TMI Blog2011 (10) TMI 629X X X X Extracts X X X X X X X X Extracts X X X X ..... of capital expenditure. Accordingly ground No. 1 is partly allowed. Amount was paid as compensation for idle period during pendency of getting permissions - Held that:- What the assessee has provided in the books of account was only a provision and the claim made by the said contractor was contingent in nature. Not only that as per the admission by the assessee itself the settlement was made on 09.10.2005 which falls in the later assessment year to an extent of ₹ 75.49 lakhs and not the entire amount of ₹ 90 lakhs. Another fact which is to be considered is that this is part of the work-inprogress of Taloja project, Maharashtra, which was set up and started functioning in later year. Therefore the expenditure cannot be considered as expenditure of abandoned project. Thus as the expenditure has not been crystallised in the year under consideration and further the expenditure is part of the setting up of a plant at Taloja which commenced later, the claim cannot be allowed as revenue expenditure in this year. Therefore, the Assessing Officer’s action in treating the same as capital expenditure is upheld. The claim to the extent of ₹ 74.49 lakhs is to be examined b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital gains on sale of Matunga land - Held that:- The doctrine of merger was applied resulting in ‘drowning’ and ‘sinking’ of inferior right into superior right. Assessee has transferred his complete rights acquired by way of tenancy rights as well as reversionary rights in the property for development. Therefore, we are of the opinion that the CIT(A) has rightly considered the amount of ₹ 3.32 crores paid in 1998 and ₹ 4.77 crores paid for vacating the tenancy as cost of acquisition of the rights transferred. The Assessing Officer’s treatment of acquiring reversionary rights alone as cost of acquisition is not correct as what the assessee has acquired in 2004 from the erstwhile owner, who already surrendered tenancy right, is only part of the reversionary rights with him so that the title is complete in all respects as far as assessee is concerned. No merit in the claim of the Revenue that the lease rights acquired and tenancy rights acquired should not form part of cost of acquisition. It is also to be noted that AO allowed cost of acquiring ‘reversionary rights’ as cost of ‘purchase of land’. Considering the facts of the case, we do not see any reason to interfere wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company is engaged in manufacturing of paints and enamels and also leases out the Dealer Tinting system to various dealers. Assessee filed return of income declaring total income of ₹ 273.03 cores. In the course of assessment the A.O. made certain additions and determined the total income at ₹ 289.08 crores inter alia making certain disallowances and additions. These issues are contested by assessee and Revenue as CIT(A) allowed certain claims of the assessee. 3. We have heard the learned counsel Shri K. Shivaram and the learned CIT D.R. Smt. Usha Nair in detail. Their arguments are incorporated wherever necessary. The learned counsel also placed a fact sheet on record to sum up the issues. ITA No. 408/Mum/2010 4. In this appeal assessee has raised six grounds on various issues. Ground No. 1 and 2 are as under: - 1) The learned Commissioner of Income Tax (Appeals) 15, Mumbai erred in confirming the disallowance of ₹ 229 lacs being contractual liability/expenses incurred in respect of setting up a paint plant at Pondicherry being expansion of paint business which was no longer pursued. 2. The Learned Commissioner of Income Tax (Appeals) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the head miscellaneous expenses . The issue in ground No. 2 is with reference to the claim of ₹ 90 lakhs being provided for M/s. Progressive Civil Construction Co. P. Ltd. as compensation for mobilizing equipments and constructing temporary sheds at its factory site at Taloja, Maharashtra. As there was delay in obtaining government permissions the construction work could not be commenced for a period of four months and ultimately the contract was terminated. The amount of ₹ 90 lakhs provided and claimed as miscellaneous expenses. The claim by the contractor was to an extent of ₹ 1.80 cores for which provision of ₹ 90 lakhs was made in the books. It was stated that ultimately the actual expenses amounting to ₹ 75.40 lakhs was settled vide settlement agreement dated 09.10.2005. The details of the expenses paid are as under: - S. No. Name of the Vendor Nature of Work Net Amount (Rs. in lakhs) 1 Dongre Dongre Associates Design Consultancy 4.47 2 Progressive Civil Construction Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture and relied on the principles established by the Hon'ble Delhi High Court in the case of Indo Rama Synthetics (I) Ltd. vs. CIT 333 ITR 18. The learned counsel also relied upon the decision of Jyoti Electric Motors Ltd. 255 IT 345 (Guj) and various other decisions as under: - - Excel Industries Ltd. vs. DCIT 86 TTJ 840 (Mum) - CIT vs. Hindustan Machine Tools Ltd. 175 ITR 212 (Kar) - B.R. Ltd. vs. CTR 113 ITR 647 (SC) - CIT vs. J.A. Trivedi Bros 117 ITR 983 (Bom) - ONGC Videsh Ltd. vs. DCIT 33 DTR 22 (Del) (Trib) - CIT vs. Anjani Kumar Co. Ltd. 259 ITR 114 (Raj) - Indian Rare Earths Ltd. ITA No. 2058/Mum/2004 dated 13.12.2007. - CIT vs. Indian Rare Earths Ltd. ITA No. 1950 of 2009 dated 29.08.2011 10. It was further submitted that as far as far as expenditure of Pondicherry project is concerned the project was altogether abandoned whereas the amount paid to M/s. Progressive Civil Construction Co. P. Ltd. was for delay execution of the project. The Taloja project was subsequently came into operation. The cases relied upon will apply to both the facts and the expenditure is to be allowed as revenue expenditure. 11. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, even if it is for the expansion of the business, namely, to start new unit which is same as earlier business and there is unit of control and a common fund, then such an expense is to be treated as business expenditure. In such case whether new business/asset comes into existence or not would become a relevant factor. If there is no creation of new asset, then the expenditure incurred would be of revenue nature. However, if the new asset comes into existence which is of enduring benefit, then such expenditure would be of capital nature. As can be seen from the above, if the expenditure was incurred for starting new business which was not carried out by the assessee earlier, then the expenditure is capital in nature. In that event it would be irrelevant as to whether it really materialised or not. However, if the expenditure is incurred in respect of the same business, in such case whether the new business/asset comes into existence or not would become a relevant factor. If there is no creation of new asset then the expenditure incurred would be revenue nature. However, if a new asset comes into existence which is of enduring benefit then such expenditure would be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee itself the settlement was made on 09.10.2005 which falls in the later assessment year to an extent of ₹ 75.49 lakhs and not the entire amount of ₹ 90 lakhs. Another fact which is to be considered is that this is part of the work-inprogress of Taloja project, Maharashtra, which was set up and started functioning in later year. Therefore the expenditure cannot be considered as expenditure of abandoned project. Thus as the expenditure has not been crystallised in the year under consideration and further the expenditure is part of the setting up of a plant at Taloja which commenced later, the claim cannot be allowed as revenue expenditure in this year. Therefore, the Assessing Officer s action in treating the same as capital expenditure is upheld. The claim to the extent of ₹ 74.49 lakhs is to be examined by the A.O. whether that can be capitalised or not in the year of commencement of the Taloja project. With these observations ground No. 2 is rejected. The orders of the A.O. and the CIT(A) on this issue stand confirmed. 14. During the course of argument the learned counsel relied on the decision in the case of CIT vs. J.A. Trivedi Bros 117 ITR 983 (Bom) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l stock. The addition made by the AO has been confirmed by the CIT(A). 12. We have heard the learned representatives of the parties and perused the record. The learned A.R. did not argue much on the issue. In principle we agree with the findings of the AO that stock of damaged goods should also be required to be valued at the end of the year. As regards estimation of amount of the said stock we find that there is no material available on record for estimation of the different amount of the stock than estimated by the AO. We, therefore, confirm the orders of the revenue authorities on this issue. Consistent with the above stand, we uphold the order of the CIT(A) and dismiss ground No. 3 of assessee. 17. Ground No. 4 pertains to the issue of disallowance under section 14A of ₹ 52.40 lakhs. During the year assessee has earned ₹ 15,31,250/- as income from tax free bonds and dividend income of ₹ 8,83,63,000/-. The A.O. disallowed ₹ 52.40 lakhs under section 14A by applying Rule 8D. On appeal the CIT(A) confirmed the same. 18. The learned counsel submitted that assessee has not incurred any expenditure for the purpose of earning exempt income. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture does not pertain to the year under consideration and the provisions of section 35DDA does not apply. The CIT(A), following the earlier years orders, did not allow the expenditure as claimed. Similar issue in A.Y. 2004-05, it was submitted, was not contested by assessee. Even though assessee claimed that it had incurred the expenditure and be allowed as deferred revenue expenditure, the amount cannot be allowed in the year as the expenditure is not in the nature of deffered revenue expenditure. As the expenditure does not pertain to the year under consideration and also similar claim was not allowed in earlier year, which assessee has not contested, there is no need to consider it in this year. Accordingly the ground 5 is dismissed. 21. Ground No. 6 pertains to the issue of withdrawal of interest granted by Department. During the year assessee had paid interest of ₹ 38,11,053/- on income tax for A.Y. 1993-94. Against the said interest paid of ₹ 38,11,053/- for A.Y. 1993-94, assessee netted of interest received in A.Y. 2004-05 of ₹ 28,82,581/- for A.Y. 1993-94. The details of interest income for 1993-94 offered for tax in A.Y. 2003-04 is as under: - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... val of tenants also as a cost of acquisition for computing short term capital gain for sale of Matunga land. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the A.O. to allow notional interest of ₹ 1,64,42,400/- on interest free loans to subsidiary companies. 3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the A.O. to allow ₹ 10.15,411/- (50% of total expenses) on account of distribution of gift articles. 