9911796707
TMI Blog2012 (6) TMI 286X X X X Extracts X X X X X X X X Extracts X X X X ..... it should be allowed in five years, as done in the case of the VRS payments. The AO is directed to allow 1/5th of the expenses in this year and balance in next four years in equal installments. Depreciation of assets - closer of the unit - held that:- neither the building nor the machinery or plant in Dharuhera unit were owned by the assessee or used by it on account of closure of the unit and transfer of the assets in this year. - the provisions contained in section 32 regarding ownership and user come into play. As the assessee is neither the owner of the assets nor the assets have been used in the business of the assessee, the assessee is not entitled to deduct depreciation. Advertisement and sales promotion expenses. - held that:- there is no allegation that any part of the expenditure relates to products in which the assessee is not dealing in the normal course of its business. The expenses by way of advertisement and sales promotion are revenue in nature. Addition on account of deposit of sales-tax under protest – Held that:- CIT (Appeals) was right in granting relief to the assessee Provision made by the assessee for import duty payable - held that:- this is me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determined by the Tribunal in its own case, in the consolidated order for assessment years 2002-03, 2003-04 and 2004-05, in favour of the assessee, holding that it was the OP. However, the ld. CIT (Appeals) did not follow these orders. In paragraph no. 11 on page no. 21 of the impugned order, it is mentioned that the finding of the Tribunal has been made on the basis that there is no good ground for not accepting the reimbursement of expenses as a part of normal OP. The TPO has raised substantial arguments in this behalf and substantiated his case. Therefore, it has been held that the TPO rightly excluded such reimbursements from the OP. Respectfully disagreeing with the findings of the Tribunal, the orders of the TPO and the AO have been accepted in this matter. The case of the ld. counsel is that the matter stands squarely covered by the order of the Tribunal in three years preceding years. The issue stands covered in paragraph no. 104, in which it has been held that there is no good ground for not accepting the reimbursement as normal operating profit and but for the reimbursement, the assessee would not have incurred such huge expenditure on advertisement. For the sake of ready ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer pricing adjustment is concerned. 3.3 We have considered the facts of the case and submissions made before us. We find that there is no change in the facts although the finding of the ld. CIT(A) is that the order of the Tribunal, referred to above, did not exactly decide the controversy at hand and, therefore, the issue was appreciated further by the TPO in this year. We further find that the Tribunal reiterated the same order in assessment years 2003-04 and 2004-05. The order, reproduced above, deals with the controversy at length. These preceding orders are in the nature of binding precedent for us and even for the ld. CIT(A). In view thereof, respectfully following these decisions, it is held that reimbursement of advertisement expenses by the AEs constitutes the OP to be included for the purpose of determining operating margin. 3.4 The exclusion of notice pay and penalty received from staff members has admittedly been decided against the assessee by the Tribunal and it has been held that such amounts cannot be included in the income for determining operating margins. In view of discussion in the preceding paragraph that the order is a binding precedent, the matte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r erred in holding that in order to claim deduction u/s 35DDA, the VRS should comply with the conditions laid down in section 10(10C) of the Act and Rule 2BA of the Income-tax Rules, 1962 (the Rules). He also erred in holding that the expenditure resulted in a benefit of enduring nature to the assessee and, therefore, it was capital in nature. 4.1 The facts mentioned in the assessment order are that the note no. 4 to the accounts mentions that the assessee has claimed the deduction of 1/5th of the expenditure u/s 35DDA. However, it appeared to the AO that the restructuring expenses are of capital nature. Therefore, the assessee was requested to explain the nature of the expenses and the deductibility in computing the income. It was submitted that the assessee has treated the expenses as under:- ( i ) 1/5th of the expenses incurred in respect the VRS have been claimed u/s 35DDA; ( ii ) the loss on sale of fixed assets has been disallowed in computing the total income but adjustment has been made in the written down value of the respective block of assets, thereby claiming the deduction of depreciation on the reduced value; and ( iii ) Other restructuring