2024 (3) TMI 1438 - AT - Income Tax

Admission of additional ground admission due to inadvertent delay - Challenge to jurisdiction of the Addl. Commissioner of Income Tax to pass the assessment order on the ground that there is no notification or order under section 120(4)(b) or 127 - HELD THAT - Though additional ground can be raised if it is a pure question of law but for adjudication such question of law ascertainment of facts are necessary then without those facts coming on record it is difficult to decide the question of law itself. Though we are aware that in some of the decisions by the Coordinate Bench have been admitted such an additional ground after inadvertent delay and decided the issue. However in the present case in absence of the records being available before us we are not able to adjudicate this issue. Had the records being made available then perhaps such delay would have been condoned being the point of jurisdiction. However without actual records coming on record because of bonafide reasons given by the department that after lapse of so many years and that to be when this issue was not raised at any point of time we cannot quash the assessment simply on the presumption that no such order would have been passed. As we have already observed above there is a difference between order not available on record for transferring the jurisdiction from DCIT to Addl. CIT and not available on record due to lapse of time and latches on part of the assessee. Thus we agree with the contention of the Ld.DR that additional ground cannot be admitted due to inadvertent delay and accordingly the petition for admission of additional ground is rejected. Eligibility of depreciation on assets pursuant to the scheme of demerger - appellants had ceased to be the owner of the assets and had ceased to use the assets for the purpose of its business - HELD THAT - We observe from the record that identical issue is decided in favour of the assessee for the A.Y. 1997-98. While deciding the issue the Coordinate Bench 2016 (1) TMI 1491 - ITAT MUMBAI as held every year the block of assets has to be adjusted in case if there are any changes in the composition of the assets within the block. This exercise has to be done every assessment year. In the given case it is fact on record that the impugned assets are not in existence with the organization. The ITAT has come to the conclusion in A.Y.2000-01 interpreting the provisions as applicable at that point of time. In our view the assets in the block has to be evaluated every assessment year and as per provision 43(6)(C)(B) it clearly indicates that the value has to be reduced of the moneys payable in respective of any assets falling within that block which is sold/discarded/demolished or destroyed. In the given case the block does not consist the assets which are transferred in the demerger in the A.Y. 1997-98. However these particular assets are not in existence in the beginning of the year and it can be considered as discarded in the provisions with NIL value. This issue needs to end some point of time. In that case the value of the assets has to be written off this year and to be claimed as loss in the statement of income (instead of depreciation). Therefore we are inclined to direct the Assessing Officer to treat the opening balance of the assets to the extent of assets which was already transferred to the demerged company as loss of assets or discarded. Nature of expenses - disallowing expenditure of Rs. 55, 01, 084/- in connection with Software treating the same as capital expenditure and granting depreciation at the rate of 25% instead of 60% - HELD THAT - We observe from the record that identical issue is decided in favour of the assessee for the A.Y. 1997-98 2016 (1) TMI 1491 - ITAT MUMBAI held that application software are of revenue in nature. Adhoc disallowance of 25% of total foreign travelling expenses - HELD THAT - This ground is covered in assessee s favor in several earlier years also and the department has accepted the ruling of the Tribunal in those years and has not preferred further appeal on this issue. This being the case we direct Ld. AO to delete the additions as sustained by Ld. CIT(A). Disallowance of Hotel and airfare expenses incurred on foreign visitors to India - these expenses were not for the purpose of the business - HELD THAT - We observe from the record that identical issue is decided in favour of the assessee for the A.Y. 1997-98. While deciding the issue the Coordinate Bench 2016 (1) TMI 1491 - ITAT MUMBAI held that foreign victors came to India for purposes of attending the board meetings general discussion finance reporting etc. It is considered that the expenditure represented predominantly business expenditure. Disallowance u/s 14A r.w.r. 8D- HELD THAT - Identical issue is decided in favour of the assessee for the A.Y. 1998-99. While deciding the issue the Coordinate Bench in 2016 (1) TMI 1491 - ITAT MUMBAI we direct the AO to restrict the disallowance @2% of the exempt income. Disallowance of Unavailed Modvat Credit - HELD THAT - As following the principle of consistency the view taken by the Tribunal in assessee s case for the preceding assessment years are respectfully followed we direct the AO to make the similar adjustment to opening stock as made to the closing stock towards the unutilized MODVAT credit accordingly ground raised raised by the assessee is allowed. Disallowing advances written off - HELD THAT - As we observe from the record that identical issue is decided in favour of the assessee 2021 (4) TMI 1346 - ITAT MUMBAI as concluded that advances lost during the course of business would be business losses. Deduction u/s 80HHC - excluding 90 per cent of the receipts while working out the profits of the business by assuming that they are in the nature of receipts - HELD THAT - Interest on employee s loan