2022 (1) TMI 44 - AT - Income Tax

Disallowance u/s 14A - HELD THAT - As the facts of the issues involved qua the issue in question remain the same, therefore, in our considered view, going by the principle of of consistency the matter in all fairness requires to be restored to the file of the AO, on the same terms, with direction to redetermine the disallowance u/s 14A of the Act after considering the judgment of the Hon ble Supreme Court in the case of Maxopp Investmnts Ltd. 2018 (3) TMI 805 - SUPREME COURT Before parting, we may however observe that the disallowance determined by the A.O in the course of the set-aside proceedings shall in no way exceed 10% of the amount of dividend income. The Ground of appeal no. 1 is allowed for statistical purpose in terms of our aforesaid observation. Addition of interest on ICD - HELD THAT - CIT(A) had consistently while disposing off the appeals in the case of the assessee for assessment years 2007-08 and 2013-14, had followed the view that was taken by their predecessor in assessment year 2006-07 and had vacated the additions of the interest income that were made by the A.O on an accrual basis qua the ICD s in question whose recovery had become doubtful. At this stage, we may herein observe, that as stated by the ld. AR, the aforesaid view taken by the CIT(A) in the abovementioned years i.e. A.Y 2006-07 and A.Y 2013-14 had not been assailed any further in appeal by the department, and thus, had attained finality. In the backdrop of the aforesaid facts, we are of the considered view, that now when the department itself had accepted that no addition qua the interest income on accrual basis with respect to the ICD s in question could be made, therefore, we have no hesitation in vacating the addition made by the AO. Addition of Excise Duty Refund - claim of the assessee that as the refund of excise duty was received by it subject to furnishing of bank guarantee for the said sum from a nationalized bank, which was to be kept alive and in full force till the main appeal before the Hon ble Apex Court was finally disposed off, therefore, the receipt of the said refund would not fall within the domain of section 41(1) of the Act, and thus, would not be exigible to tax during the year under consideration - HELD THAT - The issue in question i.e. receipt of excise duty refund against providing of bank guarantee by the assessee is squarely covered by the judgment of Hon ble High Court of Delhi in the case of CIT vs Bharatpur Nutritional Products Ltd. 2012 (3) TMI 319 - DELHI HIGH COURT wherein involving identical facts, we find, that the Hon ble High Court had observed that furnishing of bank guarantee when the excise duty refund had been received will not make any difference as per clearly worded Section 41(1) - Thus we uphold the order of the CIT(A), who had rightly concluded that the refund of the excise duty was liable to tax during the year under consideration CIT-A Jurisdiction and enhancing the income of the assessee company u/s 94(7) - HELD THAT - We find that the aforesaid issue in hand is squarely covered by the order of the Hon ble Jurisdictional High Court in the case of Gurinder Mohan Singh Nindrajog 2011 (9) TMI 755 - DELHI HIGH COURT as observed that the CIT(A) has a power of enhancement in respect of such items or items of income which has been dealt with in the body of the order of the assessment, and arose for his consideration as per the grounds of appeal raised before him, being the subject matter of appeal. In sum and substance, it was therein observed that the power of the CIT(A) to enhance the income of the assessee could be validly exercised only qua such item or items of income which had been dealt with by the A.O while framing the assessment and arose for the consideration of the first appellate authority as per the grounds of appeal raised before him. We are of a strong conviction that as the enhancement carried out by the CIT(A) qua the issue of dividend striping u/s 94(7) of the Act was never considered by the AO in the course of assessment, therefore, the CIT (A) was not vested with any jurisdiction to have enhanced the income of the assessee company in exercise of the powers vested with him u/s 251(1)(a) of the Act. We, thus, not being able to persuade ourselves to uphold the enhancement carried out by the CIT(A) qua the issue of dividend striping u/s 94(7). Nature of expenditure - amount paid by the assessee to M/s Vilter Manufacturing Corporation, USA as fee for user of know-how - capital expenditure or revenue expenditure - HELD THAT - Payment made by the assessee company to M/s Vilter Manufacturing Corporation, USA was for the technical know-how services provided by the latter for facilitating carrying out the ongoing/existing business of manufacturing of refrigeration products by the assessee in a more technically viable and profitable manner, therefore, the same was rightly claimed by the assessee as a revenue expenditure for computing its income for the year under consideration and had wrongly been dubbed as a capital expenditure by the lower authorities. Our aforesaid view i.e where an assessee who is engaged in the business of manufacturing and selling certain products had made a payment to a foreign company for merely acquiring a right to use technical know-how, whereas the ownership and intellectual property rights in the said know-how remained with the foreign company, then, the payment in question would be in the nature of a revenue expenditure, is supported by in the case of CIT Vs. Hero Honda Motors Ltd., 2015 (2) TMI 368 - DELHI HIGH COURT - We, thus, in the backdrop of our aforesaid observations not finding favour with the view taken by the lower authorities wherein they had rejected the assessee s claim for deduction of the payment made for the technical know-how to M/s Vilter Manufacturing Corporation, USA as a revenue expenditure, and had dubbed the same as a capital expenditure, set-aside the order of the CIT(A) and direct the A.O to allow the assessee s claim for deduction of the aforesaid amount of payment as a revenue expenditure.

