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TMI Blog2019 (9) TMI 443X X X X Extracts X X X X X X X X Extracts X X X X ..... on merits by the Hon ble Supreme Court as stated [ 2008 (9) TMI 921 - SC ORDER] MAT computation - whether transitional liabilities of gratuity and leave encashment as per provisions of AS-15, which is debited to General Reserve in the Balance Sheet, can be adjusted while computing book profit under section 115JB of the Act? - HELD THAT:- Transitional Liability' provided in book of accounts and adjusted against Opening General Reserve as per AS-15 (Revised 2005), towards leave liability and towards gratuity liability done by an outside actuary under mandatory AS-15 (Revised 2005) on employee benefits issued by ICAI, should be reduced from current year`s profit for computation of Book Profit u/s 115JB of the Act. Therefore, we note that notes to accounts are part of financial statements (Profit Loss account and Balance Sheet, cash flow statement etc,) therefore the computation of book profit under section 115JB of the Act should be done taking into account the figures mentioned in the notes to accounts. Hence, we direct the assessing officer to allow deduction in respect of transitional provisions of leave liability of ₹ 85,34,000/- and gratuity liability while asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decline to interfere on the order passed by the ld CIT(A), his order on this issue is hereby accepted and grounds of appeals raised by the Revenue is dismissed. Payment of lumpsum royalty as Capital Expenditure' - HELD THAT:- The assessment for AY 2007-08 was framed u/s 143(3),in that year the Assessing Officer himself did not dispute that the expenditure on royalty payments was revenue in nature and no disallowance was made. That being so we decline to interfere on the order passed by the ld CIT(A), his order on this issue is hereby accepted and grounds of appeals raised by the Revenue is dismissed. MAT computation - prior period items on computation of book profit u/s 115JB - HELD THAT:- We note that this issue is covered in favour of the assessee by the decision of the Hon'ble Delhi High Court in the case of CIT vs. Khaitan Chemicals Fertilizers Ltd [ 2008 (9) TMI 89 - DELHI HIGH COURT] wherein the Court reversed the decision of the Tribunal with regard to deduction of prior period expenses charged to profit and loss account while computing book profit under section 115JA CIT(A) correctly deleted the addition on account of adjustment made by the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder u/ s 143(3) neither the TPO nor the AO took into consideration the provisions of Section 92C of the Income-tax Act, 1961 and failed to appreciate that since the actual value of the transactions was within the permitted variation from the arm's length price so determined, the downward adjustment of ₹ 4,50,658/- was totally unwarranted. Applying the benefit accorded to the assessees in the second proviso to Section 92CA, it is clearly evident that the arm's length price is within the permitted variation of + (-) 5% from the actual value of transactions and therefore the impugned addition has rightly been deleted by the ld CIT(A) Allowance value added tax from sales consideration while computing capital gain - HELD THAT:- The assessee was statutorily required to pay VAT on the sale consideration received. Therefore, the expenditure was directly related with transfer of the asset namely trade-mark. I do not agree with the assessing officer's view that the expenditure on VAT was not related to transfer of trade-mark. Rather, the VAT was directly related to sale of trade-mark and was to be necessarily paid. Thus, this is an expenditure directly related to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n made in book of accounts towards leave liability is in the nature of general trade liability and therefore, the same was allowable u/s 37 having regard to the ratio of the decision of the Hon ble Supreme Court in the case of Bharat Earth Movers Ltd. Vs. CIT reported in 245 ITR 428 (SC) and decision of the Hon'ble Calcutta High in the case of Excide Industries Ltd. Vs. Union of India reported in292 ITR 470 (Cal. HC). 2. The learned CIT (Appeals) erred in confirming the decision of learned Assessing Officer in not allowing 'Transitional Liability' of ₹ 85,34,740/- provided in book of accounts and adjusted against Opening General Reserve as per Para 143 to 145 of AS 15 (Revised 2005), towards ascertained leave liability done by an outside actuary under mandatory AS 15 (Revised 2005) on employee benefits issued by ICAI, on the ground that such expenditure come within ambit of Sec 43B(f) of the Act. 3. For that in view of the facts and circumstances, the learned CIT (Appeals) erred in not holding that provision for leave encashment is neither a statutory nor contingent liability and therefore not to be considered for the purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Pune. Trib) . 