Interest on overdue debtors Interest on deposit with MSEB MIDC Insurance Claims Scrap Sales Income Cash Discount Equipment lease rentals Conversion Charges Write back of liabilities Cost of Services Recovered Profit u/s 41(3) on sale of R D Assets and Misc. Claims items would form part of Profits of business and accordingly not required to be reduced while computing deduction u/s 80HHC. Interest on Sales Tax Refund Income Tax Refund (Gross) - Both these items in our opinion would be covered by explanation (baa) and accordingly required to be reduced to the extent of 90% while computing profits of the business. However as per the decision of ACG Associates Capsules Pvt. Ltd 2012 (2) TMI 101 - SUPREME COURT netting-off would be available to the assessee. The Ld. AO is directed to re-work the same. Sales Tax Set-off Excise Duty refund - These two items would stand excluded in view of the fact that as per the impugned order sales tax as well as excise duty would not form part of total turnover in the denominator. When denominator has been reduced by these two components similar connected items would stand excluded from the numerator also. AO is directed to re-compute the deduction available to the assessee u/s 80HHC in the light of our adjudication on various issues effecting computations u/s 80HHC Computing the income from house property at a notional value - HELD THAT - As decided in own case 2021 (4) TMI 1346 - ITAT MUMBAI it was not a case where the property was actually let out by the assessee to a third-party but was a case wherein to facilitate demerger and to ensure smooth running of existing business an arrangement was made between the assessee and its demerged entity that the business premises would be shared with an understanding that the proportionate cost would be recovered from the demerged entity till the time an alternative facility was arranged by the demerged entity. This being the case it could very well be said that the premises was being used by the assessee only in furtherance of its business interest the objective of which was to facilitate demerger. It is quite discernible that this similar arrangement is continuing since AYs 199798 onwards and such an arrangement has never been disturbed by Ld. AO while framing assessment for AYs 1997-98 to 2000-01 which is evident from extract of assessment orders of those years as placed on record. Therefore rule of consistency would operate in assessee s favor and the facts being identical Ld. AO was not justified in disturbing such an arrangement. Therefore on the peculiar facts and circumstances the action of Ld.AO in bringing to tax notional rental value of the common premises was not justified. Capital gains arising from the transfer of Plot no 1 by adopting the fair market value of the asset transferred as at 01.04.1981 - HELD THAT - The valuation report submitted by the DVO to evaluate the same pieces of land which the assessee had sold on piecemeal basis. The valuation was done by the neutral agency there should not be any issue for adopting the same in the assessment year under consideration. Therefore we direct the AO to adopt the Fair Market value as on 01.04.1981 as determined by the DVO for the year under consideration and determine the capital gains accordingly. In the result the grounds raised by the assessee are accordingly allowed. Capital gains arising from the transfer/sale of development right in respect of slum plot by adopting the fair market vaue of the asset transferred as at 01.04.1981 - HELD THAT - As we observe that the issue under consideration is exactly same as adjudicated in Ground Nos 10 and 11 therefore the same is applicable mutandis mutatis. Accordingly we direct the AO to adopt the FMV as determined by the DVO for the issue under consideration. Hence the grounds raised by the assessee are allowed as indicated above. Treating incremental amount over and above the amount offered to tax u/s 41(3) arising from sale of buildings used for research and development purpose as revenue receipts and in not allowing appellants claim for allowance of Capital Loss thereon as claimed in the return of income - HELD THAT - Since it is a capital assets transferred by the assessee the provisions of section 45 to 48 of the Act is attracted since the assessee has claimed the benefit under section 35 of the Act to the extent of the benefit claimed by the assessee under section 35 of the Act the provisions of the section 41(3) are attracted to that extent we observe that the assessee has also complied by declaring the sale proceed as business income. Since it is a capital assets transferred the provisions of section 48 of the Act is attracted to the portion of the sale proceed over and above the exemption claimed by the assessee under section 35 of the Act. Therefore as per the provisions of section 48 of the Act the income of the assessee under the head capital gains has to be determined for the value of excess consideration received by the assessee. In our view the above said loss is allowed to be carry forward under section 74 of the Act. We came to the conclusion by relying on the decision of the Pharmason Pharmaceuticals Ltd 2003 (1) TMI 740 - ITAT AHMEDABAD Decided in favour of assessee. Incremental liability for VRS - HELD THAT - As identical issue is decided in favour of the assessee for the A.Y. 1997-98. While deciding the issue the Coordinate Bench in 2016 (1) TMI 1491 - ITAT MUMBAI applying the amended order the deduction would be allowable to the assessee. Disallowance of corporate entrance fees paid by the assessee to the clubs - HELD THAT - Identical issue is decided in favour of the assessee for the A.Y. 2001-02. While deciding the issue the Coordinate Bench 2021 (4) TMI 1346 - ITAT MUMBAI holding that club membership fees for employees incurred by the assessee is business expense under Section 37.

