2019 (3) TMI 735 - AT - Income Tax

MAT computation - enhancement of book profit related to depreciation on revalued assets u/s 115JA - HELD THAT - Issue of revaluation reserve for purpose of section 115JA of act raised in these grounds of appeal is not arising out of order of learned assessing officer or learned CIT A and thus this ground of appeal has wrongly been taken by learned assessing officer. On careful perusal of assessment order it is apparent that AO has himself accepted that revaluation reserve being credited to profit and loss account does not warrant any further adjustments. It is also noted that amount as mentioned in ground of appeal number 1 relates to amalgamation adjustment reserve that has been dealt with in ground number 7 of appeal of learned assessing officer. The ld DR also did not show us how this ground is arising from order of lower authorities. Therefore, it is apparent that this ground has been taken under some misunderstanding or erroneously. Deduction u/s 80-IA - book profit computation u/s 115JA - profit derived from industrial undertaking engaged in business of generation of distribution of power - generated power used for internal consumption of its existing unit and not distributed for purposes of business - net profit shown in profit and loss account distribution - HELD THAT - The first ground of rejection of claim of assessee is that diesel-generating sets are imported where invoices show that these were imported for home consumption. The learned assessing officer has noted that the marking show that goods are not used for purpose of business. There is a clear misunderstanding on part of learned AO in holding that when custom authorities have marked for home consumption means that they are not to be used for purpose of business. The only meaning of that particular Mark is that goods are to be used for consumption in Indian Territory. Therefore, allegation of learned assessing officer that Gen sets imported for home consumption and therefore deduction under section 80 IA of income tax act is not allowable on it is devoid of any merit. Further, with respect to power generation unit not being a separate unit and further power is not supplied to public but it is for captive consumption and therefore no deduction under section 80 IA of income tax act is allowable is also now judicially settled by decision of honourable Delhi High Court in case of CIT vs. Orient Abrasives Ltd 2014 (8) TMI 558 - DELHI HIGH COURT wherein honourable Delhi High Court has held that profit and gain from captive consumption of electricity supplied from generator set and which cannot be sold to any third person will qualify for deduction under Section 80-IA. Transfer from revaluation reserve while computing book profit under section 115JA - sum represented difference between net asset received on amalgamation of company and consideration in form of equity shares issued to equity share holders of another company, therefore above difference in amount was directly credited to amalgamation reserve in terms of purchase method‟ of accounting prescribed under accounting standard 14 issued by ICAI - HELD THAT - According to explanation to section 115JA,(b) amount carried to any reserve by whatever name is required to be added to profit shown in profit and loss account. Here assessee has not carried to any reserve from sum credited in profit and loss account. The above sum has been credited in accordance with accounting standard issued by Inst of chartered accountants of India, which conforms to profit and loss prepared by assessee according to schedule VI of companies act. Therefore, we do not find any infirmity in order of learned CIT A in directing learned assessing officer to not to increase book profit by amalgamation reserve credited by assessee directly to balance sheet of assessee company. Interest on borrowed capital utilized in expansion and modification projects as per explanation 8 to section 43 (1) - HELD THAT - Issue decided in favour of assessee for assessment year 98-99 wherein on identical circumstances, in facts, order of learned CIT A deleting above addition/disallowance was upheld. Issue squarely covered in favour of assessee by decision in case of Deputy Commissioner Of Income Tax Vs Core Healthcare Limited 2008 (2) TMI 8 - SUPREME COURT OF INDIA , CIT vs. Arvind Polycot limited 2008 (2) TMI 9 - SUPREME COURT OF INDIA and CIT vs. Sri Rama multi Tech Ltd. 2017 (4) TMI 669 - SUPREME COURT . Nature of expenditure - installation of software system - revenue or capital expenditure - HELD THAT - In present case, it is apparent that assessee has been granted license for a particular period of enterprise resource planning software. In view of this, there is no outright purchase in case of assessee. As decided in assessee s own case for assessment year 98 99 CIT A upheld holding that above expenditure on software system is revenue in nature. Characterization of interest income - correct head of income - business income or income from other sources - HELD THAT - The interest income earned by assessee is on bank interest as well as on interoperates deposits. The interest was also received on income tax refund. Looking to nature of interest income shown by assessee, no reason to sustain order of learned CIT appeal. In several decisions cited before us DR, it is apparent that earning of interest income is not business of assessee, and also above income is also not inextricably linked with business of assessee but is altogether a different source of income which should be taxed under income from other sources only. In view of this with respect to interest income, we hold that it is chargeable to tax as income from other sources and not as business income. ground revenue is allowed. Service charges received by assessee - HELD THAT - As relying on assessee s own case it is business income as it is inextricably linked with business of assessee. Disallowance of books and periodical expenses - allowable revenue expenditure or not - HELD THAT - identical issue has been decided in case of assessee for assessment year 98 99 in assessee‟s