7. The learned CIT (Appeals) erred in confirming the decision of learned Assessing Officer relying upon the CBDT Circular No. 338 , dated 18.02.1998 issued for inserting intangible asset i.e a right to manufacture, produce, or process any article or thing under Sec 55 (2)(a) and under Sec 55(1)(b) by Finance Act, 1997. 8. The learned CIT (Appeals) erred in not appreciating that in the assessee's case there was transfer of Trade Mark , CBDT Circular No.14/2001, dated 09.11.2001 was applicable issued for changes made by Finance Act, 2001 in Sec 55(2)(a) in the Cost of Acquisition only and not u/s 55(1)b) relating to Cost of Improvement , hence cost of improvement was not determinable and thus computation provision under head capital gains failed. 9. The learned CIT (Appeals) erred in disallowing 10% of Dividend Income of ₹ 66,464/- on adhoc basis as expenditure incurred for earning dividend income of ₹ 6,64,638/- without appreciating the fact that in the assessee's case dividend income had been earned out of investments made in Mutual Fund and had been received through ECS with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. Brief facts qua the issue are that the assessee in the revised computation filed with the revised return of income has claimed deduction of Leave encashment at ₹ 85,34,740/-. The amount has been claimed as deduction, although the same have not been debited in the Profit Loss account and the same have been adjusted against reserve surplus as per the transitional provisions of Accounting Standard-15 issued by the Institute of Chartered Accountants of India. The assessee has further submitted that such sum should be allowed by invoking the provisions of section 43B of the Act. Besides, a sum of ₹ 82,71,000/-, being a current year leave liability, has been debited in the Profit Loss account. Although both the aforesaid sum has not been paid therefore the assessing officer was of the view that these leave liabilities cannot be allowed u/s 43B(f) of the Act and therefore, he disallowed the total leave liability of ₹ 1,68,05,740/- (₹ 82,71,000+ ₹ 85,34,740). 7. Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the Ld. CIT(A) who has confirmed the addition made by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him. Provided that nothing contained in this section shall apply in relation to any sum referred to in clause ( a) or clause (c) of clause (d) or clause (e) or clause (f) which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return. . Explanation 3B.-For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (f) of this section is allowed in computing the income, referred to in section 28, of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 2001, or any earlier assessment year) in which the liability to pay such sum was incurred by assessee, the assessee shall not be entitled to any deduction under this section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : (i)Universal Cables Ltd. vs. DCIT: 68 SOT 307 (Kol-Trib) (ii) CESC vs. DCIT (ITA 1304 1187/Ko1l2014. 9. On the other hand, ld DR for the Revenue submitted before the Bench that issue under consideration in the case of Exide Industries Ltd. vs. Union of India 292 ITR 470 (Cal) (supra), was the very legality of section 43B(f) of the Act. Therefore, the stay of Hon`ble High Court order in case of Exide Industries Ltd (supra) has wider ramification and its scope is not limited only to the parties to the suit. Therefore, the order of the High Court in case of Exide Industries Ltd (supra) is at present not operational. Rather, the provision of section 43B(f) of the Act is to be considered to be in force in view of interim order of Hon ble Supreme Court. Considering this legal position, the interim order of Hon ble Supreme Court should be followed and thus the addition made by the ld AO should be confirmed. 10.We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of justice and fair play, to remand this issue to the file of the ld AO. Therefore, we set aside the order of ld CIT(A) and remit this issue back to the file of the assessing officer to pass order based on the outcome of the main appeal on merits by the Hon ble Supreme Court as stated (supra). 