2013 (12) TMI 139 - AT - Income Tax

Expenses debited to the Profit & Loss account Capital or revenue Held that - Following assessee s own case for A.Y. 2006-07 and 2007-08 - These expenditures are capital in nature and forms part of cost of investment. The expenditure relating to professional fees paid - These expenditures were on account of research and development activities which falls within the ambit of section 35D - This issue has not been examined by the Assessing Officer from this angle This particular issue was restored for fresh adjudication. Development expenditure - Construction equipment - Capital or revenue in nature Held that - Following assessee s own case for assessment years 2006-07 and 2007-08 - Such kind of technical consultancy is in the nature of capital only as the assessee had acquired the technical knowhow, which has an enduring benefit Decided against assessee. Disallowance under section 14A Held that - No borrowed funds have been utilized for the purpose of investment as the assessee has sufficient profit and interest free funds for making investment - The disallowance of interest component has to be removed The issue was restored for fresh adjudication. Club membership fees Held that - Following Full Bench decision of P&H High Court decision in Groz Beckert Asia Ltd. 2013 (2) TMI 375 - PUNJAB & HARYANA HIGH COURT - The nature of the expenditure incurred by the assessee cannot be said to be a capital expenditure - The corporate membership was obtained for running the business with a view to produce profit - Such membership does not bring into existence an asset or an advantage for the enduring benefit of the business - It is an expenditure incurred for the period of membership and is not long lasting. By subscribing to the membership of a club, no capital asset is created or comes into existence - The issue was restored. Transfer pricing adjustment - Guarantee fee and notional interest Held that - Following many cases of the co-ordinate bench of the Tribunal where guarantee fee commission between 0.20% to 0.5% have been upheld In assessee s own case for earlier years - 3% has been upheld - The same rate should be applied in this year also as a matter of consistency without there being any change in the facts and the circumstances. Capital loss on sale of R&D assets Held that - Following assessee's own case for assessment years 2006-07 and 2007-08 - The assessee had been allowed 100% depreciation on the asset used for R&D purpose in the first year itself and if indexation for claiming capital loss is also allowed it will amount to double benefit - Section 35 is part of Chapter-IV dealing with computation of business income and section 43 is part of the same heading - The provisions of capital gain cannot be imported to allow the assessee one more deduction Decided against assessee. Disallowance under section 40a(ia) Year end provisions Held that - Following assessee's own case for the assessment years 2006-07 and 2007-08 - The provisions of TDS are not applicable in the year and provisions, as the TDS have been deducted by the assessee, when the bills have been booked As per amendment brought by the Finance Act, 2005 in section 40(a)(ia) with retrospective effect from 1st April 2005 in the first proviso Decided in favour of assessee. Scientific research expenditure - weighted deduction under section 35(2AB) Held that - Following assessee s own case for earlier years - Once the R&D facilities are approved in Form 3CL and DSIR has not rejected the application submitted by the assessee, then it can be presumed that the application has been accepted - The failure on the part of the DSIR to inform the I.T. authorities in time cannot be the reason for denying weighted deduction to the assessee Decided in favour of assessee. Incentive and service coupon Disallownace u/s 40(a)(ia) Held that - Following assessee's own case for the assessment year 2007-08 - TDS is not required to be deducted as the provisions of section 194H is not applicable as the sale was made on principal-to-principal basis - Regarding service coupon - The matter has been set aside to the file of the Assessing Officer - Partly allowed for statistical purposes. Depreciation on intangible asset Held that - Following assessee s own case for assessment year 2007-08 - The existence of an agreement to acquire technology is not sufficient to claim depreciation. There has to be some active or passive use of technology knowhow during the year - Decided against assessee. Reversal of provisions for medical benefits Reversal of FCCB premium - Held that - The amount which has been disallowed in the assessment year 2007-08 then in the assessment year 2008-09, deduction has to be allowed on the amount reversed in this year as it will lead to double taxation, one in the assessment year 2007-08 and the other in the assessment year 2008-09 Decided in favour of assessee. Octroi incentive - Revenue receipt or not Held that - The assessee has received octroi incentive as per the package scheme of incentive declared by the Government of Maharashtra - Following the principle laid down by Hon'ble Supreme Court in Ponni Sugar and Chemicals Ltd. - The purpose test for which subsidy is given has to be applied for deciding the issue - If the object of the subsidy is to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy is on capital account and if the subsidy claimed is to enable the assessee to run the business more profitably then the receipt is on the revenue account - This fundamental principle has not been examined either by the Assessing Officer or by the Tribunal - The matter should be restored back to the file of the Assessing Officer to consider the scheme and the objects for which such incentive was given and to decide the issue in view of the principle laid down. Sale proceeds of R&D assets - Held that - Following Pruthvi Brokers & Shareholders Pvt. Ltd. 2012 (7) TMI 158 - BOMBAY HIGH COURT - Appellate authorities can accept the new claims that were not made before the AO - An assessee is entitled to raise not merely additional legal submissions before the appellate authorities, but is also entitled to raise additional claims before them. The appellate authorities have the discretion whether or not to permit such additional claims to be raised - They have the jurisdiction to entertain the new claim. That they may choose not to exercise their jurisdiction in a given case is another matter - The claim of the assessee is allowed subject to verification of the evidence filed by the assessee before the Assessing Officer - Decided in favour of assessee. Sub-letting of the property Held that - The income from letting out the property to Ridge Business Centre has been assessed as business income in earlier years - When the income which has been derived from stock-in-trade and has been accepted as business income, then the computation has to be made under section 28 and not under section 23 - The assessee has duly shown the income received / accrued from Ridge Business Centre as business income, then any further rent realized by Ridge Business Centre form the third party cannot be said to have been earned / received or accrued to the assessee company - No further income can be attributed to the as business income and not from the income from house property Decided in favour of assessee. Deduction under section 80IC Held that - Following assessee s own case for earlier years - The Assessing Officer was directed by the Tribunal to quantify the loss for the year under consideration and give clear cut findings as to whether the unit at Haridwar was set up in January 2006 or not - Partly allowed for statistical purposes.

