2020 (4) TMI 812 - AT - Income Tax

Nature of expenses - Disallowance of Software Expenses - revenue or capital ependiture - AO proceeded to capitalise the said expenditure and granted depreciation @60% - HELD THAT - As decided in own case 2019 (5) TMI 689 - ITAT MUMBAI 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. In the backdrop of the aforesaid settled position of law, we are of the considered view that as the aforesaid software purchased by the assessee did not form part of its profit making apparatus and only facilitated carrying its business more efficiently, therefore, the same was rightly claimed by it as a revenue expenditure. - Decided in favour of assessee. Addition made u/s.145A in respect of unutilised MODVAT credit - HELD THAT - As decided in own case 2019 (5) TMI 689 - 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. 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, who shall remain at a liberty to substantiate its claim before him. Disallowance of expenditure on Interest and Prepayment Charges by treating it as capital expenditure - HELD THAT - In the instant case, the expenditure on interest and prepayment charge had been incurred by the assessee to expand the existing business of the assessee company. It was submitted by the ld AR that it was with the intent of acquiring the business of M/s RPIL that, subsidiary of the assessee company had purchased shares of M/s RPIL and, since the loan had been raised for purchase of the shares of subsidiary company so as to enable the assessee company to acquire the business of M/s RPIL, hence the expenditure incurred in respect of loan raised in the instant year is a revenue expenditure u/s 36(l)(iii)of the Act. We find lot of force in the said argument of the ld AR and we accept the same. Proviso to section 36(1)(iii) in any case would not be applicable for the year under consideration as the same was introduced in the statute only with effect from Asst Year 2004-05 and not applicable for earlier years. Payment of prepayment charges also partakes the character of interest . We find that there cannot be any iota of doubt that the entire transaction of acquisition of business assets by the assessee has been done on the grounds of commercial expediency and hence the entire interest payment of ₹ 27.11 crores and prepayment charges of ₹ 8.62 crores would be squarely allowable as deduction u/s 36(1)(iii) of the Act itself. Accordingly, the Ground raised by the assessee is allowed. Addition u/s 35DD OR 37(1) - 1/5th of expenditure incurred in respect of payment made to M/s. Accenture - HELD THAT - Services to be rendered by Accenture, it could be seem that Accenture had purely rendered professional services by way of pre-proposal study to understand the viability of the merger by integrated operations of RPIL with NPIL and the resultant profitability that the resultant merged entity would derive in short to medium term. Hence, it is a clear case of simple professional services rendered by Accenture to the assessee which at any cost cannot be considered as a capital in nature. We find that the said expenditure has to be considered as wholly and exclusively as deduction u/s.37(1) of the Act. We hold that the provisions of Section 35DD as alleged by the ld. CIT(A) cannot be made applicable in the instant case as admittedly the same only refers to expenses incurred pursuant to amalgamation. Hence, we direct the ld. AO to grant deduction of the said expenditure u/s.37(1) of the Act Write off of Stocks / receivables - HELD THAT - Assessee being in pharmaceutical industry, has no other option but to write off the same in its books and claim the same as deduction which is a normal business loss occurring to the assessee. We find that the assessee had submitted before the lower authorities that out of total stock of ₹ 133.48 lacs, entire stock had expired other than stock to the tune of ₹ 1,41,698/-. We find that with regard to the observation made by the ld AO for non-furnishing of stock register by the assessee , we find that the assessee had duly adduced the reason that entire records stood destroyed in fire on 22.12.2004, evidences in support of the same are enclosed in pages 328 to 336 of paper book I. In view of these facts and circumstances, we hold that the assessee would be entitled for deduction in respect of write off of dead stocks of ₹ 133.48 lacs during the year under consideration. Write off of receivables on discontinuation of joint