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TMI Blog2014 (4) TMI 743X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee - the order of the CIT(A) is upheld Decided against Revenue. Disallowance of estimated depreciation on obsolete assets Held that:- The decision in CIT Vs. GR Shipping Ltd. [2009 (7) TMI 1169 - BOMBAY HIGH COURT] followed depreciation was allowable on obsolete assets to the assessee there was no merit in the action of the AO for declining assessees claim of depreciation on obsolete assets Decided in favour of Assessee. Disallowance of full revenue deduction VRS and Early retirement incentives Held that:- Mulund factory was working and the AO was not justified in observing that expenditure was incurred for closing that unit - various manufacturing unit of assessee at Mulund, Ankleshwar and Goa and under loan licence agreement part of the corporate business and many of the projects which were being maintained at Mulund were continued to be produced under loan licence agreement - the expenditure incurred on VRS was wholly and exclusively for the purpose of business, even if it is consider the same under the provision of Section 37(1), it cannot be disallowed Relying upon K Ravindranathan Nair Versus Commissioner of Income-Tax [2000 (11) TMI 3 - SUPREM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax free investment income Held that:- As decided in assessees own case for the previous year, it has been held that the CIT(A) accepted the claim of sale proceeds but confirmed disallowance of interest for 20 days as there was time gap of 20 days between date of investment and date of receipt - No material is placed on record to controvert the claim of the assessee regarding availability of sale proceeds Decided against Revenue. Exclusion of excise duty from turnover Computation of deduction u/s 80HHC of the Act Held that:- The decision in CIT Vs. Laxmi Machine Works [2007 (4) TMI 202 - SUPREME Court] followed - excise duty has no element of profit, therefore, not includible in total turnover for computing deduction u/s.80HHC thus, there was no infirmity in the order of CIT(A) directing for exclusion of excise duty from the total turnover for computing deduction u/s.80HHC Decided against Revenue. Exclusion of processing charges and bad debts Computation of deduction u/s 80HHC of the Act Held that:- The decision in CIT Vs. Ravindranathan Nair [2007 (11) TMI 10 - Supreme Court of India] followed - the AO is directed to recompute the deduction u/s 80HHC afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr. Ajeet Kumar Jain Mr. Deepak Repote ORDER Per Bench : These are cross appeals filed by the assessee and Revenue as well as cross objection by the assessee against the order of CIT(A) for the assessment year 2000-01, in the matter of order passed under Section143(3) and Section 271(1)(c) of the I.T.Act. ITA Nos.3703/Mum/2004, 4493/Mum/2004 CO No.65/Mum/2005 2. Rival contentions have been heard and record perused. Facts in brief are that the assessee is involved in manufacturing of pharmaceutical products and drugs and pharmaceutical formulation in the form of tablets, capsules, injections. After taking into consideration the various replies of the assessee, additions were made by AO in respect of income from house property, transfer pricing under Section 92, expenditure on software depreciation on obsolete assets, VRS expenses, bad debts and advances written off, capital gains etc., By the impugned order, CIT(A) deleted part of the addition. Against this order of CIT(A), both assessee and revenue are in appeal before us. Assessee has also filed cross objection. 3. In the appeal filed by the assessee (i.e. ITA No.3703/Mum/2004), the assessee has raised fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be reduced to the extent of 90% under Clause (baa) of the explanation to Section 80HHC for the purposes of granting relief. He ought not to have done so. 9. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming the disallowance of bad debts to the extent of Rs.464,239. He ought not to have done so. Additional Ground : On the facts and in the circumstances of the case and in law, the learned Assistant Commissioner of Income-tax has erred in taxing Rs.5,53,63,662/- as short term capital gain arising on sale of Haemaccel Brand and Omnatax Brand. He ought not to have done so 4. In the appeal filed by the Revenue (i.e. ITA No.4493/Mum/2004), following grounds have been raised :- (i) On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the AO to recompute the income from house property taking annual ratable value of the flat at Rs.24,00,000/-. (ii) On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the AO to work out the profit by taking the cost of raw materials at rates at which the supplies are made by the Korean concerns to other ph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... floor under