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TMI Blog2012 (6) TMI 286X X X X Extracts X X X X X X X X Extracts X X X X ..... omatically when other grounds taken up by the assessee are decided hereunder. 3. Ground no. 3 challenges the addition of Rs. 38,98,79,056/- made to the total income on account of determination of arm's length price of international transactions for import of finished goods. Following points have been mentioned in this regard: (i) Reimbursement of advertisement expenses amounting to Rs. 20,72,60,600/-, received from Associated Enterprises (AEs), has been excluded for computing operating-margin (OP) of the assessee in consumer electronic division; (ii) Notice-pay and penalty received from staff members have been excluded from the OP; (iii) Adjustment has not been allowed on account of difference in functions performed, risks undertaken and assets employed by the assessee and in the comparable cases; (iv) Adjustment of 5% has not been allowed from the mean value of the comparables; and (v) The TPO has not mentioned the sub-clause of section 92C(3), which has been invoked for determining arm's length price. 3.1 In the chart furnished by the assessee, it is submitted that the question whether reimbursement of advertisement expenses by AEs constituted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c realities of transaction, have not been brought on record. It is not material that other comparables have not entered into similar arrangements. Business necessity of entering into the agreement by the taxpayer has been fully explained. On facts, we are unable to disregard the assertion of the taxpayer that it would not have incurred such huge expenses on advertisement but for agreement of reimbursement. We do not see any good ground for not accepting this reimbursement as part of normal operating profit of the taxpayer. Accordingly, the revenue authorities are directed to include reimbursement as part of operating income of the taxpayer. We allow this ground of appeal." 3.2 The case of the ld. DR is that the assessee incurred the expenditure on advertisement in the course of its own business. The amount reimbursed by the AEs was gratis payment notwithstanding the fact that an agreement existed in respect of the reimbursement. Therefore, while the expenditure incurred was to be deducted in computing OP, the gratis receipt had no nexus with the business of the assessee. The assessee has debited the net amount to the profit and loss account. Looking to the aforesaid facts, such ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in such matters and what is required by law is reasonably accurate adjustment, which facts and circumstances permit. In past, the Tribunal has come to the conclusion that deduction by 20% is a reasonably accurate adjustment. We tend to agree with this view. Therefore, relying on the order of the Tribunal, this matter is also decided in favour of the assessee. 3.6 Then, there is the question of allowing 5% deduction from the arithmetic mean of the comparable cases. The case of the ld. counsel is that even if the assessee wins in respect of reimbursement of advertisement expenses, this issue will become of no consequence. We have already held that reimbursement of advertisement expenses is OP and, thus, decided the matter in favour of the assessee. In view thereof, this issue does not require any decision from us. 3.7 The result of the aforesaid discussion is that ground nos. 3 to 6 of the appeal are allowed, as indicated above. 4. Ground nos. 7, 8 and 9 are in respect of expenditure incurred by the assessee under the Voluntary Retirement Scheme (the VRS). It is mentioned that the CIT(A) erred in disallowing Rs. 6,70,49,994/- on account of amortization of expenditure incurred on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial plot No. 1, Urban Estate, Dharuhera, Haryana; (ii) all the employees of the factory at Dharuhera are eligible to apply under the scheme; and (iii) the employees who opt for the VRS are not eligible for retrenchment compensation. The provision contained in section 35DDA(1) regarding amortization of expenses incurred under Voluntary Retirement Scheme are -"Where an assessee incurs any expenditure in any previous year by way of payment of any sum to an employee in connection with his voluntary retirement, in accordance with any scheme or schemes of voluntary retirement, one-fifth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance shall be deducted in equal instalments for each of the four immediately succeeding previous years." The provision has been introduced in the Act by the Finance Act, 2001, with effect from 01.04.2001. In the explanatory notes, it has been mentioned that these payments are clearly in the nature of ex-gratia payments and are made over and above the regular terminal benefits like pension, gratuity, leave encashment etc. in respect of which normal provisions of the Act will apply. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Therefore, expenditure incurred in the course of the closure of business or transfer of business is not deductible u/s 37. Accordingly, the claim of one-fifth of the expenditure made by the assessee has been disallowed. 