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DCIT, Circle 11 (1) , New Delhi Versus M/s. Eicher Motors Ltd. and Vica-Versa

2016 (1) TMI 1076 - ITAT DELHI

Addition under section 35(2AB) - CIT(A) deleted the addition - Held that:- When the Assessing Officer has specifically not denied that the amount has been spent for R&D and has failed to appreciate the documentary evidence brought on record, the deduction should not have been disallowed by deciding the issue summarily. More so, assessee has brought on record details of revenue and capital expenditure incurred on R&D during the previous year relevant to the year under assessment, which has been d .....

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and capital expenditure incurred on R&D during the relevant period and report of tax auditors certifying the amount of R&D expenditure rather proceeded to delete the addition by allowing deduction u/s 35(2AB) of the Act. Even the Assessing Officer has himself admitted that the assessee has approved R&D centre to carry out the R&D activities. So, we are of the view that the matter is required to be restored to the Assessing Officer to decide afresh after providing opportunity or being heard to th .....

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sing Officer. Ld. CIT(A) has not preferred to call for any remand report directing the Assessing Officer to record his satisfaction and cogent reasons before invoking the provisions contained u/s 14A read with Rule 8D of I. T Rules. So, we are of the considered view that the matter is required to be restored to the file of Ld. CIT(A) to decide afresh after providing opportunity of being heard to the parties.

Ascertained liability as allowable expenditure u/s 37( 1) - Held that:- The e .....

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ty as allowable expenditure u/s 3 7( 1) of the Act. - Decided in favour of the assessee

Non compete fee receipt - long term capital gain or business income - Held that:- Cursory look at the operative clauses of the agreement entered into between the assessee and AB Volvo and VECE apparently proved that there was a negative/restrictive covenant between the assessee company and M/s. AB Volvo that assessee company shall not carry out and be engaged and carry the interest in development/ .....

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the considered view that the amount of ₹ 39,35,00,000/- received by the assessee company as non compete fee, is a component attributable in a negative / restrictive covenant and as such, is a capital receipt as has been held by Ld. CIT(A) vide impugned order. So, finding no illegality or perversity in the findings of Ld. CIT(A) - Decided against the Revenue. - I.T.A. No. 2561 /Del/20 13, I.T.A. No. 2386/Del/20 13 - Dated:- 4-1-2016 - SHRI N. K. SAINI, ACCOUNTANT MEMBER AND SHRI KULDIP SIN .....

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eIl2013: The appellant, DCIT, Circle 11 (1), New Delhi (hereinafter referred as 'the Revenue') by filing the present appeal sought to set aside the impugned order dated 27.02.2013 passed by Ld. CIT(A) XIII, New Delhi qua the assessment year 2009-10 on the grounds inter alia that: "1. On the facts and circumstance of the case and in law, the Ld. CIT(A) has erred in deleting the addition of ₹ 6,52. 42, 288/- made under section 35(2AB) of income Tax Act. 2. On the facts and circu .....

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compete fee treating it as business income. " 3. I.T.A. No. 2386/De1/2013: The appellant, M/s. Eicher Motors Ltd., (hereinafter referred as 'the assessee'), by filing the present appeal, sought to set aside the impugned order dated 27.02.20l3 passed by Ld. CIT(A) XIII, New Delhi qua the assessment year 2009-10 on the ground that: "That the learned Commissioner of Income Tax (A)-XIII. New Delhi has grossly erred on facts and in law in confirming the disallowance of notional admi .....

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ase was also discussed with him. The assessee company is engaged in the business of manufacturing and sale of commercial vehicles components including gears, motorcycles and motorcycles spares etc. During the assessment proceedings, it has come on record that the assessee has paid an amount of ₹ 1,13,00,000/- to group concern as service charges, hence, it was called upon to explain the actual nature of expenses, nature of services being rendered by group concern, basis of determination of .....

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market value of the goods and services/ facilities etc. In this case also, the assessee has failed to substantiate its working as to how the expenses under different heads like Finance and Accounts, Taxation and Payroll, administration, building rent and maintenance, information technology, internal audit and senior management, have been apportioned between VECV (group concern) and the assessee. 5. In some heads, 10% expenses allocated to Assessee Company and in some other heads, it went up to 7 .....

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d that the assessee has claimed deduction of ₹ 8,92, 70,1021- on account or research and development expenditure u/s 35/35(2AB) @ 150% of the total expenses claimed to be incurred under nomenclature weighted deduction. On inquiry, the assessee submitted the details of expenses and the Assessing Officer after considering applicability of Section 35 I 35(2AB), disallowed the deduction of ₹ 6,52,42,288/- for lack of supporting evidence and consequently, made an addition of ₹ 6,52, .....