venture - Joint venture company had discontinued the business and thereby the stocks lying with it became dead. The joint venture did not pay any sum due to the assessee company and hence the debtors balance had to be written off by the assessee during the year under consideration and claim deduction towards bad debts u/s 36(1)(vii) - assessee had duly complied with the provisions of section 36(2) of the Act. It is not in dispute that the said trade debts had been duly written off as irrecoverable in the books of accounts of the assessee company. Hence it is eligible for deduction u/s 36(1)(vii) of the Act. Write off of receivables on discontinuation of distributorship arrangement - Settlement was reached between the two parties as is evident from the settlement letter dated 23.5.2002, as a result of which, a sum of ₹ 195.22 lacs was written off by the assessee. The assessee had also furnished the invoice wise statement of the amounts written off. These details are available in pages 251 to 257 of paper book I. Since Voltas Ltd did not pay the sum due to the assessee company , it became irrecoverable pursuant to settlement letter dated 23.5.2002 as stated supra, the assessee had no other option but to write off the same which was duly done in its books. Accordingly, the assessee would be entitled for deduction u/s 36(1)(vii) of the Act in respect of the same. Compensation paid to Cost and Freight Agents (CFAs) - Whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on or conduct of the business, that it may be regarded as an integral part of the profit- earning process and not for acquisition of an asset or a Tight of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure - we hold that the assessee would be entitled for deduction in respect of compensation paid to CFAs. Loss on closure of Hospital Products division - When the stocks come back to the assessee, the same are included in the closing inventory and hence there cannot be any grievance for the revenue. Hence there is no artificial loss as claimed by the revenue in the instant case. Hence we direct the ld AO to grant deduction towards loss on closure of USS Subdivision. Loss on closure of STYR Subdivision - Assessee had submitted that the same was on account of demonstration stocks which are used to demonstrate the features, efficiency, usefulness etc of the products to the customers including potential customers. These stocks obviously would lose their value over a period of time. It was submitted that on account of improper use and wear and tear of stocks, the stocks had to be disposed off at a reduced price. We further find that this explanation has been found to be acceptable by the ld AO in the remand proceedings. Then there is absolutely no basis for the ld CITA to deny the claim of deduction. Loss on closure of G2 Subdivision - We find that the assessee had submitted that the stock of ₹ 5,23,626/- was sold for ₹ 94,361/- resulting in a loss of ₹ 4.28 lacs. Since these stocks had already undergone huge wear and tear and on account of improper use , the same would not fetch the real market price and had to be sold at a much discounted price. This commercial decision of the assessee cannot be questioned by the revenue. Accordingly we direct the ld AO to grant deduction of ₹ 4.28 lacs towards loss on closure of G2 Subdivision which is a genuinely incurred business loss by the assessee company. Treating Sale of Scrap, Cash discount and insurance claim in the nature of receipt covered by the clause (baa) of Explanation to Section 80HHC - HELD THAT - We find that cash discounts are only in respect of purchases made by the assessee company and therefore not in the nature of receipts specified in clause (baa) of Explanation to Section 80HHC of the Act. Infact pursuant to this cash discount, the value of purchases had been reduced having direct nexus with the profits of the business. We find that it has been held in the following decisions that the aforesaid receipts would be profits of the business for the purpose of computation of deduction u/s 80HHC i PFIZER LTD. 2010 (6) TMI 433 - BOMBAY HIGH COURT , M/S. RN. GUPTA 2013 (1) TMI 626 - PUNJAB AND HARYANA HIGH COURT and GKN SINTER METAL PVT LTD 2014 (1) TMI 588 - ITAT PUNE . Computation of capital gains on arising out of transfer of property styled as Rhoni Poulenc House - whether assessee s case falls under 55(2)(b)? - HELD THAT - Assessee company herein as well as M/s. RPIL were in possession