Summary

Issues Involved:

1. Disallowance of expenditure as capital expenditure.
2. Disallowance of development expenditure as capital expenditure.
3. Disallowance of pro-rata premium payable on FCCBs.
4. Addition of unutilized CENVAT credit on raw material.
5. Disallowance of provisions for warranties as contingent liability.
6. Disallowance under section 40A(9) for employee welfare contributions.
7. Disallowance of ESOP-related employee costs.
8. Disallowance under section 14A for exempt income.
9. Disallowance of club membership fees.
10. Transfer pricing adjustments.
11. Disallowance of capital loss on sale of R&D assets.
12. Disallowance under section 40a(ia) for year-end provisions.
13. Disallowance of weighted deduction under section 35(2AB).
14. Disallowance under section 40(a)(ia) for dealer incentives and service coupons.
15. Disallowance of depreciation on intangible assets.
16. Disallowance of deduction for reversal of provisions for medical benefits.
17. Treatment of octroi incentive as revenue receipt.
18. Disallowance of deduction for reversal of FCCB premium.
19. Disallowance of deduction for sale proceeds of R&D assets.
20. Disallowance of deduction for special pension.
21. Addition of difference in rent received by a group company.
22. Allowance of credit for TDS.
23. Disallowance of deduction under section 80IC.

Detailed Analysis:

1. Disallowance of Expenditure as Capital Expenditure:
The assessee's claim of Rs. 10,74,91,437 as revenue expenditure was disallowed by the Assessing Officer (AO) and confirmed by the DRP, treating it as capital expenditure. The Tribunal upheld this disallowance for most expenditures, citing previous years' decisions. However, the professional fees paid to D.S. Partnership for scientific research were remanded back to the AO for fresh examination under section 35D. The difference in exchange on FCCBs was allowed as revenue expenditure.

2. Disallowance of Development Expenditure as Capital Expenditure:
The AO treated Rs. 54,59,350 spent on developing construction equipment as capital expenditure, which was confirmed by the Tribunal based on prior years' decisions, stating that the technical consultancy acquired had enduring benefits.

3. Disallowance of Pro-Rata Premium Payable on FCCBs:
The AO disallowed Rs. 39,43,78,178 claimed as expenditure on FCCB premium. The Tribunal followed its earlier decisions, treating this expenditure as revenue in nature and allowed the assessee's claim.

4. Addition of Unutilized CENVAT Credit on Raw Material:
The AO added Rs. 1,12,20,603 of unutilized CENVAT credit to the closing stock. The Tribunal remanded this issue back to the AO for fresh adjudication, consistent with earlier years' orders.

5. Disallowance of Provisions for Warranties:
The AO disallowed Rs. 21,09,63,000 as contingent liability. The Tribunal remanded the issue back to the AO to decide afresh in light of the Supreme Court's decision in Rotrok Control India Pvt. Ltd.

