2017 (6) TMI 334 - AT - Income Tax

Addition on account of depreciation on plant and machinery, building, furniture and fixtures - addition on the basis of discontinuity of manufacturing operation of the assessee and also holding that the same have not been used during the year - Held that - With the introduction of concept of WDV of block of assets, the depreciation is allowable not on individual items but depending upon date of acquisition and put to use of the asset. Also section 38(2) deals with usage of assets for non-business purposes and does not refer to assets partly used during the year for business purposes. Depreciation is allowable on the plant and machinery, building, furniture and fixture and office equipment of INR 1,22,84,477 and the disallowance made by the AO was not justified. Thus, there is no merit for the disallowance so made. Respectfully, following the order of the Tribunal in assessee s own case, we delete the disallowance of depreciation so made by the AO. - Decided in favour of assessee. Disallowance of depreciation on goodwill - existence of no provisions in act to provide for the depreciation on goodwill - Held that - From the record we found that the Hon ble Mumbai ITAT, in the assessee s own case for AY 2002-03, has allowed depreciation on goodwill by placing reliance on the ruling of the Supreme Court in case of CIT vs Smifs Securities Limited (2012 (8) TMI 713 - SUPREME COURT ) wherein held in no uncertain terms has held that goodwill is in the nature of any other business or commercial right of similar nature , hence, eligible for depreciation.- Decided in favour of assessee. Disallowance of contribution made to group gratuity scheme - Held that - The gratuity payments totalling to INR 53,48,822 should be allowed under section 36 (1)(v) of the Act as the assessee has made payment to approved gratuity fund.- Decided in favour of assessee. Disallowance of legal and professional fee - Held that - These expenses are incurred wholly and exclusively for the purpose of business and hence be allowed as a deductible expense under section 37(1) of the Act except an amount of INR 6,20,150 should be disallowed during the year under consideration. As the assessee has suo moto reversed and offered to tax an amount of INR 5,62,492 in AY 2006-07, we direct the AO that in respect of the reversal of the amount in the books of accounts to the extent of INR 5,62,492, not to treat the same as income of AY 2006-07 as offered by assessee in the return of income as it would amount to double taxation. Disallowance of sale commission - AO disallowance assessee s claim of commission payment on the plea that notices issued u/s.133(6) to the payee were returned unserved - Held that - The amount of INR 11,19,811 was not payable to Radical Health Tech. Accordingly, assessee had written back and offered to tax the said amount in A.Y.2004-05. In view of the above, we confirm the action of the AO for disallowance of sales commission during the Assessment Year 2003-04. - Decided against assessee. Disallowance of amount of difference in ledger accounts - Held that - The difference sought to tax is the difference between amounts as per GL module and AR / AP module. As the assessee failed to reconcile the difference ever after giving various opportunities, we confirm the addition made on account of difference in ledger account.- Decided against assessee. Disallowance of expenditure incurred on foreign trip - Held that - Foreign trips were undertaken for the purpose of business, therefore, keeping in view nature of commercial expediency and the decision of Supreme Court in case of Sassoon J David (1979 (5) TMI 3 - SUPREME Court ), we do not find any merit for the disallowance so made by the AO. Assessee being an artificial juridical person cannot have personal expenses. The expenditure so incurred by the company has to be for the purpose of business of the company. Accordingly, AO is directed to allow the same. - Decided in favour of assessee. Disallowance of sales expenses - Held that - The expenditure were incurred in normal course of business to keep cordial relations with existing and potential clients. Out of the total expenses ₹ 9201/- was not paid to Dr. Krishna. Accordingly, we confirm the disallowance of ₹ 9201/- out of the total expenses of ₹ 9,17,951/-. Disallowance of convention and perfusion expenses - Held that - Expenditure for convention and perfusion was incurred for business purpose and same was substantiated with supporting documents (refer paper book page number 251 to 284). The learned AO and Hon ble CIT(A) nowhere doubted the genuineness of the expenditure. The 50 percent disallowance on contention that Assessee failed to justify the real intent behind the expenditure incurred is not tenable. Accordingly, we direct the AO to allow the entire expenditure incurred - Decided in favour of assessee. Expenditure on renovation of conference room - revenue or capital expenditure - Held that - We found that during the year under consideration, the Assessee claimed INR 1,09,828 (INR 87,464 INR 22,464) on account of renovation of conference room as revenue expenditure. However, the amount of INR 22,464 was written back in the books of accounts on 22 August 2002. The Department has not filed an appeal against the allowance of INR 87,464 made by the learned AO. As the expenditure is revenue in nature, we do not find any justification for disallowance of the same. Disallowance of staff welfare expenditure - Held that - CIT (A) granted a relief of INR 80,000 and disallowed INR 20,000 contenting that the expenses on Ganpati festival, birthday celebrations, Diwali, marrage gifts, etc. ensures cordial employer-employee relationship, though the entire amount cannot be said to be incurred wholly and exclusively for business purpose. The Department has not filed an appeal against the relief granted by the CIT(A) of INR 80,000. Since the expenditure was incurred wholly and exclusively for the purpose of business, we do not find any merit for the disallowance of ₹ 20,000/-. Disallowance of non-compete fees - Held that - Respectfully following the decision of the Tribunal in assessee s own case, we hold that assessee is eligible for consequential depreciation on non-compete fees in the AY 2003-04. Not allowing consequential adjustment in opening stock of AY 2003-04 - Held that - The assessee had changed the method of valuation of closing stock of manufactured goods from actual cost method to standard cost method of valuation and closing stock of trading items from weighted average cost method to standard cost method of valuation in AY 2002-03. The said change in the method of valuation resulted into a decrease in the profit for the captioned AY by INR 36,34,884. The Assessing Officer made an addition of INR 36,34,884 to the total income of Appellant for AY 2002-03 (reassessment proceedings). However, the Commissioner of Income tax Appeals while upholding the addition made by the Assessing Officer for AY 2002-03 (reassessment proceedings), has directed to adjust the opening stock for AY 2003-04 to that effect as per the order dated 25 October 2007. Thus we direct the AO to allow consequential adjustment in the opening stock of AY 2003-04 amounting to ₹ 36,34,884/-. Addition of notional commission income while determining the arms length price under the transfer pricing regulation - Held that - As relying on assessee s own case we are inclined to restore the issue to the file of the Assessing Officer/ Transfer Pricing Officer with a direction to adjudicate the issue afresh and if in reality the assessee is in any way involved in international transaction in relation to supply of medical devices by the overseas entity to hospitals in India, he shall determine the arm s length price after selecting an appropriate method as provided under section 92C of the Act and keeping in view all other facts and materials on record and after providing due opportunity of being heard to the assessee. Disallowance of expenditure incurred on purchase of catalogues and brochures - Held that - This expenditure has been incurred under the commercial expediency. See Dhanarajgirji Raja Narsingirji 1973 (3) TMI 6 - SUPREME Court Disallowance of 50% of expenditure incurred for sponsoring the foreign trips of doctors - Held that - We found that expenditure were incurred wholly and exclusively for the purpose of business. A company being an artificial juridical person cannot have personal expenses. All the expenses incurred by the company has to be for the purpose of the business of the company. Accordingly no adhoc disallowance can be mad. Thus direct the AO to delete the disallowance of expenditure incurred on foreign trips of doctors.- Decided in favour of assessee. Disallowance of expenditure incurred in respect of in-house IT resources Centre for abandoned project - Held that - Expenditure incurred was not for new business, but was essentially a new venture undertaken by the existing business, accordingly same is liable to be allowed as revenue expenditure. The AO is directed to allow the same.- Decided in favour of assessee. Expenditure on software development - revenue or capital - depreciation claim - Held that - CIT(A) has already allowed 60% depreciation on the amount so incurred. We do not find any valid reason to interfere in the order of CIT(A).