of the said lease hold rights in perpetuity. We hold that the perpetual lease cannot be compared at par with normal lease. Hence, we cannot say that assessee has only acquired the tenancy rights from RPIL pursuant to merger so as to fall within the ambit of Section 55(2)(a)(i) of the Act. There is no dispute that assessee would be entitled to enjoy the entire sale consideration of ₹ 33.13 Crores received during the year under consideration at its own whims and fancy and there is no diversion of such income by over riding title warranting the need to pass on some portion of such sale consideration to any other party including the main lessor who had given perpetual lease to the assessee i.e. Municipal Corporation of City of Bombay - assessee need not to transfer any part of its sale consideration to Municipal Corporation of City of Bombay. This itself goes to prove that assessee had not acquired any tenancy rights pursuant to perpetual lease granted by Municipal Corporation of City of Bombay on 04/04/1938. Lease creates right or interest in the demised property. The lease is a transfer of interest in land. The interest transferred is called lease hold interest . The lessor parts with his right to enjoy the property and lessee gets that rights to the execution of the lessee. Hence, the said acquisition of interest cannot be construed to be in the nature of tenancy rights. In the instant case pursuant to the perpetual lease deed conferring lease hold rights for 999 years, the said lease deed did provide to the assessee not a mere right to use in a particular way but also ownership of control of the property. In the instant case, we hold that assessee s case falls under 55(2)(b) of the Act, wherein assessee is entitled to substitute the actual cost of acquisition with fair market value as on 01/04/1981. Hence we direct the ld AO to recompute the long-term capital gains on sale of land and short term capital gains and sale of building in the light of above mentioned directions and findings. Accordingly, the ground raised by the assessee and ground of the revenue are disposed off in the aforesaid manner. Claim of depreciation on assets - HELD THAT - When the matter as to whether the sale of the 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. TDS u/s 195 - addition u/s.40(a)(i) in respect of payment in foreign exchange for professional services rendered - HELD THAT - Retrospective amendment in the Act cannot fasten any TDS liability on the payer as the TDS application would lie on the payer only based on the law prevailing at the time of payment or incurrence of the expenditure. Obviously the payer i.e. assessee herein could not have pre-empted the retrospective amendment in the statute while making the payment. It is well settled that the retrospective amendment could fasten income tax liability but not TDS liability on the payer herein. Hence, no disallowance could be made in the hands of the payer u/s.40(a)(i) of the Act based on retrospective amendment in the statute. Accordingly, the ground No.2 raised by the revenue is dismissed. Allowable deduction u/s.37 - legal and professional fees - HELD THAT - Legal and professional fees were paid to parties for rendering professional services for improving the overall functioning of the company and consequentially to improve the revenue of the assessee company. Hence, we hold that the said expenditure is squarely allowable as revenue expenditure in terms of Section 37 of the Act. We do not find any infirmity in the action of the ld. CIT(A) granting relief to the assessee in this regard. Computing deduction u/s.80HHC - action of ld. CIT(A) in holding that 90% of the processing charges - HELD THAT - We find that other income of the assessee included processing charges and the assessee had not reduced 90% of the said processing charges to work out the profits of the business while computing deduction u/s 80HHC of the Act. The ld. AO accordingly re-worked deduction u/s.80HHC of the Act on the premise that the said receipt is in the nature of receipt covered by the Explanation (baa) to Section 80HHC of the Act. We find that this issue is covered by the decision of Hon ble Supreme Court in the case of Southern Sea Foods Ltd., vs. JCIT 2009 (3) TMI 988 - SUPREME COURT - we hold that processing charges has got direct nexus with the export activity of the assessee and the said receipt would not be in the nature of receipt covered by Explanation (baa) of Section 80HHC.