11. Ground No. 5 raised by the assessee is as follows: 5. The learned CIT (Appeals) erred in confirming the decision of learned Assessing Officer in not allowing 'Transitional Liability' provided in book of accounts and adjusted against Opening General Reserve as per Para 143 to 145 of AS-15 (Revised 2005), towards ascertained leave liability ₹ 85,34,000/- and towards ascertained gratuity liability ₹ 3,32,38,000/- done by an outside actuary under mandatory AS-15 (Revised 2005) on employee benefits issued by ICAI, on the ground that such expenditures had not been debited in Profit and Loss Account for the financial year and cannot be reduced from current year`s profit for computation of Book Profit u/s 115JB. 12. The facts of the case which can be stated quite shortly are as follows: The assessee dur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appearing in the balance sheet and not debited to the profit and loss account, the same had necessarily to be reduced from the net profit shown in the profit and loss account for arriving at the book profit in terms of section 115JB of the Act. 15. Per contra, ld DR for the Revenue submitted before us that an item of expense which has not pass through the profit and loss account should not be used for computation of book profit under section 115JB of the Act. That is, it is mandatory condition that an item of expense should be debited in the profit and loss account to be qualified for adjustment to compute the book profit as per the scheme of section 115JB of the Act. In the assessee`s case under consideration, the assessee has not debited liability of gratuity of ₹ 3,32,28,000/- and leave encashment of ₹ 85,34,000/- in the profit and loss account. The assessee has adjusted these liabilities in the general reserve, which is accumulated profit of the assessee in previous years, therefore, the assessee is not entitled to reduce the book profit under section 115JB of the Act. The Ld DR also submitted before us that section 115JB of the Act is itself a code ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We note that Hon`ble Calcutta High Court in the case of Kanoi Paper Industries Ltd. vs. CIT: ITA No. 298 of 2004.(Cal) held that Notes to the Financial Statement are an integral part of the accounts and have to be read as part thereof and the AO can compute the book profit under section 115JA of the Act, taking into account the amount mentioned in the notes to accounts of these financial statements. The same view has been upheld by the Hon`ble Delhi High Court in the case of CIT vs. Sain Processing Weaving Mills (P) Ltd. : 325 ITR 565 (Del). The Hon`ble Delhi High Court in the case of CIT vs. Khaitan Chemicals Fertilizers Ltd: 307 ITR 150 (Del.), allowed adjustment for prior period and extra ordinary expenses shown separately in the profit and loss account while computing book profit under section 115JA of the Act. The Court noted that although the Accounting Standard (AS-5) indicated two approaches for accounting for prior period expenses, i.e., (i) the normal approach is to include prior period items in the determination of net profit or loss for the current period, (ii) the alternative approach is to show such items in the statement of profit a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot on the fancy figure shown in the Profit and loss account for the purpose of showing profit to the shareholders. In other words, to find out what is net profit one has to look into the books of accounts maintained by the company and the profit and loss account prepared on the basis of such books of account. What is shown in the printed balance sheet is for the benefit of the shareholders as it will not reflect the true state of affairs and that cannot be made the basis for levying tax under the Act. This is precisely what the Tribunal has held. Neither under the Companies Act nor under the Income-tax Act, this concept of deferred expenditure is recognized. That is a pathology used by the chartered accountants to show to the shareholders that the company has made profit though it has not earned profits. In other words, it is nothing but a window dressing and the authority should not be misled or guided by this balance sheet which is prepared to satisfy the shareholders. It is the profit and loss account prepared on the basis of the books of accounts as contemplated in Part 11 of Schedule VI which should form and assist to find out what is the profit earned and on that profit, tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alayala Manorama Co. Ltd vs. CIT : 300 ITR 251 (SC).The same identical facts were also discussed in the decision of the Coordinate Bench of ITAT Pune in the case of K..K. Nag Ltd vs. ACIT: 52 SOT 381, wherein the assessee had disclosed in the notes forming integral part of the audited financials, liability on account of leave encashment which was not debited to the profit loss account. The said liability was, however, claimed as deduction for the purpose of computation of book profit under section 115JB of the Act. The Assessing Officer denied the claim of such reduction on the ground that the same was never debited to the profit loss account. On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer. The Pune Bench of the