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TMI Blog2013 (3) TMI 195X X X X Extracts X X X X X X X X Extracts X X X X ..... m 801B units be calculated by reducing the amount of deduction u/s 801B from the deduction u/s 8OHHC and not from the profits of the business, which forms the basis for calculating the deduction u/s 8OHHC." 2. The assessee is a company, engaged in Manufacturing and marketing of consumer products. The assessee had filed its original return of income for the assessment year 1999-2000 on 22/11/1999 declaring Rs. 12,65,86,090/-, as its income. The original assessment order u/s. 143(3) of the Income Tax Act, 1961 (the Act) was passed on 27/3/2002 assessing income at Rs. 37,50,03,400/-. The AO reopened the assessment u/s. 147 of the Act by issuing notice u/s. 148 on 12/06/2003 for the reason that while completing the assessment u/s.143(3) of the Act, the deduction u/s. 80 IB of Rs. 3,21,82,320/- has not been reduced from Profits of business while computing deduction u/s. 80 HHC. 3. In the reassessment proceedings, the AO held that the deduction u/s.80-HHC of the Act had been claimed by including in the profits of business profits from Honda Unit and Kundaim unit in respect of which the assessee has claimed deduction u/s. 80IA. According to the AO allowing such a claim would amount to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t means that the deductions allowable under other provisions under heading C of Chapter VI-A would be allowed to the extent of profits as reduced by the profits allowed under section 80-IA(1). The second part of section 80-IA(9) does not refer to the method of computing deduction under other provisions under heading C of Chapter VI-A. Thus, section 80- IA(9) seeks to curtail the allowance of deduction and not the computation of deduction under any other provisions under heading C of Chapter VI-A of the Act. The Legislature has used specific words whenever it intends to affect the computation of deduction. As the words used in section 80-IA(9) relate to allowance and not computation of deduction, it cannot be inferred that section 80-IA(9) was inserted with a view to affect computation of deduction under any other provisions under heading C of Chapter VI-A. Since section 80- IA(9) uses the words "shall not be allowed", the section seeks to restrict the allowance of deduction and not the computation of deduction under any other sections under heading C of Chapter VI-A of the Act. Therefore the reasonable construction of section 80-IA(9) would be that where the deduction is allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4(1)(i) on a conditional basis thereby reverting the matter to the A.O. to verify the details of repairs expenditure incurred in connection with the house property and directing that the same be allowed only on furnishing of the relevant details. 2. The Appellant prays that deduction u/s. 24(1)(i) be allowed unconditionally." 11. The assessee is a company engaged in the business of manufacturing and sale of medicines and various personal health care products. The issue raised in Ground No.I is with regard to rental income from letting out of the property Matulya Center owned by the assessee. The assessee had given the aforesaid property to a group company M/s. Proctor & Gamble Home Products Ltd. for Rs. 1,08,00,000/- per annum. The assessee had claimed that income from letting was income from business and that depreciation on the aforesaid building should also be allowed as the asset was used for the purpose of business of the Assessee. The AO was of the view that income from aforesaid property should be assessed under the head income from house property and depreciation claimed by the assessee should not be allowed. He was of the view that rental income from the properpty has t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as business expenditure and income as rental income. The rental income should be considered as an integral part of the business of the assessee when the PGDC deals in the products of the assessee and of none others. 13. The arguments did not find favour with the AO. On appeal by the assessee the CIT(A) confirmed the order of the AO. It is not in dispute before us that identical issue had come up for consideration in assessee's own case in ITA No.845/Mum/03 for AY 95-96 and this Tribunal held as follows: "6.3 As regards the rental income, the case of the assessee is that the assessee had let out the building to Procter and Gamble Distribution Co. Ltd. for effective and smooth distribution of products and such letting out had advanced the business interest. Moreover, letting out the property was also one of the objects of the assessee company and accordingly it has been claimed that the rental income should be assessed as business income. 