Summary

Issues Involved:
1. Disallowance of Software Expenses
2. Addition u/s 145A for unutilized MODVAT credit
3. Disallowance of Interest and Prepayment Charges as capital expenditure
4. Deduction of Expenditure on Integration Services under Section 35DD vs. Section 37(1)
5. Write-off of Stocks and Receivables
6. Treatment of Sale of Scrap, Cash Discount, and Insurance Claim under Section 80HHC
7. Computation of Capital Gains on Transfer of Property
8. Depreciation on Assets of BMIL and PHL
9. Disallowance u/s 40(a)(i) for Payment in Foreign Exchange
10. Classification of Payments to Mckinsey & Co. and Mehta Partners
11. Reduction of Processing Charges in Section 80HHC Computation

Detailed Analysis:

1. Disallowance of Software Expenses:
The assessee claimed a deduction of ?61,24,779/- for software expenses, which was capitalized in the books but claimed as revenue expenditure in the computation of income. The AO capitalized the expenditure and allowed depreciation at 60%. The CIT(A) restricted depreciation to 25%, treating the software as an intangible asset. The Tribunal, following its earlier decision in the assessee’s own case, directed the AO to allow the software expenses as revenue expenditure, citing that the software facilitated business operations without forming part of the profit-making apparatus.

2. Addition u/s 145A for Unutilized MODVAT Credit:
The AO added unutilized MODVAT credit of ?66,26,443/- to the closing stock value. The CIT(A) upheld this addition. The Tribunal remanded the issue back to the AO for re-adjudication in light of its directions for AY 2009-10, emphasizing that the net impact on profit should be nil, as per the tax audit report.

3. Disallowance of Interest and Prepayment Charges as Capital Expenditure:
The assessee incurred interest and prepayment charges on loans taken for acquiring a pharmaceutical company. The AO treated these as capital expenditure. The Tribunal, citing commercial expediency and the Supreme Court's decision in S.A. Builders vs. CIT, held that the interest and prepayment charges were revenue expenditure allowable under Sections 36(1)(iii) and 37(1).

4. Deduction of Expenditure on Integration Services under Section 35DD vs. Section 37(1):
The assessee claimed ?522.97 lakhs paid to Accenture for integration services as revenue expenditure. The AO treated it as capital expenditure, and the CIT(A) allowed only 1/5th under Section 35DD. The Tribunal held that the expenditure was for professional services and allowable under Section 37(1), directing the AO to grant the full deduction.

5. Write-off of Stocks and Receivables:
The AO disallowed ?679.67 lakhs for lack of details. The CIT(A) upheld the disallowance. The Tribunal, after reviewing the detailed submissions and evidence, allowed the write-off for expired stocks, joint venture discontinuation, receivables from Voltas, compensation to CFAs, and losses on closure of subdivisions, recognizing them as genuine business losses.

6. Treatment of Sale of Scrap, Cash Discount, and Insurance Claim under Section 80HHC:
The AO excluded these from business profits for Section 80HHC computation. The Tribunal, following judicial precedents, held that these receipts had a direct nexus with the business and should be included in business profits for Section 80HHC.

7. Computation of Capital Gains on Transfer of Property:
The AO computed capital gains on the entire sale consideration of ?84.50 crores, allocating 50% to land and 50% to building, without allowing indexation on the land's fair market value. The CIT(A) adjusted the cost of acquisition but upheld the AO's allocation. The Tribunal held that only ?33.13 crores (the amount received during the year) should be considered, with 60% allocated to land based on a valuation report, and allowed indexation on the fair market value as of 01/04/1981.

8. Depreciation on Assets of BMIL and PHL:
The AO disallowed depreciation on assets acquired from BMIL and PHL. The Tribunal, following its earlier decision and the Supreme Court's ruling in Mahendra Mills, directed the AO to allow depreciation based on the written down value in the books of BMIL and PHL.

9. Disallowance u/s 40(a)(i) for Payment in Foreign Exchange:
The AO disallowed ?7,26,737/- for non-deduction of TDS on foreign payments. The CIT(A) deleted the disallowance, and the Tribunal upheld this, stating that retrospective amendments cannot impose TDS liability on past payments.

10. Classification of Payments to Mckinsey & Co. and Mehta Partners:
The AO treated payments to Mckinsey & Co. (?1023.56 lakhs) and Mehta Partners (?106.98 lakhs) as capital expenditure. The Tribunal, agreeing with the CIT(A), held these payments as revenue expenditure for professional services aimed at improving business operations.

11. Reduction of Processing Charges in Section 80HHC Computation:
The AO reduced 90% of processing charges from business profits for Section 80HHC. The Tribunal, citing the Supreme Court's decision in Southern Sea Foods Ltd., held that processing charges are part of business profits and should not be reduced.

Conclusion:
The Tribunal provided detailed directions and clarifications on each issue, ensuring that the assessments align with legal precedents and the factual matrix of the case. The decisions emphasize the importance of commercial expediency, proper allocation of sale consideration, and adherence to judicial precedents in tax assessments.