2019 (5) TMI 689 - AT - Income Tax

Disallowance of software expenses - expenditure under the head Repairs Computers Others - capital expenditure OR revenue expenditure - HELD THAT - The issue that expenses incurred by an assessee on purchase of a software which brought greater efficiency in functioning of its business had been as allowable as a revenue expenditure See HOLCIM SERVICES (SOUTH ASIA) LTD. 2018 (5) TMI 1700 - BOMBAY HIGH COURT . Further in the case of CIT Vs. Raychem RPG Ltd. 2011 (7) TMI 953 - BOMBAY HIGH COURT had observed that the expenditure incurred by an assessee on purchase of a software which facilitated its trading operations or enabled the management to conduct its business more efficiently or more profitably would not form part of the profit making apparatus of the assessee and would be allowable as a revenue expenditure. Thus expenditure incurred by the assessee on purchase of software application and payment made for acquiring license to use those applications was to be allowed as a revenue expenditure. - Decided in favour of assessee Disallowance of deduction u/s 35(2AB) in respect of Ennore Unit Goregaon Unit - claim of weighted deduction under Sec.35(2AB) - HELD THAT - The issue pertaining to the entitlement of the assessee towards claim of weighted deduction u/s 35(2AB) is a recurring issue which was also involved in its case for the immediately preceding year i.e A.Y 2008-09 2018 (7) TMI 1887 - ITAT MUMBAI We find that the Tribunal while disposing off the appeal of the assessee for the immediately preceding year i.e A.Y. 2008-09, had after considering the contention of the assessee that it had applied for approval in Form 3CM which was still pending, restored the issue to the A.O for providing an opportunity to the assessee to furnish the approval of the competent authority in the prescribed manner for claiming the deduction u/s 35(2AB). In all fairness ground requires to be restored to the file of the A.O as above - Ground allowed for statistical purposes. Depreciation on additions to computer software - assessee had claimed depreciation on the capitalized value of the software expenses @ 60% - AO allowed @25% - HELD THAT - The assesses claim of depreciation on software expense @ 60% which was allowed by the CIT(A) had also been accepted by the revenue and the same had also not been carried any further in appeal before the Tribunal. In terms of our aforesaid observations, we are of the considered view that the assessee had rightly claimed depreciation on computer software @ 60%. We thus set aside the order of the CIT(A) in context of the issue under consideration and vacate the disallowance made by the A.O on the said count - Decided in favour of assessee Disallowance of claim of depreciation on assets of BMIL and PHL - HELD THAT - Now when the DRP while disposing off the objections filed by the assessee had specifically directed the A.O to allow claim of depreciation as was raised by the assessee in respect of BMIL, therefore, there was no reason for the A.O to have not followed such directions while passing the final assessment order u/s 143(3) r.w.s 144C(13), dated 28.01.2014. In terms of our aforesaid observations, we direct the A.O to allow the assesses claim of depreciation insofar the assets of BMIL are concerned. Depreciation on the assets of PHL - HELD THAT - CIT(A) while disposing off its appeal for A.Y 1999- 2000 had observed that the sale of two divisions viz. (i). Glass Division (GGL); and (ii). Bulk Drug Division (BDD) by the assessee was rightly claimed as slump sale transaction. However, as is discernible from the order of the DRP, the issue as to whether the sale of the aforesaid two divisions was to be construed as itemized sale of assets or slump sale is pending before the ITAT in the preceding years of the assessee. Accordingly, the DRP had directed the A.O to allow depreciation to the assessee on the basis of the outcome of the main appeal regarding slump sale vs. itemized sale. In the backdrop of the aforesaid fact situation, now when the matter as to whether the sale of the aforesaid two divisions by the assessee is to be treated as an itemized sale or a slump sale is pending in the case of the assessee for the preceding years, therefore, we find no infirmity in the order of the DRP who had rightly directed the A.O to allow depreciation to the assessee on