Tribunal following the law laid down by the Hon'ble Delhi High Court in the case of CIT vs. Sain Processing Weaving Mills (P) Ltd. : 325 ITR 565 (Del), reversing the order of the lower authorities held as under: 12. In view of decision of Delhi High Court in the case of CIT vs. Sain Processing Weaving Mills (P.) Ltd. [2009) 176 Taxman 448 once it is clear that the information towards incrementa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om 07.12.2006 therefore, the assessee company has to make provision in the books of accounts by following the AS-15 for transitional liability towards gratuity and leave salary. We note that from the aforesaid decisions referred to herein above, it follows that the net profit as per the profit and loss account prepared in accordance with Part II of Schedule VI to the Companies Act, 1956 is the starting point for computation of book profit under section 115JB of the Act. Where the profit and loss account is not strictly drawn up in accordance with Part II of Schedule VI to the Companies Act, 1956, the same is first to be adjusted to bring the same in line with the relevant provisions of the Companies Act; thereafter the adjustments enumerated in various clause of Explanation 1 to section 115JB of the Act are to be carried out. In that view of the matter, where the adjustment is of the kind to align the net profit as per the profit and loss account in accordance with Part II of Schedule VI to the Companies Act, 1956, the same has to be carried out, notwithstanding that such adjustment may not be within the scope of various clauses of Explanation 1 to the said section. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essed. 21. The learned counsel informs the Bench that assessee does not want to press ground No.9 due to smallness of amount therefore, we dismiss ground No. 9, as not pressed. 22. Ground No. 10 raised by the assessee relates to expenditure disallowed u/s 14A of ₹ 66,464/-for computation of book profit u/s 115JB of the Act for minimum alternate tax. The learned counsel submitted before us that this issue is squarely covered by the judgment of the Special Bench of the ITAT in the case of ACIT vs Vireet Investments (P) Ltd. 165 ITD 27 (Del Trib) (SB). Therefore, section 14A disallowance is not considered while computing book profit under section 115JB of the Act. However, ld DR for the Revenue nevertheless relied on the stand taken by the assessing officer. 23. We have given a careful consideration to the rival submissions and perused the material available on record, we note that the provisions relating to adjustments by way of increase and decrease to the net profit shown by the assessee in Profit Loss Account, are very explicit in section 115JB of the Act. The items which are to be added to the net profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to exclude the expenditure of ₹ 66,464/- while computing book profit under section 115JB of the Act. 24. Ground No. 11 raised by the assessee relates to interest u/s 234B of the Act. We note that this ground is premature and consequential in nature, therefore, does not require adjudication. 25. Additional Ground raised by the assessee is as follows: The Assessee prays for admitting an additional ground for allowing Lease Rent Equalization, ₹ 39,718,000/- disclosed under the head Prior Period Items in audited financials being impact on recognition of rent increases over the lease term on a straight line basis for business operating lease agreements entered on or after April, I 2001 and still in force, quantified pursuant to clarification issued by Expert Advisory Committee of ICAI on mandatory AS-19 (Leases -2001), which was neither claimed in Income Tax Return due to misconception/ not properly instructed nor issue of allow ability under the normal provisions of the Act was raised before lower authorities, however issue towards deduction of said amount for computation of book profit u/s 115JB was raised before AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. 30. We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record. The Ld Counsel submitted before us that during the financial year 2007-08 the Expert Advisory Committee of the Institute of Chartered Accountants of India had issued a clarification in respect of mandatory Accounting Standard-19 on accounting of operating lease rent expense. Pursuant to the said clarification the assessee was required to recognize in its annual audited accounts the scheduled rent increments over the lease term on a straight line basis in respect of all existing operating lease agreements remained in force on or after 2001. The assessee adopted the method prescribed in the Accounting Standard-19 for accounting of operating leases in the relevant year under consideration since t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... representative of the time pattern of the user, even if the payments are not on that basis. 