4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the A.O. to allow ₹ 6,54,367/- on account of expenditure for repair of school as business expenditure. 5. On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in directing the A.O. to allow ₹ 2,22,60,000/- the adjustments on account of transfer pricing. 25. Ground No. 1 pertains to the issue of cost of acquisition while computing the capital gains on sale of Matunga land. Briefly stated, assessee acquired perpetual lease rights of the land situated at Matunga (W) from Shri Jayant Manilal Gandhi for a t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst long term capital loss offered by assessee and arrived at a capital loss of ₹ 0.08 crores as against short term capital gain of ₹ 8.01 crore determined by the A.O. Revenue is aggrieved. 27. The learned D.R. submitted that there is no correlation between reversionary rights obtained by assessee and the original free hold rights obtained in 1998 and, therefore, the A.O. was correct in denying the amount paid for acquiring the lease hold rights on purchase of tenancy rights. He relied on the order of the A.O. to submit that the capital gain was correctly calculated by the A.O. 28. The learned counsel submitted that what the assessee has acquired is complete rights over the land in Matunga and originally the perpetual lease hold rights of the land were acquired on 03.08.1998 and subsequently tenancy rights were purchased by paying the amount to the tenants the thereafter on 22.05.2004 acquired the reversionary rights from Shri Jayant Manilal Gandhi so as to avoid any future litigation as the property was to be developed. Accordingly it was submitted that all the amounts paid for acquiring the rights in the property are correctly allowed by the CIT(A) as cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eady surrendered tenancy right, is only part of the reversionary rights with him so that the title is complete in all respects as far as assessee is concerned. In view of this we do not see any merit in the claim of the Revenue that the lease rights acquired and tenancy rights acquired should not form part of cost of acquisition. It is also to be noted that AO allowed cost of acquiring reversionary rights as cost of purchase of land . Considering the facts of the case, we do not see any reason to interfere with the order of the CIT(A). Accordingly the ground 1 is rejected. 30. Ground No. 2 pertains to the issue of addition of ₹ 1,64,42,400/- under section 36(1)(iii). Assessee has advanced interest free loans to its subsidiary concerns in earlier years as under: - i) Technical Instruments Mfg. Co. Ltd. ₹ 77.02 millions ii) Asian Paints Industrial Coating Ltd. ₹ 60.00 millions ₹ 137.02 millions 31. The A.O., while completing the assessment, considered 12% interest on the amount to be disallowed as assessee has not charged on the amount advanced to subsidiary companies. The CIT(A), following the earlier years orders, gave relief to assessee. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hwar, where company s manufacturing facility is also located. Assessee claimed the expenditure as part of corporate responsibility and claimed the same as deduction. The A.O. was of the view that there is no correlation between the expenditure incurred and assessee s business. After considering assessee s submissions and relying on various case laws as extracted in para 17.1 of the order, the CIT(A) considered that the expenditure claimed is for the purpose of business. He relied on the decision of the Coordinate Bench in the case of Tata International Ltd. in ITA No. 5591/Mum/2005 dated 11.09.2009. 36. In the course of argument the learned counsel relied on the decision in the case of Mahindra Mahindra Ltd. vs. CIT 261 ITR 501 (Bom) and JCIT vs. ITC Ltd. 112 ITD 57 (Kol) (SB) and also JCIT vs. Ranbaxy Laboratories Ltd. 10 DTR 46 (Del) (Trib) to submit that the expenditure is allowable as business expenditure. After considering the rival arguments we are of the opinion that the expenditure incurred on school for repair of the building where employees children are also studying has resulted in creating goodwill/brand image for the assessee, therefore, the expenditure incurred i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itous transaction by the taxpayer and so no consideration is charged. However, it does involve performance or carrying out of service to cover the risk of default and so price has to be charged. 26.2 The TPO has collected data from the Website of Allahabad Bank, HSBC Bank and Robo India Finance and applied the flat rate of 3%. That is to say the TPO has adopted a naked quote without factoring in the qualitative factors which determine the fees. A quotation given by a third party e.g. a Banker does not constitute a CUP since it is quotation and not an actual uncontrolled transaction . The TPO has adopted a 3% rate or guarantee fees when the Citi Bank Singapore (the bank providing the loan amount) itself has charged interest at the rate of 1.625% only on the loan granted to its AE at Singapore. This makes the stand of the TPO unsustainable as guarantee fees can in no circumstances exceed the rate at which interest is charged on loan. 26.3 The TPO has also ignored the fact that the appellant has recovered the entire amount of bank guarantee commission charged by HSBC bank as guarantee commission from its AE (i.e .35% SGD 17 million) i.e ₹ 15,95,849/-. Further th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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