2011 (2) TMI 568 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - commercial borrowings - Commissioner of Income-tax (Appeals) noted that assessee company was not a share holder of M/s. Husqvarna AB from whom external commercial borrowing had been made. But the same was subsidiary of AB Electrolux which had 51 per cent share of the share holding in the assessee company. Thus the assessee which had obtained external commercial borrowing was not share holder of M/s. Husqvarna AB. - Held that - following the decision in Asstt. CIT v. Bhaumik Colours (P.) Ltd. (2008 -TMI - 59371 - ITAT BOMBAY-E) the order of CIT(A) sustained. Arms Length Price (ALM) - royalty payment during the year to the Associated Enterprises - the arms length price of these transactions is considered at NIL - Held that - royalty payment in this case was justified and the TPO was totally wrong in disallowing the royalty payment on the ground that the company has incurred losses. We do not find any infirmity in the well reasoned order of the Ld. Commissioner of Income-tax (Appeals) and accordingly we uphold the same. Capital expenditure or revenue expenditure - payment of royalty - held that - the royalty in this case is based upon the percentage of production/sales and it cannot be said to be resulting in a benefit of enduring nature and as such the same is allowable. Research and Development expenditure - expenditure was incurred for development and improvement of the existing products as well as the new products in the appellant s existing line of business. - Held that - the details regarding research and development expenditure were not produced before the Assessing Officer Ld. Commissioner of Income-tax (Appeals) s order in this regard is also silent regarding details. Under these circumstances both the counsel fairly agreed that the issue may be remitted to the files of the Assessing Officer to examine the issue afresh.

Issues Involved:
1. Deletion of addition as deemed dividend under section 2(22)(e).
2. Deletion of disallowance of provision for expenses.
3. Deletion of disallowance of provision for doubtful debts, gratuity, and expenses under section 115JB.
4. Deletion of disallowance of royalty payment.
5. Deletion of disallowance of doubtful debts/advance written off.
6. Deletion of disallowance of research and development expenses.
7. Deletion of addition on account of late payment towards ESI and PF.
8. Deletion of addition on account of provision for gratuity under section 115JB.
9. Deletion of addition on account of arms length price of the brand fees/royalty transaction.

Issue-wise Detailed Analysis:

1. Deletion of Addition as Deemed Dividend under Section 2(22)(e):
The first issue is the deletion of the addition as deemed dividend under section 2(22)(e), amounting to Rs. 49,35,59,040. The Ld. Commissioner of Income-tax (Appeals) noted that the assessee company was not a shareholder of M/s. Husqvarna AB, from whom the external commercial borrowing was made. The Special Bench decision of the ITAT in the case of Asstt. CIT v. Bhaumik Colours (P.) Ltd. was cited, which held that deemed dividend can only be assessed in the hands of a person who is a shareholder of the lender company. Respectfully following this precedent, the deletion of the addition was upheld.

2. Deletion of Disallowance of Provision for Expenses:
The next issue is the deletion of the disallowance of Rs. 9,56,62,981 being provision for expenses. The Assessing Officer disallowed the amount on the grounds that the provision was made on an estimated basis. The Ld. Commissioner of Income-tax (Appeals) verified the bills and payments and allowed the expenses except for Rs. 29,67,972, for which details were not available. The Tribunal directed that the total details be furnished before the Assessing Officer for verification.

3. Deletion of Disallowance of Provision for Doubtful Debts, Gratuity, and Expenses under Section 115JB:
The Ld. Departmental Representative submitted that the Ld. Commissioner of Income-tax (Appeals) had passed an order under section 154 confirming the disallowance of Rs. 12,33,24,025 (provision for doubtful debts), Rs. 1,24,53,119 (provision for gratuity), and Rs. 9,56,62,981 (provision for expenses). Therefore, this ground was dismissed as infructuous.

4. Deletion of Disallowance of Royalty Payment:
The Assessing Officer added back Rs. 3,99,51,000 on account of royalty payment, considering it unjustified. The Ld. Commissioner of Income-tax (Appeals) found that the royalty payment was approved by the Government of India and was incurred for genuine business purposes. The Tribunal upheld the deletion, finding no infirmity in the order of the Ld. Commissioner of Income-tax (Appeals).

5. Deletion of Disallowance of Doubtful Debts/Advance Written Off:
The Assessing Officer disallowed Rs. 66,86,974 due to lack of details. The Ld. Commissioner of Income-tax (Appeals) found that the advances were given for business purposes and were written off as business loss. The Tribunal upheld the deletion, noting that the amounts were duly written off in the books of accounts.

6. Deletion of Disallowance of Research and Development Expenses:
The Assessing Officer disallowed Rs. 1,41,89,000 for lack of details. The Ld. Commissioner of Income-tax (Appeals) held that the expenditure was incurred for business purposes and should be treated as revenue expenditure. The Tribunal remitted the matter to the Assessing Officer for fresh examination with adequate opportunity for the assessee to be heard.

7. Deletion of Addition on Account of Late Payment towards ESI and PF:
The Ld. counsel of the assessee submitted that the amounts were paid before filing the return, citing the decision of the Hon'ble Apex Court in CIT v. Alom Extrusions Ltd. The Tribunal upheld the deletion, following the Apex Court's decision.

8. Deletion of Addition on Account of Provision for Gratuity under Section 115JB:
The Ld. Commissioner of Income-tax (Appeals) noted that the provision for gratuity was based on actuary calculations and should be considered as ascertained liability for determining profit under section 115JB. The Tribunal upheld this finding.

9. Deletion of Addition on Account of Arms Length Price of the Brand Fees/Royalty Transaction:
The TPO determined the arm's length price of the brand fees/royalty transactions at NIL, making an adjustment of Rs. 3,42,97,940. The Tribunal found the issue identical to a previous case and upheld the Ld. Commissioner of Income-tax (Appeals)'s order, deciding the issue in favor of the assessee.

Conclusion:
The Tribunal partly allowed the revenue's appeals for statistical purposes in ITA No. 4878 and 3895, dismissed ITA No. 421, and allowed ITA No. 4333 for statistical purposes.

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