2012 (9) TMI 510 - AT - Income Tax

Disallowance of Licence fees AO made addition on basis that mere existence of an agreement is not sufficient to prove commercial expediency in respect of this payment - Held that - As in earlier years Tribunal in its appellate order held that the licence fee paid to M/s RPG Enterprises was an allowable expenditure. Therefore, there cannot be any dispute that the question of existence of commercial expediency has to be decided on the facts prevailing in each case. Decides in favour of assessee Disallowance of interest expenditure Relating to investment in subsidiary company Whether there was any commercial expediency in making the investment in subsidiary companies or whether the interest bearing funds have actually been diverted - Held that - Assessee has established the commercial expediency in making interest free advances to its subsidiary companies. It has also established that it has only utilized only interest free funds for the said purpose. Following the decision of Hon ble Supreme Court in the case of S.A. builders delete the addition. Case decides in favour of assessee. Disallowance in respect of delayed payments of Employees Contribution to PF, Labour welfare fund and ESI Payment made before the date of filing of return u/s 139(1) - Held that - Following the order of the Tribunal in the appellant s own case previous assessment year, the disallowance of delayed payments of Employee s contribution to provident fund, labour welfare fund and employees state insurance respectively which were paid before the due date of filing of the return is deleted. Decision in favour of assessee Addition of amount realised on sale of old and unyielding rubber trees AO treating it as revenue receipt under Rule 7A - Rule 7A, the income from rubber estate has to be apportioned in the ratio of 65 35 and the 35% of the income is to be assessed as business income - AO brought to tax 35% of the amount realised on sale of old and unyielding trees as salvage value got from an exhausted stock Held that - As Rule 7A applies only to a person who carries on the combined activity of growing rubber trees and also manufacturing or processing of field latex or coagulum obtained from rubber plants. Following the decision of Supreme Court in case of Kalpetta Estates Ltd (1996 (7) TMI 4) in holding that the Rubber trees constitute Capital assets shall hold good even after the introduction of Rule 7A. Decides in favour of assessee Disallowance of loss from business units AO hold that these are defunct units and no business is carried on therein and further there is no possibility of revival of these units Held that - As the assessee has proved the fact of generation of income from these two activities. And AO has disallowed the claim of loss from these units without properly appreciating the facts. Decision in favour of assessee Capital Gain on sale of trees - Trees are grown to afford shade to the tea bushes AO was taking consistent stand in the earlier years that no capital gain or capital loss can be computed on sale of Grevelia trees, as the cost of acquisition could not be ascertained - Held that - The AO has changed his stand in the instant year and has proceeded to assess the Capital gain on sale of Grevelia trees. Therefore, the legal position with regard to the taxability of the old Grevelia trees cannot be changed in the year under consideration, merely because the present AO has a different view. And also AO has not brought any new fact or view regarding taxability. Decision in favour of assessee Capital gains on slump sale u/s 50B Assesse sold its two rubber estates Assessee did not return any capital gain as these estates are agricultural lands - AO took the view that the transfer has been made on going concern basis Held that - Following the decision with same facts in assessee s own case by ITAT in earlier years that the assessee did not conduct any slump sale of an undertaking even though in the sale deed it was stated that the sale of rubber estate was made on going concern basis. Therefore sale of two estates in the year under consideration cannot be termed as slump sale . Decision in favour of assessee Computation of Book profit u/s 115JB Inclusion of profit on sale of two rubber estates - Assessee claimed the profit on sale of the two estates as agricultural income which is exempt u/s 10 Held that - In previous year judgement given by Tribunal in assessee s own case held that sale of rubber estate is agricultural income and hence it is not required to be included in computing the book profit u/s 115JB. Decision in favour of assessee Disallowance of Provision for gratuity in computation of Book Profit u/s 115JB Held that - On the basis of decision in case of ILPEA Paramount (2010 (2) TMI 45) & Eastern Power Distribution Co. of AP Ltd.(2011 (3) TMI 547) held that the provision for gratuity liability cannot be added for the purpose of computation of book profit. Decision in favour of assessee Disallowance of share capital related expense AO disallow share transfer charges and the professional charges paid to registrar and share transfer agents Held that - AO disallowed the above said expenses under the impression that they have been incurred in connection with the sale of shares, the capital gain of which is exempt. Therefore AO made the impugned disallowance without properly appreciating the nature of expenses. Decision in favour of assessee