own case wherein it has been held that expenditure incurred by assessee on purchase of books and journals cannot be held to be a capital expenditure. There is no change in facts and circumstances of case, nature of expenditure is also same, no contrary judicial precedent cited, therefore, following decision of coordinate bench, and hence, we dismiss ground of appeal of revenue. Disallowance of contribution to provident fund - Due date for payment of provident fund contribution - HELD THAT - Salary for a calendar month is paid by 10th of succeeding months and due date for payment of provident fund contribution would therefore be 15th of month following. The assessee has stated that it has made all payments within due dates prescribed as per provident fund laws including grace period provided therein. DR did not controvert above facts. On verification of dates mentioned in assessment order also, we also found that assessee has disposed of its liability within due date prescribed under provident fund laws as well as grace period. Accordingly, all provident fund dues have been deposited in time allowed, CIT (A) correctly deleted disallowance. Prior period expenses allowability - CIT- A allowed claim of assessee holding that it is not a prior period expenditure as it has been crystallized during year - HELD THAT - There has to be a categorical answer from assessee that disclosure made by it under companies act is erroneous and it is to be demonstrated by reliable evidences. Further, we also do not accept argument of assessee that auditors have certified prior period expenditure. This is devoid of any merit as balance sheet and notes on accounts according to companies act are prepared by assessee , auditor merely expresses an opinion on that. Therefore assessee itself has classified same is a prior period expenditure while preparing its balance sheet and now it is taking a different stand for purpose of computation of its income under income tax act. In view of this, whole issue is set aside back to file of learned assessing officer with a direction to assessee to show that above expenditure is not a prior period expenditure and has been crystallized during year only. If assessee demonstrates that, addition is required to be deleted. Disallowance u/s 35 - AO has himself held that expenditure incurred u/s 35 was an allowable expenditure, but inadvertently same was not reduced from assessed income - HELD THAT - Assessee is eligible for deduction of INR 8 184685 u/s 35 of income tax act. Even otherwise learned CIT A has directed assessing officer to rectify mistake. Therefore, revenue cannot be said to be aggrieved by order of learned CIT A if above mistake stated by assessee as well as by learned CIT appeal is correct. Employees contribution and employers contribution respectively towards provident fund allegedly not paid within stipulated period - HELD THAT - The fact shows that salary for a calendar month is paid by 10th of succeeding month. The due date for payment of PF contributions would, therefore, be 15th of month following. In that view of matter, payments which have been disallowed by AO have been made within due dates (including grace period) and therefore, disallowance under section 43B and/or section 2(24)(x) read with section 36(v)(a) of Act has rightly been deleted by CIT(A). In any case, payment of employers and employees contribution was made before due date of filing of return. In that view of matter, there should be no disallowance under section 43B . Disallowance on account of proportionate interest on interest free advances given to sister concerns - HELD THAT - CIT A in deleting above disallowance where assessee has excess of non-interest-bearing funds in form of share capital and free reserve then amount advanced allegedly without charging interest, then presumption arises in favour of assessee that above advances been given out of interest free funds and not interest-bearing funds, unless learned assessing officer prove contrary. Such view is also supported by plethora of judicial precedents. Where an assessee maintains a composite account where all receipts of business are banked and all outgoings are debited, interest free advances / non-business expenses should be presumed to have come out of profits, where profit for year exceeds interest free advances / non-business expenses. Interest paid on loans utilized in expansion and modernization of existing business - HELD THAT - Proviso inserted in section 36(1)(iii) of Act by Finance Act, 2003 would apply with effect from 1-4-2004. As held that section 36(1)(iii) is a code by itself and hence it is attracted when assessee borrows capital for purpose of his business. It does not matter whether capital is borrowed in order to acquire a revenue asset or a capital asset since transaction of borrowing is not same as transaction of investment into a revenue or capital asset. As in assessee s own case for assessment year 2000-01 vide ground of AO s appeal, following decision of coordinate bench in assessee s own case for assessment year 1998-99, we also allow claim of assessee and confirmed order of learned CIT A. Nature of expenditure - consultancy fees paid - revenue or capital expenditure - HELD THAT - The above expenditure is not capital expenditure but revenue expenditure as it helps assessee in maintaining its corporate image to outside world. The corporate image of assessee is created by product of assessee and these products are to be demonstrated to outside world in a proper manner by whole organization. Therefore, identity or image of assessee is not distorted to various stakeholders. In view of this, we do not find that these expenditure are creating any benefit of enduring nature to assessee. In fact, they are standard operating procedure of communicating with outside world. Accordingly we hold that these are revenue expenditure. Upfront fees for loans swaps and interest arbitrage expenses - revenue or capital expenditure - HELD THAT - As in case of CIT vs. Meenakshi Mills Ltd. 2006 (9) TMI 139 - MADRAS HIGH COURT held that upfront fees paid by assessee to bank