expenses such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not by itself provide for the contents of the VRS. The same are provided in Rule 2BA. These rules have been framed u/s 10(10CA). However, it is an accepted principle of construction of the statute that if a term is not defined in the section, its meaning will take colour from the definition provided in some other related section. Therefore, it is necessary to make a reference to Rule 2BA. On doing so, it will become necessary for getting deduction under this section that the provisions contained in Rule 2BA are satisfied. On comparison of the scheme with the contents of Rule 2BA, it is seen that - (i) the scheme is not open to all employees of the assessee-company as it is limited only to employees of Dharuhera unit; (ii) no age bar has been placed on the employees working in this unit; (iii) there is no bar on the minimum number of years of service of the employee for making him eligible to opt for retirement under the VRS; (iv) there is no upper limit placed on the compensation; and (v) the payment includes within its ambit earned leave, medical leave, casual leave, pension, gratuity etc. Therefore, the scheme has not been framed in accordance with Rule 2BA. Accordingly, it has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the expenditure in computing the income. The other arguments in respect of purpose of incurring expenditure and the VRS were the same as before the AO. 4.5 The ld. CIT(A) came to the conclusion that the expenditure is not in respect of retrenchment of employees of Dharuhera unit but the expenditure incurred in terms of the VRS. However, the VRS is not in accordance with Rule 2BA framed under section 10(10C). Therefore, it has been held that the expenditure has been incurred to sustain the business for a longer period of time resulting in a benefit of enduring nature and, thus, capital in nature. Accordingly, the appeal of the assessee has been dismissed on this ground. 5. Before us, the ld. counsel submitted that one of the findings of the ld. CIT (Appeals) is that the expenditure is in connection with the VRS and it is not retrenchment compensation. This finding has not been challenged by the revenue. Therefore, this finding has become final. The objection of the revenue, left for consideration, is that the scheme does not conform to the provisions contained in Rule 2BA. According to him, such non-conformation does not alter the fact that the expenditure has been incur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction can be allowed in view of existing jurisprudence in the matter u/s 37. 6.2 The ld. CIT(A) has held in paragraph no. 17.1 on page no. 52 of the impugned order that the assessee rightly states that the expenditure is not in respect of retrenchment compensation but in respect of the VRS. This finding has not been challenged by the revenue by any ground taken up in the cross appeal. However, that does not mean that the revenue cannot agitate the matter before us by raising a plea against the order of the ld. CIT (Appeals). Rule 27 of the Appellate Tribunal Rules, 1963, provides that the respondent, though he may not have appealed, may support the order appealed against on any of the grounds decided against him. It is obvious that the revenue is a respondent in this appeal. The revenue's case that the expenditure is in essence the retrenchment compensation and not under the VRS has been decided against the revenue but no specific ground has been taken in the cross appeal in this matter. However, under this Rule, the revenue may support the order appealed against on any of the ground decided against it. Therefore, revenue can legitimately support the act of disallowance of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gard, the case of the ld. counsel is based upon decision of Hon'ble Kerala High Court in the case of CIT v. O E N India Ltd., [2010] 8 Taxman.com 246/[2011] 196 Taxman 131, and in particular the observations made in paragraph no. 5. It is mentioned that the test applied to determine whether the expenditure incurred by the assessee is revenue or capital in nature depends upon the finding as to whether the assessee has created any fixed asset or not. If an asset has been created, the expenditure will certainly be capital in nature. Where the expenditure does not lead to creation of a fixed asset, the expenditure is generally revenue in nature. However, creation of an asset is not a mandatory requirement. The expenditure incurred for achieving a benefit of enduring nature is also capital in nature. When this test is applied, it is felt that the purpose of introduction of VRS is to reduce the staff strength with a view to achieve viability and profitability of the business in general and the retrenchment will give long-term benefit to the assessee. The VRS floated with a view to encourage massive retirement is primarily to streamline the business by restructuring the work force wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n integrated cinematographic business and, therefore, outgoing in respect of the closed business was not admissible. It was observed that the assessee was acquiring various theatres from time to time on lease or otherwise and running them independently with separate and identifiable books of account. The High Court held that if an assessee carries on several distinct and independent businesses, one of which is closed before the previous year, he cannot claim deduction u/s 10 in respect of outgoing attributable to the closed business. This finding was upheld by the Hon'ble Supreme Court in absence of any evidence about unity of control and management, inter-relation of the businesses, employment of the same staff to run the business or the possibility of one theatre being closed without affecting the rest of the business. In the case of CIT v. Gemini Cashew Sales Corpn. [1967] 65 ITR 643 (SC), the facts are that two persons, Walter and Ramasubramony, carried on business in cashew as partners in the firm of M/s Gemini Cashew Sales Corporation. The partnership was dissolved on 24.8.1957 on the death of Ramasubramony and the business was continued by Walter on his own account. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 338/13 Taxman 215 (Cal.), the facts are that the Board of Directors of the assessee-company decided to close down the entire printing establishment. Consequently, a notice was put up that the services of all the employees in the printing business will stand terminated from 01.07.1968. The employees were informed that they will be paid notice pay and compensation in accordance with section 25FFF read with section 25F of the Industrial Disputes Act, 1947, which could be collected on 01.07.1968. They were paid a sum of Rs. 52,121/- as compensation and Rs. 10,233/- as notice pay. A sum of Rs. 6,495/- was also paid in lieu of un-availed leave standing to their credit. The assessee claimed deduction of Rs. 68,849/- in computing the total income for assessment year 1969-70. The Hon'ble Court, relying on the decision in the case o f Gemini Cashew Sales Corprn. ( supra ), held that the payment was made in the course of closure of the business. Therefore, it was not deductible in computing the income. In the case of India Manufacturers (Madras) (P.) Ltd. v. CIT , [1985] 155 ITR 774 (Mad.), the facts inter-alia are that the assessee was carrying on the business as distributors of the prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of the assessee of manufacture, sale and trading of goods. The Hon'ble Supreme Court mentioned that the results of accounts of different ventures were entered in the account maintained at the head office, but from this circumstance no inference necessarily arises that the exhibition of films in different theatres constituted the same business. There is no evidence about unity of control, management, same staff to run the business or the possibility of one theatre being closed without affecting the rest of the business. The assessee has not established that closure of this business would not materially affect the other businesses, same personnel were employed for running the business or even unity of control and management or inter-relation of the business. Coming to the facts of this case, although it is stated that the manufacturing and trading businesses were part of the same business. One of the reasons is that the director of manufacturing business was reporting to Managing Director of the assessee-company. According to us, this by itself does not lead to inference that various businesses were the same business. It is not shown that the same bank account was maintained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us has not been proved. Thus, it is held that the decision in the case of Gemini Cashew Sales Corpn. ( supra ) can only be made applicable to the facts of this case. However, it has not been proved that the closed business of manufacturing goods was a part and parcel of the overall business of the assessee. In order to give a finding, it is inter-alia required to prove that-(i) the control and management was the same, (ii) the finances were inter-linked and inter-laced, (iii) employees were common or at least inter-changeable, and (iv) closure of this business would not materially affect other businesses. These findings of facts require material on record, such as director's report to the shareholders at the time of starting and closing the manufacturing business for ascertaining sources and utilization of funds; production of bank account to show user money as a common kitty for all business; evidence of shifting of personnel from one business to another; viability of the trading business in absence of manufacturing business etc. As all these facts are not on record, we do not furnish a finding in respect of this aspect. 