4.4 In the first appeal, it was submitted before the ld. CIT(A) that all the businesses of the assessee including the business conducted at Dharuhera unit constituted only one composite business. There was a common control and management which shows that there was unity of control. The director of Dharuhera unit used to report to Managing Director of the assessee-company. The assessee has common funds for this unit along with other trading units. It had same shareholders and the share capital. The funds were centrally monitored and the Managing Director as well as other directors in the company were authorized to sign and honour cheques/drafts etc. drawn even on the factory bank account. The annual accounts were common. The assessee has classified manufacturing and trading operations as one business. The TPO has also considered the results of manufacturing unit and trading units in a consolidated manner. Therefore, it was argued that the AO erred in not deductin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the expenditure has to be examined u/s 37(1) and not under section 35DDA. 6. We have considered the facts of the case and submissions made before us. On sifting the submissions of the ld. counsel, these can be summarized as under:- (i) the payments have been made under the VRS as held by the ld. CIT(Appeals), whose finding has become final as no appeal has been filed by the revenue; (ii) the ld. CIT (Appeals) unjustifiably reads the conditions of Rule 2BA in section 35DDA; and (iii) one-fifth of the expenditure is otherwise deductible in computing the income u/s 37(1) also in view of the existing jurisprudence in the matter. 6.1 As against the aforesaid, the submissions of the ld. DR can be summarized as under:- (i) section 35DDA and section 10(10C) deal with payment and receipt respectively in the hands of the employer and the employee and, therefore, the useful guidance can be taken from section 10(10C) and Rule 2BA for ascertaining whether the VRS of the assessee is as per intendment of section 35DDA; and (ii) the payment is in respect of closure of the business of Dharuhera unit, which is altogether a separate business and, therefore, no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This portion was deleted when the Bill was passed and, thus, the conditionalities of this rule have not been incorporated intentionally in the section. According to us, the deletion of conditionalities originally incorporated in the Bill shows that legislative intendment was not to incorporate all the conditions of section 10(10C) in section 35DDA. Finally, the legislature left the scheme of voluntary retirement open-ended and did not place any restriction on the scheme. Thus, plain language of the provision supports the case of the assessee. Further, it is not a case of taking guidance from a definition section. For sustaining the arguments of the ld. DR, the provision contained in section 35DDA will have to be modified by incorporating a part of section 10(10C) in it. In our view, such an incorporation does not find support from any rule of construction stated before us. Thus, there is no compelling reason to read section 35DDA as suggested by the ld. DR. Therefore, the scheme of the assessee is held to be a VRS, to which the aforesaid provision is applicable. 6.4 This brings us to the further question-whether, the deduction can be allowed u/s 37(1) of the Act? In this regard, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecisions of various High Courts, the order of the Tribunal was affirmed, which means that the entire amount paid under the VRS has been held to be revenue in nature to bring in line its decision with the decisions of various High Courts. 6.5 We may also discuss the decisions relied upon by the ld. DR. In the case of L.M. Chhabrda & Sons v. CIT [1967] 65 ITR 638 (SC), the facts are that the assessee had taken Prakash Talkies on lease for the purpose of carrying on the business of exhibiting cinematographic films. After the expiry of the lease, the landlord filed a suit for eviction and obtained a decree for possession of the theatre and for payment of mesne profit. The assessee claimed Rs. 92,240/- out of mesne profit as deduction in the proceedings of assessment year 1955-56. The ITO disallowed the claim on the ground that the assessee did not carry on the business in the relevant previous year. The AAC confirmed the order of the ITO on the ground that mesne profit paid was on account of wrongful use of the premises and, therefore, the payment is ex-gratia or capital payment. The Tribunal held that the assessee did not prove in any manner that it was carrying on an integrated cine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred though no actual payment was made. The Hon'ble Supreme Court reversed this finding. It was mentioned that for claiming a deduction or allowance, the expenditure must be for the purpose of carrying on the business. Even in mercantile system of accounting where the liability is, during the whole of the period that the business is carried on, wholly contingent and does not raise any definite obligation during the time that the business is carried on, it cannot fall within the expression "expenditure laid out or expanded wholly and exclusively" for the purpose of business. 6.6 In the case of S.P.V. Bank Ltd. v. CIT [1980] 126 ITR 773 /[1981] 5 Taxman 155 (Ker.), the facts are that the banking business of the assessee was taken over by another bank. The assessee was engaged only in realizing the outstandings relating to the discontinued business. The assessee incurred expenditure by way of interest payable to other banks. The Hon'ble Court held that the banking business had been discontinued and, therefore, the expenditure was not deductible, with a view to carry forward it as a loss. In the case of Binani Printers (P.) Ltd. v. CIT, [1983] 143 ITR 338/13 Taxman 215 (Cal.), the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eductions of two sums of Rs. 16,905/-and Rs. 10,444/- on account of repairs to the machinery and provision made for overtime wages to its workers respectively. The claim of the assessee was that the scope of section 37(1) is much wider for allowing any expenditure laid out or expanded wholly and exclusively for the purpose of business or profession. The Hon'ble Court pointed out that for claiming the deduction in respect of a business u/s 37(1), it has to be proved that the expenditure had some nexus with the business and it was carried on during the relevant previous year. The assessee carried on the business of sale of goods manufactured prior to its closing the unit in 1967. Therefore, the expenditure had no relevant nexus as contemplated under section 37(1) of the Act. Accordingly, the matter was decided in favour of the revenue and against the assessee. 