the head income from house property . The AO computed ALP by taking Rs.150/- per sq.ft. per month for 7442 sq.ft., which works out to be Rs.1,33,95,600/-. By the impugned order, the CIT(A) directed the AO to compute ALV at Rs.24,00,000/-. Both the assessee and Revenue are in further appeals before us. Learned AR submitted that this issue has been decided by the Tribunal in assessee s own case passed in ITA No.5791/Mum/2000 for the assessment year 1994-95, vide order dated 5-11-2004, wherein the Tribunal decided the issue in favour of the assessee after having following observations :- 11. Apropos ground No.5, it is requested that the income from house property be computed as per the municipal ratable value at Rs.1,44,058/- and not on adhoc figure of Rs.24,00,000/-. The fifth floor of the property Hoechst House , was let out to M/s VB Limited by the assessee on a monthly rent of Re.1 besides interest free deposit of Rs.2.20 crores. The income from the fifth floor was however, not calculated on the rent of Re.1 per month. The Municipal Corporation fixed the book value of the fifth floor at Rs.1,44,058/-, being 1/5th of the total value so fixed. The income from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d AR to the effect that issue has been decided in favour of assessee by the aforesaid orders of Tribunal in assessee s own case. 5.1 We have heard rival contentions, perused from the record and orders of the Tribunal and found that the very same issue has already been decided by the Tribunal in assessee s own case in terms discussed above. After considering the decision of Hon ble Supreme Court, the Tribunal has concluded that gross annual ratable value of the property at the annual value determined for the purposes of computation of house property income is to be determined at the annual value determined by Municipal Corporation. As the facts and circumstances during the year under consideration are same, hence, respectfully following the decision of the Tribunal, we direct the AO to determine ALV at the value determined by Municipal Corporation for the year under consideration. Hence, this ground of the assessee is allowed for statistical purposes, whereas the ground raised by the Revenue is dismissed. 6. Ground No.2 is regarding addition u/s.92 in respect of purchases of Cefotaxime Sodium Roxythromycin. Facts in brief are that in respect of manufacturing pharmaceutical f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer is directed to verify this aspect and make adjustment to the addition on this account if required. In so far as grant of further weightage discussed in para-8 above, there is no merit in the claim in view of the detailed discussions in this respect made in the appellate order dated 20/03/2003. The weightage is, therefore, required to be retained at 10% over and above the purchase price paid by other pharmaceutical company in the import of raw material from the Korean concern at arms length. The Assessing Officer shall, therefore, make adjustment to the amount added as per the directions given above. The appeal in respect of Ground No.2 is thus, disposed off as partly allowed. Both assessee and revenue are in appeals before us. 6.1 Learned AR submitted that the Hon ble Bombay High Court in Income Tax Appeal No.1528/2009 vide order dated 8-9-2009 in assessee s own case has decided similar issue in favour of the assessee. Our attention was also invited to the order of Tribunal in assessee s own case for the A.Y.1996-97 1997-98, dated 16-5-2007, wherein exactly similar issue was dealt with and following conclusions were arrived at :- 28. In view of the abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur of the assessee and ground raised by the Revenue is dismissed. 7. Ground No.3 is regarding disallowance of estimated depreciation on obsolete assets of Rs.34,43,610/-. It was contended by the learned AR that this issue has been decided by the Hon ble Bombay High Court in the case of CIT Vs. GR Shipping Ltd., ITA No.598/2009 in favour of the assessee. 7.1 We have considered rival contentions and found from the record that exactly similar issue has been decided by the Tribunal in assessee s own case for the assessment year 1998-99 and 1999-2000, wherein the Tribunal after considering the decision in the case of G.R.Shipping Company and Inductotherm India Ltd, 73 ITD 529, held that depreciation was allowable on obsolete assets to the assessee. However, against this decision of the Tribunal, the department has not filed any further appeal before the Hon ble High Court. 7.2 As the facts and circumstances during the year under consideration are same, respectfully following the decision of the Tribunal in assessee s own case, we do not find any merit in the action of the AO for declining assessee s claim of depreciation on obsolete assets. 