs.10 crore. The retrospective amendment should not be detrimental to any of the assessees. This judgment of the Hon ble Gujarat High Court has been affirmed by the Hon ble Supreme Court in the case of Commissioner of Income Tax v. Avani Exports 2015 (4) TMI 193 - SUPREME COURT . Hon ble Jurisdictional Bombay High Court in the case of Vijaya Silk House 2012 (9) TMI 263 - BOMBAY HIGH COURT has also held that retrospective amendment u/s 80HHC is ultra vires and invalid. Thus, exclusion of profit on sale of DEPB license from business profit for computation of deduction u/s 80HHC is not correct and the entire claim for deduction u/s 80HHC is held to be allowed because the sole basis for disallowance was retrospective amendment which has been quashed by the constitutional Courts. Assessee appeal allowed. Disallowance of deduction for commissions paid by the assessee - notice u/s.133(6) could not be served - HELD THAT - Simply because notice u/s.133(6) has not been served cannot be the ground when assessee has produced all the evidences and details before the ld. CIT(A) as additional evidence on which remand report has also been sought. Once there is no discrepancy found in the details and evidences filed, then as held by the Hon ble High Court disallowance cannot be made simply for non-service of notice u/s.133(6). No addition can be made simply by want of the confirmation from the parties and accordingly, deduction paid as commission is allowed. Nature of expenses - expenditure incurred on repairs and replacements of plant and machinery - revenue or capital expenditure - HELD THAT - Simply because assessee has capitalised expenditure in the books of accounts but later on in the computation has claimed it as revenue expenditure, then what is required to be seen is whether these falls in the ambit and scope of current repairs u/s. 31. As in the case of Saravana Spinning Mills (P) Ltd. 2007 (8) TMI 16 - SUPREME COURT held that u/s 31(i) of the Act, needs to be seen whether the expenditure incurred by the assessee is for current repairs . It is irrelevant to consider whether the expenditure is revenue or capital in nature. If this principle is to be followed, then, what is required to be seen what is the nature of repair and maintenance which neither the AO nor CIT(A) have analysed. Thus, from the perusal of the details as in the paper book, it is seen that these are small repairs and replacement of part of plant and machinery which is to be allowed u/s. 31 of the Act irrespective whether it is a capital or Revenue in nature. Thus, AO is directed to examine the details - this ground is allowed subject to verification by the ld. AO. Claim of deduction of amount paid as service charges to BMCL - HELD THAT -If the services have been taken in the relevant assessment year, the charges paid by BMCL on this account as per case of PCIT v. M/s Merck Ltd. 2019 (9) TMI 1506 - BOMBAY HIGH COURT then same are allowable. Further here in this case, assessee not only received sundry managerial services from BMCL but also availed the services for which sample evidence of service has been furnished by way of additional evidence before us. Similar evidences were filed in AY 2004-05 wherein the First Appellate Authority had accepted the rendering of services and allowability of deduction after detailed examination of the evidences. Thus, for this year also, we hold that payment made to BMCL for rendering service cannot be disallowed by invoking Section 40A (2). Thus, we direct the AO to allow the payment made to BMCL for rendering of services. Claim of deduction of amount spent by the assessee as community development expenses - assessee has explained that the expenses were incurred for assistance with respect to drinking water supply, educational support etc. in the neighbouring areas of mine - AO disallowed the expenses treating it as donation in nature being not connected with business of the assessee - HELD THAT - This issue stands covered in the case of Madras Refineries Ltd. 2003 (11) TMI 47 - MADRAS HIGH COURT wherein under similar circumstances, the assessee therein had incurred community development expenses of the same nature, and the said expenses were finally held to be non-philanthropic in nature, incurred wholly for the purpose of business. Thus, we hold that expenses incurred of sundry development are treated as expenditure incurred wholly and exclusively for the purpose of business. Deduction of the entrance fees paid to clubs - As per the ld. CIT(A), the expense cannot fall in the category of an expenditure incurred wholly, necessarily and exclusively for the purpose of business - HELD THAT - As relying on Sayaji Iron Engg. Co 2001 (7) TMI 70 - GUJARAT HIGH COURT , Groz Beckert Asia Limited 2013 (2) TMI 375 - PUNJAB HARYANA HIGH COURT it cannot be said that the assessee s expenditure on subscription to the club for its employees is for the personal use. Instead, the welfare of the employees gained out of the said expense goes towards running the business of the assessee and producing business benefits. Thus, ground is allowed. Disallowing set off of short term capital loss on sale of investments against profit on sale of investments - applicability of provision of dividend stripping - HELD THAT - When original unit of K bond was sold, as per section 55(2)(aa), the cost of original unit remains the same at which the original units were acquired and sale of original units resulted in Loss CIT (A) has wrongly applied provision of dividend stripping contained in 94(7) on transaction in the nature of bonus stripping covered by section 94(8) which were not in existence in previous year 2002-03 - this matter should be restored back to the ld. AO to examine whether the losses of bonus stripping should be allowed as there is no application of section 94(8) in year under appeal. So far as loss on account of dividend striping is concerned, the ld. AO will examine the holding period of units and decide the issue to examine the issue of losses because Section 94(7) is not attracted due to adequate holding period. Accordingly, this ground is partly allowed for statistical purposes. Expenditure incurred on maintenance and depreciation of aircraft - trial run of machines - HELD THAT - As decided in Ashima Syntex Ltd. 2000 (8) TMI 22 - GUJARAT HIGH COURT wherein trial run of machines was held to be being used for the purpose of business as specified u/s 32 The trial run is held as use for the purpose of business, then the maintenance expenses should also be allowed as deductible. The assessee had also furnished flight details for the year under consideration which has been enclosed which clearly shows that it was a trial run and for training of the flights. Thus, depreciation and maintenance at the aircraft is held to be allowed. In the result, ground of assessee is allowed. Deduction u/s 80HHC has to be computed on the basis of adjusted book profit u/s 115JB and not on the basis of the profits computed under regular provisions of law applicable to computation of profits and gains of business - HELD THAT - This issue is remanded back to the ld. AO to examine the computation of the revised working of 80HHC which is deductible from the book profit which is in light of the decision of Ajanta Pharma Ltd 2010 (9) TMI 8 - SUPREME COURT Accordingly, additional Ground No.2 is allowed. Market value for computing the deduction u/s 80IA - Rates charged by Orissa State electricity board to its industrial consumer which was taken at Rs. 2.63 per unit as Transfer price to Aluminum unit is accepted to be at Market rate. Disallowance of repairs maintenance expenses - AO disallowed 5% of expenses because at the time of scrutiny proceeding only unit wise details has been submitted CIT (A) held that expenses on account of building and others was substantiated and accordingly, ld. CIT(A) has deleted the estimated disallowance of 5% - HELD THAT - In any case, the entire repair expenses have been charged to profit and loss account and there is no allegation that they are capital in nature. Assessee had filed voluminous bills and invoices on account of repairs of plant and machinery before the authorities below and accordingly, no disallowance is called for on estimated basis. Thus, order of the ld. CIT(A) is confirmed and ground No.4 is dismissed. Addition as amount written back on the ground that write back of an amount does not amount to payment of statutory liability - assessee contended that the ground has become infructuous as AO himself after verifying the sum has already offered to tax in earlier years u/s 43B, hence allowed deduction of write back from taxable income while giving appeal effect - HELD THAT - Since, ld. AO himself has verified and same has been offered to tax in earlier years u/s.43B, he has accepted deduction from write back from taxable income while giving appeal effect and the provision which was already offered to tax in the earlier years, they have been returned back in the subsequent years, therefore, the same cannot be taxed in subsequent years, accordingly, there is no substance raised by the department and the same is dismissed.