6.7 We have considered this matter also. As will be evident from the decision in the case of L.M. Chhabda & Sons (supra), the answer to this question depends upon whether the manufacturing unit at Dharuhera is a separate and independent business or it is a part of the overall business of the assessee of manufacture, sale and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid to other banks was not the expenditure incurred in the course of carrying on the business. Therefore, the facts are distinguishable. In the case of Binani Printers (P.) Ltd. (supra), the Court had no occasion to go into the question whether it was a part of other businesses carried on by the assessee, yet it was held that the claims of Rs. 62,121/- and Rs. 10,233/-were not allowable as the liabilities pertained to the closed business. In the case of India Manufacturers (Madras) (P.) Ltd. (supra), the assessee was unable to justify that Rs. 7,500/- paid as retrenchment compensation were in respect of service department. However, the Hon'ble Court did mention that it had not been held as a matter of law that the various ventures formed part of a single business. In the case of Perfect Pottery Co. Ltd. (supra), the expenditure in respect of repairs of machinery etc. was incurred on the assets etc. of the closed business and, therefore, the Hon'ble Court held that the provision contained in section 37(1) is not so wide as to include within it the expenditure incurred for the business in respect of which the nexus has not been proved. Thus, it is held that the decision in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,07,000/- has been disallowed. 7.2 Before the ld. CIT(A), it was submitted that the expenditure was incurred in the course of the business for closing down its one unit, Dharuhera unit. The expenses were incurred for carrying out the restructuring exercise for conducting the business more efficiently and profitably. Various amounts were paid to the consultants in the course of settling the claims of the employees under the VRS. The expenses have also been incurred for providing assistance in handling media coverage on closure of the factory, obtaining medi-claim insurance for retired employees, contribution made to superannuation fund, security charges for additional security guard hired during the closure period and traveling etc. expenses of the consultants. These expenses are not in the capital field. Therefore, it was agitated that the expenses may be allowed in full. However, the ld. CIT (Appeals) mentioned that that the expenses were incurred for closing the manufacturing unit. These are in the nature of one time expenditure and the assessee has itself treated the VRS expenditure as capital in nature. The expenditure inured an enduring benefit by closing down the unviable u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal in the case of ITO v. Samiran Majumdar [2006] 98 ITD 119 (Kol.), the ld. DR relied on the orders of the lower authorities. As the coordinate bench has already taken a decision in the matter, relying on the same, the matter is decided in favour of the assessee and against the revenue. The AO is directed to allow depreciation on these items at the rate of sixty per cent. 9. Ground nos. 14 and 15 are in respect of depreciation on factory assets. It is mentioned that the ld. CIT(A) erred in upholding the disallowance of Rs. 4,42,22,475/-, made by the AO by denying depreciation on balance written down value of assets of the factory, which was closed down during the financial year 2004-05, and which was included in the total written down value of all block of assets of the assessee-company. It is further mentioned that he erred in holding that the depreciation on assets sold/transferred during the year was not admissible as the assets were no longer owned by the assessee and used by it in its business during the year. 9.1 In this connection, it is mentioned in the assessment order that the manufacturing activities in Dharuhera unit were closed down in July, 2004. Thereafte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of such reduction does not exceed the written down value as so increased. Therefore, it is argued that the depreciation has rightly been claimed. 10.1 In reply, the ld. DR submitted that Dharuhera unit was a separate manufacturing unit. The other units located elsewhere were producing softwares or trading in goods. The assessee decided to close down the Dharuhera unit, with the result that the building, and plant and machinery of this unit was no longer owned by the assessee in this year. The other units were not manufacturing units and, therefore, there was no block of factory building or machinery and plant. 11. We have considered the facts of the case and the submissions made before us. The facts of the case are that as per books, the assessee had free-hold land of the w.d.v. of Rs. 1,13,55,000/- pertaining to the Dharuhera unit, which was reduced from the block leading to nil value at the end of the year. No depreciation has been charged in the books. Further the assessee had building of the w.d.v. of about Rs. 12.00 crore which was also reduced to nil. In the case of machinery and plant, the opening value was about Rs. 55.81 crore, to which addition of Rs. 53.70 lakh was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of assets, which is sold, discarded, demolished or destroyed, during the previous year together with the amount of scrap value, if any. It has been held that unless and until the scrap value of the machinery, which has been discarded etc. is ascertained, the same cannot be reduced for the purpose of computing depreciation and, therefore, nothing