6.4 We have heard both the parties and considered the material carefully. There is no material to show that building has been let out by the assessee as part of any business arrangement so that the rental income could be considered as incident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wherein it was mentioned that there was no impact on the Profit & Loss account due to the deviation from the method of valuation prescribed under Sec. 145A of the Act. The contention of the assessee was not accepted by the AO and he was of the view that as the provisions of Sec. 145A of the Act the amount of unutilized modvat credit had to be added in the value of closing stock. He held that the closing stock of the assessee company was undervalued to the extent of such non-inclusion of modvat credit of Rs. 15,102,496/- and the profit of the company was under-reported to the above extent. Therefore, an amount of Rs. 15,102,496/- was added to the value of dosing stock and the total income of the assessee company was enhanced to that extent. 18. On appeal by the assessee the CIT(A) confirmed the order of the AO. The issue raised in ground No.3 is no longer resintegra and has been decided by the Hon'ble Delhi High Court in the case of CIT vs. Mahavir Alluminium Ltd., 297 ITR 77 , wherein the Hon'ble Delhi High Court held that whenever adjustment on account of Modvat credit is made corresponding adjustment is also to be made to opening stock. The aforesaid view has also been accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out that these assets are additions to such assets in the plant and could be in the nature of replacement of an existing old pallet truck. The Assessee also submitted that the aforesaid two items cannot be considered as vehicles because these assets are vehicles used in the manufacturing plant for the purpose of moving materials and finished goods which is an essential part of the manufacturing activity. Hence these assets have to be classified under the block "plant & machinery". The Assessee also submitted that the block of assets "motor cars" covers specifically Motor Cars as suggested by the name of the block and not vehicles in general. Hence these two assets cannot be classified under the block "motor cars". 22. The AO however did not accept the explanation of the Assessee and he held as follows: "8.3 The explanation of the assessee is, however, not acceptable as the appendix-I talks about battery powered vehicles. The assessee has been using the fork lift and the pallet truck inside the factory for shifting of material. The fork lift & the pallet truck is not registered as a vehicle under the Motor Vehicles Act. Therefore, the claim of the assessee that the fork lift and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed battery powered or fuel cell powered vehicles" The requirement of a vehicle being registered under Motor Vehicle At 1988 cannot be extended to the category of vehicles referred to item-O referred to above. We have to keep in mind that these vehicles operate within the Plant and do not ply on public roads. In our view the test would be whether they are renewable energy devices and they are vehicles in common parlance. The dictionary meaning of vehicle as given in Oxford English Reference Dictionary is " any conveyance for transporting people, good etc. especially on land". In our view the devices on which the assessee claimed 100% depreciation satisfy this requirement as they carried goods on land albeit within the factory. These provisions allowing depreciation at 100% being beneficial provision calls for broad interpretation. Apart from the above we also notice that battery operated vehicles plying in public roads was not in vogue at the relevant point of time when these provisions were introduced and, therefore, it cannot be said that these provisions intended to cover vehicle as per the Motor Vehicle Act 1988. We also find that these devices were battery operated and renewa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an independent item of a plant. Replacement of such part of computer has to be considered as revenue expenditure. The claim of the assessee is therefore, directed to be accepted. Ground No.VIII is accordingly allowed. 34. Ground No.IX raised by the assessee reads as follows: "GROUND IX: "1. The CIT(A) erred in granting depreciation @ 25% on Moulds and Dies by rejecting the Appellants claim of amortization over a period of four years. 2. The Appellant prays that depreciation be allowed as claimed." 35. The assessee claimed as revenue expenditure deduction while computing income from business expenditure on moulds and dies. The assessee as already stated is in the business of manufacturing personal health care products. The products are sold in attractive plastic containers. The person who supplies the packing material makes moulds and dies for making packing material/containers. The assessee reimburses the cost of the moulds and dies to the supplier of packing material. According to the assessee because of change in consumer desires and pattern, the containers are used for a short period and are often changed. Therefore, the cost of moulds and dies were treated as revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is allowed as per the rates specified in the Income Tax Act/Rules. Penalty proceedings u/s.271(1)(c) for furnishing inaccurate particulars of income are initiated separately." 