2018 (11) TMI 285 - AT - Income Tax

Disallowance u/s.14A r.w. Rule 8D(2) - non recording of satisfaction - Held that - AO failed to record the sustainable satisfaction before invoking the provisions of section 14A of the Act. Therefore, the disallowance made by the AO is unsustainable technically. Accordingly, this part of the argument of Ground No.1 is allowed. Disallowance of foreign travel expenses of employees - allowable busniss expenses - Held that - On the issue of capitalization of the expenditure, in view of the assessee s submission that the expenses incurred for the purpose other than the purchase of machinery, needs to be verified by the AO, we find this issue needs to be remitted back to the file of AO for verification of correctness of the facts relating to this claim. AO is directed to verify the expenses in this regard after granting reasonable opportunity of being heard to the assessee. Assessee is directed to produce relevant documents to substantiate his claim. Classification of items of fixed assets - rate of depreciation - AO made addition being difference in depreciation @10% and 15% on some items under block of Plant and Machinery treating the same as Furniture - Held that - We find this issue is settled one in favour of the assessee by virtue of the orders of Tribunal in the A.Yrs. 2006-07 to 2009-10. Considering the same and following the rule of consistency, we allow the ground No.3 raised by the assessee. Disallowance on account of Product Development expenses - Held that - The assessment year specific approach is the decided issue legally and not the date specific approach. We find the facts are somewhat identical to the facts of the present case. Considering the above, we allow the Ground No.5 (a) and (b) needs to be remanded to the file of AO for fresh adjudication on the matters. Addition u/s.48 on account of demat charges which was claimed as expenditure incurred for earning income from capital gains to be deleted Addition made on account of rent paid for the property at Bungalow No.70, Koregaon Park and depreciation - Held that - As decided in assessee s own case there is no clarity with reference to the capitalised items of assets credited to the Serum Institute of India Ltd. in the said house premises occupied by Mr. Z.S. Poonawalla, applicable rate of depreciation and the use of the asset etc. As discussed in the open court, we are of the opinion that this limb of the ground should be remanded to the file of AO for fresh adjudication after granting reasonable opportunity of being heard to the assessee in accordance with the set principles of natural justice. Allowability of depreciation @80% on the cost and Electrical and Civil Works - Held that - Considering the binding precedents on this limited issue of allowing higher depreciation on the civil works linked to the foundation work of the windmill, we are of the opinion that the assessee is entitled to claim higher depreciation @80% on the civil structures of the windmill which is part and parcel of the windmill and which cannot be separated. Therefore, the order of CIT(A) holding that the higher depreciation is applicable in windmill and also expenses incurred on civil structure, is fair and reasonable and it does not call for any interference. Accordingly, the ground raised by the Revenue is dismissed. Disallowance of Selling and Distribution Expenses - allowable business expense - discounts on purchase of vaccines given to doctors - Held that - The scope of the CBDT Circular cannot be extended to the pharmaceutical companies without having any enabling Notification or Circular for Medical Council of India. Consequently, the present assessee being a pharmaceutical company is outside the scope of the said circulars of MCI and the CBDT. Considering the above, we are of the opinion that the Ground No.10/Modified Ground No.10 raised by the assessee should be allowed in favour of the assessee. MAT - Allowability of deduction to the Wealth Tax paid by the assessee for the purpose of computing book profits u/s.115JB - AO denied the said payment of tax as not an allowable deduction - Held that - The wealth tax paid by the assessee, being an ascertained liability is an allowable deduction for the purpose of section 115JA of the Act. Accordingly, Ground by the assessee is allowed.

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance of foreign travel expenses.
3. Classification of fixed assets for depreciation purposes.
4. Disallowance of provision for leave encashment.
5. Disallowance of product development expenses.
6. Disallowance of demat charges.
7. Disallowance of bogus purchases.
8. Disallowance of rent and depreciation for a leased property.
9. Depreciation on windmill-related electrical and civil works.
10. Disallowance of selling and distribution expenses.
11. Allowability of wealth tax paid for computing book profits under Section 115JB.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A:
The Tribunal found that the Assessing Officer (AO) did not record specific satisfaction as required under Section 14A(2) read with Rule 8D. The AO’s satisfaction was deemed generic and insufficient. Consequently, the disallowance under Section 14A was not sustainable. The Tribunal allowed the assessee's appeal on this ground.

2. Disallowance of Foreign Travel Expenses:
The AO treated foreign travel expenses as capital in nature. The Tribunal remitted the issue back to the AO for verification, as similar issues in previous years were also remanded. The Tribunal directed the AO to verify the expenses and allow them if they were incurred for business purposes.

3. Classification of Fixed Assets:
The AO reclassified certain assets, leading to different depreciation rates. The Tribunal noted that in earlier years, similar issues were decided in favor of the assessee, allowing the classification of these assets as ‘Plant and Machinery’ rather than ‘Furniture and Fixtures’. The Tribunal followed the rule of consistency and allowed the appeal.

4. Disallowance of Provision for Leave Encashment:
The Tribunal upheld the disallowance, noting that similar issues in previous years were decided against the assessee. The provision for leave encashment was not allowed as an expense.

5. Disallowance of Product Development Expenses:
The AO disallowed weighted deduction for expenses incurred before the approval date of the R&D facility. The Tribunal remanded the issue back to the AO for fresh adjudication, directing the AO to follow the legal precedent that the date of approval is not crucial but the existence of recognition is.

6. Disallowance of Demat Charges:
The Tribunal allowed the appeal, noting that similar issues in previous years were decided in favor of the assessee. Demat charges were considered allowable expenses for computing capital gains.

7. Disallowance of Bogus Purchases:
Based on information from the Sales Tax Department, the AO treated certain purchases as bogus. The Tribunal remanded the issue back to the CIT(A) for fresh adjudication, directing the CIT(A) to follow the Tribunal’s decision in similar cases, which involved categorizing suppliers and verifying the trail of goods.

8. Disallowance of Rent and Depreciation for Leased Property:
The Tribunal allowed the rent expenses, citing previous decisions in favor of the assessee. However, the issue of depreciation on capitalized expenses was remanded to the AO for fresh adjudication.

9. Depreciation on Windmill-related Electrical and Civil Works:
The Tribunal allowed the appeal, granting higher depreciation rates for electrical and civil works related to windmills, following legal precedents that such works form an integral part of the windmill.

10. Disallowance of Selling and Distribution Expenses:
The AO disallowed expenses based on a CBDT circular. The Tribunal allowed the appeal, noting that the circular does not apply to pharmaceutical companies and that similar issues were decided in favor of the assessee in previous cases.

11. Allowability of Wealth Tax Paid for Computing Book Profits:
The Tribunal allowed the appeal, noting that wealth tax paid constitutes an ascertained liability and is an allowable deduction for computing book profits under Section 115JB, following previous decisions in the assessee’s favor.

Conclusion:
The Tribunal provided relief to the assessee on several grounds, remanded some issues for fresh adjudication, and upheld disallowances on a few grounds, ensuring consistency with previous decisions and legal precedents. The appeals of the assessee were partly allowed for statistical purposes, while the appeals of the Revenue were dismissed.

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