Summary

Issues Involved:
1. Depreciation on plant and machinery, building, furniture, and fixtures.
2. Depreciation on goodwill.
3. Disallowance of contribution to group gratuity scheme.
4. Disallowance of legal and professional fees.
5. Disallowance of sales commission.
6. Disallowance due to differences in ledger accounts.
7. Disallowance of foreign trip expenses.
8. Disallowance of sales promotion expenses.
9. Disallowance of convention and perfusion expenses.
10. Disallowance of capital expenditure.
11. Disallowance of staff welfare expenses.
12. Disallowance of non-compete fees.
13. Adjustment in opening stock.
14. Addition of notional commission income under transfer pricing regulations.
15. Disallowance of expenditure on gifts.
16. Disallowance of expenditure on catalogues and brochures.
17. Disallowance of expenditure on foreign trips of doctors.
18. Disallowance of expenditure on abandoned IT project.
19. Disallowance of software development expenses.
20. Addition due to ERP accounting system discrepancies.

Detailed Analysis:

Depreciation on Plant and Machinery, Building, Furniture, and Fixtures:
The Tribunal found that the assessee was entitled to depreciation on plant and machinery, building, furniture, and fixtures, even though the manufacturing operations were discontinued. The concept of block of assets allows depreciation on the aggregate WDV of all assets in the block. The Tribunal followed its earlier decisions in the assessee's own cases for previous years and deleted the disallowance made by the AO.

