2013 (4) TMI 228 - AT - Income Tax

Depreciation on Testing equipment - Held that - Respectfully following the Tribunal order passed in another group concern of the assessee, whose facts have not been distinguished by the DR the depreciation should be allowed on the testing equipment provided to laboratories and hospitals free of charge as the said equipments have been provided to the laboratories and hospitals for making profit from the sale of slides. Disallowance towards executive retirement scheme (ERS) - Held that - It is important to note that section 35DDA has been inserted by the Finance Act, 2001 with effect from 01.04.2001. This section provides for amortization of expenditure incurred under Voluntary Retirement Scheme (VRS). As per this section, the entire amount of expenditure incurred on VRS cannot be allowed as deduction in the first year. Only 1/5th of the same is to be deducted in first year and then equal amounts in four immediately succeeding previous years. The assessee contended that the provisions of section 35DDA are not applicable as ERS is different from VRS. No discussion on the facts of the instant ground in the orders of the authorities below. Since section 35DDA has been inserted by the Finance Act, 2001, which is relevant from assessment year 2001-2002 therefore, set aside the impugned order and remit the matter to the file of A.O. for deciding this issue afresh in the light of section 35DDA, if applicable. Provision of cash discount - Held that - As dealt with this issue in the appeals for the assessment year 2000- 2001, by which the matter has been restored to the file of A.O. for allowing deduction of cash discount on actual payment basis. Disallowance of payments made to the persons specified u/s 40A(2)(b) - Held that - In so far as royalty payment is concerned, it is observed that the assessee made payment to Johnson & Johnson, USA after due approval from RBI. If the RBI has given approval to such payment, the AO, without any cogent material, cannot take a stand that such payment was excessive, thus CIT(A) was justified in deleting disallowance to this extent. Now, disallowance at 10% of the value of goods purchased from sister concerns. The onus is on the AO to demonstrate that the payment was excessive. There is no warrant for making any disallowance under this section without pointing out as to how payment was excessive. There is really no mention by the authorities below as to the excessive amount of payment made by the assessee for purchases made from its two sister concerns. Denial of deduction u/s 80- IB on certain items of miscellaneous income - Held that - DR did not object to the restoration of the matter but requested that the decision be taken by considering the judgment in the case of Liberty India v. CIT 2009 (8) TMI 63 - SUPREME COURT stating that Duty drawback receipt/DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purposes of Sections 80I/80-IA/80-IB of the 1961 Act . Reduction/denial of deduction u/s 80HHC on the amount of Write back of liabilities and Miscellaneous income with Service charges and Recovery of R & D cost - Held that - Both the sides raised arguments similar to those advanced qua the assessee s appeal for assessment year 2001-2001. Once again it was requested that these items be considered afresh one by one for their eligibility u/s 80HHC as per the relevant judgments. Disallowance u/s 80HHC on rent - Held that - The Tribunal, following the judgment in the case of ACG Associate Capsules Private Limited v. CIT 2012 (2) TMI 101 - SUPREME COURT OF INDIA has held that netting off of rent paid should be done against the rent received and only 90% of such net rent income should be considered for disallowance u/s 80HHC - remit the matter to the AO for deciding this issue in accordance with the view taken by the tribunal in its order for the earlier years. Disallowance of expenses for repairs and maintenance for Building and Plant & Machinery - Held that - As it is seen from the details of expenses disallowed by the A.O. that all are of revenue nature. Amounts has been incurred on items of revenue nature, such as, false ceiling, paneling and monsoon shed of temporary period. CIT(A) was justified in deleting the disallowance. 10% of ad hoc disallowance of traveling expenses - CIT(A) deleted the addition - Held that - There is no doubt that the assessee is a limited company. In such a situation, there cannot be any question of sustaining any disallowance even by treating the expenditure for non- business purposes. It has been held so by the Hon ble Gujarat High Court in the case of Sayaji Iron & Engg. Co. (2001 (7) TMI 70 - GUJARAT HIGH COURT), which view has been reiterated in Dinesh Mills Ltd. v. CIT 2002 (10) TMI 10 - GUJARAT HIGH COURT - against revenue. Disallowance of hotel expenses - CIT(A) deleted this addition - Held that - No infirmity in the impugned order on this issue. When the guests are entertained by the assessee, it is but natural to arrange for their stay. This ground is, therefore, not allowed. Disallowance of club entrance fee - Held that - The case is covered by the judgment of of Otis Elevator v. CIT 195 ITR 682 (1991 (4) TMI 53 - BOMBAY HIGH COURT) as per which deduction of such entrance fee paid for club is allowable in the year of incurring. Therefore, the view taken by the CIT(A)approved. AO is directed to ensure that no deduction is allowed for the 4/5th of the total amount in the succeeding years. Disallowance of 10% of professional sponsorship expenses - Held that - It is amply borne out that the AO accepted the incurring of such expenses towards the promotion of assessee s business. Once the expenditure is held to be for business purposes, there is no question of disallowing 10% of such expenses by treating the same as for non-business purposes - against revenue. Exclusion of excise duty and trade discount from the total turnover for deduction u/s 80HHC - Held that - Decided in favour of assessee as relying on Laxmi Machine Works case 2007 (4) TMI 202 - SUPREME COURT that the excise duty is not includible in the total turnover in the formula contained in section 80HHC - against revenue.