37. On appeal by the assessee the CIT(A) confirmed the order of the AO. 38. Before us the ld. Counsel for the assessee reiterated the submissions as were made before lower authorities. The ld. Counsel for the assessee submitted that the cost of molds and dies is actual cost of packing material consumed which should be charged to the P&L account in the year of acquisition but the assessee taking into account the fact that the molds and dies have a life of 4 years amortized the cost over a period of 4 years and claimed deduction as revenue expenditure over a period of 4 years. The learned D.R. relied on the order of the CIT(A). 39. Having considered the rival submissions we are of the view that the claim made by the assessee deserves to be accepted. Considering the fact that the dies and molds are actually acquired by the packing material supplier and considering the fact that the cost of such molds and dies are reimbursed by the assessee to the packing material supplier, the assessee cannot be said to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany has been facing a lot of problems in selling the products of the company on account of these fake products, pass-offs, spurious products etc. In order to curb such growing issues and problems it was imperative and necessary for the company to take such steps to protect the business of the assessee company. Thus this expenditure is incurred to protect the business of the company and hence is an expenditure required for commercial expediency. Also as licensed users of the trademarks and brands the assessee company is responsible for the protection of the trademarks it is licensed to use." 43. The relevant part of clause 8.1 of the agreement for the product "Whisper" referred to by the assessee in its explanation is reproduced as under : "clause -8.1 The User undertakes to being to the notice of the proprietor all cases of infringement and/or passing off of the said Trade Marks or registration or attempted registration of the said Trade Marks or of any Trade Marks similar thereto. In the event of the proprietor undertaking any opposition to or any action to restrain or punish such act or acts, the User agrees to co-operate fully and freely with the proprietor and if require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of which it has incurred expenditure to prevent infringement and misuse thereof. As per the only agreement for use of trademark which has been produced by the assessee, the expenditure on such legal action was to be shared on the basis of terms which were to be mutually agreed upon. No such mutually agreed terms were produced by the assessee despite being asked to do so. The AO therefore presumed that there are no such mutually agreed terms in existence. So the AO was of the view that the limited issue that arose for consideration was as to whether in such circumstances, the assessee had incurred the expenditure wholly and exclusively for the purpose of its business. 47. The AO held that the Assessee as part of the technical know-how agreement and royalty for know-how was paying the owner of the trade mark. He held that there was an indirect payment by the assessee for exploiting the commercial potential of such trademark. The AO was of the view that the expenditure does not satisfy the test of sec.37 of the I.T.Act as it cannot be said to be expenditure incurred wholly and exclusively for the purpose of the assessee's business. The claim of Rs. 89,92,014/- by way of professional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he fact that a third party derives benefit by reason of such expenditure would not be a ground to reject the claim for deduction. 1. CIT vs. Chandulal Keshavlal & Co., (38 ITR 6010(SC) 2. Sasson J. David and Co. P. Ltd. vs. CIT (118 ITR 261) (SC) 3. Star India (P) Ltd. vs. Addl. CIT (103 ITD 73) (ITAT Mumbai)(Mad) 50. The ld. D.R on the other hand relied on the order of the CIT(A). 51. We have considered the rival submissions. We have already seen clause (8)(i) of the User Agreement dated 7/8/2003 between the assessee and the owner of the trademark. It is clear from the said clause that the assessee had to bear the expenses for protecting the trademark and infringement thereof. We are of the view that the assessee would derive a benefit by any legal recourse taken by the proprietor of the trademark for protecting the trademark. If the Assessee does that on its own even that would protect the business interest of the Assessee. We are also of the view that the agreement clearly envisages that the assessee will bear cost as mutually agreed between the assessee and the owner of the trademark. We are of the view that there is no requirement for any further written agreement betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich had been disallowed by the Assessing Officer. The Assessing Officer, thus allowed deduction u/s 8OHH at Rs. 2,30,91,331/- in place of Rs. 4,88,01,456/- claimed by the assessee. In appeal, the CIT (A) confirmed the order of the Assessing Officer, aggrieved by which the assessee is in appeal before the Tribunal. 7.1 We have heard both the parties perused the records and considered the matter carefully. The deduction u/s 8OHH is to be allowed in respect of business profit computed under the provisions of the Act. Therefore any addition made to the business income u/s 436 has to be considered as part of the business income for computation of deduction u/s 80H1-f. We, therefore, set aside the order of the CIT (A) in relation to disallowance of deduction on account of addition u/s 436 and the claim of the assessee is allowed. 