2013 (9) TMI 192 - AT - Income Tax

Allowance of additional depreciation - Plant and machinery on which such depreciation is being claimed was used in office and not in the manufacturing activity of the assessee - It is an admitted position that assessee was already engaged in manufacturing activity Reliance has been placed upon the judgment in the case of VTM Ltd 2010 (10) TMI 925 - MADRAS HIGH COURT , wherein it has been held that it was not necessary for a new plant and machinery to have operational connectivity to products already being manufactured In the present case, computer software was SAP R/3 generally used in managing inventory as well Additional depreciation allowable Decided in favor of Assessee. Apportionment of expenditure on Research & Development to the units on which assessee had claimed deduction under Section 10B of the Act - Assessee mentioned that the products manufactured in the units for which 10B was available, were time tested products so the new product developed from the R&D could not be used Held that - Nothing is available on record to show what tangible benefit, if any, assessee had derived on account of the research work. Whether any such earlier research had helped the assessee with regard to its activities in the units on which it had claimed deduction under Section 10B of the Act, is also not on record - Matter requires a fresh look by the Assessing Officer. Assessing Officer has to verify whether the research done by the assessee had any tangible benefit vis- -vis the activities carried on by it from the units on which deduction under Section 10B was claimed Remitted this issue back to Assessing Officer for consideration afresh Decided in favor of Assessee for statistical purpose. Set off of loss in 10B units against profits of non-10B units Held that - Reliance has been placed upon the Hon ble Bombay High Court decision in the case of Hindustan Unilever Ltd 2010 (4) TMI 206 - BOMBAY HIGH COURT It is allowed to set off of loss in the 10B units with profits in other non-10B units by putting reliance upon the above named case Decided in favor of Assessee. Disallowances made under Section 40(a)(i) of the Income Tax Act - Held that - Recipients of the payment made by the assessee had not made available to the assessee any new technique or skill which assessee could use in its business. The services rendered by the said parties related to clearing, warehousing and freight charges, outside India. The logistics service rendered was essentially warehousing facility. This cannot be equated with managerial, technical or consultancy services. Even if it is considered as technical service, the fee was payable only for services utilized by the assessee in the business or profession carried on by the said non-residents outside India. Such business or profession of the non-residents, earned them income outside India. Thus, it would fall within the exception given under sub-clause (b) of Section 9(1) of the Act - Assessee was justified in having a bona fide belief that the payments did not warrant application of Section 195 of the Act Assessee could not have been saddled with the consequences mentioned under Section 40(a)(i) of the Act Decided in favor of Assessee. Disallowance of additional depreciation u/s 32(1)(iia) Held that - A perusal of the provisions of section 32 as applicable for the relevant assessment year clearly shows that additional depreciation is allowable on the plant and machinery only for the year in which the capacity expansion has taken place which has resulted in the substantial increase in the installed capacity. In the assessee s case this took place in the assessment year 2005-06 and the assessee has also claimed the additional depreciation during that year and the same has also been allowed. Each assessment year is separate and independent assessment year. The provisions of section 32 of the Act do not provide for carry forward of the residual additional depreciation, if any. Disallowance of expenses incurred for purchase of software license - The nature of software, which was acquired by the assessee, is not at all clear from the orders of authorities below. Except for mentioning that it was for purchasing Virtual Lab Durable Software for Fatigue Rig , no other information is forthcoming Held that - . The question whether the payment was made for acquiring right for using a software or for a copyrighted software cannot be answered without such data - The facts are not sufficient to come to a rational conclusion Matter remitted to the file of A.O. for consideration afresh.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income-tax Act, 1961.
2. Disallowance of power charges.
3. Disallowance of additional depreciation on plant and machinery.
4. Apportionment of expenditure on Research & Development to units claiming deduction under Section 10B.
5. Setting off loss in 10B units against profits of non-10B units.
6. Disallowance under Section 40(a)(i) for payments to non-residents for non-deduction of tax at source.
7. Disallowance of additional depreciation for the balance from the preceding year.
8. Denial of higher depreciation on UPS.
9. Disallowance of expenses incurred for purchase of software license.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income-tax Act, 1961:
The Revenue contested the reduction of disallowance under Section 14A by the CIT(A) to 2% of the exempt income. The Assessing Officer (A.O.) had applied Rule 8D, disallowing Rs. 21.65 lakh against a claim of tax-free interest and dividend of Rs. 7.05 crore. The CIT(A) held Rule 8D inapplicable for the assessment year in question but allowed a reasonable disallowance of 2%. The Tribunal, referencing the Bombay High Court decision in Godrej & Boyce Mfg. Co. Ltd., remitted the issue back to the A.O. for fresh consideration.

2. Disallowance of power charges:
The A.O. disallowed Rs. 4.63 crore paid to Wescare India Ltd. for power charges, asserting the assessee was the owner of the windmills. The CIT(A) deleted the addition, following earlier orders. The Tribunal remitted the issue back to the A.O., referencing its previous orders for earlier assessment years.

3. Disallowance of additional depreciation on plant and machinery:
The A.O. disallowed Rs. 9.58 lakh, claiming the assets were used for non-manufacturing purposes. The CIT(A) allowed the claim, stating the machinery was used in manufacturing automobile spare parts. The Tribunal upheld the CIT(A)'s decision, referencing the jurisdictional High Court decision in CIT v. VTM Limited.

4. Apportionment of expenditure on Research & Development to units claiming deduction under Section 10B:
The A.O. apportioned scientific research expenditure to units claiming Section 10B deduction, reducing the deduction claim. The CIT(A) deleted the apportionment, stating no R&D efforts were required for the products from these units. The Tribunal remitted the issue back to the A.O. for fresh consideration, requiring verification of any tangible benefit to the units from the research.

5. Setting off loss in 10B units against profits of non-10B units:
The A.O. disallowed the set-off of loss in 10B units against profits of non-10B units. The CIT(A) allowed the set-off, referencing the Tribunal's decision in Lason India (P.) Ltd. The Tribunal upheld the CIT(A)'s decision, referencing the Bombay High Court decision in Hindustan Unilever Ltd.

6. Disallowance under Section 40(a)(i) for payments to non-residents for non-deduction of tax at source:
The A.O. disallowed payments made to non-residents for export sales commission and logistic services under Section 40(a)(i) for non-deduction of tax at source. The CIT(A) deleted the disallowances, stating the payments were for services rendered outside India with no permanent establishment in India. The Tribunal upheld the CIT(A)'s decision, stating the services did not fall under "fees for technical services" and were not chargeable under Section 195.

7. Disallowance of additional depreciation for the balance from the preceding year:
The A.O. disallowed the carry forward of additional depreciation for machinery added in the preceding year. The CIT(A) upheld the disallowance. The Tribunal upheld the CIT(A)'s decision, referencing its own earlier decision in the assessee's case.

8. Denial of higher depreciation on UPS:
The A.O. denied higher depreciation on UPS. The Tribunal, referencing its earlier decision, directed the A.O. to grant higher depreciation, treating UPS as an energy-saving device.

9. Disallowance of expenses incurred for purchase of software license:
The A.O. disallowed Rs. 15.72 lakh for software license purchase, treating it as royalty under Section 9(1)(vi) and applying Section 40(a)(i) for non-deduction of tax at source. The CIT(A) upheld the disallowance. The Tribunal remitted the issue back to the A.O. for fresh consideration, requiring verification of the nature of the software.

Conclusion:
The Tribunal partly allowed the appeals of both the Revenue and the assessee for statistical purposes, remitting several issues back to the A.O. for fresh consideration and upholding the CIT(A)'s decisions on others.