TMI Blog2015 (12) TMI 302X X X X Extracts X X X X X X X X Extracts X X X X ..... ds direct expenses are concerned, the AO, has given a categorical finding which has not been rebutted before us, that Demat charges of ₹ 8,25,010/- were directly related to investment made in shares. Accordingly, so far as disallowance of ₹ 8,25,010/- on account of demat charges made by the AO, the same stands confirmed. Regarding balance disallowance, we find that 5% of the exempt income appears to be quite reasonable having regard to the nature of expenses and accounts of the assessee. Accordingly, we uphold the disallowance to the extent of ₹ 9,98,374/- which was made by the AO. - Decided partly in favour of assessee. Disallowance of professional fees paid to 'Majumdar and Co.' for registration of copy rights of designs and engines - revenue v/s capital expenditure - Held that:- It is an undisputed fact that payment has been made for getting the engine designs patented, which the assessee produces/manufactures. Such a copyright and patent will only go to enhance the cost of such an intangible asset and accordingly, it has been rightly disallowed as capital expenditure by the Ld. AO and CIT(A). However, we agree with the alternate contention of the Ld. Counse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of R & D expenses - Held that:- assessee has taken a plea that it had incurred expenditure on research and development for developing a world class multipurpose engine for which it has embarked on "Avatar Project", which got completed in AY 2007-08 and sample products were also tested. Since AO and CIT(A) have solely gone by the fact that that in the tax audit the amount under R & D has not been qualified therefore, in the interest of justice, we are of the opinion that this matter should go back to the file of the AO to verify the details of expenses incurred by the assessee and if the same are for R&D purpose, as claimed by the assessee, then the same should be allowed as deduction u/s 35(1)(iv).- Decided in favour of assessee for statistical purposes. Addition on account of unutilized CENVAT credit - Held that:- CIT(A) has rightly directed the AO to make corresponding adjustment of CENVAT credit in the opening stock. However, the Ld. CIT(A) has not referred to purchases made during the year as similar treatment has to be given for the purchases also. Accordingly, we direct the AO to give effect of adjustment in the purchases made during the year and work out the relief.- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of such additional evidences which are in the form of lease agreement dated 06.11.2003 and sale agreement dated 30th June 2004, both pertaining to RPRL Unit which was available on the date of the Balance Sheet for the relevant previous year. These additional evidence go to the very root of the issue involved and therefore, we are of the opinion that same should be admitted and this entire matter should be restored back to the file of the AO to examine these additional evidence and decide this issue afresh and in accordance with the provisions of the law.- Decided in favour of assessee for statistical purposes. Addition on account of revaluation of reserve made in the book profits - Held that:- Depreciation of ₹ 16,10,62,604/- has been reduced by the amount transferred from revaluation reserve and only the net depreciation has been debited i.e. ₹ 6,80,317/- and accordingly, this net depreciation which has been transferred and reduced from revaluation reserve credited to the P&L account, ought to be excluded. Accordingly, AO is directed to reduce the net amount of ₹ 6,80,317/- on account of depreciation from the book profit in view of Explanation (i) to section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epreciation has been claimed if it is treated as capital expenditure 1,13,350/- 3 C Disallowance on account of contribution to employees contribution to Provident Fund 1,73,543/- 4 D Disallowance of following payments : 1) Charges towards late payment fee to Chennai Municipal Corporation ₹ 9,650/- 2) Sales tax charged due to technical error and Stating destination of as Indore even though Consignee's name and address were correctly Written on consignment ₹ 1,22,887/- 3) Compliance fee per Weights and Measurement Rules ₹ 32,000/- 4) Amount paid to High Court in pursuance of High Court order on company's stay petition in respect Of appeal to HC ₹ 10,00,000/- 11,65,749/- 5 E Disallowance of R D expenses 6,48,912/- 6 F Addition on account of unutilized Cenvat credit 1,44,14,614/- 7 G Addition on account o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wite Crucible Ltd., which was purchased long time back out of assessee's own funds. Similarly, the investment in UTI Bonds and Kokan Railway Bonds were also made from assessee's own funds. Hence, no expenditure can be said to have been incurred or can be attributed for the purpose of making these investments, especially no interest expenditure can be disallowed. The AO noted that similar submissions were made by the assessee during the course of assessment proceedings for the AYs 2001-02, 2002-03 2003-04, wherein 5% of the exempt income was treated as expenditure disallowable u/s 14A and accordingly, he made the disallowance of ₹ 1,73,364/- being 5% of the total exempt income of ₹ 34,67,285/- Besides this, he further made the disallowance of Demat charges of ₹ 8,25,010/- debited under the head other sundry expenses which was a direct expenditure. Accordingly, aggregate disallowance of ₹ 9,98,374/- was made. 5. In the first appellate proceedings, Ld. CIT(A) held that the assessee's contention that no disallowance is called for cannot be accepted. Although he held that Rule 8D is not applicable, however, he proposed to make the disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y case, now this issue stands covered by decision of jurisdictional High Court in the case of CIT vs HDFC Bank, 366 ITR 505 and Delhi High Court in the case of Taikisha Engineering, 370 ITR 338. 