the basis of the outcome of the main appeal Adjustment of Inventory as per Sec. 145A - value of the closing stock - HELD THAT - As per Clause 12(b) the adjustment u/s 145A worked out at Nil. It is the claim of the assessee that the amount reflected in Clause 12(b) of the tax Audit report shall be treated as the adjustment required u/s 145A, and in support thereof had relied on the order in the case of Hawkins Cookers Ltd. Vs. ITO 2008 (8) TMI 904 - ITAT MUMBAI . We have perused Clause 12(b) of the Tax Audit report of the assessee and find that it is the claim of the assessee that the impact of grossing up of tax, duty, cess etc. by restating the values of purchases and inventories by inter alia including the effect of CENVAT credit will be Nil, subject to Sec. 43B that the duty, taxes, cess etc. is paid before the due date of filing of the return of income. As the ld. D.R had submitted that the aforesaid working of the assessee would require to be verified, we therefore, in all fairness restore the matter to the file of the A.O for readjudication. Disallowance of interest expenditure u/s 14A r.w. Rule 8D(2)(ii) - HELD THAT - As decided in assessee's own case 2018 (7) TMI 1887 - ITAT MUMBAI Tribunal after deliberating on the issue under consideration, had directed the A.O to verify the assesses claim of availability of sufficient interest free funds for the purpose of making investments in exempt income yielding assets, and if the said claim was found to be in order, then no disallowance of interest expenditure U/rule 8D(2)(ii) could be made. We thus respectfully following the view taken by the Tribunal in the assesses own case for A.Y 2008-09 in the backdrop of the aforesaid settled position of law, thus direct the A.O to verify the claim of availability of sufficient interest free funds with the assessee. After verification, if the assesses claim is found to be in order, then the disallowance of the interest expenditure made in its hands u/s 14A r.w 8D(2)(ii) shall be deleted. Disallowance of administrative expenditure U/rule 8D(2)(iii) - in the assesses own case for the immediately preceding year i.e A.Y 2008-09 in M/s Piramal Enterprises Ltd. Vs. Asst. CIT 2018 (7) TMI 1887 - ITAT MUMBAI had directed the A.O to exclude the investments which had not yielded any exempt income during the relevant previous year for computing the disallowance U/rule 8D(2)(iii). The A.R had during the course of hearing of the appeal furnished before us the working of the disallowance of administrative expenses u/s 14A r.w Rule 8D(2)(iii). As per the said working the disallowance works out at ₹ 20,730.26. The A.O is directed to examine the working of the assessee and decide the issue accordingly after affording an opportunity of being heard to the assessee. Disallowance of deduction u/s 35A on the trade marks - HELD THAT - Deduction of the entire expenditure of ₹ 34 crore in terms of the observations of the tribunal had to be allowed in one go u/s 37, which would thus put it in a much more disadvantageous position, had thus for the said reason not pressed its appeal before the High Court on the issue of allowability of claim of deduction u/s 35A. In the backdrop of the aforesaid facts, the Tribunal while disposing off the appeal of the assessee for the preceding year i.e A.Y 2008-09 observed that as the claim of the assessee for deduction u/s 35A was allowed in the preceding years, thus applying the rule of consistency allowed the same during the year before them. As the assesses claim of deduction u/s 35A had consistently been allowed by the Tribunal in the preceding years, therefore, respectfully following the view taken by the Tribunal while disposing off the appeal of the assessee for A.Y 2008-09, the disallowance made by the A.O/DRP u/s 35A of ₹ 2,42,85,714/- during the year under consideration viz. A.Y 2009-10 is vacated. Disallowance of advertisement and business promotion expenses - HELD THAT - No such exercise carried out by the A.O can be gathered from the orders of the lower authorities. Apart there from, nothing has been brought to our notice by the ld. D.R in the course of hearing of the appeal which would have persuaded us to have arrived at a different view. Be that as it may, we find that the A.O even at the time of disallowing 50% of the expenses i.e ₹ 27,90,84,346/-, had observed that the same were being disallowed