while availing loan cannot be construed as a capital expenditure and allowed same as revenue expenditure. In view of this, we do not find any infirmity in order of learned CIT A in allowing claim of assessee as revenue expenditure. MAT computation - how to calculate profit u/s 80 HHC while computing book profit? - HELD THAT - Hon‟ble Supreme Court in case of CIT vs. Punjab Stainless Steel Industries 2014 (5) TMI 238 - SUPREME COURT wherein in context of section 80HHC of Act, it was held that sale proceeds of scrap cannot be included in the term turnover for reason that respondent-unit is engaged primarily in manufacturing and selling of steel utensils and not scrap of steel. - Applying this analogy to facts of present case, miscellaneous receipts should not be added to total turnover. In view of above judicial precedent it is held that assessee is directed to submit computation of income under section 80 HHC which is required to be reduced from book profit to be computed under section 115JB of Income Tax Act before learned Assessing Officer. The learned AO after examination, in view of above judicial precedents, allow claim of assessee, if it is found in accordance with law. Club expenses are also PO of business expenditure - club expenses are in nature of business expenditure and therefore allowable to appellant See CIT VERSUS UNITED GLASS MFG CO. LTD. 2012 (9) TMI 914 - SUPREME COURT Disallowance of notional interest on refundable deposits made to club - HELD THAT - As noted that assessee has sufficient own non-interest bearing funds of ₹ 122 crores and therefore it cannot be held that such interest expenses can be disallowed. Even otherwise when we have held that club expenditure are expenditure incurred by assessee only an extra relief for purpose of business natural corollary will also states that deposit made by assessee with club is also for purposes of business. Claim u/s 35D - HELD THAT - On careful analysis of provisions of section 35D of income tax act, it is apparent that such expenditure are allowed in case of commencement of business of assessee in connection with extension of his undertaking or in connection of setting up of a unit. There is no provision that expenses are allowable in case of amalgamation. Argument of assessee that in earlier years if same has been allowed it should be allowed in this year too, it needs to be rejected. To perpetuate an error is no heroism, to rectify it is the compulsion of judicial conscience. Treatment given to long-term capital gain arising on relinquishment of rights in residential flat as income from other sources - HELD THAT - right to obtain the conveyance of 65 flats was not identified to any property and therefore when the original property does not exist, how does the right to obtain the possession of that property can be said to be a capital asset. Accordingly ground of the appeal is dismissed. claims received from insurance companies in respect of raw materials, stocks, finished goods, fixed assets, vehicles and from Railways - HELD THAT - Insurance companies have surveyors whose primary work is to review claims made and assess losses. Surveyors in insurance industry are domain experts for particular area- be it fire, loss in transit or loss due to any other natural calamity. The Ld. AO does not have any mechanism to estimate it. Receipt of sums from insurance companies is sufficient proof of having incurred losses. Nevertheless, claims received from insurance companies because of raw materials, stocks, unfinished goods, fixed assets, vehicles and from railways was credited to P&L account and offered to tax by Appellant. When sum is offered to tax, Action of Ld. AO cannot doubt correctness of claim without any evidences. Ld. AO‟s addition is based on mere suspicion and surmises therefore have no legal or factual basis. Therefore, we upheld the order of the ld CIT A. Quantum of claim of deduction u/s 80 HHC - claim restricted being 90% of impugned export incentives from profits and gains of business - HELD THAT - Issue is squarely covered in favour of assessee by decision of honourable Supreme Court in Avani exports 2015 (4) TMI 193 - SUPREME COURT . In view of above facts, we direct assessee to file revised computation of deduction allowable to it before learned AO, who after verification allow claim of assessee, if found in accordance with law. Accordingly, ground of appeal of assessee is allowed. Disallowance of expenditure u/s 14A - claim of assessee is that assessee has sufficient own funds for investment in exempt income generating investments - HELD THAT - On careful examination of the disallowance made by the learned assessing officer it was found that the learned AO has not recorded the satisfaction on examination of the books of accounts of the assessee that assessee has incurred expenditure for earning of exempt income and the explanation given by the assessee is incorrect. Such is the mandate of the decision of MAXOPP INVESTMENT LTD 2018 (3) TMI 805 - SUPREME COURT OF INDIA . In view of this, the disallowance made by the learned assessing officer cannot be sustained. Nature of receipt - receivable towards breach of contract for setting up of the plant - revenue or capital receipt - Ranbaxy did not place orders for manufacturing of the minimum quantities and therefore assessee reached on a settlement agreement according to which it was to receive INR 72173000 from that company - HELD THAT - assessing officer has correctly not entertained the claim of the assessee as assessee neither filed the revised return nor made the claim in the original return of income. He followed the mandate of the honourable Supreme Court. However, such mandate did not apply to the first appellate authority. Therefore the learned CIT A should have entertained claim of the assessee and examined the same on the merits of the case. The learned CIT A has not examined such claim. Therefore, in the interest of justice, the ground is set aside to the file of the learned CIT A to examine the claim of the assessee and to adjudicate whether the above receipt is revenue receipt or capital receipt.

