2016 (2) TMI 230 - AT - Income Tax

Disallowance u/s 14A - Held that - Disallowance u/s.14A r.w. Rule 8D should not exceed the exempt income. The Mumbai Bench in its order sustained the disallowance on applicability of provisions of sec.14A r.w. Rule 8D. However, the alternative claim of the assessee was that disallowance if at all should be made, it should be restricted to exempt income earned and not beyond that. Accordingly, the AO is directed to look at this issue on this angle and decide it afresh in the light of the above decision of the Mumbai Bench of the Tribunal in the case of M/s Daga Global Chemicals Pvt. Ltd vs ACIT. 2015 (1) TMI 1204 - ITAT MUMBAI Disallowance of payment made to Registrar of Companies - Held that - By placing reliance on the judgment of Supreme Court in the case of Punjab State Industrial Development Corpn Ltd vs CIT, 1996 (12) TMI 6 - SUPREME Court , wherein held that the fees paid to the Registrar of Companies for expansion of the capital base of a company is directly related to the capital expenditure incurred by the company and although incidentally that would certainly help in profit making, it still retains the character of capital expenditure since the expenditure is directly related to the expansion of the capital base of the company. Following the above judgment of the Supreme Court, we dismiss the ground raised by the assessee.- Decided against assessee Retention money payable - Held that - The provision for payment made by the assessee towards sub-contract is allowable expenditure as the assessee recognized the revenue from the said contract as income in the assessment year under consideration. Further, we make it clear that the assessee cannot claim the same expenditure on actual payment basis, otherwise it amounts to double deduction one on the basis of accrual and another on the basis of actual payment. Hence, we direct the Assessing Officer to allow this retention money payment only on accrual basis and not on actual payment basis. With these observations, we remit this issue to the file of the Assessing Officer for quantification. Disallowance u/s 37(1) of the Act towards payment of trade licence fee - Held that - This issue came up for consideration before the Tribunal in assessee s own case for assessment year 2006-07 decided the issue in favour of the assessee by observing that the payment made to M/s Samruddhi Holdings is an allowable expenditure u/s 37 of the Act and thereby annulled the revisional order of the CIT dated 27.10.2010 passed u/s 263 of the Act. Being so, in our opinion, the expenditure incurred by the assessee is a revenue expenditure and to be allowed accordingly. - Decided in favour of assessee Disallowance of additional depreciation - CIT(A) deleted the addition - Held that - The findings of the CIT(A) is justified and the contention of the Revenue is not sustainable in view of the judgment of the jurisdictional High Court in the case of CIT vs VTM Ltd, 2009 (9) TMI 35 - MADRAS HIGH COURT , wherein held that the assessee which was a manufacturer of textile goods when set up a windmill was entitled to additional depreciation. - Decided in favour of assessee Disallowance of purchase of auto cad - CIT(A) deleted the addition - Held that - As seen from the order of the CIT(A), the Autocad software is an application software. It helps in speeding up the process and to conduct the part of a business in a more efficient and better manner. The benefits of this software are accrued on day to-day running of the business but do not in any way give an enduring benefit. Though the software could be used for more than one year, that itself cannot be a reason for treating the expenditure incurred on application software as capital expenditure. In our opinion, the judgment of the jurisdictional High Court in the case of Southern Roadways Ltd. (2007 (6) TMI 193 - MADRAS HIGH COURT ) is squarely applicable to the facts of this case and the expenditure incurred on application software is only a revenue expenditure and it is to be allowed. Being so, we confirm the order of the CIT(A)- Decided in favour of assessee Corporate finance, industry research, preparing corporate strategy - Treatment to expenditure as capital expenditure or revenue - Held that - In the present case, the assessee incurred expenditure towards corporate finance, industry research, preparing corporate strategy and growth for bringing out a business plan which gives enduring benefit to the assessee and therefore, the expenditure is not for a particular assessment year as such it cannot be neither a revenue expenditure or deferred revenue expenditure. The benefits of the expenditure are enduring in nature. In our opinion, the judgment of Supreme Court in the case of Brooke Bond India Ltd (1997 (2) TMI 11 - SUPREME Court ) is directly applicable to the facts of the case. Accordingly, we have no hesitation to hold that the Assessing Officer is justified in treating the expenditure as capital expenditure - Decided against assessee Disallowance u/s 14A - Held that - Assessing Officer is directed to disallow 2% of the dividend income as expenditure

Summary

Issues Involved:
1. Condonation of delay in filing appeals.
2. Disallowance under Section 14A read with Rule 8D.
3. Disallowance of payment to Registrar of Companies.
4. Disallowance of retention money payable.
5. Disallowance under Section 37(1) for payment of trade license fee.
6. Disallowance of additional depreciation on plant and machinery.
7. Treatment of expenditure on purchase of AutoCAD software.
8. Treatment of expenditure on professional services and share capital raising.