8. Ground No.4 is in regard to fai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt in case of K. Ravindranathan Nair Vs. CIT, 247 ITR 178 (SC) in favour of the assessee. Reliance was also placed on the decision of Hon ble Bombay High Court in the case of CIT Vs. Foseco India Ltd, 352 ITR 320. Learned AR also submitted that similar claim of Rs.41.64 cores in the assessment year 1999-2000 was allowed by the AO himself. 10.1 We have heard the rival contentions. Facts in brief are that assessee has incurred expenditure under VRS scheme for its various units and head office. The assessee had shown total cost incurred on VRS at Rs.41.64 crores incurred in the financial year 1998-1999. Out of this, VRS cost debited in the financial year 1999-2000 is Rs.2.82 crores and 13.88 crores out of VRS expenses incurred during the financial year 1998-99. The AO declined assessee s claim by observing that assessee company stopped manufacturing certain industrial products permanently at this Mulund unit, therefore, business of assessee, as far as manufacturing of those particular products was concerned, is stopped. As per the AO, VRS expenses incurred by the assessee is only allowable to it in case of going concern. As per AO, the business expenditure is allowed for a busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rkers. In the result, ground taken by the assessee is allowed, whereas ground of revenue is dismissed. 11. Ground No.7 is in regard to sales-tax set off and refund amounting to Rs.1,76,85,412 is liable to be included in the total turnover for computing the deduction under section 80HHC of the Act and Ground No.8 is regarding processing charges of Rs.34,97,542 and bad debts recovered amounting to Rs. 89,475/- are required to be reduced to the extent of 90% under Clause (baa) of the explanation to Section 80HHC for the purposes of granting relief. This issue of eligibility of income from processing charges has been considered by the Hon ble Supreme Court in the case of ACG Associated Capsules Vs. CIT, 343 ITR 89 (SC). The Tribunal also in assessee s own case for A.Y.1999-2000, in ITA No.4180/Mum/2003, following the judgment of the Hon ble Apex Court in the case of ACG Associated Capsules (supra), held as under :- 2.10.2 We have perused the records and considered the matter carefully. The dispute is regarding applicability of provision of Explanation (baa) to processing charges and sales tax refund and setoff. As regards the processing charges, the issues is covered by the judg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the same, we direct the AO that only net receipts after deducting expenditure incurred for earning such income will be considered for reduction from eligible business profit as per Explanation (baa). Matter is restored back to the file of the AO for deciding as per direction given by the Tribunal in its order for assessment year 1999-2000 in assessee s own case, as discussed hereinabove. 12. Ground No.9 is in regard to confirming the disallowance of bad debts to the extent of Rs.464,239/-. As per learned AR, this issue has been decided in favour of the assessee by the Hon ble Supreme Court in the case of TRF Ltd. Vs. CIT, Ranchi, (2010) 323 ITR 397 (SC), wherein the Hon ble Supreme Court held that, this position in law is well settled. After April 1, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. 12.1 We have considered rival contentions and found that before the AO assessee has furnished reasons for writing off bad debts along with details of bad debts written off. The reasons cited by the assessee in the case of bad deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the ld. AR that this issue has been decided by the Hon ble Surpeme Court in case of CIT Vs. B.C.Srinivasa Shetty, reported in 128 ITR 294 (SC), wherein the Hon ble Apex Court has held as under :- We are of opinion that the goodwill generated in a newly commenced business cannot be described as an asset within the terms of section 45 and, therefore, its transfer is not subject to income-tax under the head Capital gains . The question which has been raised before us has been considered by some High Courts, and it appears that there is a conflict of opinion. The Madras High Court in CIT v. K. Rathnam Nadar [1969] 71 ITR 433, the Calcutta High Court in CIT v. Chunilal Prabhudas Co. [1970] 76 ITR 566, the Delhi High Court in Jagdev Singh Mumick v. CIT [1971] 81 ITR 500, the Kerala High Court in CIT v. E.C. Jacob [1973] 89 ITR 88 [FB], the Bombay High Court in CIT v. Home Industries and Co. [1977] 107 ITR 609 and CIT v. Michel Postel [1978] 112 ITR 315 and the Madhya Pradesh High Court in CIT v. Jaswantlal Dayabhai[1978] 114 ITR 798, have taken the view that the receipt on the transfer of goodwill generated in a business is not subject to income-tax as a capital gain. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed as deduction under various heads can be related to the cost of acquisition of these trademarks. On that basis, he concluded that the receipt claimed as exempt from tax that is arising to the appellant on transfer of trademarks is chargeable to tax and brought the amount so determined to tax as income of the appellant under the head short term capital gains. However, this ground was not taken before the CIT(A). Therefore, he has not decided the issue. In the fitness things, we restore this ground to the file of the CIT(A) for deciding on merit after giving due opportunity to the assessee and also considering the decision of the of the Hon ble Supreme Court in the case of B.C.Srinivasa Shetty (supra). We direct accordingly. Now, we take the grounds raised by the Revenue in its appeal, not decided hereinabove. 15. Ground No.(iii) in Revenue s appeal is regarding disallowance of interest attributable to tax free investment income in Chiron Behring Vaccines Pvt. Ltd.. Learned AR, at the outset, submitted that the very issue has been decided by the Tribunal for A.Y.1999-2000 in ITA No4180/Mum/2009 in assessee s own case vide order dated 20-2-2013. The precise observation of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing with the law as it stood during assessment year 1993-94. At that time Section 80HHC(3) of the I.T. Act constituted a Code by itself. Subsequent amendments have imposed restrictions/qualifications by which the said provision has ceased to be a code by itself. In the above formula there existed four variables, namely, business profits, export turnover, total turnover and 90% of the sums referred to in clause (baa) to the said Explanation. In the computation of deduction under Section 80HHC all four variables had to be taken into account. All four variables were required to be given weightage. The substitution of Section 80HHC(3) secures profits derived from the exports of eligible goods. Therefore, if all the four variables are kept in mind, it becomes clear that every receipt is not income and every income would not necessarily include element of export turnover. This aspect needs to be kept in mind while interpreting clause (baa) to the said Explanation. The said clause stated that 90% of incentive profits or receipts by way of brokerage, commission, interest, rent, charges or any other receipt of like nature included in Business Profits, had to be deducted from Business Profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the taxpayer on behalf of the government the tax recovered is for the government. It may be an income in the conceptual sense or even under the I.T. Act but while working out the formula under Section 80HHC(3) of the I.T. Act and while applying the four variables one has to ascertain whether the receipt has an attribute of export turnover. An indirect tax like excise duty does not have that element of export turnover as understood in the above formula. As stated above, it is recovered by the taxpayer on behalf of the government. Therefore, in the present cases, our judgment in Commissioner of Income Tax, Coimbatore v. M/s. Lakshmi Machine Works - 2007(6) Scale 168, has no application. 24. Accordingly, the impugned judgments of the High Court and the Tribunal are set aside and the above civil appeals filed by the Department are accordingly allowed with no order as to costs. 17.1 This issue has been discussed by us at para 11.2 hereinabove, accordingly the AO to recompute the deduction u/s.80HHC after excluding the net income from processing charges. However, bad debts recovered is neither part of total turnover nor export turnover for the purpose of Section 80HHC, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of trading goods, therefore, there is no justification for reducing the profit of trading export by Hyderabad branch expenses. 18.3 We have considered rival contentions and found from the record that exactly similar issue has been dealt by the Tribunal in assessee s own case for the assessment year 1998-99. We found that in the cross objection (i.e. CONo.65/Mum/2005), also the assessee has raised following issue :- On the facts and in the circumstances of the case and in law the learned Commissioner of Income-tax (Appeals) has erred in holding that in computing the deduction in respect of export of trading goods under section 80HHC of the Income-tax Act, 1961, the expenditure incurred at the branches of the appellant company to the extent not directly related to domestic sale was liable to be treated as part of indirect cost of trading exports without appreciating the fact that the branches did not carry out any activity relating to trading export. He ought not to have done so. 18.4 We found that this issue is covered by the decision of the Tribunal in assessee s own case for A.Y.1998-99 in ITA No.4179/Mum/2003, vide order dated 12-12-2012, wherein the Tribunal has uphel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over further defined under clause (ba) of Explanation to sub sec. 4C. Therefore, the total turnover includes the local sales as well as the export sales regarding manufacturing goods and trading goods except certain items which shall be included as per clause (ba). When the indirect cost has to be allocated in the ratio of export turnover of trading goods to the total turnover, then the indirect cost subjected to be allocated in the said ratio includes all items of indirect cost incurred for the total turnover. 