7.2 As regards the allocation of interest expenditure to Medok Unit is considered, we find that this issue is covered by the decision of the Tribunal in the assessee's own case for the assessment year 1989-90 in ITA no.8280/Mum/1992 in which the Tribunal held that only the interest payable on the bank overdraft has to b' allocated towards the Medok Unit. We, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 4' scrap and disposal of empty containers as part of turnover for the purpose of calculation of deduction under section 8OHHC. 14. It was submitted that this ground is also covered in favour of the assessee by the decision of the Coordinate Bench. in assessee's on case in ITA No. 3216/Mum/2005 dated 14th November 2006 wherein the assessee has relied on the following decisions of the Tribunal for the proposition that the income generated from scrap sales cannot be held to be forming part of the total turnover: - i. ITO vs. Jagraon Exports ii. Coftab Exports vs. ITO ITA No. 918/Mum/ 1999 iii. BHD Industries Ltd. vs. JCIT ITA No. 2584/Mum/2000 iv. SKF Bearings vs. DCIT ITA No. 1858/Mum! 1998 Since the issue is similar, respectfully following the decision of the Coordinate Bench, the ground of the assessee is allowed." 57. Respectfully following the said decision we direct the AO to include the amount in question as part of the turnover for the purpose of calculation of deduction under section 80 HHC of the Act. 58. As far as other income is concerned the same is mainly on account of interest on surplus funds earned by the assessee. The Hon'ble Bombay High Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come not connected with the export activity and, therefore, outside the purview of profits of business. 59. Ground No.XIII raised by the assessee reads as follows: "GROUND XIII: 1. The CIT (A) erred in reducing an amount of Rs. 55,95,38,291/-, being the deduction u/s 801B, from the profits of the business for calculating the deduction u/s 8OHHC. 2. The Appellant prays that the deduction u/s 8OHHC in respect of profits from 801B units be calculated by reducing the amount of deduction u/s 801B from the deduction u/s 8OHHC and not from the profits of the business, which forms the basis for calculating the deduction u/s 8OHHC." 60. The aforesaid ground has to be decided in favour of the assessee in view of the decision of the Hon'ble Bombay High Court in the case of Associated Capsules Pvt. Ltd. Vs. DCIT 332 ITR 42(Bom) which we have referred to in the appeal of the Assessee for AY 99-2000 in the earlier part of this order. Consequently, the deduction u/s. 80 IB should not be reduced from the profits of the business on which deduction u/s. 80 HHC is allowed. 61. In the result, the appeal by the assessee is partly allowed. ITA NO.1241/MUM/2005, A.Y.2001-02: (REVENUE'S APPEAL) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o our notice that Hon'ble ITAT in assessee's own case in ITA No.4541 & 5009/M/04 for A.Y 1997-98 and 1998-99 similar issue had come up for consideration and this Tribunal held as follows: "10. Ground No. 4 pertains to addition of Rs. 61,45,000/- in respect of expenditure incurred on production of films for advertising the products of the assessee. 11. It was the assessee contention that the expenditure was incurred for advertisement of products being manufactured/marketed by it in the ongoing business and no there is enduring benefit. The AO relied on the decision of CIT vs. Patel International Film LtdlO2 ITR 219 which was confirmed by the CIT(A). This issue is covered in favour of the assessec by the decision of the Hon'ble Bombay High Court in the case of CIT vs. M/s. Geoffrey Manner & Co. Ltd. 180 Taxman 87 where in the above decision was distinguished and held that expenditure was revenue in nature if the same was incurred in the ongoing business. Respectfully following the said decision, the ground raised by the assessee is allowed." Following the said decision we uphold the order of CIT(A) and dismiss ground No.1 raised by the revenue. 65. Ground No.2 raised by the rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exact purpose of the visit for each employee. The CIT(A) has confirmed that as a reasonable disallowance. It was the submission that assessee is a global MNC with operations in 160 countries and exports to many countries. All the expenditure was incurred on the employees for their foreign visit for the purpose of business and no capital expenditure was involved. It was further submitted that Tax Auditors also gave details but no disallowance was considered. 17.1 On consideration of the details and the facts on record we are in agreement with the assessee submissions. First of all no such disallowance was made in any of the earlier years and this claim was a recurring one. Secondly the expenditure was incurred on employees and the details of the trips and nature was furnished. Considering the business activity of the assessee and nature of expenditure we are of the opinion that any adhoc disallowance was not warranted. AO is directed to delete the same. Ground is allowed." 