Summary

Issues Involved:
1. Deduction under Section 80IB for the Belur Unit.
2. Deduction under Section 80HHC.
3. Deduction for commissions paid.
4. Deduction for repairs and replacements of plant and machinery.
5. Deduction for service charges paid to BMCL.
6. Deduction for community development expenses.
7. Deduction for entrance fees paid to clubs.
8. Set off of short-term capital loss against profit on sale of investments.
9. Expenditure on maintenance and depreciation of aircraft.
10. Additional grounds related to Section 80HHC and Section 115JB.
11. Deduction under Section 80IA for power plant.
12. Disallowance of commission paid.
13. Verification of payment to Dy. Conservator of Forest.
14. Disallowance on repairs and maintenance.
15. Verification of statutory dues under Section 43B.
16. Verification of employee management pension fund.

Detailed Analysis:

1. Deduction under Section 80IB for the Belur Unit:
The assessee claimed a deduction of Rs. 3,87,41,881 under Section 80IB for the Belur Unit. The AO restricted this to Rs. 2,01,22,104 by applying the global net profit ratio of the company. The CIT(A) upheld this restriction, referencing a similar decision for A.Y. 2002-03. However, the Tribunal noted that the assessee had filed an audit certificate in Form 10CCB, which was not considered by the AO. The Tribunal accepted the net profit of 11.66% for the Belur unit as reasonable and allowed the full deduction of Rs. 3,87,41,881.

2. Deduction under Section 80HHC:
The assessee claimed a deduction of Rs. 6,04,02,369 under Section 80HHC, which was disallowed by the AO based on the retrospective amendment regarding DEPB licenses. The Tribunal referenced the Gujarat High Court's decision in Avani Exports, which struck down the retrospective amendment. Consequently, the Tribunal allowed the deduction under Section 80HHC in full.