Summary

The core legal questions considered in this judgment primarily revolve around the jurisdiction of the Additional Commissioner of Income Tax (Addl. CIT) to act as an Assessing Officer (AO) under the Income Tax Act, 1961, and the validity of the assessment order passed by such authority. The issues also include the admissibility of additional grounds of appeal raised after a substantial delay, the applicability of procedural provisions concerning transfer and conferment of jurisdiction among income tax authorities, and substantive tax assessment matters such as depreciation claims, disallowance of expenses, valuation of assets for capital gains, and computation of income under various sections of the Act.

Regarding the jurisdictional issue, the primary questions are:

• Whether the Addl. CIT had valid jurisdiction under section 120(4)(b) read with section 2(7A) of the Income Tax Act to act as an Assessing Officer for the relevant assessment year.
• Whether there was a valid transfer of jurisdiction from the Assistant or Deputy Commissioner of Income Tax to the Addl. CIT under section 127 of the Act.
• Whether the challenge to the jurisdiction raised after a delay of over 16 years is maintainable and admissible as an additional ground of appeal.
• Whether the procedural defects, if any, in conferment or transfer of jurisdiction invalidate the assessment order or are curable administrative irregularities.
• Whether such jurisdictional issues are appealable before the Tribunal under section 253 of the Act or are to be addressed administratively under section 124.

Substantive tax issues include:

• Allowability of depreciation on assets transferred pursuant to a demerger scheme and the correct treatment of such assets in the block of assets.
• Classification of software expenditure as capital or revenue expenditure and the applicable rate of depreciation.
• Allowability of foreign travel expenses and expenses related to foreign visitors as business expenses.
• Disallowance under section 14A read with Rule 8D regarding expenditure attributable to exempt income.
• Adjustment of unavailed MODVAT credit in valuation of closing and opening stock under section 145A.
• Allowability of written-off advances as business expenses under section 37(1).
• Computation of profits eligible for deduction under section 80HHC, including treatment of various receipts such as interest, insurance claims, scrap sales, and incentives under DEPB scheme.
• Computation of income from house property, including notional rent on shared premises post-demerger.
• Determination of fair market value (FMV) of land and development rights as on 1 April 1981 for capital gains computation.
• Tax treatment of sale proceeds of assets used for research and development, particularly the application of section 41(3) and capital gains provisions.

Issue-wise detailed analysis:

Jurisdiction of Additional Commissioner of Income Tax as Assessing Officer

The legal framework mandates that an Additional Commissioner can act as an Assessing Officer only if empowered under section 120(4)(b) of the Income Tax Act, which requires a two-step process: (a) the CBDT must issue an order empowering the Principal Director General or Commissioner to authorize Additional Commissioners, and (b) the specified authority must issue orders conferring such powers to the Addl. CIT. Furthermore, any transfer of jurisdiction from one Assessing Officer to another must be effected by an order under section 127. Section 2(7A) defines "Assessing Officer" to include officers empowered under these provisions.

The assessee challenged the validity of the assessment order on the ground that no such orders under sections 120(4)(b) or 127 were available on record, and thus the Addl. CIT lacked jurisdiction. The department failed to produce any such orders, citing unavailability due to lapse of time and restructuring.

The Tribunal noted that the original return was filed with the Assistant Commissioner of Income Tax (Asst. CIT), notices under section 143(2) were issued by the Dy. CIT, and the Addl. CIT issued notices only later. Without a valid transfer or conferment of jurisdiction, the Addl. CIT could not validly act as AO. The Tribunal underscored the burden on the Revenue to establish jurisdiction, which was not discharged.

However, the department contended that the issue was barred by delay, as the jurisdictional challenge was raised after 16 years, and that jurisdictional issues are administrative matters not appealable before the Tribunal but to be addressed under section 124 within prescribed time limits. The department relied on judicial precedents holding that jurisdictional objections must be raised within one month of notice under section 124(3), and that after completion of assessment, such objections cannot be entertained.

The Tribunal acknowledged the settled legal position that jurisdictional issues can be raised at any stage if they go to the root of the matter, but stressed the need for contemporaneous records to establish or negate jurisdiction. The absence of such records after a long delay invoked the doctrines of estoppel by laches and acquiescence, precluding relief. The Tribunal declined to admit the additional ground due to inordinate delay and lack of records, emphasizing that had the issue been raised timely, the records could have been examined.

