Tax Management India. Com
Law and Practice  :  Digital eBook
Research is most exciting & rewarding


  TMI - Tax Management India. Com
Follow us:
  Facebook   Twitter   Linkedin   Telegram

TMI Blog

Home

2016 (2) TMI 230

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... iture incurred by the company and although incidentally that would certainly help in profit making, it still retains the character of capital expenditure since the expenditure is directly related to the expansion of the capital base of the company. Following the above judgment of the Supreme Court, we dismiss the ground raised by the assessee.- Decided against assessee Retention money payable - Held that:- The provision for payment made by the assessee towards sub-contract is allowable expenditure as the assessee recognized the revenue from the said contract as income in the assessment year under consideration. Further, we make it clear that the assessee cannot claim the same expenditure on actual payment basis, otherwise it amounts to double deduction – one on the basis of accrual and another on the basis of actual payment. Hence, we direct the Assessing Officer to allow this retention money payment only on accrual basis and not on actual payment basis. With these observations, we remit this issue to the file of the Assessing Officer for quantification. Disallowance u/s 37(1) of the Act towards payment of trade licence fee - Held that:- This issue came up for consideration b .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... deferred revenue expenditure. The benefits of the expenditure are enduring in nature. In our opinion, the judgment of Supreme Court in the case of Brooke Bond India Ltd (1997 (2) TMI 11 - SUPREME Court ) is directly applicable to the facts of the case. Accordingly, we have no hesitation to hold that the Assessing Officer is justified in treating the expenditure as capital expenditure - Decided against assessee Disallowance u/s 14A - Held that:- Assessing Officer is directed to disallow 2% of the dividend income as expenditure - I.T.A.Nos. 1824/Mds/2011, 875, 701, 702/Mds/2014, I.T.A.Nos. 592, 593, 594/Mds/2014 - - - Dated:- 6-1-2016 - SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER For The Assessee : Shri S. Sridhar, Advocate For The Department : Shri A B Koli, JCIT ORDER PER CHANDRA POOJARI, ACCOUNTANT MEMBER These appeals filed by the assessee and the Revenue are directed against the respective orders of the Commissioner of Income- tax (Appeals), Chennai, for assessment years 2006-07, 2007-08, 2008- 09 and 2009-10. Since certain issues are common in nature, these appeals are clubbed together, heard together and dispo .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... 21,28,70,457 On examination of the accounts and the return on these investments, it is seen that the items classified in (a), (b), (d) to (f) did not result in profits or gains which are under the purview of taxation and even if they do, the same remains exempt. Hence the corresponding investments are under the ambit of computation of disallowance u/s 14A. From the above, the Assessing Officer observed that a portion of the interest expenditure pertains to tax free investment. He found from the nature of transaction in the form of investments, being dormant in category (a) to (e), the assessee would not have incurred any expenditure towards managerial and administrative costs, in its maintenance. Even in respect of the additions made in non-quoted shares of subsidiary companies, the exercise does not involve any cost towards managerial and administration, in short its maintenance. Therefore, the disallowance u/s 14A r.w. Rule 8D is after fair application of mind, restricted to the computation envisaged in the second limb of Rule 8D alone in respect of interest cost covering all investments other than in overseas subsidiary and that of the third limb on .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... the Tribunal in the case of M/s. Daga Global Chemicals Pvt. Ltd. (supra), we find that an identical issue has been decided by the Tribunal holding that disallowance under section 14A read with rule 8D cannot exceed the exempt income. While holding so, the Tribunal observed as under:- 2. At the time of hearing, Dr. K.Shivaram along with Shri Rahul Hakani, ld. counsels for the assessee advanced their arguments which are identical to the ground raised by submitting that no expenditure directly or indirectly was incurred by the assessee for earning exempt income and further the investment in shares was made in earlier years out of own funds and not out of borrowed funds, therefore, no disallowance u/s 14A r.w. Rule 8D is to be made. 2.1. On the other hand, Shri Akhilendra Yadav stronglydefended the conclusion arrived at by the ld. Commissioner of Income tax (Appeals) by contending that a well reasoned order has been passed by the ld. First Appellate Authority as apportionment of expenditure for earning the dividend income was done as per the provisions of the Act. It was pleaded that section 14A r.w. Rule 8D of the Rules is clearly applicable to the facts of the present appeal. .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... look at this issue on this angle and decide it afresh in the light of the above decision of the Mumbai Bench of the Tribunal. 6. The next ground in assessee s appeal is with regard to disallowance of payment of ₹ 1,50,200/- made to Registrar of Companies. 7. We have heard both the parties and perused the material available on record. By placing reliance on the judgment of Supreme Court in the case of Punjab State Industrial Development Corpn Ltd vs CIT, 225 ITR 792, wherein held that the fees paid to the Registrar of Companies for expansion of the capital base of a company is directly related to the capital expenditure incurred by the company and although incidentally that would certainly help in profit making, it still retains the character of capital expenditure since the expenditure is directly related to the expansion of the capital base of the company. Following the above judgment of the Supreme Court, we dismiss the ground raised by the assessee. 