8. On the other hand, Ld. CIT DR, submitted that the Ld. CIT(A) has only tried to work out a reasonable basis for disallowance for which he has taken a same clue from formula laid down in Rule 8D. It is the onus of the assessee to prove the nexus between the investment made and interest free funds and also the expenditures debited in the P L Account. In support of his contention he relied upon the decision of Delhi High Court in the case of Maxbopp Investments, 347 ITR 272 and drew our specific attention to para 24 25 of the judgment. 9. We have considered the rival contentions and also perused the relevant finding given in the impugned order as well as material referred to before us. The Ld. CIT(A) has enhanced the disallowance u/s 14A to ₹ 3,25,89,130/- as against the disallowance made by the AO at ₹ 9,98,374/-.The formula adopted by the Ld. CIT(A) for making the disallowance u/s 14A is quite akin to formula laid down in Rule 8D which admittedly cannot be held to be ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been made for getting the engine designs patented, which the assessee produces/manufactures. Such a copyright and patent will only go to enhance the cost of such an intangible asset and accordingly, it has been rightly disallowed as capital expenditure by the Ld. AO and CIT(A). However, we agree with the alternate contention of the Ld. Counsel that if it is treated as capital expenditure for a capital asset then, depreciation has to be allowed on such an intangible asset, which specifically finds mention in section 32(1)(ii). Accordingly, we direct the AO to allow depreciation as per relevant rules provisions on such a capital expenditure. Accordingly, ground no. B is treated as partly allowed. 14. As regards ground no. C relating to addition on account of contribution to employees welfare fund of ₹ 1,73,543/-. It has been admitted by the Ld. Counsel that this issue has been decided against the assessee by the Tribunal in AY 2003-04. On perusal of the Tribunal order for the AY 2003-04. We find that this issue has been dealt in detail by the Tribunal in the following manner : 10. The issue raised in ground No.4 of the assessee's appeal relates to the disallowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned CIT(Appeals), however, did not find merit in these contentions of the assessee. According to him, all the contributions having been made by the assessee to non statutory funds, the same were not eligible for deduction in view of the express provisions contained in section 40A(9). 12. We have heard the arguments of both the sides on this issue and also perused the relevant material on record. The learned counsel for the assessee has reiterated before us the submissions made before he learned CIT(Appeals) to the effect that most of the contributions having been made by the assessee as per the settlement arrived at with the workers' union, the same are covered by the Industrial Dispute Act, 1947 and provisions of section 40A(9) of the Act cannot be invoked. However, she has not been able to produce any evidence in the form of the copy of agreement with the workers' union to support and substantiate her stand taken on this issue and in the absence of the same, we find no justifiable reason to interfere with the impugned order of the learned CIT(Appeals) confirming the disallowance made by the AO on this issue by invoking the provisions of section 40A(9). Ground No. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est for the delayed statutory payment and also penalty. Accordingly, such payments cannot be compensatory in nature but in the nature of infraction of law. 17. After considering the submissions made by the parties and also the relevant findings given in the impugned orders, we find that so far as late payment of fee to Chennai Municipal Corporation is concerned it is on account of late payment of Health License, it is not for any kind of penalty or infraction of law. Accordingly, the payment made to Chennai Municipal Corporation is treated as business expenditure. As regards the payment on account of sales tax, it was due to technical error wherein assessee has stated that the destination of consignee as Indore despite the fact that name of consignee, destination and address were correctly written. This again cannot held to be in the nature of penalty or infraction of law. Next, amount of charges of ₹ 32,000/- for compliance of Weights and Measures is not for any violation which can be suggestive of any infringement of law, hence it cannot be held to be punitive in nature and accordingly, the same is held to be allowable. Lastly, as regard the amount paid to the High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors to