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TMI Blog2016 (2) TMI 1221X X X X Extracts X X X X X X X X Extracts X X X X ..... that the expenditure was incurred by the assessee for acquiring technical know how. CIT(A) himself noted that the assessee has not incurred expenditure in question for the purpose of technical know how but the claimed expenditure was incurred for consultancy services which is obviously allowable u/s 37 of the Act as being incurred for the purpose of business of the assessee. Accordingly addition to be deleted - Decided in favour of assessee MAT computation - enhance book profit by depreciation in revalued assets for the purpose of section 115JA(2) - HELD THAT;- as per the claim of the assessee, the assessee transferred similar amount to the profit and loss account from revaluation account and thereafter, the assessee claimed reduction from the book profits of the same amount representing transfer from revaluation reserve. In this situation, the assessee was rightly held as eligible for reduction of book profits by the amount which was transferred from revaluation to profit and loss account. However, the CIT-DR has raised his dispute regarding above noted treatment claimed to have been made by the assessee. Therefore, firstly, we uphold that the assessee is eligible for reduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for legal and consultancy charges. Therefore, the same was allowable u/s 37 of the Act. Deduction u/s 80HH, 80I and 80IA on interest income - AR submitted that interest received on fixed deposits kept in bank as margin money is taxable under the head business income and is consequently eligible for deduction - and not income from other sources as per revenue - DR vehemently contended that the income from other sources was not derived from industrial undertaking therefore, the same was not eligible for deduction - HELD THAT:- CIT(A) has treated the sum of ₹ 3,85,17,571/- as business income and directed the AO to allow deductions u/s 80HH, 80I and 80IA of the Act by following the decision in assessee s own case for A.Y 1996-97. We find no infirmity in the order of the ld. CIT(A) - revenue appeal dismissed. Disallowance u/s 40A(2) on account of excessive interest paid - HELD THAT:- We find substance in the contention of the ld. AR that interest has been paid on the borrowings which have been utilized for the purpose of assessee s business. Further the assessee has borrowed funds from several other unrelated concerns on which interest @ 20-21% was paid. Thus, interest @ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 98-99 passed in first appeal No. 945/MBD/2003-04. Assessee s appeal ITA No. 4307/Del/2003 2. At the very outset, the ld. Counsel for the assessee submitted that except for Ground Nos. 1 and 2, the assessee does not want to press Ground Nos. 3 to 11. Therefore, Ground Nos. 3 to 11 stand dismissed as not pressed. 3. Ground Nos 1 and 2 read as under: 1. That the ld. CIT(A) has erred on facts and in law in not holding that the assessment order passed by the AO was bad in law. 2. That the ld. CIT(A) has erred on facts and in law in confirming a disallowance of ₹ 19,88,753/- out of total disallowance of ₹ 22,83,200/- made by the AO from legal and consultancy expense. 4. We have heard the arguments of both the sides and carefully perused the relevant material placed on record before us. 5. The ld. Counsel for the assessee submitted that during the relevant previous year, the assessee incurred legal and consultancy expenses amounting to ₹ 97,22,819/- and the AO disallowed a sum of ₹ 22,83,200/- out of legal and consultancy expenses by holding that the same was covered u/s 35AB(1) of the Income-tax Act, 1961 ['the Act' for short]. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred for the purpose of technical know how, then in this situation, the provisions of section 35AB of the Act cannot be invoked and the claim of the assessee is allowable as business expenditure u/s 37 of the Act. 8. On careful consideration of the above rival submissions of both the sides, firstly, from the relevant operative part of the first appellate authority, the ld. CIT(A) upheld the part disallowance to the tune of ₹ 19,88,753/- by observing as under: The 7th ground of appeal is that the AO erred on facts and in law in making a disallowance of ₹ 22,83,200/- out of legal and consultancy expenses. The Assessing officer in the order has mentioned that a sum of ₹ 22,83,200/- was disallowed as these expenses were covered under section 35 AB(1) of the IT Act. The assessment has been set aside and during the reassessment proceeding the assessee appellant simply submitted that, disallowance has been made without properly appreciating the provisions of law and is therefore liable to be deleted. The AO further mentioned that no new facts were brought to notice therefore the AO disallowed ₹ 22,83,200/-. The AR in appeal furnished the details of expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made for acquisition of technical know how paid for consultancy which goes in favour of the assessee. In this situation, when we analyse the facts and circumstances of the present case, in the light of the principles laid down by the Hon'ble Supreme Court in the case of Swaraj Engines [supra], then we find that it is pre condition for invocation of provisions of section 35AB of the Act that the AO has to bring out this allegation that the expenditure in question was of capital in nature and unless and until this fact brought out on record and established by cogent material, provisions of section 35AB of the Act cannot be invoked. In view of the