as majority of the expenses were incurred for giving freebies to doctors for promotion of assesses business which was inadmissible u/s 37(1) being an expense prohibited by law. We thus on the basis of our aforesaid observations, being of the considered view that the A.O/DRP had erred in making an adhoc disallowance of ₹ 27,90,84,346/- i.e 50% of the advertisement and business promotion expenses, therefore, delete the same. Disallowance of deduction u/s 80IC -on account of reallocation of expenses - A.O had carried out part allocation of the interest R D expenditure to its Baddi unit, only for the reason that there was a disparity between the profit rate of Baddi unit and the other units - HELD THAT - As is discernible from the records, the department had failed to place on record any cogent and irrefutable material which would conclusively establish that the borrowed funds were utilised in setting up the Baddi unit and further the R D expenditure incurred was in context of the manufacturing activity carried out at the Baddi unit. Apart there from, there is also no clarity on the fact whether the assessee had maintained unit wise accounts and the expenditure claimed is as per the accounts. In nut shell, there is no evidence which would justify attribution and allocation of the interest expenditure and the R D expenditure to the Baddi unit of the assessee. We find that similar facts were involved as regards allocation of the aforesaid expenses viz.(i). interest expenditure; and (ii). R D expenses, in the assesses own case for the immediately preceding year i.e A.Y 2008-09 before the Tribunal The Tribunal observing that as the revenue had failed to bring on record any cogent material to establish that the borrowed funds were utilised in setting-up the Baddi unit and further the R D expenditure incurred was related to manufacturing activity carried out at the Baddi unit, had thus in all fairness restored the issue to the file of the A.O for fresh adjudication, after affording an opportunity of being heard to the assessee. As the fact situation in context of the issue before us remains the same, therefore, respectfully following the order passed by the Tribunal in the assesses own case for the immediately preceding year i.e A.Y 2008-09, we restore the matter to the file of the A.O for fresh adjudication. Needless to say, the A.O shall in the course of the set aside proceedings afford a reasonable opportunity of being heard to the assessee. Disallowance of deduction u/s 80IC - on account of ineligibility of the assessee - HELD THAT - If the undertaking or enterprise is formed by transfer to a new business of machinery or plant previously used for any purpose of a value less than 20% of the total value of machinery or plant used in the business of such undertaking or enterprise, then as per Sec.80IC(4)(ii) r.w. Explanation 2 of Sec.80IA(3), it can safely be concluded that the said condition stands satisfied by the assessee. However, at the same time the aforesaid claim of the assessee that the amount of ₹ 4,57,28,210/- (supra) did not from part of the cost of FFS machine, but was the accumulated depreciation of the said machine is not borne from the records and would require verification. Therefore, to the said extent the matter in all fairness is restored to the file of the A.O for making necessary verification. In case the claim of the assessee is found to be in order, then no adverse inferences as regards satisfaction of the second condition envisaged in Sec.80IC(4)(ii) would be drawn in its hands. Addition towards transfer pricing adjustment - Corporate guarantee given by the assessee to its AE - HELD THAT - Issue under consideration had directed the A.O to charge commission on Corporate Guarantee @ 0.5%. As the facts involved in the case before us in context to the issue under consideration remains the same, therefore, we respectfully follow the view taken by the Tribunal in the case of the assessee for A.Y 2008-09 and direct the A.O to charge commission on Corporate Guarantee @ 0.5%. Addition of disallowance u/s 14A r.w Rule 8D for computing book profits under Sec. 115JB - HELD THAT - We direct the A.O to not consider the disallowance made u/s 14A r.w Rule 8D while computing the book profit u/s 115JB of the I.T Act in the hands of the assessee. See VIREET INVESTMENT (P.) LTD. 2017 (6) TMI 1124 - ITAT DELHI