Depreciation on Goodwill:
The Tribunal allowed depreciation on goodwill, relying on the Supreme Court's ruling in CIT vs Smifs Securities Limited, which held that goodwill is a depreciable asset under Section 32(1)(ii) of the Act. The Tribunal directed the AO to allow depreciation on goodwill of INR 5,46,875.

Disallowance of Contribution to Group Gratuity Scheme:
The Tribunal allowed the deduction for contributions to the group gratuity scheme, noting that the gratuity trust maintained by the assessee had been granted approval with retrospective effect. The amount of INR 53,48,822 was allowed under Section 36(1)(v) of the Act.

Disallowance of Legal and Professional Fees:
The Tribunal allowed the legal and professional fees paid to Dr. Ashok N. Johari, except for INR 6,20,150, which was disallowed as it was not paid. The balance amount of INR 5,62,492, which was written back in the books, was directed not to be treated as income for AY 2006-07 to avoid double taxation.

Disallowance of Sales Commission:
The Tribunal confirmed the disallowance of sales commission of INR 11,19,811 as the assessee failed to provide evidence supporting the genuineness of the transaction.

Disallowance Due to Differences in Ledger Accounts:
The Tribunal upheld the disallowance of INR 22,48,672 due to differences between the General Ledger module and AR/AP modules, as the assessee failed to reconcile the differences.

Disallowance of Foreign Trip Expenses:
The Tribunal allowed the foreign trip expenses of INR 10,42,000 incurred by the director, noting that the trips were undertaken for business purposes. The Tribunal cited the decision in Sayaji Iron and Engg. Co. and held that the expenses were for the business of the company.

Disallowance of Sales Promotion Expenses:
The Tribunal allowed the sales promotion expenses, except for INR 9,201, which was not paid to Dr. Krishna. The Tribunal noted that the expenses were incurred in the normal course of business.

Disallowance of Convention and Perfusion Expenses:
The Tribunal allowed the entire convention and perfusion expenses, noting that the expenses were incurred for business purposes and were substantiated with supporting documents.

Disallowance of Capital Expenditure:
The Tribunal allowed the renovation expenses of INR 22,464 as revenue expenditure, noting that the amount was written back in the books and was revenue in nature.

Disallowance of Staff Welfare Expenses:
The Tribunal allowed the staff welfare expenses of INR 20,000, noting that the expenses were incurred wholly and exclusively for business purposes.

Disallowance of Non-Compete Fees:
The Tribunal allowed depreciation on non-compete fees, following its earlier decision in the assessee's own case for AY 2002-03, where it was held that non-compete fees are a capital expenditure eligible for depreciation.

Adjustment in Opening Stock:
The Tribunal directed the AO to allow the consequential adjustment in the opening stock of AY 2003-04 amounting to INR 36,34,884, following the order of the CIT(A).

Addition of Notional Commission Income Under Transfer Pricing Regulations:
The Tribunal restored the issue to the AO/Transfer Pricing Officer to determine the arm's length price using an appropriate method, following its earlier decision in the assessee's own case for AY 2002-03.

Disallowance of Expenditure on Gifts:
The Tribunal directed the AO to allow the entire expenditure incurred on gifts, following the reasoning given in AY 2003-04.

Disallowance of Expenditure on Catalogues and Brochures:
The Tribunal allowed the expenditure on catalogues and brochures, noting that the expenses were incurred under commercial expediency and were wholly and exclusively for business purposes.

Disallowance of Expenditure on Foreign Trips of Doctors:
The Tribunal allowed the expenditure on foreign trips of doctors, noting that the expenses were incurred wholly and exclusively for business purposes and no adhoc disallowance can be made.

Disallowance of Expenditure on Abandoned IT Project:
The Tribunal allowed the expenditure on the abandoned IT project as revenue expenditure, noting that it was a new venture undertaken by the existing business.

Disallowance of Software Development Expenses:
The Tribunal upheld the allowance of 60% depreciation on software development expenses by the CIT(A).

Addition Due to ERP Accounting System Discrepancies:
The Tribunal upheld the addition of INR 3,485 arising from discrepancies in the ERP accounting system, following the findings of the AO and CIT(A).

Conclusion:
The Tribunal allowed most of the claims made by the assessee, following its earlier decisions and relevant case laws. The appeals of the revenue were dismissed on the ground of tax effect being below the prescribed limit. The Tribunal directed the AO to follow its directions and allow the claims accordingly. The judgment was pronounced in the open court on 25/05/2017.