above, we are inclined to hold that the AO made disallowance without any justified reason and basis and the ld. CIT(A) upheld part disallowance by observing incorrect facts and without bringing out any material to establish the fact that the expenditure was incurred by the assessee for acquiring technical know how. At this juncture, at the cost of repetition, we point out that the ld. CIT(A) himself noted that the assessee has not incurred expenditure in question for the purpose of technical know how but the claimed expenditure was incur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO. 12. Per contra, replying the contentions of the revenue, the ld. Counsel for the assessee submitted that the assessee had revalued its assets during the F.Y. relevant to A.Y 1989-90 enhancing the valuation on assets to the extent of ₹ 2045.77 lakhs and equal amount was carried to the revalued reserve. The ld. AR further explained that the assessee company claimed depreciation on revalued assets amounting to ₹ 1805.83 lakhs on the WDV of the revalued amount of assets and the assessee transferred ₹ 339.69 lakhs from the revaluation accounts to the profit and loss account, therefore, resulting in net debit of ₹ 1466.14 lakhs on the revalued amount of assets. The ld counsel of the assessee strongly pointed out that in the return of income, the assessee claimed reduction from the book profits of an amount of ₹ 339.69 lakhs representing transfer from revaluation reserve which has not been disputed by the AO. 13. The ld. AR further contended that the AO incorrectly held that the assessee company has wrongly claimed depreciation on the revalued assets and in calculating book profits and income u/s 115JA of the Act. The depreciation on revalued asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the revalued figure for the purpose of calculation of depreciation and only WDV and not the revalued figures has to be taken in case of revaluation of assets after 1956. It is observed that provisions on revaluation of assets in the accounts prepared under the Companies Act is mandated by the AS 6 and guidance note on treatment of reserve created on revaluation of fixed assets issued by the Institute of Chartered Accountants of India. The position regarding provision of depreciation under the Companies Act in any case has undergone change after introduction of the Schedule XIV to the Companies Act wherein depreciation under SLM as veil as WDV method are provided. Further under Schedule XIV read with section 205 350 of the companies Act, there is no bar on provision of depreciation on revalued amount of assets. The letter of CBDT as relied by the AO is not applicable in the present case. The Assessing officer has not dispute the quantum of revaluation of assets made by the appellant nor they have rejected the report of the Chartered Accountant. The manner and mode of writing off the depreciation on such revalued assets has been explained in various Guidance Notes of accounting is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fixed assets the fixed assets of the assessee were revalued in the earlier assessment year 2000-01 (i.e. financial year ending 31.3.2000) and amount of enhancement in valuation was ₹ 288,58,19,000/- which was credited to the revaluation reserve. In other words, at the time of revaluation of assets, the said figure of ₹ 288,58,19,000/- was added to the historical cost of assets on the asset side of the balance sheet and in order to equalize both sides of the balance sheet the revaluation reserve to that extent was created on the liability. Their Lordships also noted that during the relevant assessment year in question, certain amount being the differential depreciation, was transferred out of the said revaluation reserve and credited to the P L Account which the A.O. disallowed by placing reliance on the proviso to clause (i) of the explanation to Section 115JB(2) of the Act. Consequently, it was held by the Hon'ble Supreme Court that since the amount of revaluation reserve had not gone to increase book profits at ht time it was created, benefit of reduction was rightly denied to the assessee. 16. In the present case, the assessee transferred ₹ 339.69 lakh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ckground, we notice that the use of the words in accordance with the provisions of Part II and III of Schedule VI to the Companies Act was made for the limited purpose of empowering the assessing authority to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, an assessing officer under the IT Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinised and certified by statutory auditors and will have to be approved by the company in its General Meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Inspite of all these procedures contemplated under the provisions of the Companies Act, we find it difficult to accept the argument of the Revenue that it is still open to the assessing officer to re-scrutinize this account and satisfy himself that these accounts have been maintaine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we are inclined to hold that the AO, while computing the income u/s 115JA of the Act has only power to examine whether the book of accounts are certified under the Companies Act as having been properly maintained in accordance with the Companies Act. It was also held that the AO, thereafter, has limited power of making and increasing and reducing as provided in Explanation to section 115JA of the Act. In other words, the AO does not have jurisdiction to go beyond the profits shown in profit and loss account except to the extent provided in section 115JA