On the legal precedents, the Tribunal analyzed conflicting decisions of various High Courts and coordinate benches of the Tribunal. It noted that the Delhi High Court in a binding decision had held that the Addl. CIT is included in the definition of Assessing Officer retrospectively from 1 June 1994, and that reference to incorrect provisions does not invalidate jurisdiction if the authority is otherwise competent. The Tribunal also observed that various coordinate bench decisions holding otherwise were rendered per incuriam or sub silentio and thus not binding.

Regarding transfer of jurisdiction under section 127, the Tribunal noted that such transfers are administrative orders, generally for convenience, and do not cause prejudice to the assessee. However, the absence of any transfer order on record meant the Addl. CIT could not validly exercise jurisdiction unless he was the Assessing Officer by virtue of section 120(4)(b).

The Tribunal further held that jurisdictional orders under sections 120, 124, or 127 are not appealable before the Tribunal under section 253, and challenges thereto must be made administratively within prescribed time limits. The Tribunal relied on authoritative Supreme Court and High Court decisions to this effect.

In sum, the Tribunal rejected the additional ground challenging jurisdiction due to delay and lack of records, but recognized that the Addl. CIT could validly act as AO if empowered under section 120(4)(b) and/or section 127, which was not established in this case.

Allowability of Depreciation on Assets Post-Demerger

The assessee claimed depreciation on assets transferred to a demerged company pursuant to a scheme sanctioned by the High Court. The Assessing Officer disallowed depreciation on the ground that the assessee ceased to be owner and user of the assets.

The Tribunal noted that depreciation is allowable on the written down value of the block of assets under section 32. Section 43(6) prescribes adjustments to the written down value for assets sold or discarded. The assessee's claim did not fall within these exceptions, and the block of assets included the demerged assets.

Earlier Tribunal decisions for prior years had allowed depreciation on such assets. The Tribunal directed the Assessing Officer to allow depreciation on the block of assets including those relating to the demerged undertaking for the year under consideration, following the principle of consistency and earlier favorable orders.

Software Expenditure: Capital or Revenue

The assessee incurred expenditure on computer software packages, including license fees and implementation charges, and treated them as revenue expenses. The Assessing Officer classified the expenditure as capital and allowed depreciation at 25%.

The Tribunal referred to its own earlier decisions in the assessee's case and relevant judicial precedents, which held that application software, which is frequently outdated, is revenue in nature. The Tribunal directed the Assessing Officer to allow the expenditure as revenue expense, reversing the depreciation adjustment.

Foreign Travel Expenses

The Assessing Officer disallowed 25% of foreign travel expenses on the ground that the assessee failed to prove the expenses were wholly and exclusively for business. The CIT(A) reduced the disallowance to 20%.

The Tribunal noted that identical issues for earlier years were decided in favor of the assessee, allowing such expenses as business expenses. Accordingly, the Tribunal directed deletion of the disallowance.

Disallowance under Section 14A and Rule 8D

The Assessing Officer made an adhoc disallowance under section 14A on account of expenditure attributable to exempt income, rejecting the assessee's submission for a lower disallowance. The CIT(A) enhanced the disallowance applying Rule 8D.

The Tribunal observed that Rule 8D is retrospective from AY 2007-08 and not applicable to the year under consideration. It also noted that the assessee's investments were made from own funds without borrowed funds, and no specific expenses were incurred for earning exempt income. Following earlier decisions, the Tribunal restricted the disallowance to 2% of exempt income.

Adjustment of Unavailed MODVAT Credit

The Assessing Officer added unavailed MODVAT credit to the value of closing stock, disallowing the assessee's accounting treatment. The CIT(A) upheld the addition but directed adjustment to opening stock in the subsequent year.

The Tribunal followed earlier decisions and judicial precedents holding that unavailed MODVAT credit must be added to closing stock and correspondingly to opening stock of the next year. The Tribunal directed the Assessing Officer to make such adjustments.

Written-off Advances

The assessee claimed deduction for advances written off as business expenses. The Assessing Officer disallowed the claim under section 36(1)(vii) and section 36(2), holding that the advances were not money lent in the ordinary course of business.

The Tribunal observed that the advances were trade advances and had become irrecoverable, and that the claim was allowable under section 37(1) as business loss. The Tribunal relied on judicial precedents supporting allowance of such claims and directed deletion of the disallowance.

Computation of Profits under Section 80HHC

The Assessing Officer excluded 90% of various receipts such as interest on employee loans, insurance claims, scrap sales, and others from the profits of business for computing deduction under section 80HHC. The CIT(A) upheld the exclusion relying on earlier orders.