6. Disallowance under Section 40A(9) for Employee Welfare Contributions:
The AO disallowed Rs. 27,47,447 for contributions to Mahindra Academic. The Tribunal remanded the issue back to the AO for fresh adjudication, following earlier years' orders.

7. Disallowance of ESOP-Related Employee Costs:
The AO disallowed Rs. 2,90,34,761 claimed as employee costs under ESOP. The Tribunal remanded the issue back to the AO to decide in light of the Special Bench decision in Biocon Ltd.

8. Disallowance under Section 14A for Exempt Income:
The AO disallowed Rs. 39,76,50,000 under section 14A. The Tribunal remanded the issue back to the AO to examine if investments were made out of surplus funds and to apply Rule 8D for other expenditures.

9. Disallowance of Club Membership Fees:
The AO disallowed Rs. 1,55,25,601 as capital expenditure. The Tribunal remanded the issue back to the AO to consider the Full Bench decision of the Punjab & Haryana High Court in Groz Beckert Asia Ltd.

10. Transfer Pricing Adjustments:
The AO made an upward adjustment of Rs. 3,80,63,602 for guarantee fee and notional interest. The Tribunal directed the AO to apply a 3% rate for guarantee fee and to decide the notional interest based on the LIBOR rate.

11. Disallowance of Capital Loss on Sale of R&D Assets:
The AO disallowed Rs. 1,98,44,153 claimed as capital loss. The Tribunal upheld this disallowance, consistent with earlier years' decisions.

12. Disallowance under Section 40a(ia) for Year-End Provisions:
The AO disallowed Rs. 9,00,35,392 for year-end provisions. The Tribunal allowed the assessee's claim, following earlier years' decisions that TDS provisions are not applicable to year-end provisions.

13. Disallowance of Weighted Deduction under Section 35(2AB):
The AO disallowed Rs. 128,39,81,081 claimed under section 35(2AB). The Tribunal allowed the claim, following earlier years' decisions that the failure of DSIR to inform the IT authorities cannot deny the deduction.

14. Disallowance under Section 40(a)(ia) for Dealer Incentives and Service Coupons:
The AO disallowed Rs. 149,26,14,000 for dealer incentives and service coupons. The Tribunal upheld the disallowance for dealer incentives but remanded the issue of service coupons back to the AO.

15. Disallowance of Depreciation on Intangible Assets:
The AO disallowed Rs. 22,92,344 claimed as depreciation. The Tribunal upheld this disallowance, consistent with earlier years' decisions.

16. Disallowance of Deduction for Reversal of Provisions for Medical Benefits:
The AO disallowed Rs. 28,39,000 for reversal of provisions for medical benefits. The Tribunal allowed the deduction, stating it would otherwise lead to double taxation.

17. Treatment of Octroi Incentive as Revenue Receipt:
The AO treated Rs. 92.89 crores of octroi incentive as revenue receipt. The Tribunal remanded the issue back to the AO to examine the scheme's purpose and decide in light of the Supreme Court and Jurisdictional High Court decisions.

18. Disallowance of Deduction for Reversal of FCCB Premium:
The AO disallowed Rs. 1,24,41,145 for reversal of FCCB premium. The Tribunal directed the AO to verify and ensure no double taxation occurs.

19. Disallowance of Deduction for Sale Proceeds of R&D Assets:
The AO disallowed Rs. 69,35,208 claimed as sale proceeds of R&D assets. The Tribunal allowed the claim, subject to verification by the AO.

20. Disallowance of Deduction for Special Pension:
The AO disallowed Rs. 25,55,112 claimed as special pension. The Tribunal directed the AO to allow 1/5th of the claim, consistent with earlier years.

21. Addition of Difference in Rent Received by a Group Company:
The AO added Rs. 7.43 crores as the difference in rent received by Ridge Business Centre. The Tribunal allowed the assessee's claim, stating the rental income should be assessed as business income.

22. Allowance of Credit for TDS:
The Tribunal directed the AO to give credit for TDS after verifying the necessary details.

23. Disallowance of Deduction under Section 80IC:
The AO disallowed the deduction under section 80IC. The Tribunal remanded the issue back to the AO to quantify the loss and verify the commencement of the Haridwar unit.

Conclusion:
The Tribunal's decision involved a mix of upholding, remanding, and allowing various claims based on precedents, detailed examination of facts, and adherence to legal principles. The judgment reflects a comprehensive analysis of multiple issues, ensuring that the principles of law are applied consistently while addressing the specific facts of each case.