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while treating the receipt of non compete fee as business receipt. The assessee filed comprehensive reply. While considering the issue of non compete fee received for an amount of ₹ 39,35,00,000/- from AB Volvo as capital receipt in view of the proviso (1) to Section 28(va) of the Act, it is found that the assessee has tried to cover its case under the proviso (I) to Section 28(va) of the Act. However, the aforesaid proviso is not applicable in the case of the assessee as this case falls u .....

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ng the Assessment Year under consideration, the assessee claimed to have earned dividend income of ₹ 6,39,00,000/-. On calling upon the assessee to explain as to why expenses attributable to in earning of dividend income, should not be disallowed u/s 14A of the Income tax Act, 1961 and furnish the working of disallowance in view of Rule 80 of the I T Rules, assessee submitted that neither interest nor any administrative expenses relate to earning of dividend and as such disallowance u/s 14 .....

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on of Rs.l.57 crores should not be disallowed being not an ascertained liability. The assessee filed comprehensive submissions dated 09.09.201 I. The Assessing Officer considered the same and came to the conclusion that assessee has failed to furnish scientific basis for making such a provision but has made the same purely on estimate basis and as such, is not an ascertained liability. So, the amount of provision for warranty in excess of actual warranty, came to an amount of ₹ 0.40 crores .....

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l/2013: Ground No.1: Whether, "on the facts and circumstance of the case and in law, the Ld. CIT(A) has erred in deleting the addition of ₹ 6,52,42,2881- made under section 35(2AB) of Income Tax Act. Ld. D.R. challenging the impugned order contended that since the assessee has failed to bring on record as to which new variants for domestic market have been introduced, the Assessing Officer has rightly made the addition by invoking the provisions contained u/s 3 S(2AB) of the Act. 14. .....

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ful thought. Section 35(2AB) provides for a weighted deduction in respect of expenditure on in house research and development facility subject to the following: 1) The tax payer is a company. 2) It is engaged in the business of bio technology or in the business of manufacture or production of any drugs, pharmaceuticals, electronics equipments, chemicals or any other article or thing notified by the Board i.e. manufacture or production of helicopter or aircraft or computer software or automobile .....

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ed as deduction. Here, it is pertinent to mention that all the above conditions are to be satisfied in totality. During the year as per assessee's own submission. research and development has been carried out in its three R&D centre in the following manner:- Sr. No. Title and scope of R&D Project Name of Project leader Year in which started Remarks 1 Bullet Electra Twinspark S.M. Hameed 2009 New variant of bullet with UCE Twinspark 2 Bullet 350 Twinspark -do- 2009 -do- 3 Classic Chro .....

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t been able to specifically prove as to which New variants and as to how these are new variants for domestic market. The proposed objectives of scientific research contemplated by the assessee are the following:- (i) Environment related - To bring down the noise level, intake and exhaust system are redesigned. To reduce environmental pollution on account of unburnt gases. (ii) Safety related - To prevent starting of vehicles when side stand is 'ON', LED brake lamps etc. (iii) Customer re .....

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esearch, as it is not supported by any documentary evidence, accordingly not eligible for weighted deduction. The intention of law, in giving weighted deduction to companies is to encourage the research and development in specified areas so as to discourage import of R & D and related technology which may help the country in becoming self-reliant in these fields. To avail this deduction/benefit, assessee has to prove beyond doubt the fulfillment of all conditions with supporting evidences. T .....

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on of ₹ 6,52,42,288/- is being disallowed and added to the income of the assessee. f am satisfied that assessee has furnished inaccurate particulars of income. Penalty u/s 271(l)(c) initiated. 16. During appeal before Ld. CIT(A), the issue raised in ground No. 1has been discussed in para 6.2 page 22 of the impugned order and decided that capital of revenue expenditure incurred by the appellant as claimed, were for in house R&D activities for its centre at Pithapur and Chennai which hav .....

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le ground that the assessee has not been able to specifically prove as to which new variant and as to how these are new variant for domestic market has been developed. When the Assessing Officer has specifically not denied that the amount has been spent for R&D and has failed to appreciate the documentary evidence brought on record, the deduction should not have been disallowed by deciding the issue summarily. More so, assessee has brought on record details of revenue and capital expenditure .....

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call upon any remand report from the Assessing Officer regarding his opinion that details of revenue and capital expenditure incurred on R&D during the relevant period and report of tax auditors certifying the amount of R&D expenditure rather proceeded to delete the addition by allowing deduction u/s 35(2AB) of the Act. Even the Assessing Officer has himself admitted that the assessee has approved R&D centre to carry out the R&D activities. So, we are of the view that the matter .....