can be reduced from the written down value of the block of assets. In the case of Nathani Steels Ltd. v. Dy. CIT, [1996] 57 ITD 584 (Bom.), the facts are that the assessee-company, engaged in the business of manufacturing marine containers, established a second unit and claimed depreciation on the buildings as well as machinery and plant installed therein. The AO disallowed the depreciation on the ground that the building, plant and machinery have not been used in the course of actual production, which started in November, 1991 only. The Tribunal did not allow deduction of depreciation in respect of the assets of the new unit by mentioning that the time lag between installation and actual production indicates that the machinery was not ready for use. The plant and machinery was not tested or subjected to trial run which further strengthens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the depreciation in the light of aforesaid observations. 11.3 In the case of Vinyl Chemicals (India) Ltd., v. Dy. CIT [2008] 25 SOT 235 (Mum.), the question was somewhat different regarding determination of the scrap value in respect of a discarded asset. The Tribunal was of the view that the monies payable in respect of discarded asset should be adjusted in the year of sale and not in the year of discarding when such value was not ascertainable. 11.4 In the case of Dineshkumar Gulabchand Agarwal v. CIT [2004] 267 ITR 768/141 Taxman 62 (Bom.), the Hon'ble Bombay High Court has held that after amendment in section 32, depreciation in respect of an asset could be allowed only if it has been actually used in the business. The SLP against this decision was dismissed by the Hon'ble Supreme Court as mentioned in (2004) 266 ITR 106 (St.). 11.5 Having considered the facts and the jurisprudence in the matter, it may be mentioned that neither the building nor the machinery or plant in Dharuhera unit were owned by the assessee or used by it on account of closure of the unit and transfer of the assets in this year. As held earlier, it has not been established by the assessee that the busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing ownership and user come into play. As the assessee is neither the owner of the assets nor the assets have been used in the business of the assessee, the assessee is not entitled to deduct depreciation. 11.6 Section 50 regarding "Special provision for computation of capital gain in case of depreciable assets" deals inter-alia with a situation where any block of assets ceases to exist for the reason that all the assets in the block have been transferred during the previous year. It is provided that income received or accruing as a result of such transfer shall be deemed to be the capital gains arising from the transfer of short-term capital asset. We are of the view that the case of the assessee falls within the ambit of this sub-section because the word "income" includes within its ambit the "loss" also. The AO is directed to hear the assessee in this matter and compute the loss as provided in section 50(2). 11.7 In the result, the ground is treated as partly allowed as discussed above. 12. Ground nos. 16, 17 and 18 are in respect of part-disallowance out of advertisement and sales promotion expenses. It is mentioned that the ld. CIT (Appeals) erred in disallowing 10% of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was dealing in cannot be disallowed as the expenses were incurred in the course of business of the assessee. It has been further held that since payments have been made to third parties, there is no question of making adjustments on account of transfer-pricing. 12.4 In this case, there is no allegation that any part of the expenditure relates to products in which the assessee is not dealing in the normal course of its business. The expenses by way of advertisement and sales promotion are revenue in nature. Further, if incurring of the expenditure leads to a benefit incidentally to any other person, that does not constitute sufficient ground for making part-disallowance. Further, no part of the expenditure can be said to be capital in nature. Therefore, the addition partly sustained by the ld. CIT (Appeals) is deleted. 12.5 In the result, these grounds are allowed. 13. Ground no. 19 is in respect of claim of deduction under sections 10A and 10B. It is mentioned that the claims were reduced by Rs. 1,68,970/- and Rs. 90,795/- respectively. The ld. counsel did not argue this ground by mentioning that in the earlier years similar ground stands covered by the order of the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. Ground nos. 1 to 12 are similar to ground nos. 1 to 6 in the appeal of the assessee for assessment year 2005-06 (supra). The only additional point is stated to be in respect of provision made by the assessee for import duty payable by it. The case of the ld. counsel is that there was a confusion about the rate of duty applicable on import of still camera, whether it is the same as the duty on video camera or not. The benefit of lower duty was explicitly extended in the immediately succeeding year. However, by way of an entry, a provision was created taking the rate to be higher and this provision was reversed in the immediately succeeding year as the benefit was extended in respect of still cameras also. Since it is merely a book entry, it was argued that the expenditure debited to profit and loss account by way of the provision should be excluded while working out operating ratio in the case of the assessee for comparison with arm's length transactions. The ld. DR fairly conceded that this is merely a book entry. Having considered these arguments, it is held that the provision should be excluded for working out the OP in the case of the assessee. In respect of other points the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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