2025 (6) TMI 132 - AT - Income Tax

Disallowance of claim of depreciation - HELD THAT - Identical issue came up for consideration before Coordinate Bench in A.Y. 2005-06 2023 (7) TMI 1511 - ITAT MUMBAI once the property forms part of the block of assets carving out the depreciation for the said property and disallowing the same goes against the spirit of allowing depreciation on the entire block of depreciable assets. Before concluding we may note that in this appeal the Revenue has not disputed the claim of deduction u/s 24 of the Act in respect of the property which forms part of the block of assets. Thus merely because the Revenue has accepted the claim of deduction u/s 24 of the Act doesn t mean that the property which forms part of the block of assets will cease to be so. Therefore the disallowance of depreciation made by the AO is deleted. Disallowance representing delayed payment of employees contribution to provident fund - HELD THAT - Thus in view of the case of Checkmate Services P. Ltd. 2022 (10) TMI 617 - SUPREME COURT (LB) we uphold the disallowance made by the AO and sustained by learned First Appellate Authority. This ground is dismissed. Addition being surplus arising out of prepayment of sales tax loan - Receipts are in the nature of capital receipt hence not taxable. The Assessing Officer is directed to delete the addition. This ground is allowed. Disallowance of SAP ERP expenses claimed as revenue expenditure - We find in assessee s own case in Assessment Years 2002-03- and 2003-04 the Tribunal had allowed assessee s claim of revenue expenses. Facts being identical we allow assessee s claim and direct the AO to delete the disallowance. Of course the depreciation allowed has to be withdrawn. This ground is allowed. Disallowance of deduction u/s.80IA qua rental income - AO noticed that the assessee had not excluded miscellaneous/other income not derived from the profits of the undertaking - HELD THAT -We direct the AO to allow assessee s claim of deduction u/s.80IA of the Act in respect of rental income. This ground is allowed. Taxability of interest on income tax refund - AO was of the view that interest paid on income tax is not an allowable deduction u/s. 40(a)(ii) - HELD THAT - While deciding the issue following the decision in case of DIT vs. Bank of America 2014 (12) TMI 551 - BOMBAY HIGH COURT decided the issue in favour of the assessee. We allow the ground in favour of the assessee. Disallowance of provision made for doubtful debts written off - We are convinced that the issue is squarely covered in favour of the assessee by virtue of the ratio laid down in the cases of M/s Vijya Bank 2010 (4) TMI 46 - SUPREME COURT and T. R. F. Ltd. 2010 (2) TMI 211 - SUPREME COURT Taxability of dividend received from Alexandria Carbon Black Company incorporated and registered in Egypt - On perusal of the record we find that in assessee s own case in A.Ys 2004-05 and 2005-06 the Tribunal has held that the dividend received from the Egyptian company is taxable in India. Taxability of subsidy received from the Central Government under technology upgradation and fund (TUF) - It is the case of the assessee that the subsidiary received being of capital nature is not taxable - HELD THAT - Identical issue came up for consideration before the Tribunal in assessee s own case in Assessment Year 2005-06 2023 (7) TMI 1511 - ITAT MUMBAI Tribunal has taken a view in favour of the assessee by holding that the subsidy received under the TUF scheme is capital in nature. Deduction of education cess - Whether education cess would not be covered u/s. 40(a)(ii) ? - HELD THAT - As could seen from a reading of Explanation-3 the term tax as contemplated u/s. 40(a)(ii) of the Act includes cess and surcharge by whatever name called. Therefore education cess partakes the character of tax which is on profits or gains of business. Merely because tax is taken as a quantifiable measure to determine the quantum of education cess it cannot be said that education cess is not a tax on profits of business. Once as per the provisions of the Act tax includes cess and surcharge it directly relates to the profits or gains because the quantum of tax liability is ultimately determined on the profits or gains of business. Therefore in our view assessee s contention that education cess is not a tax on profits and gains of business or profession is without merit. Deduction u/s. 43B allowed. Disallowance of rural development expenses - We find this is a recurring issue between the parties from AY 1998-99 onwards. We have further observed that the Tribunal has taken a consistent view and decided the issue in favour of the assessee. Allowance cost of production of advertisement films Taxability of sales tax subsidy as revenue - In each of these assessment years the Tribunal has taken a consistent view that the receipts on account of sales tax subsidy are in the nature of capital receipt hence not liable to tax. We uphold the decision of learned First Appellate Authority by dismissing this ground.

Summary

The core legal questions considered in this judgment include:

1. Whether depreciation can be claimed on let-out office premises that form part of a block of assets when rental income from such premises is taxed under the head "Income from House Property".

2. The allowability of deduction for delayed payment of employees' provident fund contributions.

3. The nature of surplus arising from prepayment of sales tax loan-whether it is capital or revenue receipt.

4. The classification of SAP ERP implementation expenses as revenue or capital expenditure.

5. The eligibility of deduction under section 80IA of the Income Tax Act in respect of rental income.

6. The tax treatment of interest on income tax refund and whether interest paid to the Department can be set off against interest received.