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e 80 of Income Tax Rules. 1962. Bare perusal contained in Section 14A goes to prove that Section 14A is applicable only when the Assessing Officer at the outset has returned the finding that the assessee has actually incurred expenses which have proximate nexus with the earning of exempt dividend income and not otherwise. So, the onus is on the Assessing Officer to find proximate/ distinct nexus of the expenses with the earning of exempt income before rejecting the claim of the assessee and comp .....

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f the Act. Ld. A.R. relied upon the judgement cited as CIT Vs Hero Cycles Ltd. 323 ITR 518 (P&H) and CIT Vs Gujarat State Fertilizers and Chemicals Ltd., 358 ITR 323 (Guj.). 22. Admittedly, assessee company has received dividend income of ₹ 6.39 crores from the investment made in various mutual funds, foreign companies, exempt u/s 10(34) of the Act. The Assessing Officer by applying provision contained u/s 14A of the Act read with Rule 80, has disallowed Rs. l ,02,73,361/- as expenses .....

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has not returned findings that as to whether the expenditure incurred are actual expenditure and not imagined expenditure. 24. Hon'ble Punjab & Haryana High Court in case cited as CIT Vs Hero Cycles Ltd., 323 ITR 518 held that disallowance u/s 14A requires finding of incurring the expenditure and where, it was found that for earning exempt income, no expenditure had been incurred, disallowance u/s 14A could not stand. Operative part of the judgement in case of Hero Cycles Ltd. (supra) i .....

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sing Officer made an inquiry whether any expenditure was incurred for earning this income and as a result of the inquiry made addition by way of disallowance under section 14A(3), which w partly upheld by the CIT(A). The Tribunal held that there was no nexus between the expenditure incurred and the income generated. Therefore, it held that merely because of the assessee had incurred interest expenditure on funds borrowed in the main unit it would not ipso facto invite the disallowance under sect .....

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nditure was incurred which was to be disallowed, was a question of/act. The contention of the Revenue that directly or indirectly some expenditure 3was always incurred which must be disallowed under section 14A and the impact of expenditure so incurred could not be allowed to be set off against the business income which may nullify the mandate of section 14A, could not be accepted. Disallowance under sect ion 14A required finding of incurring of expenditure where it was found that for earning ex .....

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re in the absence of rule 8D of the Income tax Rules, 1962, on the basis of a reasonable and acceptable method of apportionment. " 26. Hon'ble Supreme Court in the case cited as CIT Vs Wallfort Share and Stock Brokers 326 ITR 01 has held that there must be proximate relationship of expenditure with the exempt income for the purpose of making disallowance claimed u/s 14A of the Act. 27. Hon'ble Jurisdictional High Court in the judgement cited as Maxopp Investment Ltd. Vs CIT, 347 ITR .....

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aw laid down by Hon'ble Supreme Court and Hon'ble High Court referred to above, the question arises for determination in this case is, 'as to whether the Assessing Officer has satisfied himself before invoking the provisions contained u/s 14A read with Rule 8D of I T Rules that assessee has incurred expenses having proximate nexus with earning or exempt dividend income and that Assessing Officer has rejected the claim of assessee having not incurred any expenditure in relation to ear .....

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; 1,02,73,361/- made by the Assessing Officer. Ld. CIT(A) has not preferred to call for any remand report directing the Assessing Officer to record his satisfaction and cogent reasons before invoking the provisions contained u/s 14A read with Rule 8D of I. T Rules. So, we are of the considered view that the matter is required to be restored to the file of Ld. CIT(A) to decide afresh after providing opportunity of being heard to the parties. Consequently, ground No.2 of the appeal No.2561/del/101 .....

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s, has been furnished and that the provisions has been made purely on the basis of estimation and as such, is not ascertained liability. 31. Undisputedly, assessee is engaged in the business of manufacturing and sale of commercial vehicles, tractors, two wheelers and gears. Ld. A.R. contended that various products of the company are sold along with warranty and assessee is under obligation to replace any component bearing manufacturing defect free of cost and at the end of the relevant previous .....

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. A.R. also relied upon the decision delivered by Income tax Appellate Tribunal Delhi Bench 'B', New Delhi in assessee's own case entitled DCIT Vs M/s. Eicher Motors Ltd. in I.T.A. No. 3560/Del12008 order dated 18.09.2009. Ld. A.R. also relied upon the judgment of Hon'ble Supreme Court in the case entitled Rotork Controls India Pvt. Ltd. Vs CIT, 314 ITR 62 (S.C.). The ratio of judgment (supra) is that estimated provisions for warranty are allowable for deduction. Operative part o .....

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the warranty stood attached to the sale price of the product. In this case, the warranty provisions had to be recognized because the assessee had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of obligation. Therefore, the assessee had incurred a liability during the assessment year which was entitled to deduction under section 37 of the Income tax Act, 1961. The present value of a contingent liability, lik .....