8. The next ground in assessee s appeal is with regard to retention money payable at ₹ 13,28,86,446/-. 9. The facts of the issue are that the Assessing Officer disallowed the retention money held back by the .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ability. He submitted that when the assessee has been consistently and regularly following the same method of accounting from year to year for the purpose of recognizing the income and also accepted by the Department, it cannot be allowed to disturb the method of accounting in the middle of the completion of works contract. It was argued that for determining the profits and gains of the business, sec. 145 of the Act provided the method of accounting, as per which such profits or gains are computed in cash or mercantile system of accounting regularly employed by the assessee. In this case, the assessee followed completed contract method in terms of AS-7, issued by the ICAI and the Assessing Officer was satisfied with the correctness and completeness of the accounts of the assessee and also with regard to the method of accounting regularly employed has been scientific and rational. In such circumstances, it is not open to the Assessing Officer to deviate from regularly and consistently following the method of accounting followed by the assessee and accepted by the Department. He argued that consistent and regular method of accounting is supreme unless the Assessing Officer finds that .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... partment is that the retention money which is receivable was not recognized as income as such, retention payment also cannot be allowed as deduction while computing the income of the assessee. As rightly argued by the assessee, both these are governed by different Accounting Standards. Retention payment is governed by AS-7 issued by ICAI, New Delhi. On the other hand, retention money receivable is governed by AS-9. What is applicable to retention money receivable cannot be applied to retention money payable as these are governed by different Accounting Standard. Further it is undisputed that whenever assessee incurred expenditure on the project it is admissible for deduction. The only dispute raised by the Revenue is regarding the year of liability of expenditure. Considering that the assessee- company is assessed at uniform rate of tax, the entire exercise of seeking to disturb the year of allowability of expenditure is, in any case, revenue neutral. We are reminded of the classic observation made by the Bombay High Court in the case of CIT vs Nagri Mills Co. Ltd, 33 ITR 681 which reads as under: We have often wondered why the income-tax authorities, in a matter such as this .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... 62, held that the provision made by the assessee for warranty claims on the basis of past experience is allowable deduction u/s 37 of the Act. In the case of Bharat Earth Movers vs CIT, 245 ITR 428, the Supreme Court held that where the assessee has incurred expenditure which is more than the provision for warranty obligation made in the books of account, it cannot be said that the provision made by the assessee is not capable of being estimated with the reasonable certainty though actual quantification was not possible and therefore, the Tribunal was justified in allowing the deduction. The Delhi High Court in the case of CIT vs Ericssion Communications P. Ltd, 318 ITR 340, held that provision for warranty claims on scientific basis which is consistently applied by the assessee for its business was allowable as deduction. The Madras High Court in the case of CIT vs Luk India Pvt. Ltd, 239 CTR 440, held that provision for warranty claimed by applying the settled principles of having regard to the fact that claim was based on a scientific approach and it was worked out on the average of previous year s warranty settlement is allowable expenditure. Same view was taken by the jurisdi .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... Rule 8D to only 3rd limb of Rule 8D(2). 15. Since we have remitted the issue relating to the disallowance u/s 14A of the Act in assessee s appeal I.T.A.No. 594/Mds/2014, this ground does not require adjudications. 16. The second issue in Revenue s appeal is with regard to deleting the disallowance of ₹ 2 crores u/s 37(1) of the Act towards payment of trade licence fee. 17. The facts of the issue are that dduring the year, an amount of ₹ 2 crores had been paid to M/s. Samruddhi Holdings, a closely related partnership firm which according to the assessee was paid for usage of name and logo that belonged to that firm. The Assessing Officer has observed that the transaction involving the payment of ₹ 2 crores would be covered by the provisions of Section 40A(2)(b) of the Act wherein the cost of obtaining the rights for usage of brand name and logo namely, 'CCC', Triple C' and 'UGA' by the appellant company from their associate concern M/s. Samruddhi Holdings was found to be unreasonably high. It was observed further that the said logo had not attained any significant or appreciable brand image as well as the basis for arriving for quantum .