not mention any amount which is otherwise qualified for deduction under section 35 of the act. The job of the auditors is to examine the facts of the case and given appropriate certificate and qualifications where ever required. The very fact that the auditors have mentioned NIL against the deduction allowable u/s 35 of the act, would mean that there is no such amount in the books of accounts of the appellant. Further but for submission as above, the appellant has not submitted details of capital expenses incurred by it, which would qualify for deduction under section 35 of the Act. Further the appellant has not even furnished any clarification from their auditors to this effect that they mentioned NIL against deduction u/s 35 for the reason that the appellant kept on hold the project due to huge losses incurred by the Appellant in earlier three years. Taking into consideration all the facts of the case, the action of the AO is considered justified and his action is upheld. Accordingly this ground of appeal is dismissed . 21. After considering the rival submissions and on perusal of the impugned orders, it is seen that assessee has taken a plea that it had incurred exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 145A has to be given and purchases made during the year should also be given effect to. 25. After going through the relevant finding given in the impugned order, we find that the Ld. CIT(A) has rightly directed the AO to make corresponding adjustment of CENVAT credit in the opening stock also in accordance with the decision of jurisdictional High Court. However, the Ld. CIT(A) has not referred to purchases made during the year as similar treatment has to be given for the purchases also. Accordingly, we direct the AO to give effect of adjustment in the purchases made during the year and work out the relief. Thus ground no. F is treated as partly allowed for statistical purposes. 26. As regards, the issue in ground G with regard to the interest waiver of CIT(A) ₹ 10,14,94,385/-, the addition has been made by the AO on the ground that CBDT has not any issued certificate till date on waiver application filed by the assessee u/s 41(1) as per the order of the BIFR. The assessee has shown an amount of ₹ 10,14,94,385/- on account of interest waived by the bank as taxable, however, in the loss shown in the return, the said amount was not reduced. The reason being, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,53,73,530 65.46 Less: Indigenous cost (Local transactions) 11,24,62,164 59.02 8,54,09,950 53.69 Total Gross Profit 1,00,61,573 5.28 1,89,63,574 11.78 The gross margin of external comparables i.e. L T Ltd., at 7.42% and Ingersoll India Rand Ltd. was 6.6%. Hence it was stated that, the assessee's gross margin was much better and accordingly, it was submitted that the margin of import with AE was at arm's length price. 31. However, the Ld. TPO observed that assessee is showing its transfer pricing result by adopting TNMM to justify the margins. He also rejected the external comparables selected by the assessee. He further observed that since assessee is carrying out transaction with 2 AEs, therefore, there is an internal comparability and if internal RPM is applied and gross margin of BOMAG GmbH, Germany which was at 11.7% and transaction with SIFA Spa, Italy, which was 5.28% is applied to benchmark the assessee's margin, then it can be seen th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons with the AE cannot be compared, because both are controlled transactions and any comparability for benchmarking arm's length price has to be done by uncontrolled transactions. Thus, she submitted that entire determination of arm's length price submitted by the AO is erroneous. She further submitted that external comparables, as submitted by the assessee should be adopted and in case of L T, the same has held to be a good comparable in the earlier year, which has been upheld by the Tribunal also, therefore, TPO should be directed to accept the assessee's external comparables. 34. On the other hand Ld. DR, argued that it is not in dispute that Resale Price Method (RPM) should be adopted and PLI should be the gross margin. If there are no internal comparables having uncontrolled transactions then matter should be restored back to the file of the TPO for carrying out fresh comparability analysis by selecting external comparables, to benchmark the gross margins. 35. We have considered the rival submissions also perused relevant finding in the impugned orders. The transfer pricing adjustment has been made in relation to the import of spare part and equipments made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest of justice, we are of the opinion this matter should be restored back to the file of the TPO/AO for examining the three external comparables and complete gross profit margin for benchmarking the assessee's gross profit margin in the import transaction carried out by the assessee with its AE. Accordingly, ground no. H is treated as partly allowed for statistical purposes. 36. In ground no. I, the assessee has challenged carried forward losses and unabsorbed depreciation. 37. At the time of hearing, the Ld. Counsel submitted that this is a general ground and hence same is not pressed. Accordingly, ground I is not adjudicated upon. 38. In ground no. J, the assessee has challenged the computation of long-term-capital-gain on sale of flat held for more than 3 years. 