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ty which can be measured only by using a substantial degree of estimation. A provision is recognized when: (a) an enterprise has a present obligation as a result of a past event: (h) it is probable that an outflow of resources will be required to settle the obligation, and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized. The principle is that if the historical trend indicates that a large number of sophisticated .....

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mated the provisions for warranty on the basis of past history. The estimate of warranty made by the assessee on the basis of past history cannot be treated as a provision for any ascertained liability and allowed the provision for warranty as deduction. Following the law laid down by Hon'ble Supreme Court in the judgement (supra), decision of coordinate bench in the assessee's own case, we find that there is no infirmity or perversity in the findings returned by Ld. CIT(A) in allowing t .....

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essee and the same has been offered to tax under the head 'long term capital gain'. The Assessing Officer made an addition of ₹ 39,35,00,000/- on the ground that the assessee's case falls under clause (b) of Section 28(va) which is termed as license and in similar nature. Hence, proviso to clause (a) to Section 28(va) is not applicable. Relevant portion or the assessment order passed by Assessing Officer is reproduced as under: "I have considered the submission of the asse .....

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any activity in relation to any business; or Provided that sub clause (a) shall not apply to- (i) Any sum, whether received or receivable in cash or kind, on account of transfer of the right to manufacture, produce or process any article or thing or right to carryon any business which is chargeable under the head "Capital Gains ": The above proviso is applicable only in cases where clause (a) is applicable, however the said proviso is not applicable in those cases which fall under cla .....

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applicable and automatically proviso (I) to section 28 (va) would have become operational. But here in instant case, the assessee has received the amount of ₹ 39,35, 00, 000/- on account of transfer of business of commercial rights in the nature of license as inaugurated in clause (b) to section 28 (va) of the IT Act. The assessee has further tried to include the transaction in clause (a) so that the assessee may avail the benefit of proviso (1) mainly to reduce the tax liability under the .....

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ffirmed with lord Halsbory one Lord Symonds means the subject is not to be taxed without clew' words for that purpose and also that every act of parliament must he read according to the natural construction of its words. In a classic passage, Lord Cairns stated the principle thus. if the person sought to be taxed comes within the latter of the law he must be taxed however great the hardship may appear in the judicial mind to be. On the other hand, if the crown seeking to recover the tax cann .....

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thing is to be implied. One can only look fairly at the language read. " 35. Now, the question arises for determination in this case is, as to whether the non compete fee of ₹ 39,35, 00, 0001- received by the assessee company from A B Volvo is taxable under the head 'capital gain' or not u/s 28BA". The Assessing Officer relied upon the judgement cited as CIT Vs Kasturi & Sons, 237 ITR 24 wherein Hon'ble Supreme Court has held that the principle that has been taken .....

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agreement for- (a) Not carrying out any activity in relation to any business: or Provided that sub clause (a) shall not apply to- (i) Any sum, whether received or receivable in cash or kind. on account of transfer of the right to manufacture produce or process any article or thing or right to carryon any business, which is chargeable under the head "Capital Gains '': 36. Bare perusal of clause (a) of Section 28(va) goes to prove that any amount, the amount ofRs.39,35,00,000/- recei .....

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ee pursuant to non competition agreement entered into by the assessee with other company, is to be treated as capital receipt and not revenue receipt '. The Hon'ble Supreme Court decided the issue in para 5and 6 of the judgement which are reproduced as under: "Decision: 5. The position in law is clear and well sell led. There is a dichotomy between receipt of compensation by an assessee for the loss of agency and receipt of compensation attributable to the negative/restrictive coven .....

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and distributors on behalf of foreign principals and bought and sold on its own account. Under an agreement which was terminable at will the assessee acted as a sole agent of explosives manufactured by Imperial Chemical Industries (Export) Ltd. That agency was terminated and by way of compensation the Imperial Chemical Industries (Export) Ltd., paid for fist three years after the termination of the agency two fifths of the commission accrued on its sales in the territory of the agency of the ap .....

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and had acquired considerable knowledge and expertise in the field of commercial vehicle business. The assessee company entered into an agreement with MIs. A B Volvo to transfer its exclusive right to conduct commercial vehicles business in favour of M/s. AB Volvo. Operative part of the agreement dated 26.05.2008 is reproduced as under for facility of reference: "Further, clause 3. I and 3.1.1 is reproduced as under: 3.1 In consideration of this Agreement including the payment of the consid .....

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partner, consultant, manager, employee, agent or otherwise) any Persons, direct or otherwise) any Persons, directly or indirectly: 3.1.1. with effect from the date of this Agreement, up to the Termination Date and for a further period of 3 (three) years from the Termination Date. (a) carryon or be engaged or concerned or interested in the development and / or manufacture and / or sale and / or distribution of and / or provisions of after sales services of trucks and / or busses; or (b) induce, a .....

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