2017 (2) TMI 791 - AT - Income Tax

Disallowance u/s.14A r.w.r 8D - Held that - We find that the assessee had not claimed any exempt income in its return. However he made disallowance of ₹ 1.25 crores(Rs.1.19 crores interest expenditure ₹ 6.89 lakhs administrative expenses) and same was upheld by the FAA. The pre-requisite to invoke the provisions of section 14A r.w.r.8D of the Rules is that the assessee should have claimed some expenditure against exempt income. In the case under consideration, no exempt income was shown by the assessee in its return, so, there was no justification for making disallowance of any kind. Disallowance being loss incurred due to revaluation of open forward exchange contract - Held that - We find that in the case of M/s. D.Chetan & Co. 2016 (10) TMI 629 - BOMBAY HIGH COURT held that Tribunal was justified in deleting the addition of Mark to Market Loss made by the Assessing Officer on account of disallowance of loss on foreign exchange forward contract loss. - Decided in favour of assessee MAT computation on Disallowance u/s 14A - Held that - As no addition should have been made u/s.14A for the year under consideration. Following the same, we hold that addition confirmed by the FAA for computing the book profit u/s.115JB has to be deleted. Consideration received on assignment of patent - applicability of provisions of section 55(2) - Held that - The patent was for the purpose to have right to manufacture /produce/ process some article/thing. The patent was registered for commercial exploitation of the same in India as well as in the international market. It was transferred to the assignee for exploiting it commercially. Section 55(2)(a) talks of right to manufacture, produce or process any article or thing.Therefore, as per the amended provisions, the right to manufacture/ produce/ process would be taxable under the head capital gains and cost has to be taken at Rs. nil. In these circumstances, in our opinion the FAA has rightly invoked the provisions of Section 55 and taxed the disputed amount under the head capital gain. - Decided against the assessee. Sum received on sale of patent / know-how known as Profofal - capital receipt OR trading receipt - Held that - After hearing the rival submissions, we are of the opinion that the FAA had rightly treated the disputed amount as capital receipt and had taxed it as capital gain u/s.55 (2) of the Act. The assessee was not in the business of purchase and sale of patents, so the sale proceed of the assignment agreement could not be treated a revenue receipt.

Issues Involved:

1. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules.
2. Disallowance of loss due to revaluation of open forward exchange contracts.
3. Addition of disallowance under Section 14A for computing book profit under Section 115JB.
4. Addition of loss due to revaluation of open forward exchange contracts for computing book profit under Section 115JB.
5. Taxability of consideration received on the assignment of a patent under Section 55(2) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules:

The assessee challenged the disallowance of ?1.25 crores under Section 14A read with Rule 8D. The AO disallowed the amount, stating that the assessee had investments that could generate exempt income and had not disallowed any expenses. The assessee argued that no exempt income was claimed in the return, referencing the Cheminvest case. The Tribunal found that since no exempt income was shown, there was no justification for the disallowance, following the Cheminvest ruling. Thus, the first ground of appeal was allowed.

2. Disallowance of loss due to revaluation of open forward exchange contracts:

The AO disallowed ?4.74 crores as a notional loss from revaluation of open forward exchange contracts, considering it a provision and not an ascertained liability. The FAA upheld this, treating it as a contingent loss. The assessee cited cases like M/s. D.Chetan & Co. and Woodward Governor India Pvt. Ltd. The Tribunal agreed with the assessee, referencing the Bombay High Court's decision in M/s. D.Chetan & Co., and allowed the second ground of appeal.

3. Addition of disallowance under Section 14A for computing book profit under Section 115JB:

The third ground dealt with the addition of ?1.25 crores under Section 14A for computing book profit. Since the Tribunal allowed the first ground of appeal, it followed that no addition should be made under Section 115JB. Thus, the third ground of appeal was allowed.

4. Addition of loss due to revaluation of open forward exchange contracts for computing book profit under Section 115JB:

The fourth ground addressed the addition of ?4.74 crores for computing book profit under Section 115JB. Following the decision on the second ground, the Tribunal held that there was no justification for this addition. Hence, the fourth ground of appeal was allowed.

5. Taxability of consideration received on the assignment of a patent under Section 55(2) of the Income Tax Act:

The last ground concerned the ?1.5 crores received from the assignment of the patent "Profofal." The AO treated it as revenue receipt, while the FAA considered it capital gains under Section 55(2). The Tribunal discussed the nature of patents, their historical context, and the specific terms of the assignment agreement, concluding that the patent was for commercial exploitation. It upheld the FAA's decision to tax the amount under capital gains, rejecting the assessee's reliance on cases like Kwality Biscuit Pvt. Ltd. and Fernhill Laboratories and Industrial Establishment. Thus, the last ground was decided against the assessee.

Additional Points:

The AO's appeal on treating the ?1.5 crores as a trading receipt was dismissed, with the Tribunal agreeing with the FAA's treatment as capital gains. Additional grounds regarding re-opening were not adjudicated as the appeals were decided on merits.

Conclusion:

The appeal filed by the assessee was partly allowed, and the appeal of the AO was dismissed. The order was pronounced in the open court on 15th February 2017.

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