3. Deduction for Commissions Paid:
The AO disallowed Rs. 3,98,32,604 out of Rs. 10,48,67,000 claimed as commission expenses due to lack of details. The CIT(A) allowed most of the expenses except Rs. 28,49,419, which were disallowed due to unserved notices. The Tribunal held that non-service of notice under Section 133(6) cannot be a ground for disallowance if all other evidence is provided. Therefore, the entire commission expense was allowed.

4. Deduction for Repairs and Replacements of Plant and Machinery:
The AO disallowed Rs. 66,38,184 as capital expenditure. The CIT(A) upheld this, referencing a similar decision for A.Y. 2002-03. The Tribunal noted that the Supreme Court in Saravana Spinning Mills held that the nature of repairs should be considered, not whether they are capital or revenue. The Tribunal directed the AO to examine the details and allowed the deduction subject to verification.

5. Deduction for Service Charges Paid to BMCL:
The AO disallowed Rs. 5,63,69,000 paid to BMCL due to lack of evidence of services rendered. The CIT(A) upheld this, referencing a similar decision for A.Y. 2002-03. The Tribunal noted that the High Court had set aside the ITAT's decision for A.Y. 2002-03 and allowed the deduction based on additional evidence provided by the assessee.

6. Deduction for Community Development Expenses:
The AO disallowed Rs. 27,88,975 as non-business expenditure. The CIT(A) upheld this, referencing a similar decision for A.Y. 2002-03. The Tribunal noted that the High Court had set aside the ITAT's decision for A.Y. 2002-03 and allowed the deduction, referencing the Madras High Court's decision in Madras Refineries, which held that community development expenses are business expenses.

7. Deduction for Entrance Fees Paid to Clubs:
The AO disallowed Rs. 14,38,666 paid for club membership. The CIT(A) upheld this. The Tribunal referenced multiple High Court decisions, including Groz Beckert Asia, which held that club membership fees are business expenses. The Tribunal allowed the deduction.

8. Set Off of Short-Term Capital Loss Against Profit on Sale of Investments:
The AO did not allow the set-off of Rs. 33,09,97,762 short-term capital loss. The CIT(A) treated the entire loss as arising from dividend stripping under Section 94(7). The Tribunal directed the AO to re-examine the holding period and the applicability of Section 94(7) and allowed the ground for statistical purposes.

9. Expenditure on Maintenance and Depreciation of Aircraft:
The AO disallowed Rs. 36,00,000 for maintenance and Rs. 1,05,39,094 for depreciation, stating the aircraft was not used for business. The CIT(A) upheld this. The Tribunal referenced the Gujarat High Court's decision in Ashima Syntex, which held that trial runs qualify as business use, and allowed the deduction.

10. Additional Grounds Related to Section 80HHC and Section 115JB:
The Tribunal remanded the issue of computing deduction under Section 80HHC based on adjusted book profit under Section 115JB to the AO for re-examination in light of the Supreme Court's decision in Bhari Information Technology. The Tribunal also allowed the claim for 100% deduction under Section 80HHC for computing book profit under MAT, referencing the Supreme Court's decision in Ajanta Pharma.

11. Deduction under Section 80IA for Power Plant:
The AO denied the deduction under Section 80IA by adopting the transfer price of 77 paisa per unit, while the assessee used Rs. 2.63 per unit. The CIT(A) accepted the assessee's rate. The Tribunal referenced the Supreme Court's decision in Jindal Steels & Power, which held that the market value should be based on the rate charged to industrial consumers, and upheld the CIT(A)'s decision.

12. Disallowance of Commission Paid:
The Tribunal dismissed the Revenue's ground, noting that the AO had already verified and accepted the payments under the head 'commission' in the remand report.

13. Verification of Payment to Dy. Conservator of Forest:
The Tribunal noted that the AO had already disallowed the payment, making the ground infructuous.

14. Disallowance on Repairs and Maintenance:
The AO disallowed 5% of the expenses due to lack of details. The CIT(A) deleted this disallowance based on additional evidence. The Tribunal upheld the CIT(A)'s decision, noting that the expenses were charged to the profit and loss account and were not capital in nature.

15. Verification of Statutory Dues under Section 43B:
The AO disallowed Rs. 4,26,31,807, stating that write-back does not amount to payment. The CIT(A) directed the AO to verify if the amount was offered to tax in earlier years. The AO verified and allowed the deduction, making the ground infructuous.

16. Verification of Employee Management Pension Fund:
The AO disallowed Rs. 12,61,00,000, stating it was not paid. The CIT(A) directed the AO to verify if the amount was added back in the return of income. The AO verified and upheld the addition, making the ground infructuous.

Conclusion:
The appeal of the assessee is partly allowed, and the appeal of the Revenue is dismissed.