2019 (8) TMI 369 - AT - Income Tax

Disallowance u/s 35DD - fees for increase in authorized share capital - amalgamation proceedings conceived - HELD THAT - This ground is covered by the decision of Co-ordinate Bench of the Tribunal, Pune in assessee‟s own case in 2019 (7) TMI 949 - ITAT PUNE and 2019 (7) TMI 1082 - ITAT PUNE Assessing Officer and the CIT(Appeals) has not denied the facts that there were amalgamation proceedings with respect to the assessee, however they have not brought out any reasons, specially in the order of the Ld. CIT(Appeals) that when entire expenses are in connection with amalgamation proceedings and the Revenue Authorities have allowed stamp duty expenses as deduction u/s.35DD of the Act then what is the reason for not allowing the expenses incurred regarding fees for increase in authorized share capital which is also part of the same amalgamation proceedings. We are also inclined to agree with the submission of the Ld. AR after perusing facts of the case in the decision of the Hon ble Delhi High Court (supra.) that it relates to fees for registration of company and essentially dealing with provision of section 35D(2)(c)(iii) of the Act. There is substantial difference between registration of a company and action taken for increase in authorized share capital. In the case of the assessee because of amalgamation proceedings, there was need to increase in authorized share capital and therefore, such expenses cannot be segregated from the main amalgamation proceedings and therefore, these expenses are part of amalgamation expenses. Additions deleted - Decided in favour of assessee. Nature of expenses - software development expenses - revenue or capital expenditure - HELD THAT - One of the parties could submit through evidence regarding endurability of these software, whether it is in the category of general purpose of software or specialized software which can be utilized directly for manufacturing or production. Therefore, this issue needs detailed verification. Hon‟ble Bombay High Court in the case of CIT Vs. Geoffrey Manners Co. Ltd. 2014 (6) TMI 958 - BOMBAY HIGH COURT wherein the decision of the Tribunal has been upheld by observing that in the changing trend development of technology for research is essential and there is small degree of endurability attached to it. Thus, the expenditures in that case was held to be revenue in nature. Similar position the assessee had witnessed for assessment year 2001-02 wherein the Ld. CIT(Appeals) himself has given relief to the assessee. But in the relevant assessment given, the specialized software used by the assessee, the degree of endurability of these software are to be ascertained. If they are of such expenditure that they can be used directly for manufacturing and production and for longer degree of endurability then there cannot be any iota of doubt that they are capital in nature. However, if the degree of endurability is small then following the decision of the Hon‟ble Bombay High Court (supra.) this expenditure should be treated as revenue expenditure and hence, allowable. In view of the matter, we set aside the order of the Ld. CIT(Appeals) on this issue and restore it to the file of Assessing Officer for detailed verification - Decided in favour of assessee for statistical purposes. Expenditure on premises - nature of expenditure - HELD THAT - Assessee company during the year had purchased a second hand bungalow for MD. Thereafter, all these repairs works had taken place. The case laws relied on the by the Ld. AR are on the facts and situation that renovation/repairs were taken place where already the property was in use. But in this case during the year property was purchased and suitable repairs/renovation were made and then it was put to use. So substantially facts are different as compared to the case of the assessee. AO had directed 80% to be capitalized which was reduced to 40% by the Ld. CIT(Appeals) considering that some of the repairs were in nature of current repair. We find this reasoning to be judicious so as that it had maintained the principles of equality with regard to the parties herein in the given facts and circumstances. We do not find any infirmity with the findings of the Ld. CIT(Appeals) which is thereby upheld. Thus, ground No.3 raised in appeal by the assessee is dismissed. Deduction towards provision for warranty - HELD THAT - From the material on record, it can only be gathered that the assessee credited a sum of ₹ 77,53,766/- to provision account. It is not clearly emanating as to whether ₹ 77,53,766/- was, in fact, offered for taxation in this assessment year. If the assessee really offered the amount of ₹ 77,53,766/- for taxation, then the view taken by the Ld. CIT(Appeals) in deleting the addition has to be upheld. On the other hand, if it is found that the amount of ₹ 77,53,766/- was credited to Provision for warranty account, but was not offered for taxation, in that case, provision will have to be restricted @ 0.40% of total sales, which is ₹ 1.17 crore as against the claim of deduction for provision at ₹ 1,76,75,590/-. Excess amount of provision in that case will have to be disallowed. We therefore, set aside the impugned order on this score and remit the matter to the file of Assessing Officer for deciding the issue afresh in accordance with the above directions. Needless to say, the assessee will be allowed a reasonable opportunity of hearing. Thus, ground No.6 raised in appeal by the Revenue is allowed for statistical purposes. Disallowance of miscellaneous expenses - CIT-A restricted this disallowance to 20% - HELD THAT - As seen that a sum of ₹ 41,33,283/- has been included under this head, which is on account of Software development account. We have separately dealt with this issue and allowed the assessee‟s claim for statistical purposes. This amount is, therefore, directed to be excluded from the total of Miscellaneous expenses. A sum of ₹ 25,83,042/- included under this head is on account of actual expenditure on warranty repairs during that period. Similar issue has been decided by the Tribunal in the immediately preceding year against the assessee. We, therefore, direct to disallow the amount of ₹ 25,83,042/-. In the preceding year, we have also disallowed expenditure incurred by the assessee on Gifts and Donations, in entirety. The Assessing Officer is directed to verify the details of such Miscellaneous expenses and disallow the amount relating to Gifts and Donation, if included, under this head. For the preceding year, we have allowed full deduction towards fees for share handling. The Assessing Officer is directed to allow deduction for the full amount towards fees for share handling, after excluding it from this head, if already included. In so far as the remaining amount is concerned, following the view taken in the preceding year, we direct the Assessing Officer to restrict the disallowance to 15% of such remaining expenses. Computation of deduction u/s.80HHC - confirmation of inclusion of commission income - confirmation of exclusion of 90% of Service charges and Miscellaneous income from profits of business for deduction u/s.80HHC - HELD THAT - similar issue came up for consideration before the Tribunal in assessee s own case for the immediately preceding assessment year. Following the view taken by the Tribunal in assessee s own case for still another year, the matter has been remitted to the AO for a fresh decision. Both the sides are in agreement that the facts and circumstances of the extant ground are similar to those for the A.Y. 2002-03 2019 (7) TMI 949 - ITAT PUNE . Following the view taken for the immediately preceding assessment year, we set aside the impugned order and remit the matter to the file of AO for deciding this issue in conformity with the directions given by the Tribunal in its earlier orders TP adjustment on account of royalty payment made to AE - HELD THAT - As decided in own case 2019 (7) TMI 1082 - ITAT PUNE and 2019 (7) TMI 949 - ITAT PUNE TPO is required to determine the ALP of an international transaction under one of the methods mandated under rule 10B of the Income-tax Rules, 1962. Nothing of the sort has been done in the instant case. The TPO got influenced with extraneous reasons, which have no bearing on the determination of the ALP of an international transaction. It is further observed that similar issue came up for consideration before the Tribunal in assessee s own case for the immediately preceding assessment year. The transfer pricing addition made in similar circumstances has been deleted. Relevant discussion has been made on page 39 onwards of the order. Considering the entire conspectus of the case, including the fact that the payment of Royalty to AEs was as per RBI norms, we are satisfied that the view taken by the ld. CIT(A) is unassailable. This ground, therefore, fails

