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2011 (4) TMI 1355 - AT - Income Tax
Issues Involved:
1. Disallowance of product development expenses.
2. Allowability of enhanced depreciation on UPS.
3. Disallowance of EDP charges.
4. Claim of depreciation in relation to software expenses disallowed earlier.
5. Addition on account of unutilized MODVAT credit.
6. Disallowance of interest under section 36(1)(iii) of the Income-tax Act.
7. Disallowance of expenditure under section 14A of the Income-tax Act.
8. Disallowance of leave encashment expenses.
9. Claim of deduction under section 80HHC in respect of DEPB income.
10. Levy of interest under section 234D.
11. Deduction on account of legal and professional fees.
12. Disallowance of contribution to labour welfare fund.
13. Claim of depreciation on motor cars at a higher rate.
14. Depreciation on building.
15. Disallowance of cigarette sampling expenses.
16. Nature of income earned from interest and rent.
17. Exclusion of excise duty from total turnover.
18. Levy of interest under section 234B and 234C.
Issue-wise Detailed Analysis:
1. Disallowance of Product Development Expenses:
The assessee claimed product development expenses for printing cigarette packs. The AO disallowed these expenses as capital in nature. The tribunal, following its decision in the assessee's case for A.Y. 2002-03, allowed the claim as revenue expenditure, noting that the items were consumable stores with a short life.
2. Allowability of Enhanced Depreciation on UPS:
The assessee claimed higher depreciation on UPS, categorizing it as Energy Saving Equipment. The AO rejected this, allowing normal depreciation. The tribunal, following its decision in the assessee's case for A.Y. 2002-03, allowed the higher depreciation, considering UPS as an automatic voltage controller.
3. Disallowance of EDP Charges:
The AO disallowed EDP charges for computer software as capital expenditure, allowing depreciation instead. The tribunal restored the issue to the AO for fresh examination in light of the Special Bench decision in Amway India Enterprises Vs DCIT.
4. Claim of Depreciation in Relation to Software Expenses Disallowed Earlier:
The tribunal restored the issue to the AO for fresh decision, directing that if software expenses are capitalized, the assessee should be allowed depreciation as per rules.
5. Addition on Account of Unutilized MODVAT Credit:
The AO added unutilized MODVAT credit to the closing stock. The tribunal restored the issue to the AO for fresh consideration in light of the Delhi High Court's decision in CIT Vs Mahavir Aluminum Ltd.
6. Disallowance of Interest Under Section 36(1)(iii):
The AO disallowed interest on borrowings, noting interest-free and subsidized loans to a subsidiary. The tribunal restored the matter to the AO for fresh consideration, emphasizing the need to verify the source of funds and commercial expediency.
7. Disallowance of Expenditure Under Section 14A:
The assessee did not press this ground due to the small amount involved, and the tribunal dismissed the grounds as not pressed.
8. Disallowance of Leave Encashment Expenses:
The AO made an estimated disallowance of leave encashment expenses. The tribunal restored the issue to the AO for fresh examination, directing that only previously allowed payments should be disallowed.
9. Claim of Deduction Under Section 80HHC in Respect of DEPB Income:
The AO disallowed the deduction, noting non-fulfillment of conditions in the third proviso to section 80HHC(3). The tribunal, following the Mumbai High Court's decision in CIT Vs Kalpataru Colours & Chemicals, upheld the disallowance.
10. Levy of Interest Under Section 234D:
The tribunal directed the AO to re-compute interest at the time of giving effect to the order.
11. Deduction on Account of Legal and Professional Fees:
The tribunal allowed the claim of legal and professional fees for A.Y. 2003-04, noting that the liability crystallized in that year.
12. Disallowance of Contribution to Labour Welfare Fund:
The AO disallowed the contribution due to late realization. The tribunal, following its decision in the assessee's case for A.Y. 2002-03, allowed the claim, noting timely deposit.
13. Claim of Depreciation on Motor Cars at a Higher Rate:
The AO disallowed higher depreciation on motor cars. The tribunal, following its decision in the assessee's case for A.Y. 2002-03, allowed the higher rate, considering the cars as commercial vehicles.
14. Depreciation on Building:
The AO disallowed depreciation on a building not registered in the assessee's name. The tribunal, following its decision in the assessee's case for A.Y. 2002-03, allowed the claim, noting full possession and use by the assessee.
15. Disallowance of Cigarette Sampling Expenses:
The AO disallowed cigarette sampling expenses. The tribunal, following its decision in the assessee's case for A.Y. 2002-03, allowed the claim, noting that sample distribution is a normal business expense.
16. Nature of Income Earned from Interest and Rent:
The AO treated rental and interest income as income from other sources. The tribunal held rental income as business income but upheld the AO's decision on interest income, noting lack of business nexus.
17. Exclusion of Excise Duty from Total Turnover:
The AO included excise duty in total turnover. The tribunal, following the Supreme Court's decision in CIT Vs Laxmi Machine Works, excluded excise duty from total turnover.
18. Levy of Interest Under Section 234B and 234C:
The tribunal dismissed the cross objections regarding interest levy, directing the AO to recompute interest at the time of giving effect to the order.
Conclusion:
The cross appeals for both years were partly allowed, while the cross objection of the assessee was dismissed. The tribunal provided detailed directions for each issue, ensuring compliance with relevant judicial precedents and statutory provisions.