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing Appeals:
At the outset, it was noticed that all the appeals filed by the assessee were time-barred by 6 days. The assessee filed condonation petitions stating that the delay was due to a typographical error in Form No.36. After reviewing the records, the Tribunal condoned the delay and admitted the appeals.

2. Disallowance under Section 14A read with Rule 8D:
- Assessment Year 2009-10: The Assessing Officer (AO) disallowed Rs. 1,05,93,937/- under Section 14A, which was partially upheld by the Commissioner of Income-tax (Appeals) [CIT(A)]. The Tribunal noted that the Special Bench decision in Cheminvest vs ITO was reversed by the Delhi High Court, holding that no disallowance under Section 14A can be made if no exempt income is earned. The Tribunal directed the AO to reexamine the issue considering relevant case laws.
- Assessment Year 2007-08: The AO disallowed 5% of the dividend income as expenditure. The Tribunal directed the AO to disallow 2% of the dividend income as expenditure, in line with the Madras High Court judgment in Simpson & Co Ltd vs DCIT.
- Assessment Year 2008-09: Similar to the previous year, the Tribunal directed the AO to disallow 2% of the dividend income as expenditure.

3. Disallowance of Payment to Registrar of Companies:
The Tribunal upheld the disallowance of Rs. 1,50,200/- paid to the Registrar of Companies, citing the Supreme Court judgment in Punjab State Industrial Development Corpn Ltd vs CIT, which held that such fees are capital expenditure.

4. Disallowance of Retention Money Payable:
- Assessment Year 2009-10: The AO disallowed retention money held back by the assessee, considering it contingent liability. The Tribunal directed the AO to allow the retention money payment on an accrual basis, citing various case laws supporting the allowance of accrued liabilities.
- Assessment Year 2007-08 & 2008-09: The Tribunal remitted the issue to the AO for quantification, following similar directions as given for the assessment year 2009-10.

5. Disallowance under Section 37(1) for Payment of Trade License Fee:
- Assessment Year 2009-10: The AO disallowed Rs. 2 crores paid to M/s. Samruddhi Holdings, considering it excessive and a device to shift profits. The CIT(A) allowed the deduction, noting the legal obligation and TDS compliance. The Tribunal upheld the CIT(A)'s decision, following its earlier order in the assessee's case for the assessment year 2006-07.
- Assessment Year 2007-08 & 2008-09: The Tribunal dismissed the Revenue's appeals, following its decision for the assessment year 2009-10.

6. Disallowance of Additional Depreciation on Plant and Machinery:
- Assessment Year 2009-10: The AO disallowed additional depreciation on the ground that the assessee was not engaged in manufacturing. The CIT(A) allowed the claim, considering the ready-mix concrete plant as a separate undertaking engaged in manufacturing. The Tribunal upheld the CIT(A)'s decision, citing relevant case laws.
- Assessment Year 2007-08 & 2008-09: The Tribunal dismissed the Revenue's appeals, following its decision for the assessment year 2009-10.

7. Treatment of Expenditure on Purchase of AutoCAD Software:
The AO treated the expenditure on AutoCAD software as capital expenditure. The CIT(A) allowed it as revenue expenditure, citing the jurisdictional High Court judgment in Southern Roadways Ltd. The Tribunal upheld the CIT(A)'s decision.

8. Treatment of Expenditure on Professional Services and Share Capital Raising:
- Assessment Year 2006-07: The AO treated the expenditure of Rs. 1.45 crores on professional services and Rs. 25 lakhs on raising share capital as capital expenditure. The CIT(A) apportioned the expenditure over three years. The Tribunal reversed the CIT(A)'s decision and upheld the AO's treatment as capital expenditure, citing the Supreme Court judgment in Brooke Bond India Ltd.

Summary:
- Appeals were admitted after condoning a 6-day delay.
- Disallowances under Section 14A were remitted for reexamination or adjusted to 2% of dividend income.
- Payment to Registrar of Companies was treated as capital expenditure.
- Retention money payable was allowed on an accrual basis.
- Trade license fee payments were allowed as revenue expenditure.
- Additional depreciation on plant and machinery was allowed.
- Expenditure on AutoCAD software was treated as revenue expenditure.
- Expenditure on professional services and share capital raising was treated as capital expenditure.