Summary

Issues Involved:
1. Disallowance of license fee paid to RPG Enterprises.
2. Disallowance of proportionate interest relating to interest-free loans given to subsidiary companies.
3. Disallowance of delayed payments of Employee's Contribution to Provident Fund, Labour Welfare Fund, and Employees State Insurance.
4. Addition of amount realized on sale of old and unyielding rubber trees as revenue receipt under Rule 7A of the Income Tax Rules.
5. Disallowance of loss from Plant Tissue Culture Division and Aqua Culture Division.
6. Assessment of capital gain on sale of Grevelia trees.
7. Assessment of capital gains on slump sale under section 50B of the Income Tax Act.
8. Inclusion of profit on sale of estates for computation of book profit under section 115JB.
9. Addition of provision for gratuity liability while computing book profit.
10. Disallowance of share transfer charges and professional charges paid to Registrar and Share Transfer Agents.

Detailed Analysis:

1. Disallowance of License Fee Paid to RPG Enterprises:
The assessing officer disallowed the license fee payments based on earlier years' orders. However, the Tribunal previously held that the license fee paid to RPG Enterprises was an allowable expenditure. The CIT(A) followed these decisions, and the Tribunal found no reason to interfere with this consistent view.

2. Disallowance of Proportionate Interest Relating to Interest-Free Loans Given to Subsidiary Companies:
The AO disallowed interest expenditure proportionate to interest-free loans given to subsidiaries. The CIT(A) deleted the disallowance, noting that the appellant's net own funds exceeded the loans granted to subsidiaries and that the loans were granted to wholly-owned subsidiaries with 100% economic interest. The Tribunal upheld this decision, agreeing that there was commercial expediency in making these advances and that interest-free funds were used.

3. Disallowance of Delayed Payments of Employee's Contribution to Provident Fund, Labour Welfare Fund, and Employees State Insurance:
The CIT(A) deleted the disallowances, following the Tribunal's earlier decision that contributions paid before the due date of filing the return should not be disallowed. The Tribunal upheld this view, noting no distinction between employees' and employers' contributions.

4. Addition of Amount Realized on Sale of Old and Unyielding Rubber Trees as Revenue Receipt under Rule 7A of the Income Tax Rules:
The AO considered the sale value of old rubber trees as revenue receipt under Rule 7A. The CIT(A) disagreed, stating that Rule 7A does not apply to the sale of old rubber trees, which are capital assets. The Tribunal upheld this view, agreeing that Rule 7A applies only to the combined activity of growing and processing rubber, not to the sale of old trees.

5. Disallowance of Loss from Plant Tissue Culture Division and Aqua Culture Division:
The AO disallowed losses from these divisions, considering them defunct. The CIT(A) deleted the disallowances, noting that these units generated income. The Tribunal upheld this decision, finding that the AO did not properly appreciate the facts.

6. Assessment of Capital Gain on Sale of Grevelia Trees:
The AO assessed capital gains on the sale of Grevelia trees, treating them as capital assets with negligible cost of acquisition. The CIT(A) held that the amount received was a capital receipt, not assessable for central income tax, following earlier consistent views. The Tribunal upheld this decision, noting no change in facts or legal views.

7. Assessment of Capital Gains on Slump Sale under Section 50B of the Income Tax Act:
The AO assessed capital gains on the sale of two estates as slump sales. The CIT(A) disagreed, following the Tribunal's earlier decision that similar sales were not slump sales. The Tribunal upheld this view, noting no difference in facts from the earlier case.

8. Inclusion of Profit on Sale of Estates for Computation of Book Profit under Section 115JB:
The AO included profit from the sale of estates in book profit computation. The CIT(A) excluded it, following the Tribunal's earlier decision that such profit is agricultural income and exempt. The Tribunal upheld this decision.

9. Addition of Provision for Gratuity Liability while Computing Book Profit:
The CIT(A) directed the deletion of this addition, following Supreme Court decisions. The Tribunal upheld this decision, citing similar rulings that provision for gratuity liability should not be added for book profit computation.

10. Disallowance of Share Transfer Charges and Professional Charges Paid to Registrar and Share Transfer Agents:
The AO disallowed these expenses, considering them related to exempt capital gains. The CIT(A) allowed them as revenue expenses necessary for statutory compliance. The Tribunal upheld this decision, noting the AO's misunderstanding of the expense nature.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions on all issues.