6.8 However, as mentioned earlier, the assessee is ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al in nature. The expenditure inured an enduring benefit by closing down the unviable unit. Therefore, the expenditure was held to be capital in nature and the ground of the assessee in this regard was dismissed. 7.3 Before us, the case of the assessee is that this kind of expenses are revenue in nature, deductible in full u/s 37(1) of the Act. On the other hand, the ld. DR relied on the arguments in respect of ground nos. 7, 8 and 9 to argue that the expenditure is capital in nature. He also relied on the findings of the AO and the ld. CIT(A). 7.4 We have considered the facts of the case and submissions made before us. Generally, speaking the expenditure incurred in the course of a running business on consultants and employees constitutes revenue expenditure. However, it has not been established by the assessee that the closed unit was a part and parcel of the overall business of the assessee of manufacturing and sale of goods. Accordingly, it is held that the expenditure is in connection with closure of the manufacturing business. Therefore, it cannot be denied that the expenditure is capital in nature. Further, its nature is the same as that of VRS expenses. The expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment order that the manufacturing activities in Dharuhera unit were closed down in July, 2004. Thereafter, all the assets except motor vehicles and software were sold before 31.3.2005. The assessee still claimed depreciation of Rs. 4,42,22,475/- in respect of the assets excluding motor vehicles and software. It has been held that it is completely inconceivable that the assessee can be allowed depreciation in respect of assets which it no longer owns and which it has already transferred. The transferee is claiming depreciation on these assets. Thus, the claim has been denied. 9.2 The arguments submitted before the ld. CIT(A) were the same as before the AO. The ld. CIT(A) considered the facts of the case and held that both ownership and user of the assets are essential ingredients for claiming depreciation. Both the ingredients are missing in this case. Therefore, the deduction has not been allowed to the assessee. 10. Before us, the ld. counsel relied on the provision contained in section 32(1)(ii) to the effect that in respect of building, machinery, plant or furniture, being tangible assets; owned, wholly or partly by the assessee and used for the purposes of business or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of machinery and plant, the opening value was about Rs. 55.81 crore, to which addition of Rs. 53.70 lakh was made, but on account of transfer, this block was also reduced to nil at the end of the year. Apart from the aforesaid, the other blocks are in respect of furniture, fixtures and office equipments; computers; lease-hold improvements and vehicles. As mentioned earlier, computers and vehicles in Dharuhera unit were merged with the computers and vehicles of other units, which are still functioning. However, in so far as the position of the blocks of building, and plant machinery as per the I.T. Rules is concerned, it is somewhat different. In the consolidated statement, the assessee has shown opening WDV of machinery and plant at about Rs. 25.33 crore from which sale proceeds of about Rs. 5.05 crore have been reduced. An overall addition of about 1.17 crore has been made, taking the value as on 31.3.2005 at Rs. 21.44 crore. On this value, depreciation of about Rs. 53.22 lakh has been claimed and the closing WDV has been worked out at about Rs. 1.61 crore. There is also a block of non-residential buildings with the opening WDV of about Rs. 12.46 crore. This has been re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the machinery was not ready for use. The plant and machinery was not tested or subjected to trial run which further strengthens the conclusion that the machinery was not used. The argument of the assessee of passive user based on the concept of block of assets was not accepted in view of specific provision of section 32(1) regarding the use of asset for the purpose of business. 11.2 In the case of Asstt. CIT v. SRF Ltd. , [2008] 21 SOT 122 (Delhi), the facts are that the assessee claimed depreciation inter-alia in respect of assets of its international division. The AO disallowed the same on the ground that no business activity took place in this division. The ld. CIT (Appeals) came to the conclusion that these assets had been used in earlier years and even in subsequent years and, therefore, the assets were ready for use. He also held that the concept of depreciation on individual assets has been done away with and substituted with the concept of "block of assets". In such a situation, the question of user will only come in the first year and once the asset has entered in the block, depreciation could not be determined or allowed on a piece-meal basis. The Tribunal upheld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by