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2016 (2) TMI 372 - ITAT AHMEDABAD

2016 (2) TMI 372 - ITAT AHMEDABAD - TMI - Addition of royalty charges - whether royalty payment calculated by applying certain percentage on sales of the assesseecompany, which is payable to a foreign company under a technology transfer agreement is in the nature of capital expenditure or revenue expenditure? - Held that:- The royalty was paid on the basis of sales generated by the assessee and was not a lump sum payment. Further there was no new asset acquired by the company in form of tangible .....

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facts and circumstances of the case, we are of the opinion that the first appellate authority has rightly held that the expenditure relates to general repair expenses and there is no creation of new asset, thus clearly, the impugned expenditure lay in the revenue field and not in the capital field and there we do not find any infirmity in the order of CIT(A). - Decided in favour of assessee

Addition to the book profit u/s 115JB on account of provisions for leave encashment and gratuit .....

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ve encashment and gratuity is an ascertained liability. CIT(A) has rightly deleted the addition to the book profit u/s 115JB - Decided in favour of assessee

Addition on account of excise duty claim considered to be penal in nature - Held that:- As the three types of expenses referred in this ground are of general nature expenditure because ₹ 57,015/- is a reversal of cenvat credit which was previously reduced on the purchase cost and for some reason the claim of this cenvat cred .....

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e are of the view that ld. CIT(A) has rightly deleted the addition - Decided in favour of assessee

Disallowance of excess claim of depreciation on electrical installations - Held that:- CIT(A) has rightly held that the expenditure referred in this ground as expenditure on electrical equipment and machinery attached to the plant and machinery by observing that mainly electrical equipment and accessories attached to the plant & machinery has been grouped by the assessee company under th .....

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- Held that:- s far as the first three petty amounts of ₹ 1,000/-, ₹ 550/- and ₹ 1,100/- are concerned, they are in the nature of recoverable expenses incurred by the assessee which could not be recovered and, therefore, they have been written off in the current year because the same has already suffered taxation in earlier year when they were actually not claimed as expenditure and, therefore, rightly claimed as paid debts. However, the amount of ₹ 26,224/- and ₹ .....

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he assessee. Therefore, we find no infirmity in the order of CIT(A) in deleting the impugned addition. - Decided in favour of assessee

Addition u/s 68 - unexplained cash credit - Held that:- All the conditions have been duly adhered and followed and complied with by the assessee in relation to FDI receipt towards share application money for investment in 82,62,000 equity shares of ₹ 10/- each received from the holding company for investment in the subsidiary company and the iden .....

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7; 56,30,000/- is in opening balance in the name of CVG Germany received in earlier year and we have already decided in the above ground No.4 about the identity, financial capacity, genuineness of the transaction and creditworthiness of M/s CVG and also looking to the facts that this amount of ₹ 56,30,000/- pertains to immediately preceding year and, therefore, any action if had to be taken by the Assessing Officer was in the year in which the amount was received. Therefore, the Assessing .....

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he CIT(A)-I, Baroda, wherein assessment was framed for Asst. Year 2004-05 on 28.12.2006 u/s 143(3) of the Income-tax Act, 1961 (in short the Act) by ACIT, Circle-1(1), Baroda and ITA No.2616/Ahd/2010 is directed against the order of CIT(A)-1, Baroda, dated 25.5.2010 for Asst. Year 2005-06 wherein assessment was framed u/s 143(3) of the Act on 20/12/2007 by DCIT, Circle-1(1), Baroda. As the grounds raised in both these appeals are mostly common and the assessee is same these were heard together a .....

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r Asst. Year 2004-05 was filed on 30.10.2004 declaring total loss of ₹ 1,44,22,082/-. The case was selected for scrutiny assessment and notice u/s 143(2) was issued on 1.8.2005. Assessment was completed by making an addition of ₹ 18,89,228/- and loss was assessed at ₹ 125,46,262/- whereas book profit which was computed by assessee in the income-tax return at ₹ 25,84,151/- was assessed at NIL by Assessing Officer. 3. Aggrieved, assessee went in appeal before CIT(A) and got .....

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y Transfer Agreement" entered into by the assessee in relation to the acquisition of the right to manufacture the product of CVG and hence, the expenditure is of capital in nature." 5. The ld. DR submitted that during the course of assessment proceedings Assessing Officer noted that assessee had claimed expenditure in the nature of royalty at ₹ 17,10,428/- computed @ 1.5% of total sales at ₹ 1,14,02,856/-. The royalty was paid under the terms of technology transfer agreemen .....

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see with M/s Coronet Verwaluntngsgesellschalft GmbH (CVG), Germany and this agreement has been approved by Government of India (GOI) vide letter dated 21st May, 2001 through the Ministry of Commerce and Industry and effectively endorsed by Reserve Bank of India (RBI) on 12.9.2001 and registration was granted to the collaboration along with laying out procedure for remittances as and when required. 7. Ld. AR also buttressed his argument by taking us through the relevant clauses of the technology .....

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nure of agreement was not fixed rather it was exclusively at the option of either of the parties. The ld. AR further submitted that the royalty payment was solely depending on the sales generated by the assessee and there was no cap provided for such royalty payment and therefore, this royalty payment was rightly claimed as revenue expenditure. 8. We have heard the rival contentions and perused the material on record. The issue to be examined is that whether royalty payment calculated by applyin .....

