2013 (10) TMI 749 - AT - Income Tax

Nature of receipts, whether a capital receipt or revenue receipt - Assessee-company had purchased on slump-sale basis the Non-Synthetic Pyrethroid division (NSP) of the Mitsu Industries Ltd. Simultaneously, a development took place according to which M/s. Hoechst Schering AgrEvo, a foreign company, acquired controlling interest of Mitsu Industries Ltd. vide JV Agreement dated 03/07/1999 Held that - Once a division has been siphoned out by Mitsu Industries Ltd. which was purchased as a slump sale by the assessee, then why a non-compete fees was paid to the assessee In the present case, there was no transfer of any trade-mark or any asset for which the assessee in question has received any consideration. There was no agreement between the assessee and the Hoechst AgrEvo. Most importantly, there was no restrictive covenant for not carrying on the business of manufacturing of Pesticides by the assessee - In the absence of any loss of income on account of existence of a restrictive covenant, there was total absence of holding the receipt in question as capital receipt. TDS on the gift made by the assessee Held that - Value of articles distributed by the assessee to its employees comes within the ambit of perquisites employed in Section 17(2)(iii) of the IT Act which is covered under the definition of Salaries as provided in Section 17(i)(iv) of the Act. Therefore, before distributing articles to the employees, the assessee ought to have deducted the tax at source on the value of such articles - Ld.Assessing Officer has rightly charged the interest u/s.201(1A) of the Act Decided against the Assessee. Allowability of foreign travel expense Commissioner (A) deleted addition on account of foreign travel expenses amounting to Rs.1,81,130/- - Expenditure towards foreign travel was for the purpose of the assessee s business - Various Executives are necessarily required to travel to abroad to study the market and development of the market - Assessee is having export business and requires it employees to go abroad Deduction of foreign travel expense allowed Decided in favor of assessee.

Issues Involved:
1. Nature of Non-Compete Fees.
2. Disallowance of Contribution to PF/ESIC.
3. Advances Written Off.
4. Deduction under Section 80IA/80IB.
5. Deduction under Section 80HHC.
6. Inclusion of Excise Duty and Sales Tax in Total Turnover.
7. Allowability of Gifts to Employees.
8. Sales Promotion Expenses.
9. Foreign Travel Expenses.
10. Miscellaneous Expenses.
11. Registration Expenses.
12. Valuation of Closing Stock including Excise Duty.
13. Inclusion of Various Receipts while Calculating Profit for Section 80HHC.

Issue-wise Detailed Analysis:

1. Nature of Non-Compete Fees:
The assessee received Rs.10 crores as non-compete fees, which was treated as business income by the AO. The assessee argued it was a capital receipt for loss of source of income. The CIT(A) ruled that the amendment by Finance Act, 2002, effective from A.Y. 2003-04, was not applicable for A.Y. 2000-01. The ITAT held that the assessee was not in a position to offer competition, was not a party to the agreement, and therefore, the receipt was rightly taxed as revenue receipt.

2. Disallowance of Contribution to PF/ESIC:
The AO disallowed Rs.4,24,730/- due to late payment of PF/ESIC. The ITAT, referencing Vinay Cement and Alom Extrusions cases, directed the deletion of the addition as the payments were made within the succeeding month.

3. Advances Written Off:
The AO added Rs.15,54,260/- as the assessee had voluntarily offered it for taxation. The ITAT upheld the disallowance, noting the absence of evidence proving the write-off was for business purposes.

4. Deduction under Section 80IA/80IB:
The ITAT restored the issue to the CIT(A) for de novo adjudication, as the CIT(A) had not addressed the matter.

5. Deduction under Section 80HHC:
The ITAT restored the issue of netting interest received against interest expenditure to the CIT(A) for proper examination and adjudication.

6. Inclusion of Excise Duty and Sales Tax in Total Turnover:
The AO included Excise Duty and Sales Tax in the total turnover for Section 80HHC deduction. The ITAT directed the AO to exclude these as per the Supreme Court ruling in Laxmi Machines.

7. Allowability of Gifts to Employees:
The ITAT allowed the deduction for gifts to employees, referencing its own decision in the assessee's case for a previous year.

8. Sales Promotion Expenses:
The AO disallowed 1/5th of the sales promotion expenses due to lack of specific details. The ITAT reversed the CIT(A) and upheld the AO's action, finding the disallowance reasonable.

9. Foreign Travel Expenses:
The AO disallowed 1/5th of foreign travel expenses due to insufficient details. The ITAT upheld the CIT(A) and allowed the expenses, noting the business necessity of the travels.

10. Miscellaneous Expenses:
The AO disallowed 1/5th of tea and coffee expenses. The ITAT upheld the CIT(A), allowing the expenses, referencing the Sayaji Iron & Engg. case.

11. Registration Expenses:
The AO disallowed Rs.25,000/- for product registration fees. The ITAT upheld the CIT(A), treating it as revenue expenditure necessary for business.

12. Valuation of Closing Stock including Excise Duty:
The AO added excise duty to the valuation of closing stock. The ITAT upheld the CIT(A), referencing Indo Nippon Chemicals, and allowed the assessee's method of valuation.

13. Inclusion of Various Receipts while Calculating Profit for Section 80HHC:
The ITAT upheld the CIT(A)'s decision to include receipts like scrap sale, exchange difference, and advance license benefit in the calculation of profit for Section 80HHC, citing relevant case laws.

Conclusion:
The ITAT provided a detailed analysis of each issue, confirming some of the AO's actions while reversing others based on legal precedents and the specifics of the case. The judgment reflects a thorough examination of the facts and applicable laws, ensuring a fair and just resolution.

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