31. We note that Hon ble Supreme Court explained the importance of mandatory accounting standards in the case of J. K. Industries Ltd. Vs UOI (297 ITR 776) wherein the Court held that the main object sought to be achieved by Accounting Standards which are now made mandatory is to see that accounting income is adopted as taxable income and not merely as the basis from which taxable income is to be computed. The Supreme Court explained its position by citing examples. In case of inventories, the valuation rules are laid down in the Accounting Standards which are followed in the determination of accounting income. Since the income-tax law does not lay down any such rules, the tax authorities are not required to examine the computation of the valuation of inventories and its effect on computation of income. However, in case of depreciation on assets, different rules accounting guidelines are laid down in the Accounting standards vis-a-vis Income-tax Act, 1961. Accordingly, in such cases the provisions rules laid down in I.T Act, 1961 I.T. Rules, 1962 are to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent expenditure was recognized on a straightline basis which was considered to be a more systematic and rational basis by accounting experts. On accounting of escalating rentals in the operating lease agreements, it led to creation of additional lease rental liability in the relevant year under consideration which was debited to the P L A/ c under the head Rent Straight-Lining . This accounting treatment was in sync accounting guidelines laid down by ICAI which the assessee was required to mandatorily follow. The profits so determined after accounting for the expense towards straight-lining of lease rentals reflected a better accurate picture of the true commercial profits of the assessee company. In light of the law down by the Apex Court since there are no contrary or specific provisions in the Income-tax Act, 1961 in respect of accounting of lease rentals, the expenditure of ₹ 40,647,000/- so recognized in the Profit Loss account is deductible while computing profits of the business. We note that ld CIT(A) has rightly held that assessee is entitled to claim deduction of ₹ 40,647,000/- on account of lease rent, observing the following: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Central Government u/s 145(2) of the Act. It is also not the case of the assessing officer that the system of accounting followed by the assessee was such that the correctness and completeness of accounts was to be doubted. Rather, the assessee has followed accounting standard issued by ICAI. The assessee had made the claim in the assessment proceedings and the assessing officer has neither allowed nor given reason for its rejection. In the remand report dated 03.01.2014, the assessing officer has objected to the assessee s claim on the ground that such claim was not made by way of filing revised return. Apparently, he intends to draw strength from the decision of the Hon ble Supreme in the case ofGoetze India Ltd. 284 ITR 323, though he has not specifically mentioned the same. However, in the said decision itself, Hon`ble Supreme Court has clarified that the bar on claiming a deduction not claimed in the return does not apply on the appellate authority. In the decisions in the case of National Thermal Power Co Ltd. (supra) and Jute Corporation India Ltd. (supra) Hon ble Supreme Court has held that appellate authority has power even to admit a claim not made i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , liability for the current year was debited to the profit and loss account in an amount of ₹ 4,06,47,000/-. The assessee had inadvertently added back the amount of ₹ 4,06,47,000 in the return of income but the same was subsequently claimed before the assessing officer during the course of assessment. The assessing officer omitted to deal with the said claim. The same was, however, allowed on appeal by the CIT(A) against which the Revenue has come up in appeal (S. No. 5 of Grounds of Appeal), which we have already adjudicated in para 31 of this order. In so far as the amount of ₹ 39,718,000/- is concerned, assessing officer added back the same while computing book profit under section 115JB of the Act. The adjustment made by the assessing officer was deleted by the CIT(A) for which the Revenue is in appeal before us, vide S. No. 4 of Grounds of Appeal. The amount of ₹ 39,718,000/- was not claimed deduction while computing income under the normal provisions of the Act. The same is being raised by way of additional ground for the first time before this Tribunal. We note that the amount of ₹ 39,718,000/- represents liabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be allowed deduction in the year in which the changed method was adopted for the first time: - CIT v. Carborandum Universal Ltd. : [1984] 149 ITR 759 (Mad.) - SLP dismissed vide 187 ITR (St) 38; - Melmould Corporation vs. CIT: [1993] 202 ITR 789 (Bombay) We note that Hon'ble Gujarat High Court in the case of Saurashtra Cement Chemical Industries Ltd. vs. CIT: 213 ITR 523 held that: Merely because an expense relates to a transaction of an earlier year it does not become a liability payable in the earlier year unless it can be said that the liability was determined and crystallized in the year in question on the basis of maintaining accounts on the mercantile basis. In view of the aforesaid decision in law, the incremental liability on account of lease rental equalization provided for pursuant to the clarification issued by the Expert Advisor Committee of the ICAl, accrued during the relevant previous year and is allowable deduction in computing income for the said year, notwithstanding that such liability may relate to the earlier years. Therefore, we direct the assessing officer to all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SI is not governed by Section 43B but it is governed by Section 36(1)(va) of the Act, but this is not the jurisdictional High Court of the assessee and therefore cannot be followed. Other High Courts which have held that the employees contribution is also covered by Section 43B of the Act are as follows: i) CIT vs. Aimil Ltd. (2010) 32 ITR 508 (Del) ii) CIT vs. Nipso Polyfabriks Ltd. (2013) 350 ITR 326 (HP) iii) CIT Vs. Sabari Enterprises (2008) 298 ITR 141 (Kar) iv)EssacTeraoka (P) Ltd. Vs. DCIT (2014) 222 Taxman 170 (Kar) 39. Having heard the rival submissions, perused the material available on record, we note that the above issue is squarely covered by the Jurisdictional High Court, Calcutta (supra). Therefore, we are of the view that employees share of contribution towards PF and ESI, if it is paid before filing of return of income then it would be a sufficient compliance of the Act. Accordingly, we dismiss the ground No.1 raised by the Revenue. 40.Ground No. 2 raised by the Revenue relates to disallowance of depreciation of ₹ 78,002/- on account of River Embankment und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs for the assessment years 2005-06 to 2007-08. Orders for the assessment years 2005-06 and 2006-07 have been upheld by this Tribunal vide order dated 23.05.2013 in ITA Nos. 1826, 1827 1828/Kol/2012. Respectfully following the decision of the Coordinate Bench in the assessee's own case, the ld CIT(A) deleted the disallowance of depreciation of ₹ 78,002/-. That being so we decline to interfere on the order passed by the ld CIT(A), his order on this issue is hereby accepted and grounds of appeals raised by the Revenue is dismissed. 42. Ground No. 3 raised by the Revenue relates to payment of lumpsum royalty of ₹ 3,87,80,185/- as Capital Expenditure. 43.The brief facts qua the issue are that the assessee has claimed ₹ 3,87,80,185/- towards payment of royalty. The said sum was paid to following concerns: i. Wolverine Worldwise INC ₹ 82,19,725/- ii. Wolverine INC ₹ 1,02,14,190/- iii. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e capital nature but it was revenue in nature and thereby deleted the disallowances made in both the years. Copies of the relevant orders of the Tribunal are enclosed page 223 to 231 of paper book. It is also material to note that in the immediate preceding year i.e. AY 2007-08 the assessee had made similar royalty payments. The assessment for AY 2007-08 was framed u/s 143(3). In that year the Assessing Officer himself did not dispute that the expenditure on royalty payments was revenue in nature and no disallowance was made. Accordingly, even the AO, in the immediate preceding year, accepted that the royalty payments were not capital in nature and allowable as deduction from the profits of the business. The ld Counsel submits that during the relevant year it made royalty payments to the very same parties pursuant to same agreements or arrangements prevailing earlier. In this factual background, following the orders of the ITAT in assessee s own case for AY 2005-06 2006-07 and the Department s own stand in AY 2007-08, we note that the disallowance of royalty of ₹ 3,87,80,185/- made by the Assessing Officer in AY 2008-09 deserves to be deleted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f prior period items on computation of book profit u/s 115JB of the Act. 47. The brief facts qua the issue are that the assessee has claimed deduction of prior period item of ₹ 5,02,54,168/-,in the computation u/s 115JB of the Act and have also claimed deduction on account of adjustment of leave and gratuity of ₹ 85,34,000/- and ₹ 3,32,38,000/- respectively. AO