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... nts attracting provisions holding that the appellant could not have paid that much amount to an out sider, that too when the whole amount paid by the company was subjected to TDS. The company has subjected the amount to TDS and remitted the same as per the provisions of the Act. 6.2.1 From the point of view of Samruddhi Holdings, the Id. AR has submitted that the same have been subjected to taxation at Maximum Marginal Rate on the entire sums received from the company. The AO even though made an effort to see the receipt side in the hands of Samruddhi Holdings to avoid double taxation, he has not made any comment whether the same was offered for taxation in the hands of Samruddhi Holdings. The same were examined by me in the course of appellate proceedings. It is noticed that the amounts paid by the company were not accounted regularly in the books of Samruddhi Holdings, even though it is maintaining its account on cash basis. Only from AY 2012-13, it started maintaining its account on mercantile basis. It is noticed that all the amounts received were offered for taxation over a period of time upto and including A.Y 2012-13. Therefore, there is no revenue loss from the point of .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... concrete was substantially high, the assessee in its economics had installed a separate ready-mix concrete plant and hollow block machinery in each of the select sites in which the construction is under progress. According to Assessing Officer, the construction activity in which the new plant was installed was not to be construed as a manufacturing or production activity. Further, it was held that the installation of the plants was admittedly in the places of contractees and accordingly it was further held that the plants under consideration were not installed in the sites owned by the assessee. Therefore, the assessee is not eligible for additional depreciation u/s.32(iia) amounting to ₹ 56,00,907/- and hence disallowed. The Assessing Officer has placed his reliance on the decision of the Supreme Court in the following cases: N.G.Budharaja Co. And another reported in 2041TR 412(SC), Builders Association of India vs. UOI Others reported in 209 ITR 877 (SC), The Delhi High Court in Ansal Housing and Constructions Lld in (320 ITR 420) The Allahabad High Court in the case of Jayaprakash Associates Pvt. Lld and UP Rajkiya Nirman Ltd (155 Taxman 392) and (155 Taxm .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... urisdictional High Court in the cae of CIT vs Southern Roadways Ltd, 304 ITR 84, decided the issue in favour of the assessee. Against this, the Revenue is in appeal before us. 24. We have considered the rival submissions on either side and also perused the material on record. As seen from the order of the CIT(A), the Autocad software is an application software. It helps in speeding up the process and to conduct the part of a business in a more efficient and better manner. The benefits of this software are accrued on day to-day running of the business but do not in any way give an enduring benefit. Though the software could be used for more than one year, that itself cannot be a reason for treating the expenditure incurred on application software as capital expenditure. In our opinion, the judgment of the jurisdictional High Court in the case of Southern Roadways Ltd. (supra) is squarely applicable to the facts of this case and the expenditure incurred on application software is only a revenue expenditure and it is to be allowed. Being so, we confirm the order of the CIT(A). This ground of Revenue is dismissed. 25. In the result, the Revenue s appeal I.T.A.No.702/Mds/2014 for .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... which it was issued. In the present case, the assessee incurred expenditure towards corporate finance, industry research, preparing corporate strategy and growth for bringing out a business plan which gives enduring benefit to the assessee and therefore, the expenditure is not for a particular assessment year as such it cannot be neither a revenue expenditure or deferred revenue expenditure. The benefits of the expenditure are enduring in nature. In our opinion, the judgment of Supreme Court in the case of Brooke Bond India Ltd (supra) is directly applicable to the facts of the case. Accordingly, we have no hesitation to hold that the Assessing Officer is justified in treating the expenditure as capital expenditure. Accordingly, we reverse the order of the CIT(A) and restore that of the Assessing Officer. 29. In the result, the Revenue s appeal I.T.A.No.1824/Mds/2011 is allowed. I.T.A.No.592/Mds/2014 [Assessee s appeal] I.T.A.No. 875/Mds/2014 [Revenue s appeal] A.Y 2007-08 30. In the appeal of the assessee in I.T.A.No.592/Mds/2014 for assessment year 2007-08, the first issue is with regard to disallowance of expenses relating to the exempt income on the application .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ground raised by the Revenue in the former part of this order. Accordingly, this ground is dismissed. 39. The next issue is with regard to deleting the disallowance of additional depreciation made to the extent of ₹ 76,13,190/-. 40. We have discussed similar issue elaborately in assessment year 2009-10 in Revenue s appeal I.T.A.No.702/Mds/2014. In view of our order in the former part of this order for the assessment year 2009-10 and for the reasons stated therein, this ground of the Revenue is dismissed. 41. In the result, Revenue s appeal I.T.A.No.875/Mds/2014 is dismissed. I.T.A.No.593/Mds/2014 [Assessee s appeal] and I.T.A.No.701/Mds/ 2014 [Revenue s appeal] A.Y 2008-09 42. In assessee s appeal I.T.A.No.593/Mds/2014 for assessment year 2008-09, the first issue is with regard to disallowance of expenses u/s 14A of the Act. 43. We have decided similar issue elaborately in assessee s appeal in I.T.A.No.592/Mds/2014 for assessment year 2007-08. Accordingly, the Assessing Officer is directed to disallow 2% of the dividend income as expenditure. This ground is partly allowed. 44. The next issue is with regard to disallowance of ROC fee. 45. In view .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

 

 

 

 

Quick Updates:Latest Updates