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2019 (7) TMI 299 - AT - Income TaxDisallowance u/s 14A - HELD THAT - Without going into the merits of the disallowance, we find that the assessee has disclosed exempt dividend income of ₹ 20,995/- u/s 10(33) of the Act. In the light of the decision of JOINT INVESTMENTS PVT LTD VERSUS COMMISSIONER OF INCOME TAX 2015 (3) TMI 155 - DELHI HIGH COURT we direct the Assessing Officer to restrict the disallowance to the extent of exempt income. Ground No. 1, with all its sub-grounds is partly allowed. Disallowance of expenses relating to gift to its employees - HELD THAT - Assessing Officer has himself accepted that 50% of the gift as eligible expenditure and, therefore, we fail to understand why balance 50% has been disallowed. Moreover, there is no dispute that the assessee has paid FBT @ 50%. Now it is a settled position of law that no disallowance can be made once expenses are exigble to FBT. Our view is supported by the decision of the co-ordinate bench in the case of BG Shirke Construction Technology P Ltd Vs. CIT 2012 (10) TMI 435 - ITAT PUNE Treatment of rental income as income from other sources - receipts from its factory building at Gurgaon - whether leave and licence agreement is not similar to lease rental agreement - HELD THAT - There is no dispute that the factory building owned by the assessee was let out to M/s Anand Engines Component Ltd., for which the assessee earned rental income of ₹ 47.26 lakhs. Whether there existed leave and licence agreement and not rental agreement would not change the colour of receipts in the hands of the assessee. The undeniable fact is that the assessee has earned rental income from letting out its property and the same has to be taxed under the head income from house property eligible for deduction as per the provisions of section 24. We, accordingly, direct the AO to tax rental income under the head income from house property as per provisions of law MAT credit claimed - HELD THAT - MAT credit has to be allowed to the assessee as per the provisions of law and after considering the provisions and the assessment history of the assessee. We, accordingly, direct the AO to allow MAT credit as per provisions of law after considering the provisions and the assessment history of the assessee. Ground allowed for statistical purposes. Deduction u/s 80IC - scheme of amalgamation conceived - amalgamation of other company in assessee company and change in name - HELD THAT - There is no dispute that the manufacturing unit at Parwanoo was eligible for deduction u/s 80IC the same always belonged to the assessee, previously known as M/s Purolator India Ltd. Provisions of section 80IA(12) of the Act have been wrongly applied by the AO because the said provision is applicable where any undertaking which is entitled to the deduction u/s 80IA is transferred before expiry of the period specified therein to another India company in a scheme of amalgamation or demerger, whereas the facts of the case in hand show that the manufacturing unit at Parwanoo, HP continued to belong to the assessee and it is only M/s Mahle Filter systems India Ltd which amalgamated with the assessee M/s Purolator India Ltd and only the name has been changed to M/s Mahle Filter systems India Ltd. Accordingly, even consequent to the amalgamation, the unit at Parwanoo was still owned and managed by the assessee in the same manner as it was managed prior to amalgamation. - deduction allowed Computation of deduction u/s 80IC - other Income - derived from - direct nexus with the eligible business- HELD THAT - Rental income and income on fixed deposits was offered to tax under the head Income from other sources . Other items of income are inevitably linked and have direct nexus to the industrial undertaking. Therefore, these incomes are eligible for benefit of deduction u/s 80IC . We, therefore, do not find any reason to interfere with the findings of the CIT(A). Ground No.2 is dismissed. Enhancement of deduction claimed u/s 80IC - allocation of expenditure - HELD THAT - As extracted charts as part of the annual audited accounts of the assessee it can be seen from the above chart that the head office has allocated the expenditure to three units based on their ratio of sale. Therefore, the findings of the Assessing Officer are ill-founded. We, accordingly decline to interfere with the findings of the CIT(A). Accordingly, Ground No. 3 stands dismissed. Disallowance on account of royalty payments - expenditure is related to carry on business and is for efficient running of business for better profitability - capital OR revenue expenditure - HELD THAT - The undisputed fact is that by virtue of agreement with its AEs, the assessee has only acquired limited rights to use the information for the purpose of production of products in India. There is also no dispute that the assessee merely acquired a right to use technical information provided by the owners of the technical know-how. The ownership/proprietary rights in the technical know-how continue to vest in lithe censor and the assessee is not authorised to transfer, assign or convey the know how/technical information to any third party and therefore, the assessee acquired a limited right to use and exploit the know-how. In our considered opinion, payment of royalty was for mere use of technical know-how, not resulting in any enduring benefit in the capital field, the same has to be allowed as revenue expenditure.