Summary

Issues Involved:
1. Disallowance under Section 35DD of the Income Tax Act, 1961.
2. Treatment of software development expenses as capital expenditure.
3. Expenditure on premises.
4. Deduction towards provision for warranty.
5. Disallowance of miscellaneous expenses.
6. Ad-hoc disallowance under Section 14A.
7. Inclusion of commission income in the computation of deduction under Section 80HHC.
8. Deduction under Section 35DDA for Voluntary Retirement Scheme (VRS).
9. Allowability of stamp duty as amalgamation expenses under Section 35DD.
10. Allowance of payment of commission.
11. Transfer pricing adjustment on account of royalty payment to Associated Enterprises (AE).

Detailed Analysis:

1. Disallowance under Section 35DD:
The Tribunal allowed the appeal of the assessee regarding the disallowance under Section 35DD for fees related to the increase in authorized share capital. This decision followed the precedent set in the assessee's own case for previous assessment years, where such expenses were deemed part of amalgamation proceedings and thus allowable.

2. Treatment of Software Development Expenses:
The Tribunal observed that the nature of the software expenses differed from general-purpose software to specialized software, which provides enduring benefits. The matter was remitted back to the Assessing Officer for detailed verification to determine the endurability and nature of the software expenses, whether they should be treated as capital or revenue expenditure.

3. Expenditure on Premises:
The Tribunal upheld the decision of the CIT(Appeals) to capitalize 40% of the expenditure on the MD’s bungalow, considering it as capital expenditure rather than current repairs. The reasoning was that the property was newly purchased, and the repairs were substantial, not merely maintenance.

4. Deduction Towards Provision for Warranty:
The Tribunal remitted the issue back to the Assessing Officer to verify whether the amount credited to the provision for warranty account was offered for taxation. The Tribunal directed that if the amount was offered for taxation, the CIT(Appeals)’s deletion of the addition should be upheld; otherwise, the provision should be restricted to 0.40% of total sales.

5. Disallowance of Miscellaneous Expenses:
The Tribunal directed the Assessing Officer to exclude specific amounts related to software development and warranty repairs from miscellaneous expenses. The Tribunal further directed that the disallowance should be restricted to 15% of the remaining miscellaneous expenses, following the precedent set in the previous assessment year.

6. Ad-hoc Disallowance under Section 14A:
The assessee did not press this ground, and hence, it was dismissed as "not pressed."

7. Inclusion of Commission Income in Deduction under Section 80HHC:
The Tribunal remitted this issue back to the Assessing Officer for fresh decision, following the precedent set in the assessee’s own case for previous assessment years. The Tribunal directed the Assessing Officer to decide the issue in conformity with earlier Tribunal orders.

8. Deduction under Section 35DDA for VRS:
The Tribunal restored this issue to the file of the Assessing Officer with directions to allow deduction only towards incurring of liability on an accrual basis and not on payment basis, following the decision in the assessee’s own case for the previous assessment year.

9. Allowability of Stamp Duty as Amalgamation Expenses under Section 35DD:
The Tribunal dismissed the Revenue’s appeal on this ground, following the precedent set in the assessee’s own case for previous assessment years, where such expenses were allowed as amalgamation expenses.

10. Allowance of Payment of Commission:
The Tribunal dismissed the Revenue’s appeal regarding the payment of commission, following the precedent set in the assessee’s own case for the previous assessment year, where such payments were allowed.

11. Transfer Pricing Adjustment on Account of Royalty Payment to AE:
The Tribunal dismissed the Revenue’s appeal on this ground, noting that the royalty payments were made as per RBI norms and the TPO had not determined the ALP using the mandated methods. The Tribunal followed the precedent set in the assessee’s own case for previous assessment years.

Conclusion:
Both the appeals by the assessee and the Revenue were partly allowed for statistical purposes, with several issues remitted back to the Assessing Officer for fresh verification and decision in accordance with the Tribunal’s directions and precedents set in previous assessment years.