The Tribunal referred to its own earlier decisions for the assessee and judicial precedents, including decisions of the Bombay High Court and Supreme Court, which held that receipts arising directly from business operations are part of profits of business and not to be excluded. The Tribunal allowed the claim for inclusion of these receipts in the profits of business. It also noted that sales tax and excise duty are excluded from turnover for computing deduction under section 80HHC, following the legislative intent and judicial decisions.

Regarding the DEPB incentive receipts, the Tribunal noted retrospective amendments and directed remand for reconsideration.

Income from House Property - Notional Rent

The Assessing Officer computed notional rent on premises jointly occupied by the assessee and its demerged entity, CSCIL, holding that rent was not reflected and thus taxable under section 22.

The Tribunal examined the arrangement between the assessee and CSCIL, noting that the premises were shared for business purposes with cost recovery. The Tribunal found that the premises were used in furtherance of the assessee's business interest and that the arrangement continued for several years without dispute. Applying the principle of consistency, the Tribunal held that the notional rent addition was not justified and directed deletion.

Determination of Fair Market Value of Land and Development Rights as on 1 April 1981

The assessee relied on valuation reports from independent valuers to determine FMV for computing capital gains. The Assessing Officer rejected these reports due to alleged errors and lack of scientific basis, adopting a much lower rate per square foot. Subsequently, the AO obtained a valuation from the District Valuation Officer (DVO), which was considered neutral and reliable.

The Tribunal directed the AO to adopt the DVO valuation for the purpose of capital gains computation, considering it appropriate to bring finality to the issue. The Tribunal also allowed the assessee's submissions to limit reduction in FMV for slum-affected land to a reasonable percentage and to consider only the area actually encroached.

Capital Gains on Sale of Assets Used for Research and Development

The assessee sold a building used for R&D, having claimed full deduction of its cost under section 35 in earlier years. The AO taxed the excess sale proceeds under section 41(3) and disallowed capital loss claimed by the assessee.

The Tribunal analyzed the provisions of section 41(3), which requires that excess proceeds over capital expenditure allowed as deduction be treated as business income. The Tribunal held that the balance consideration after the amount taxed under section 41(3) is to be treated as capital gains, allowing the assessee to compute capital loss accordingly with indexation benefits under section 48. The Tribunal rejected the AO's disallowance of capital loss and directed allowance thereof, relying on judicial precedents.

Interest under Section 234D

This ground being consequential was not adjudicated.

Significant holdings:

On jurisdiction, the Tribunal held:

"The burden on the Revenue to establish jurisdiction of the Additional Commissioner of Income Tax as Assessing Officer under section 120(4)(b) and transfer of jurisdiction under section 127 has not been discharged. The absence of such orders on record and the inordinate delay in raising jurisdictional challenge precludes relief. The doctrine of estoppel by laches and acquiescence applies."

"Jurisdictional orders under sections 120, 124, or 127 are administrative and procedural in nature and are not appealable before the Tribunal under section 253 of the Act."

"The Additional Commissioner of Income Tax is included in the definition of Assessing Officer retrospectively from 1 June 1994 by amendment to section 2(7A)."

On substantive issues, the Tribunal held:

"Depreciation on assets transferred pursuant to demerger is allowable on the written down value of the block of assets including such assets, subject to adjustments as per section 43(6)."

"Expenditure on application software which is frequently outdated is revenue in nature and allowable as such."

"Foreign travel expenses wholly and exclusively incurred for business are allowable, and ad-hoc disallowances based on assumptions are to be deleted."

"Disallowance under section 14A and Rule 8D must be reasonable and applicable only from AY 2007-08 onwards."

"Unavailed MODVAT credit must be added to closing stock and correspondingly to opening stock of the next year."

"Written-off advances in the nature of trade advances which become irrecoverable are allowable as business expenditure under section 37(1)."

"Receipts arising directly from business operations are part of profits of business and not to be excluded under section 80HHC, except statutory levies like sales tax and excise duty."

"Notional rent on shared premises used for business purposes post-demerger is not taxable as income from house property."

"Fair market value for capital gains computation should be adopted from neutral valuation by District Valuation Officer where independent valuer reports are rejected."

"Capital gains on sale of assets used for scientific research should be computed after excluding amount taxed under section 41(3), allowing capital loss with indexation."

The Tribunal applied the principle of consistency, following its own earlier decisions for the assessee on recurring issues. It also emphasized the need for timely raising of jurisdictional objections and the procedural nature of conferment and transfer of jurisdiction among income tax authorities.