10.4 It is manifest from the plan reading of the relevant provisions that the indirect cost for the purpose of sec. 80HHC (3)(b) r.w.s clause (e) of Explanation does not restrict the items of expenditure incurred in relation to export of trading goods only; but the entire indirect cost incurred for the total turnover has to be allocated in the ratio of export turnover of trading goods to the total turnover which itself makes it clear that only such portion of the total indirect cost in the ratio of export turnover of the trading goods to the total turnover shall be allocated for the purpose of computing the profits derived from such export u/s 80HHC(3)(b). 10.5 Though ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would have served as a weapon of defence against the appeal, but it could not be made into a weapon of attack against the order in so far as it was against the assessee. 10.8 The CIT(A) has given the findings on the issue in paras 28 to 30 as under; 28. After careful consideration of the submission, it has to be said that the section of the Assessing Officer does not appear to be correct. What cannot be ignored is that subsection (3)(b)deduction inter-alia of indirect cost attributable to such exports. The phrase attributable to such export cannot be missed out. Therefore, an item of expenditure can be taken as cost for the purpose only if it has some connection, link, attributes to the export. If the expenditure is totally disconnected with the export activity, it cannot be taken as part of the indirect costs, Therefore, the Assessing Officer has definitely gone beyond what is provided in the Act to workout the indirect cost attributable to export of trading goods. 29. In order to determine correctly the indirect cost, the appellant s representative was asked to furnish the details of trading export activities. In this regard the details reveal that the trading goods ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e do not find any error as far as the formula adopted by the Assessing Officer for computation of indirect cost allocated to the export of trading goods. 18.5 As the facts and circumstances during the year under consideration are same, respectfully following the decision of the Tribunal in assessee s own case, the ground in the Revenue s appeal is allowed and the cross objection filed by the assessee is dismissed. 19. Ground No.(vii) is regarding directing the AO to calculate deduction u/s.80HHC without reducing 90% of the DEPB license sold without appreciating the facts of the case. This issue has been decided in favour of the assessee by the decision of Hon ble Supreme Court in the case of Topman Exports Vs. CIT, 342 ITR 49 (SC), wherein the Hon ble Supreme Court has held as under :- The aforesaid discussion would show that where an assessee has an export turnover exceeding Rs. 10 crores and has made profits on transfer of DEPB under clause (d) of section 28, he would not get the benefit of addition to export profits under third or fourth proviso to sub-section (3) of section 80HHC, but he would get the benefit of exclusion of a smaller figure from profits of the busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 03/Mum/04) and Revenue (ITA No.4493/Mum/13) are allowed in part, whereas the Cross Objection filed by the assessee (CO No.65/Mum/2005) is dismissed. 21. In the appeal filed by the Revenue (i.e. ITA No.695/Mum/2004), following grounds have been raised :- 1. On the facts and in the circumstances of the case and in law, the CIT (A) erred in restricting the penalty levied u/s 271(1)(c) to the amount leviable on account receipt arising to the assessee on transfer of trade marks only, without appreciating the facts of the case. 2. The appellant prays that the Order of CIT(A) on the above ground to be set aside and that of the ITO/AO/DCIT be restored. The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary. 21.1 Assessee is also in appeal (ITA No.635/Mum/2006) against the order of CIT(A) for upholding penalty on short-term capital gains computed by AO. 21.2 We have heard rival contentions and found that the AO has initiated penalty proceedings under Section 271(1)(c) with respect to the addition made u/s.92 of the Act (Rs.10,56,64,492/-), b) inadmissible and wrong claim of deduction on account of VRS expenses (Rs.15,08,52,250/ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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