Issues Involved:
1. Disallowance under section 14A of the Income-tax Act. 2. Disallowance of expenses distributed to employees. 3. Treatment of rental income. 4. MAT credit claim. 5. Deduction under section 80IC. 6. Inclusion of 'Other Income' for section 80IC deduction. 7. Enhancement of deduction under section 80IC. 8. Disallowance of royalty payments. Issue-wise Analysis: 1. Disallowance under section 14A of the Income-tax Act: The assessee challenged the disallowance of ?88,577/- under section 14A read with Rule 8D. The appellate tribunal agreed with the assessee's contention based on the Delhi High Court's decision that disallowance cannot exceed the exempt income. The assessee had disclosed exempt dividend income of ?20,995/-. Consequently, the tribunal directed the Assessing Officer (AO) to restrict the disallowance to ?20,995/-. This ground was partly allowed. 2. Disallowance of expenses distributed to employees: The AO disallowed 50% of the ?3,14,148/- debited as gift expenses, citing section 37(1). The assessee argued that since Fringe Benefit Tax (FBT) was paid, no disallowance should be made. The tribunal noted that the AO had accepted 50% of the gift as eligible expenditure and, given the settled law that no disallowance can be made once expenses are exigible to FBT, directed the AO to delete the addition of ?1,57,074/-. 3. Treatment of rental income: The AO treated rental receipts of ?47,26,510/- from a factory building as 'income from other sources' instead of 'income from house property' because the agreement was a 'Leave and License' rather than a 'Lease Rental'. The tribunal held that the nature of the agreement did not change the fact that the income was rental income from house property. The AO was directed to tax the rental income under 'income from house property' with the applicable deduction under section 24. 4. MAT credit claim: The tribunal directed the AO to allow MAT credit amounting to ?72,30,482/- as per the provisions of law and the assessee's assessment history. This ground was allowed for statistical purposes. 5. Deduction under section 80IC: The AO disallowed ?2.96 crores under section 80IC, assuming a wrong amalgamation sequence. The tribunal clarified that the manufacturing unit at Parwanoo, eligible for deduction, always belonged to the assessee (formerly M/s Purolator India Ltd.). The amalgamation was approved by the Delhi High Court, and the unit continued to belong to the assessee. The tribunal upheld the CIT(A)'s decision, dismissing the revenue's grounds. 6. Inclusion of 'Other Income' for section 80IC deduction: The AO disallowed ?64,23,771/- of 'Other Income' from the section 80IC deduction, arguing a lack of direct nexus with the eligible business. The tribunal found that except for rental income and fixed deposit interest, the other items were directly linked to the industrial undertaking. Thus, the CIT(A)'s decision to include these incomes for section 80IC deduction was upheld. 7. Enhancement of deduction under section 80IC: The AO recomputed the deduction, suspecting profit shifting to the Parwanoo unit. The CIT(A) found that the head office had allocated expenses to units based on sales ratios. The tribunal agreed with the CIT(A) that the AO's findings were ill-founded and upheld the CIT(A)'s decision. 8. Disallowance of royalty payments: The AO treated royalty payments of ?33,27,126/- as capital expenditure. The CIT(A) and the tribunal found that the payments were for using technical know-how without acquiring any enduring benefit or capital asset, thus allowable as revenue expenditure. The tribunal directed the withdrawal of depreciation allowed by the AO on these payments. Conclusion: The assessee's appeal was partly allowed for statistical purposes, and the revenue's appeal was dismissed. The order was pronounced in the open court on 04.07.2019.
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