7. The allowability of provision made for doubtful debts written off.

8. The taxability of dividend received from a foreign company, specifically from Egypt.

9. The taxability of subsidy received under the Technology Upgradation Fund (TUF) scheme.

10. The allowability of deduction for education cess under section 40(a)(ii) of the Act.

11. The applicability of section 43B regarding disallowance of certain payments not made within the previous year.

12. The allowability of contributions to local organizations as business expenses.

13. The allowability of rural development expenses.

14. The classification of costs related to production of advertisement films as capital or revenue expenses.

15. The taxability of sales tax subsidy received by the assessee.

Issue-wise Detailed Analysis

Depreciation on Let-Out Premises (Issue 1)

The legal framework revolves around the provisions of sections 2(11), 32, and 43(6)(c) of the Income Tax Act, which define "block of assets" and prescribe the manner of claiming depreciation on such blocks. The Tribunal examined whether depreciation can be claimed on a property that is part of a block of assets but is let out, with rental income taxed under "Income from House Property". The Assessing Officer disallowed depreciation, reasoning that since the property was rented out and a 30% maintenance deduction was claimed under section 24, depreciation could not be allowed.

The Tribunal relied on the Coordinate Bench decision in the assessee's own case for AY 2005-06, which held that once an asset forms part of a block of assets, it loses its individual identity for depreciation purposes. The Tribunal cited CBDT Circular No. 469 dated 23.09.1986, which introduced the block of assets concept to simplify depreciation claims, avoiding asset-wise bookkeeping.

Further, the Tribunal referred to the Hon'ble Delhi High Court's ruling in CIT v. Oswal Agro Mills Ltd., which clarified that the user of each asset individually is not material once it forms part of a block of assets. The Court emphasized that allowing depreciation on the entire block does not cause revenue loss, as sale of any asset would trigger capital gains tax.

Applying these principles, the Tribunal concluded that depreciation disallowance was erroneous and directed the Assessing Officer to allow the claim. The Revenue did not dispute the claim under section 24 for the same property, reinforcing the view that the property remained part of the block.

Delayed Payment of Provident Fund Contributions (Issue 2)

The assessee conceded that the delayed payment issue was settled against it by the Supreme Court in Checkmate Services P. Ltd. vs. Commissioner of Income Tax. The Tribunal upheld the disallowance of Rs. 1,66,328/- representing delayed provident fund contributions, following the Supreme Court's binding precedent.

Surplus on Prepayment of Sales Tax Loan (Issue 3)

The AO treated the surplus arising from prepayment of sales tax loan as revenue income, relying on a revision order under section 263. The assessee contended that the surplus was capital in nature, supported by a Special Bench decision in M/s Sulzer India Ltd., and the Tribunal's own decision in AY 2005-06 where the revision order was quashed and the receipt held capital.

The Tribunal examined the legislative intent behind section 263, emphasizing that revision powers require the original order to be erroneous and prejudicial to revenue. It found that the AO's view was one of two possible views and was supported by binding precedent. The Tribunal held that the surplus was a capital receipt and directed deletion of the addition.

SAP ERP Expenses (Issue 4)

The assessee claimed Rs. 5.79 crores as revenue expenditure for SAP ERP implementation, while the AO treated it as capital expenditure, allowing depreciation at 60%. The Tribunal followed its own prior decisions in AYs 2002-03 and 2003-04, which allowed such expenses as revenue expenditure. The DR agreed with the assessee. The Tribunal allowed the claim, directing withdrawal of depreciation.

Deduction under Section 80IA for Rental Income (Issue 5)

The AO disallowed deduction under section 80IA for rental income, holding that rental income is not derived from profits of the undertaking. The assessee relied on earlier favorable decisions in AYs 2004-05 and 2005-06. The DR concurred. The Tribunal noted that in AY 2002-03, the issue was decided in favor of the assessee and that subsequent orders allowed the claim. It directed the AO to allow the deduction.

Taxability of Interest on Income Tax Refund (Issue 6)

The assessee set off interest paid to the Department against interest received on income tax refunds, offering net interest income to tax. The AO disallowed deduction of interest paid under section 40(a)(ii), adding it back. The assessee relied on decisions including Director of Income Tax vs. Bank of America NT and SA and others, which allowed netting off interest transactions with the same party (government). The DR relied on older decisions disallowing such set off.

The Tribunal followed the Hon'ble Jurisdictional High Court's ruling in Bank of America case, which held that netting off interest paid and received from the same party is permissible. It distinguished the DR's decisions as factually different. The Tribunal allowed the ground in favor of the assessee.

Provision for Doubtful Debts (Issue 7)

The issue was common between parties and covered by the Tribunal's decision in AY 2002-03 and Supreme Court rulings in M/s Vijya Bank and T.R.F. Ltd. The Tribunal allowed the claim.

Taxability of Dividend from Foreign Company (Issue 8)

The assessee claimed that dividends from an Egyptian company were taxable only in Egypt based on the pre-2004 meaning of "may be taxed" under section 90. However, the Tribunal had taken a contrary view in AYs 2004-05 and 2005-06, holding such dividends taxable in India. The assessee conceded the issue was pending before the High Court but accepted the Tribunal's consistent view. The ground was dismissed.