it on account of closure of the unit and transfer of the assets in this year. As held earlier, it has not been established by the assessee that the business of manufacturing and trading constituted one composite business. The aforesaid two blocks of assets in respect of Dharuhera unit ceased to exist on transfer of all the assets in these blocks. It is true that for the purpose of computing the deduction of depreciation, the assessee had prepared a consolidated statement including all the assets of all units under respective blocks. This however cannot be accepted as a basis that the respective blocks of Dharuhera unit, carrying on manufacturing business, did not stand exhausted. The facts of the case of Inductotherm (India) Ltd. ( supra ) are distinguishable as some assets had been discarded but scrap value was not ascertained. The block of assets had not thus come to an end. The facts of Nathani Steels Ltd are also distinguishable as it was a case of installation of a new unit whose assets had not been used at all. It was not a case of closure of one of the unit, where the assets have been used earlier to the closure. The facts of the case of SRF Ltd. are also distinguishab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nos. 16, 17 and 18 are in respect of part-disallowance out of advertisement and sales promotion expenses. It is mentioned that the ld. CIT (Appeals) erred in disallowing 10% of such expenses leading to enhancement of income by Rs. 6,03,62,100/- by holding that the expenses resulted in a benefit of enduring nature. It is further mentioned that similar issue has been decided in favour of the assessee in earlier years. It is also mentioned that the ld. CIT(A) erred in not following the decision of the Tribunal in its own case for earlier years where the facts were similar. 12.1 In this connection, it is inter-alia mentioned in the assessment order that expenditure of Rs. 60,36,21,000/- was incurred under the head "advertisement and selling expenses". Sony Corporation, Japan, the ultimate parent company, and its subsidiaries are holding the whole of the share capital in it. The huge expenditure on advertisement and sales-promotion will lead to a benefit to the parent company also. Besides this, the aggressive advertisement and sales promotion will lead to a benefit of enduring nature. On an estimated basis 10% of the expenditure was attributed to the benefit flowing to Sony Corpora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were reduced by Rs. 1,68,970/- and Rs. 90,795/- respectively. The ld. counsel did not argue this ground by mentioning that in the earlier years similar ground stands covered by the order of the Tribunal against the assessee. Accordingly, this ground is dismissed. ITA No. 4114(Del)/2010- A.Y. 2005-06- Appeal of the revenue 14. The only ground taken in this appeal is that the ld. CIT (Appeals) erred in deleting the addition of Rs. 15,51,403/-, made by the AO on account of deposit of sales-tax under protest. 14.1 In this connection, it is mentioned in the impugned order that the assessee tendered a fresh claim u/s 43B in respect of sales-tax of Rs. 15,51,403/-, deposited by it under protest. It was submitted that the demand had been raised by the sales-tax authorities but the amount was not debited to profit and loss account as the demand had been challenged. Due to inadvertence, the claim was also not made at the time of filing of the return of income. The amount is otherwise deductible in computing the total income under the provisions of section 43B. The ld. CIT (Appeals) allowed the deduction by following the decision of Mumbai Tribunal in the case of Emerson Network ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sactions. The ld. DR fairly conceded that this is merely a book entry. Having considered these arguments, it is held that the provision should be excluded for working out the OP in the case of the assessee. In respect of other points the order of last year is made applicable to this year also. 15.1 Thus, these grounds are allowed. 16. Ground nos. 13 to 17 are in respect of amortization of the expenses under the VRS. It has been held by us that 1/5th of the expenditure was deductible in assessment year 2005-06 and, thus, the balance amount is deductible in four equal installments in the immediately succeeding years. Relying on that order, it is held that the assessee is entitled to deduct 1/5th of the expenditure in this year also. Thus, this ground is allowed. 17. Ground no. 18 is in respect of rate of depreciation on UPS, switches and printers. It has been held by us that the assessee is entitled to deduction at the rate of sixty per cent on these items also, being part and parcel of the computers. Accordingly, this ground is allowed. 18. Ground nos. 19 and 20 are in respect of deduction of depreciation on the depreciable assets of Dharuhera unit. It has been held ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