noticed that in the computation of 115JB, the adjustment allowed are only as per Explanation to Section 115JB and no other adjustments whatsoever in nature is allowed. Further, such adjustment is only be made to the P L A/c as prepared as per part II III of Schedule VI of the Companies Act, 1956, therefore, ₹ 5,02,54,168/- relating to prior period item does not fall under any of the items in the Explanation of Section 115JB and hence such amount cannot be reduced as claimed by the assessee. As regards the expenses adjusted through reserve surplus being leave and gratuity since such items have not been passed through P L A/c, there does not arise any question of reducing such sums as these also do not fall within the deduction items as provided in Section 115JB. Even otherwise, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 115JA of the Act, holding as under: The second question which has been raised by the assessee, is with regard to the following findings of the learned Tribunal. 16. The next grievance of the assessee related to not allowing deduction of prior period expenses of ₹ 1,28,986/-charged to the profit and loss account, while arriving at book profit Section 115JA. 17. We have heard the rival contentions. There is no adjustment as provided in Explanation to Section 1154JA which empowered either the A. O. or the assessee to tinker the profit with regard to the prior period of expenses charged to the profit and loss account. Mr. Khaitan submitted that this point is equally covered by a judgment of the Delhi High Court in the case of CIT vs. Khaitan Chemicals and fertilizers Ltd. reported in 307 ITR 150 . .. . The prior period expenditure amounting to a sum of ₹ 1,28, 986/- was already shown in the profit and loss account as per accounting standards. The learned Tribunal purported to disallow the aforesaid expenditure on the basis of a mistaken belief that the assessee was seekin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontained in clause (38 thereof) of section 11 or section 12 apply, if any such amount is credited to the P L A/c. Therefore, the assessee is correct in claiming reduction in respect of dividend income. However, it may be mentioned, that as a logical consequence, expenditure relating to such exempt income is also to be added in view of clause (f) of explanation 1 to section 115JB. The expenditure pertaining to dividend income was taken by CIT(A) at 10% of dividend. Considering this, the Ld CIT(A) directed the assessing officer to reduce profit shown in the P L account by 90% of dividend income, i.e. ₹ 5,98,174/-. We note that dividend income exempts in terms of section 10(34) of the Act therefore it should be excluded under normal computation provisions. It should also be excluded in computing book profit in terms of clause (ii) of Explanation 1 to section 115JB of the Act. Therefore, we direct the AO to exclude dividend income from normal computation as well as computation of book profit under section 115JB of the Act. 53. Ground No. 7 raised by the Revenue relates to exemption/deduction on dividend/operating rent equalizatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ward adjustment made by the TPO. The assessee had entered into a number of international transactions within the meaning of section 92B of l. T. Act, 1961. Reference was made by the assessing officer to the TPO. In her order, the TPO analysed the international transaction in the segment for export spare parts, import of chemicals and TSA fee. The average of comparable PLI cited by her was 7.4% (percentage of sales), whereas the PLI for the assessee company was 6.55%. According to the working made by the TPO, the ALP cost of goods and services came to ₹ 2,44,31,005/- as against the transaction amount of ₹ 2,48,81,663/-. Hence, vide her order dated 31.10.2011, the TPO recommended downward adjustment of ₹ 4,50,658/-(₹ 2,48,81,663- ₹ 2,44,31,005). On appeal, ld CIT(A) deleted addition. Aggrieved, the Revenue is in appeal before us. 58. We note that in the course of transfer pricing assessment, details/explanations in respect of international transactions were furnished by assessee. In the segment of export of spare parts, import of chemicals ISA fees the assessee had benchmarked the valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al transaction amount of ₹ 2,48,81,663/-. Accordingly, the difference of ₹ 4,50,658/ - was the downward adjustment proposed by the Transfer Pricing Officer. We note that the downward adjustment of ₹ 4,50,658/ - proposed by the TPO was in gross violation of the provisions of second proviso to Section 92CA of the Income-tax Act, 1961. Without prejudice to the assessee's claim for use of multiple year data for determining PLI of the comparables, making functional working capital adjustments to the PLI and the