39. Brief facts are that, the assessee has sold residential flats which were acquired prior to 5 years. As per the depreciation statement in the block of assets, residential building was shown at nil . Accordingly, the Assessing Officer treated gain on sale of these flats as short-term-capital-gain u/s 50. The assessee's case before the authorities below was that since these flats were held for more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act such as section 54EC the capital gain has to be treated as long term capital gain, if the asset is held for more than three years. The same view has been taken by the Mumbai bench of Tribunal in case of Manali Investments Vs. Assistant Commissioner of Income Tax (139 TTJ 411) in which it has been held that the prescriptions of section 50 are to be extended only to the stage of computation of capital gain and, therefore, capital gain resulting from transfer of depreciable asset which was held for more than three years would retain the character of long term capital gain for the purpose of all other provisions of the Act. In this case the Ld. AR for the assessee submitted that flat had been held for 15 to 20 years which is supported by the fact that cost of the flat as shown in the balance sheet was only ₹ 1,30,000/-. Therefore, if the flat is held for than three years the tax rate has to be applied as provided in section 112 of the IT Act applicable in respect of capital gain from transfer of long term capital asset. 2.6 We, therefore, held that, for the purpose of computation of capital gain, the flat has to be treated a short term capital gain u/s 50 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the principal and Interest Waived for earlier years amounting to ₹ 20,24,65,688/- is written back and disclosed in the accounts. Extraordinary item(Pg 40 of the audited accounts Rs.32,47,54,786/- The assessee's case had been that, it has not sold PPRL Unit in AY 2004-05 and instead of estimating sale value of ₹ 11 crores and provided estimated loss of ₹ 37,89,80,137/-. Further the assessee has sold RPRL unit in 2005-06 and not in AY 2004-05. The assessee's clarification in this regard has been incorporated by the CIT(A) from pages 57 to 59 of the appellate order. However, the Ld. CIT(A) rejected the assessee's contention after observing and holding as under :- In the facts of the case, the appellant only acquired permission from the shareholders without any concrete proposals to sell the RPRL Unit and estimated the sale value of the undertaking at ₹ 11 crores and provided estimated loss of ₹ 37.90 crores and disclosed the same as extraordinary item. The appellant has made such provisions for losses based on the Valuation Report of approved valuer M.C. Dalal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et aside as provision for diminution in value of any assets is required to be added to the profit as shown in the Profit Loss Account to arrive at the book profit as per clause 'i' of Explanation 1 of Section 115JB(2). Accordingly, such provisions created for diminution in the value of investment in RPRL unit including Goodwill is considered as unascertained liability in the shape of the reserve created and accordingly it is held that the clause 'c' / 'I' of Explanation 1 of Sec 115JB(2) are clearly applicable to the facts of the case and the action of the AO in this regard is therefore upheld. Consequently this sub round of appeal raised by the appellant is dismissed . 45. The assessee before us has now filed a computation of paper book containing additional and petition for admission of such additional evidences which are in the form of lease agreement dated 06.11.2003 and sale agreement dated 30th June 2004, both pertaining to RPRL Unit which was available on the date of the Balance Sheet for the relevant previous year. These additional evidence go to the very root of the issue involved and therefore, we are of the opinion that same should be admitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C. The assessee's case was that as per provisions of section 115JB, there is a book profit and therefore, the deduction for the purpose of eligible profit u/s 80HHC is to be worked out based on such book profit deducted as per explanation (iv) to section 115JB(2). However, the Ld. CIT(A) dismissed the assessee's contention on the following ground :- I have considered the facts of the case, submission of the appellant as against the observation / findings of the AO in his order passed u/s 143(3) of the I.T. Act. In respect to the submission of the appellant, it is stated that there is no doubt that the deduction of eligible profit u/s 80HHC is to be given from the book profit computed in accordance with the Sec. 115JB of the I.T. Act, 1961. However neither in the Circular No. 680 dated 21.02.1994 of the CBDT not in the decision of Hon'ble Supreme Court in the case of Ajanta Pharma Ltd. vs CIT (2010) 327 ITR 305 (SC), it is mentioned that for the purposes, the eligible profit u/s 80HHC is to be worked out based on the book profit as computed in accordance with the Sec 115JB of the Act. The AO's stand that the profits and gains of the business of the appellant is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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