70. We are of the view that in the present year also the assessee furnished all the details regarding foreign travel expenses. The AO made the addition for the simple reason that the assessee had imported capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the CIT(A)'s order and, therefore, the matter should be remanded to the AO for fresh consideration. The ld. Counsel for the assessee on the other hand relied on the decision of the Special Bench of ITAT, Delhi in the case of Motorola Inc. 96 TTJ 1(Del) (SB). 75. We have considered the rival submissions. We find that the exact nature of payment made by the assessee has not been properly spelt out either in the order of the AO or CIT(A) or before us. In the circumstances it would be just and proper to set aside the order of the CIT(A) on this issue and direct the AO to examine the issue afresh. The assessee is directed to give the exact nature of the software whether purchased outright or on mere license basis and the purpose for which the same was purchased. The AO will decide the issue after affording the assessee opportunity of being heard. 76. Ground No.4 has already been decided while deciding the ground No.5 raised by the assessee. For the reasons stated therein this ground of appeal is dismissed. 77. Ground No.5 raised by the revenue reads as follows: "5. On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in deleting the disallowance o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r it has to be treated as computers eligible for depreciation at 60%. Aggrieved by the order of the CIT(A) the revenue has raised Ground No.5 before the Tribunal. 81. We have heard the rival submissions. The issue as to whether depreciation has to be allowed at 60% or 25% for A.Y 2001-02 on software is no longer res-integra and has been decided by the Special Bench of the ITAT in the case of Amway India Enterprises vs. DCIT, 111 ITD 112 (Del), wherein it was held that depreciation on computer software has to be allowed at 25% prior to 1/4/2003 and that is only from A.Y 2003-04 computer software are entitled to depreciation at 60%. The reasoning of the CIT(A) that software was part of the computer and had to be treated as computer in our view is contrary to the claim of the Assessee. The Assessee had itself claimed depreciation treating software as a separate and independent item of capital asset. In view of the aforesaid decision of the special bench, we reverse the order of the CIT(A) and restore the order of the AO. Ground No.6 raised by the revenue is allowed. 82. Ground No.7 raised by the revenue reads as follows: "7. On the facts and in the circumstances of the case and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed the claim of the assessee for deprecation and further brought the rental income in question to tax under section 22 of the Act. 88. The plea of the assessee that the income from letting out of property had to be considered as income from business was based on the fact that the property was leased to a sister company of the Asssessee M/S.Proctor & Gamble Home Products Ltd. Under a business arrangement between the assessee and sister company whereby the sister company agreed to compensate the assessee for use of space. According to the assessee the premises in question was also occupied by the employees of the assessee and were functioning from the same premises and used the same set of infrastructure as is available is assessee's sister concern. The assessee further submitted it was the manufacturer and distributor of all its products upto March'1993. Thereafter, with a view to take advantage of the merits of specialization, the distribution task was allotted to a new company (namely Procter & Gamble Distribution Co. Ltd. "PGDC") in April'1993 and subsequently to PGHP in November'1998 when this business of PGDC was commenced by PGHP. One of PGHP's activity was that of distr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e building has been let out tj the distributor of the assessee, the rental income cannot be treated as business income in the absence of any material to show that letting out was necessary for the purpose of business. Similarly, merely because one of the objects of the assessee was letting out of the property, it cannot automatically lead to the conclusion that the assessee was actually doing business in letting out buildings. There is no material to show that the assessee was doing any organized activity of letting out buildings. Therefore, the claim of the assessee that the rental income should be assessed as business income cannot be accepted and the order of the CIT (A) is upheld." 90. It is in respect of the disallowance of depreciation and treating the rental income as income from house property as against the claim of the assessee that it was business income that penalty was imposed on the assessee by the AO which was confirmed by the CIT(A). We find that the assessee had made complete disclosure of all the facts. The assessee had made a claim that rental income received was to be assessed as income from business based on the utility of the premises for the assessee's busin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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