Taxability of Subsidy under Technology Upgradation Fund (Issue 9)

The assessee claimed the subsidy was capital in nature and not taxable. The Tribunal relied on its own prior decisions in AY 2005-06 and other coordinate bench rulings, including the Rajasthan High Court's decision in PCIT vs. Nitin Spinners Ltd. and the Calcutta High Court in CIT vs. Gloster Jute Mills Ltd., which held TUF subsidies capital in nature. The DR's contention regarding applicability of Explanation 10 to section 43(1) was rejected. The Tribunal directed the AO to treat the subsidy as capital receipt and delete any addition.

Deduction of Education Cess (Issue 10)

The assessee argued that education cess is not a tax on profits or gains of business under section 40(a)(ii), as it is computed on the tax amount and not on profits directly. The Tribunal referred to Explanation 3 inserted retrospectively from 01.04.2005, which clarified that "tax" includes cess and surcharge. The Tribunal held that education cess is a tax on profits and gains and dismissed the claim, following the coordinate bench's decision in AY 2005-06.

Disallowance under Section 43B (Issue 11)

The AO disallowed certain payments aggregating to Rs. 9.60 crores under section 43B, but the assessee contended that Explanation 2 to section 43B applies only to clause (a) and not clauses (b) to (f). The Tribunal noted consistent favorable decisions in the assessee's own case since AY 1986-87 and upheld the deletion of disallowance.

Contributions to Local Organizations (Issue 12)

The AO disallowed Rs. 19.08 lakhs claimed as contributions to local organizations, holding they were not allowable under section 37(1). The Tribunal observed that since AY 1988-89, the issue has been consistently decided in favor of the assessee, including by the High Court. The Tribunal upheld the claim.

Rural Development Expenses (Issue 13)

The AO disallowed Rs. 1.20 crores claimed for rural development activities. The Tribunal noted consistent favorable decisions since AY 1998-99 and upheld the claim.

Cost of Production of Advertisement Films (Issue 14)

The AO treated Rs. 45.26 lakhs spent on advertisement film production as capital expenditure. The Tribunal noted the issue has been consistently decided in favor of the assessee since AY 1976-77 and upheld the claim as revenue expenditure.

Sales Tax Subsidy (Issue 15)

The AO treated Rs. 83.76 crores received as sales tax subsidy as revenue receipt. The Tribunal noted consistent decisions since AY 1996-97 holding such receipts as capital in nature and upheld the deletion of the addition.

Significant Holdings

On depreciation for let-out premises forming part of block of assets, the Tribunal held:

"Once any asset forms part of the block of assets, it loses its individual identity, and thus for the purpose of depreciation, only the block of assets has to be considered."

It further stated:

"The Revenue has also not disputed this fact. It is settled that once any asset forms part of the block of assets, it loses its individual identity, and thus for the purpose of depreciation, only the block of assets has to be considered."

Regarding surplus on prepayment of sales tax loan:

"The view taken by the Assessing Officer is one of the possible views and it is not a case to invoke section 263 of the Act. The view so formed by him in the light of the Special Bench decision in the case of Sulzer India Limited reflects correct legal position."

On taxability of interest on income tax refund:

"The Tribunal has followed the similar exercise in the case of very Assessee on the prior occasion as well. In such circumstances we are of the opinion that the second question also does not raise any substantial question of law."

On education cess:

"For the purposes of this sub-clause, the term 'tax' shall include and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax."

On subsidy under TUF scheme:

"The Hon'ble Rajasthan High Court in the case of PCIT vs. Nitin Spinners Ltd. has held subsidy received under TUF as capital in nature. Similar view has been taken by Mumbai Tribunal and Hon'ble Calcutta High Court."

On section 43B disallowance:

"The issue has been consistently decided in favour of the assessee by the Tribunal in its own case in past assessment years."

On contributions to local organizations and rural development expenses:

"From AY 1988-89 onwards identical issue has been decided in favour of the assessee not only by the Tribunal but even by the Hon'ble High Court."

On cost of advertisement films:

"The issue first time came up for consideration before the Tribunal in assessee's own case in AY 1976-77 and has been consistently decided in favour of the assessee."

On sales tax subsidy:

"This is a recurring issue between the parties since the AY 1996-97 up to AY 2005-06. In each of these assessment years, the Tribunal has taken a consistent view that the receipts on account of sales tax subsidy are in the nature of capital receipt, hence, not liable to tax."

Final determinations included allowing depreciation on let-out premises forming part of block of assets, upholding disallowance of delayed provident fund contributions, treating surplus on prepayment of sales tax loan as capital receipt, allowing SAP ERP expenses as revenue expenditure, permitting deduction under section 80IA on rental income, allowing netting off of interest on income tax refund, allowing provision for doubtful debts, dismissing claim against taxability of foreign dividends, treating TUF subsidies as capital receipts, disallowing claim on education cess deduction, upholding deletion of section 43B disallowance, allowing contributions to local organizations and rural development expenses, allowing cost of advertisement films as revenue expenditure, and holding sales tax subsidy as capital receipt.