of the Act. 18. In the present case, the AO has not disputed the quantum of revaluation of asset made by the assessee nor report of the CA has not been rejected by the AO. In the guidance note of accounts, the manner and mode of writing of depreciation of such revaluation assets has been explained. The AO has not disputed this fact that the assessee transferred ₹ 339.69lakhs from the revaluation account to the profit and loss account and again, the assessee claimed deduction from the book profits by same amount representing transfer from revaluation reserves. In the case of Apollo Tyres, the assessee created reserve without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quired rapid upgradation and the claimed expenditure incurred was not incurred for installation of any new computer software but the expenditure incurred led to better conducting of existing business. The ld. AR, placing reliance on the judgment of the Special Bench of the ITAT, in the case of Amway India Enterprise VS. DCIT 21 SOT 1 [[SBTri], submitted that the life of computer software is short due to which the same has to be treated as revenue expenditure. 21. On careful consideration of the above submissions, at the very outset, we note that the Hon'ble Jurisdictional High Court of Delhi in the case of DCIT Vs. Amway India Enterprise 346 ITR 341 [Del] has upheld the order of the Special Bench of the ITAT in Amway India Enterprise [supra] wherein the conclusion of the Special Bench that life of the computer software is short due to which same has to be treated as revenue expenditure. In view of the dicta of the Hon'ble Jurisdictional High Court, when we logically test the conclusion of the ld. CIT(A) in paras 6 and 7 of the impugned order, then we note that the ld. CIT(A) has followed the decision of the Hon'ble Supreme Court in the case of Empire Jute Company Lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roverted this fact that eh assessee had borrowed moneys for modernization and improvement of productivity with reference to an existing business. It is not the case of the AO that the borrowed money on which interest was paid were not utilized for modernization and improvement of productivity and the same were used for another purpose. At the same time, we observe that the AO has noted that the necessary circulars requiring modernization and improvement of productivity of existing business of the assessee were filed during assessment proceedings. At this juncture, it is relevant to take respectful cognizance of the decision of the Hon'ble Supreme Court in the case of DCIT Vs. Core Health Care Limited [supra] wherein it was held that the assessee was entitled to deduction u/s 36(1)(iii) of the Act prior to its amendment by the Finance Act, 2003 in relation to money borrowed for the purchase of machinery even though the assessee had not utilized the machinery in the year of borrowing. In this case, confirming the decision of the Hon'ble High Court of Gujarat, the Hon'ble Supreme Court held that the proviso inserted in section 36(1)(iii) w.e.f. 1.4.2004 will operate prospe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invoking the provisions of section 35AB(1) of the Act wherein expenditure on capital nature is allowed in six installments and the ld. CIT(A) after appreciation of facts found that the amount of ₹ 2,94,447/- has nothing to do with the capital expenditure. Therefore, the same was allowed by granting part relief to the assessee. The ld. AR also drew our attention towards para 14 of the impugned order and supported the conclusion of the ld. CIT(A). 32. On careful consideration of the above submissions of the rival representatives, from the operative para 14 of the impugned order, we clearly observe that the ld. CIT(A) considered total amount of disallowance and deducting ₹ 19,88,753/-, granted part relief of ₹ 2,94,447/- to the assessee. Undisputedly, this amount was not incurred for the purpose of acquiring technical know how and from para 11 of the assessment order it is clear that the expenses were incurred for legal and consultancy charges. Therefore, the same was allowable u/s 37 of the Act. I view of the above, we are unable to see any valid reason to interfere with the ld. CIT(A) and we thus uphold the same. Finally, Ground No. 10 being devoid of merits st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. CIT(A) s order deleting the disallowable of ₹ 30,468/- and ₹ 50,811/- which was correctly made by the AO u/s 40A(2) of the Act on account of excessive interest paid. 37. Per contra, the ld. AR relying on various decisions, submitted that reasonableness is to be decided on the basis of fair market value of the goods, services or facilities. It is a settled law that reasonableness of any expenditure is to be seen from the view point of the business man and not from the view point of the revenue authorities. 38. On careful consideration the above rival submissions, we find that during the relevant previous year, the assessee paid interest to Anichem India Limited, Gomti Credit Limited and Enpro India Limited. The AO observed that since the interest @ 16% was paid to M/s Vam Organic Chemical Limited, whereas interest to the tune of 24% was paid to Anichem India Limited, Gomti Credit Limited and Enpro India Limited, therefore, the difference in the two rates needs to be disallowed. However, the ld. CIT(A) observing that the AO has not made out case as to show interest paid to Anichem and other parties were excessive and also that he borrowings were not for smooth b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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