manner in which PLI was worked out by the Transfer Pricing Officer, at the very onset it is submitted that going by TPO's own computation of the arm's length value of the transactions, the arm's length price was within the prescribed range of +/- 5% of the actual transaction amount. Attention in this regard is invited to the second proviso of Section 92CA of the Income-tax Act, 1961 which reads as follows: Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the lat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,005/-. Applying the benefit accorded to the assessees in the second proviso to Section 92CA, it is clearly evident that the arm's length price is within the permitted variation of + (-) 5% from the actual value of transactions and therefore the impugned addition of ₹ 4.50,658/- has rightly been deleted by the ld CIT(A) observing the following: 7.2. I have considered the facts of the case. The ALP for cost of goods and services computed by the TPO was of ₹ 2,44,31,005/- on the basis of arithmetical mean of PLI of eight comparables, whereas the transaction amount was of ₹ 2,48,81,663/-. The computation of ALP is to be made in accordance with the provision of section 92C of the Income Tax Act, 1961. The provision, as it stood in the year under consideration, stipulates that:- where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean. Consequently, if the va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration for the purpose of computing capital gains. The payment of VAT was imperative in the transaction for sale of the trademark; without payment of VAT, the transfer of trademark could not be effected. In that view of the matter, such payment being expenditure incurred wholly and exclusively in connection with the transfer of trademark was required to be deducted from the sale consideration. In view of the aforesaid, it is submitted that the CIT(A) was right in allowing deduction of V AT paid in connection with transfer of a capital asset. In view of the aforesaid, the order passed by the CIT(A) deleting the aforesaid disallowance deserves to be upheld. 65. We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record. We note that in the year under consideration the assessee had sold one of its registered trademark' Hawaii' for a consideration of ₹ 3,91,90,000/- and paid VAT of ₹ 15,07,308/- to the State Government on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aning thereby an assessee is entitled to claim deduction in respect of both 'cost of improvement' and 'expenditure incurred wholly and exclusively in connection with transfer' of brand name whose 'cost of acquisition' is taken at NIL under the provisions of Section 55(2)(a) of the Income-tax Act, 1961.There is no provision in the Chapter - IV 'Computation of Capital Gains' which prohibits the assessee to claim deduction in respect of 'cost of improvement' and 'expenditure incurred wholly and exclusively in connection with transfer' whose cost of acquisition is deemed to be NIL. It is therefore submitted that the basic premise of the Assessing Officer based on which he alleged that the assessee was not entitled to claim deduction in respect of VAT paid as 'cost of improvement' and/ or 'expenditure incurred wholly and exclusively in connection with transfer' is found to be false. We note that in terms of the statutory provisions of State Value Added Tax Act, assessee was legally obliged to pay VAT ₹ 15,07,308/- which it had paid. Levy of VAT was a direct incidence against the vendor of the trademar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee itself, its cost of acquisition was nil. However, in its computation of capital gain the assessee had, from the consideration received, reduced the amount of VAT. It is clear that VAT have been paid in respect of sale of the assessee's trade-mark. The assessee was statutorily required to pay VAT on the sale consideration received. Therefore, the expenditure was directly related with transfer of the asset namely trade-mark. I do not agree with the assessing officer's view that the expenditure on VAT was not related to transfer of trade-mark. Rather, the VAT was directly related to sale of trade-mark and was to be necessarily paid. Thus, this is an expenditure directly related to transfer of asset and hence deductible from sale of consideration in view of clause (i) of section 48. The disallowance of ₹ 15,07,308/- is accordingly deleted. That being so, we decline to interfere in the order passed by ld CIT(A), his order on this issue is hereby accepted and grounds of appeal raised by the Revenue is dismissed. 66. In the result the appeal filed by the Assessee is allowed and the appeal filed by the Revenue is dismissed. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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