Summary

Issues Involved:
1. Addition on account of sales to Johnson & Johnson Exports Limited.
2. Disallowance of MODVAT excise duty credit.
3. Disallowance of provision for Executive Retirement Scheme (ERS).
4. Disallowance of deduction u/s 80-IB.
5. Provision of cash discount.
6. Disallowance of expenses related to exempt dividend income.
7. Disallowance of deduction u/s 80HHC on rent.
8. Disallowance u/s 80HHC on miscellaneous income and service charges.
9. Deletion of addition on account of sales to Johnson & Johnson Exports Limited.
10. Treatment of production of ad films as capital vs. revenue expenditure.
11. Exclusion of excise duty and trade discount from total turnover for deduction u/s 80HHC.
12. Depreciation on testing equipment.
13. Disallowance of payments made to persons specified u/s 40A(2)(b).
14. Disallowance towards provision for bonus.
15. Denial of deduction u/s 80-IB on certain items of miscellaneous income.
16. Disallowance u/s 80HHC on write back of liabilities, miscellaneous income, and recovery of R & D cost.
17. Disallowance of hotel expenses.
18. Disallowance of club entrance fee.
19. Disallowance of professional sponsorship expenses.
20. Exclusion of excise duty and trade discount from total turnover for deduction u/s 80HHC.

Detailed Analysis:

1. Addition on Account of Sales to Johnson & Johnson Exports Limited:
The Tribunal set aside the impugned order and remitted the matter to the file of the Assessing Officer (A.O.) for fresh decision, following the precedent set in the assessee's own case for earlier years.

2. Disallowance of MODVAT Excise Duty Credit:
The Tribunal restored the matter to the A.O. for re-working the disallowance, if any, subject to certain verifications, following the precedent set in the assessee's own case for the assessment year 1999-2000.

3. Disallowance of Provision for Executive Retirement Scheme (ERS):
The Tribunal directed the A.O. to allow deduction for ERS on a payment basis as against the provision basis claimed by the assessee, following the precedent set in the assessee's own case for earlier years.

4. Disallowance of Deduction u/s 80-IB:
The Tribunal upheld the view taken by the learned CIT(A) and decided this issue against the assessee, as there was no distinguishing feature on the facts of this ground vis-`a-vis the earlier year.

5. Provision of Cash Discount:
The Tribunal set aside the impugned order and remitted the matter to the A.O. for deciding it in conformity with the view taken by the Tribunal in the earlier year, allowing deduction of cash discount to the extent of actual payment.