Summary

Issues Involved:

1. Disallowance under Section 14A of the Income Tax Act.
2. Addition of interest on Inter-Corporate Deposits (ICD).
3. Addition of Excise Duty Refund.
4. Enhancement of income under Section 94(7) of the Income Tax Act.
5. Treatment of technical know-how fees and royalty payments as capital expenditure.

Detailed Analysis:

(A) Disallowance under Section 14A of the Income Tax Act:

The assessee company, engaged in the business of manufacturing and sale of air-conditioning and refrigeration equipment, had claimed an exempt income of ?1,23,67,853 under Sections 10(34) and 10(35) of the Income Tax Act. The Assessing Officer (AO) disallowed ?30,97,000 under Section 14A, which was enhanced by the Commissioner of Income Tax (Appeals) [CIT(A)] to ?1,04,16,000, following the Tribunal's order for AY 2001-02. The Tribunal, however, noted that the disallowance should be limited to 10% of the dividend income, as per the rectified order for AY 2001-02. Thus, the Tribunal restored the matter to the AO to redetermine the disallowance under Section 14A, ensuring it does not exceed 10% of the dividend income.

(B) Addition of Interest on Inter-Corporate Deposits (ICD):

The assessee had advanced ICDs to three companies, which were not repaid, leading to legal actions. The AO added ?35,76,000 as interest income on these ICDs, following the mercantile system of accounting. The CIT(A) upheld this addition. However, the Tribunal noted that the principal amount was doubtful of recovery, and as per the Delhi High Court's decision in Vasisth Chay Vyapar Ltd., interest income on such doubtful ICDs should not be considered accrued. The Tribunal vacated the addition, aligning with the CIT(A)'s decisions for subsequent years where such additions were not made.

(C) Addition of Excise Duty Refund:

The assessee received a refund of ?1 crore on excise duty, subject to a bank guarantee, following the Supreme Court's order. The AO added this amount to the income, which was upheld by the CIT(A). The Tribunal, referencing the Delhi High Court's decision in Bharatpur Nutritional Products Ltd., affirmed that the refund should be taxed under Section 41(1), despite the bank guarantee condition. The Tribunal upheld the CIT(A)'s decision to include the refund in the taxable income.

(D) Enhancement of Income under Section 94(7):

The CIT(A) enhanced the income by ?1,38,131 under Section 94(7) for dividend stripping, which was not considered by the AO in the original assessment. The Tribunal noted that the CIT(A)'s power to enhance is limited to issues dealt with by the AO and raised in the grounds of appeal. Citing the Delhi High Court's decisions in Gurinder Mohan Singh Nindrajog and Union Tyres, the Tribunal vacated the enhancement, ruling it beyond the CIT(A)'s jurisdiction.

(E) Treatment of Technical Know-How Fees and Royalty Payments as Capital Expenditure:

The assessee paid ?82,73,814 to M/s Vilter Manufacturing Corporation, USA, for technical know-how, which was claimed as a revenue expenditure. The AO and CIT(A) treated it as a capital expenditure, allowing depreciation under Section 32(1)(ii). The Tribunal, however, observed that the payment was for running the existing business more efficiently and was not for acquiring an enduring asset. Referring to the Delhi High Court's decision in Hero Honda Motors Ltd., the Tribunal ruled that the payment was a revenue expenditure and directed the AO to allow the deduction. The Tribunal also vacated the CIT(A)'s observation regarding royalty payments, as no royalty was paid during the year under consideration.

Conclusion:

The appeals for AY 2004-05 and AY 2005-06 were partly allowed, with specific directions to the AO for redetermination and correction of assessments as per the Tribunal's observations and applicable legal precedents.