Summary

Issues Involved:
1. Disallowance of Software Expenses
2. Disallowance of Deduction under Sec. 35(2AB)
3. Disallowance of Depreciation on Computer Software
4. Disallowance of Depreciation on Assets of BMIL and PHL
5. Adjustment of Inventory under Sec. 145A
6. Disallowance under Sec. 14A
7. Disallowance of Deduction under Sec. 35A
8. Disallowance of Advertisement and Business Promotion Expenses
9. Disallowance of Deduction under Sec. 80IC (on account of reallocation of expenses)
10. Disallowance of Deduction under Sec. 80IC (on account of ineligibility)
11. Transfer Pricing Adjustment on Corporate Guarantee
12. Addition of Disallowance under Sec. 14A to Computation of Book Profit under Sec. 115JB

Detailed Analysis:

1. Disallowance of Software Expenses:
The assessee claimed software expenses of ?14,00,800 as revenue expenditure. The AO treated these expenses as capital expenditure, allowing depreciation at 25%. The tribunal, referencing judgments from the Bombay High Court and Delhi High Court, concluded that the software expenses facilitated business operations and should be treated as revenue expenditure. The tribunal directed the AO to allow the software expenses as claimed by the assessee.

2. Disallowance of Deduction under Sec. 35(2AB):
The assessee's claim of ?24,89,50,211 for R&D expenses under Sec. 35(2AB) was disallowed due to the absence of Form 3CM approval. The tribunal restored the issue to the AO, allowing the assessee to furnish the required approval from the competent authority, following the precedent set in the assessee's case for A.Y. 2008-09.

3. Disallowance of Depreciation on Computer Software:
The AO restricted depreciation on computer software to 25% instead of the claimed 60%. The tribunal, referencing prior decisions and the Bombay High Court's judgment, held that the assessee was entitled to 60% depreciation on computer software. The tribunal vacated the disallowance of ?17,63,425.

4. Disallowance of Depreciation on Assets of BMIL and PHL:
The tribunal noted that the DRP had directed the AO to allow depreciation on BMIL assets, which the AO failed to follow. For PHL assets, the tribunal upheld the DRP's direction to allow depreciation based on the outcome of the main appeal regarding the slump sale vs. itemized sale issue. The tribunal directed the AO to follow the DRP's directions and allow the claimed depreciation.

5. Adjustment of Inventory under Sec. 145A:
The AO's adjustment of ?1,16,08,088 for inventory valuation was contested by the assessee, claiming it was tax-neutral. The tribunal restored the matter to the AO for verification, directing the AO to consider the assessee's working and provide an opportunity for the assessee to substantiate its claim.

6. Disallowance under Sec. 14A:
The tribunal agreed with the assessee that no disallowance of interest expenditure under Rule 8D(2)(ii) was warranted due to sufficient interest-free funds. The tribunal directed the AO to verify this claim. For administrative expenses under Rule 8D(2)(iii), the tribunal directed the AO to consider only investments yielding exempt income during the year, following the precedent set by the Special Bench of the ITAT, Delhi.

7. Disallowance of Deduction under Sec. 35A:
The tribunal noted that the assessee's claim for deduction under Sec. 35A had been consistently allowed in prior years. Following the principle of consistency, the tribunal vacated the disallowance of ?2,42,85,714.

8. Disallowance of Advertisement and Business Promotion Expenses:
The tribunal disagreed with the AO's disallowance of 50% of the expenses, noting that the expenses were incurred wholly and exclusively for business purposes. The tribunal referenced the ITAT's decision in Aristo Pharmaceuticals Pvt. Ltd. and concluded that the expenses were not hit by Explanation 1 to Sec. 37. The tribunal deleted the disallowance of ?27,90,84,346.

9. Disallowance of Deduction under Sec. 80IC (on account of reallocation of expenses):
The tribunal restored the matter to the AO for fresh adjudication, directing the AO to verify the assessee's claim that no part of the interest and R&D expenses were attributable to the Baddi unit. The tribunal noted that the revenue had failed to provide evidence justifying the allocation of these expenses to the Baddi unit.

10. Disallowance of Deduction under Sec. 80IC (on account of ineligibility):
The tribunal held that the conditions prescribed in Sec. 80IC(4) were required to be satisfied only in the year of formation. The tribunal noted that the Baddi unit was formed on 10.06.2006, and the conditions were satisfied in A.Y. 2007-08. The tribunal vacated the adverse inferences drawn by the lower authorities for A.Y. 2009-10, directing the AO to allow the deduction claimed under Sec. 80IC.

11. Transfer Pricing Adjustment on Corporate Guarantee:
The tribunal directed the AO to charge commission on corporate guarantee at 0.5%, following the precedent set in the assessee's case for A.Y. 2008-09.

12. Addition of Disallowance under Sec. 14A to Computation of Book Profit under Sec. 115JB:
The tribunal directed the AO not to consider the disallowance made under Sec. 14A for computing the book profit under Sec. 115JB, referencing the Special Bench of the ITAT, Delhi, and the Bombay High Court's judgment.

Conclusion:
The appeal of the assessee was partly allowed, and the appeal of the revenue was partly allowed for statistical purposes, with directions for fresh adjudication and verification by the AO on specific issues.