6. Disallowance of Expenses Related to Exempt Dividend Income:
The Tribunal upheld the disallowance of 2% of the gross dividend as incidental expenses for earning exempt income, as the provisions of section 14A applied to the exempt dividend income u/s 10(33) of the Act.

7. Disallowance of Deduction u/s 80HHC on Rent:
The Tribunal directed that "netting off" of rent paid should be done against the rent received, and only 90% of such net rent income should be considered for disallowance u/s 80HHC, following the judgment of the Hon'ble Supreme Court in the case of ACG Associate Capsules Private Limited v. CIT.

8. Disallowance u/s 80HHC on Miscellaneous Income and Service Charges:
The Tribunal set aside the impugned order and remitted the matter to the A.O. for deciding this issue afresh item-wise by considering relevant Tribunal orders, as both sides agreed to this approach.

9. Deletion of Addition on Account of Sales to Johnson & Johnson Exports Limited:
The Tribunal set aside the impugned order and remitted the matter to the file of the A.O. for deciding it in conformity with the directions contained in the earlier Tribunal order, as both sides agreed that the facts and circumstances were similar to those of earlier years.

10. Treatment of Production of Ad Films as Capital vs. Revenue Expenditure:
The Tribunal upheld the impugned order treating the expenditure on production of ad films as revenue expenditure, following the precedent set in the assessee's own case for earlier years.

11. Exclusion of Excise Duty and Trade Discount from Total Turnover for Deduction u/s 80HHC:
The Tribunal approved the impugned order on this issue, following the judgment of the Hon'ble Supreme Court in the case of Lakshmi Machine Works.

12. Depreciation on Testing Equipment:
The Tribunal upheld the impugned order allowing depreciation on testing equipment provided to laboratories and hospitals free of charge, following the precedent set in the case of the assessee's sister concern.

13. Disallowance of Payments Made to Persons Specified u/s 40A(2)(b):
The Tribunal upheld the deletion of disallowance on account of royalty payments, as the payments were made to Johnson & Johnson, USA after due approval from RBI. However, the Tribunal overturned the impugned order on the disallowance of 10% of the value of goods purchased from sister concerns, as the A.O. did not demonstrate that the payments were excessive.

14. Disallowance Towards Provision for Bonus:
This ground was not pressed by the learned AR and was dismissed.

15. Denial of Deduction u/s 80-IB on Certain Items of Miscellaneous Income:
The Tribunal set aside the impugned order and restored the matter to the file of the A.O. for fresh decision, considering the judgment of the Hon'ble Supreme Court in the case of Liberty India v. CIT.

16. Disallowance u/s 80HHC on Write Back of Liabilities, Miscellaneous Income, and Recovery of R & D Cost:
The Tribunal set aside the impugned order and remitted the matter to the file of the A.O. for deciding the question of allowability of deduction u/s 80HHC on these items, following the view taken in the appeal for the assessment year 2000-2001.

17. Disallowance of Hotel Expenses:
The Tribunal upheld the deletion of disallowance of hotel expenses incurred on visitors, as it was natural to arrange for their stay when guests were entertained by the assessee.

18. Disallowance of Club Entrance Fee:
The Tribunal approved the view taken by the learned CIT(A) allowing deduction of club entrance fee in the year of incurring, following the judgment of the Hon'ble jurisdictional High Court in the case of Otis Elevator v. CIT.

19. Disallowance of Professional Sponsorship Expenses:
The Tribunal upheld the view taken by the learned CIT(A) deleting the disallowance of 10% of professional sponsorship expenses, as the expenditure was for business purposes.

20. Exclusion of Excise Duty and Trade Discount from Total Turnover for Deduction u/s 80HHC:
The Tribunal upheld the impugned order on this issue, following the judgment of the Hon'ble Supreme Court in the case of Laxmi Machine Works.

Conclusion:
The appeals were partly allowed for both the assessee and the Revenue, with several issues remitted back to the A.O. for fresh consideration in light of earlier judgments and directions.