Summary

Issues Involved:

1. Enhancement of book profit by depreciation on revalued assets under Section 115JA.
2. Computation of book profit under Section 115JA for power generation unit.
3. Disallowance of interest on borrowed capital for expansion projects.
4. Classification of software installation costs as capital or revenue expenditure.
5. Classification of interest income and service charges as business income or income from other sources.
6. Treatment of expenses on books and periodicals as capital or revenue expenditure.
7. Disallowance of provident fund contributions.
8. Allowance of prior period expenses.
9. Deduction under Section 35 for scientific research expenditure.
10. Deduction under Section 80HHC for export incentives in book profit computation.
11. Disallowance of club expenses and notional interest on deposits to clubs.
12. Treatment of compensation received for breach of contract as capital or revenue receipt.
13. Disallowance under Section 14A for expenditure related to exempt income.

Detailed Analysis:

1. Enhancement of Book Profit by Depreciation on Revalued Assets:
The tribunal found that the issue of revaluation reserve for the purpose of Section 115JA was not arising out of the order of the lower authorities. The AO had accepted that revaluation reserve being credited to the profit and loss account did not warrant any further adjustments. Hence, this ground was dismissed.

2. Computation of Book Profit for Power Generation Unit:
The tribunal upheld the CIT(A)'s decision that the power generation unit's profits should be excluded from book profits under Section 115JA. The power generated was for internal consumption, and the unit was considered a separate industrial undertaking. Judicial precedents supported this view, confirming that profits from captive consumption qualify for deduction.

3. Disallowance of Interest on Borrowed Capital:
The tribunal confirmed the CIT(A)'s deletion of the disallowance of interest on borrowed capital used for expansion projects. The issue was covered by the Supreme Court's decision in Deputy Commissioner Of Income Tax Vs Core Healthcare Limited and other judicial precedents, which allowed such interest as a revenue expenditure.

4. Classification of Software Installation Costs:
The tribunal upheld the CIT(A)'s decision that software installation costs were revenue expenditures. This was supported by the tribunal's earlier decisions and various judicial precedents, distinguishing the facts from those in the Rajasthan High Court's decision.

5. Classification of Interest Income and Service Charges:
Interest income was held to be taxable under "income from other sources" rather than "business income," aligning with judicial precedents. However, service charges were considered business income, as they were inextricably linked with the business operations.

6. Treatment of Expenses on Books and Periodicals:
The tribunal upheld the CIT(A)'s decision that expenses on books and periodicals were revenue in nature. This was consistent with earlier decisions in the assessee's case and supported by judicial precedents.

7. Disallowance of Provident Fund Contributions:
The tribunal confirmed the CIT(A)'s deletion of disallowances for provident fund contributions, as payments were made within the due dates prescribed under provident fund laws, including the grace period.

8. Allowance of Prior Period Expenses:
The tribunal set aside the issue of prior period expenses back to the AO to verify if the expenses crystallized during the year. The CIT(A)'s logic of treating prior period income and expenses on the same parity was found to be flawed.

9. Deduction under Section 35 for Scientific Research Expenditure:
The tribunal upheld the CIT(A)'s direction to allow the deduction under Section 35 for scientific research expenditure, noting that the AO had inadvertently not reduced the allowable expenditure from the assessed income.

10. Deduction under Section 80HHC for Export Incentives:
The tribunal directed the AO to recompute the deduction under Section 80HHC for the purpose of Section 115JB based on judicial precedents, including the Supreme Court's decisions in CIT vs. Bhari Information Technology Systems (P.) Ltd. and Ajanta Pharma Ltd. vs. CIT.

11. Disallowance of Club Expenses and Notional Interest:
The tribunal allowed the deduction of club expenses, considering them business expenditures. Similarly, disallowance of notional interest on refundable deposits to clubs was deleted, as the deposits were for business purposes.

12. Treatment of Compensation for Breach of Contract:
The tribunal set aside the issue of whether compensation received from Ranbaxy Laboratories Ltd. was a capital or revenue receipt to the CIT(A) for a detailed examination.

13. Disallowance under Section 14A:
The tribunal found that the AO had not recorded the necessary satisfaction for disallowance under Section 14A. The disallowance was deleted, aligning with the Supreme Court's mandate for recording satisfaction.

Conclusion:
The tribunal's detailed analysis addressed each issue comprehensively, aligning decisions with judicial precedents and ensuring correct application of tax laws. The appeals were disposed of with specific directions for further verification where necessary.