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a)(i) and during the year under appeal assessee has claimed deduction of royalty of ₹ 3,09,912/- in its computation of income for the royalty which pertained to Asst. Year 2003-04 but disallowed in Asst. Year 2003-04 as TDS was not deducted and finally deducted and deposited in Asst. Year 2004-05. For this reason Revenue has revised its ground of appeal by replacing ₹ 17,10,428/- by ₹ 3,09,912/-. 9. Going through the facts of the case we find that the royalty was paid on the ba .....

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ng or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it made not for the purpose of the bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure." The Hon'ble Supreme Court has further held in the said case- "that where payment of royalty i .....

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ts are almost identical to the facts discussed by Hon'ble Apex Court and Hon'ble Jurisdictional High Court in the above referred two cases, as the assessee in order to effect sales needs regular technology services from M/s CVG, Germany and royalty is @ 1.5% of the total sales effected by the assessee company. 12. In view of our above discussion and judicial pronouncements, we are of the considered view that the royalty payment made by the assessee is undoubtedly revenue expenditure. The .....

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ed expenditure on account of cost of replacing stamping dies logo for ₹ 27,041/- and purchase of AC to DC Convertors for ₹ 13,914/- which the assessee has claimed as revenue expenditure under the head rpair expenditure but the Assessing Officer was of the view of treating this expenditure of ₹ 35,386/- capital expenditure. 15. On the other hand, ld. AR submitted that the above said expenditure was incurred for replacing of spares and was in the nature of consumable spares which .....

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re which (a) provides benefit for less than one year, (b) involves mere replacement of a part of the machine and not the entire machine, or (c) does not result in the creation of any new asset, cannot be termed as capital expenditure. It would amount to a revenue expenses, and would qualify for deduction as repairs and maintenance expenditure. Clearly, the impugned expenditure lay in the revenue field and not in the capital field. Accordingly, the net addition of ₹ 35,836/- is directed to .....

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ances of the case and in law, the ld. CIT(A) erred in deleting the addition of ₹ 3,60,809/- to the book profit u/s 115JB on account of provisions for leave encashment and gratuity ignoring that the liabilities do not form part of ascertained liabilities. 18. Ld. DR supported the order of Assessing Officer. Whereas the ld. AR of assessee submitted that as the leave encashment and gratuity are ascertained liability which is calculated on a scientific basis and, accordingly ld. CIT(A) has rig .....

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record. The issue in this case is that whether provisions of ₹ 3,60,809/- pertaining to leave encashment and gratuity is an ascertained liability, because if the liability is ascertained then it need not be added back to the book profit referred u/s 115JB of the Act. 21. While deleting the addition made by Assessing Officer, ld. CIT(A) has observed as under :- "9.2 I have considered the submissions of the ld. AR and the facts of the case. The Supreme Court, in the case of Bharat Eart .....

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that Hon'ble Apex Court in the case of Bharat Earthmovers vs. CIT (supra) while reversing the decision of Hon'ble High Court has held - that the provisions made by the assessee for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by the employees of the company inclusive of officers and staff subject to the ceiling accumulation as applicable on the relevant date was entitled to deduction out of the gross receipts of the acco .....

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ompany based on the actual period of working and wages for its employees and hence the provision for leave encashment and gratuity at ₹ 3,60,809/- is an ascertained liability. In the light of above discussion, we do not find any infirmity in the order of ld. CIT(A).We uphold the view taken by ld. CIT(A). This ground is also dismissed. 24. Ground No.4 raised in Revenue's appeal is as follows :- On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deletin .....

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rsal Rs.57,015/- b) Additional Excise duty paid Rs.13,440/- c) Service Tax paid ₹ 8,032/- Rs.78,487/- He further submitted that Cenvat Credit Reversal which was actually claimed by assessee on cenvat credit reversal against excise duty payable and the same was not allowed by Excise Department and accordingly this amount of ₹ 57,015/- was debited as expenses because this amount was earlier reduced from the purchase cost of the assessee-company and now when this amount was reversed by .....

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at the Assessing Officer has disallowed the above said expenditure of ₹ 78,487/- just on the basis of heads of expenditure and has not tried to co-relate it with the supporting amount for treating the same as penalties which are not allowable as an expenditure u/s 37. The ld. CIT(A) while deleting the addition made by Assessing Officer has observed :- "10.3 I have considered the submissions of the ld. AR and the facts of the case. On perusal of the details filed, I find that item no.) .....

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in nature. The disallowance of ₹ 78,487/- is therefore directed to be deleted." 27. As the three types of expenses referred in this ground are of general nature expenditure because ₹ 57,015/- is a reversal of cenvat credit which was previously reduced on the purchase cost and for some reason the claim of this cenvat credit was not allowed by the Excise Department and therefore, assessee has debited that difference as expenditure and this reversal cannot be termed as a penalty as .....

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fails. 28. Ground No.5 : The appellant craves to leave, to add, to amend, or later the above grounds as may be deemed necessary. This ground is of general nature, which needs no adjudication. 29. Now we take up ITA No.2616/Ahd/2010 for Asst. Year 2005-06. 30 Ground No.1 of Revenue's appeal is as follows :- 1) On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in restricting the addition of royalty payment to a foreign company of ₹ 23,55,046/- to 50% i.e .....

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l, wherein we have discussed the same in detail and decided the issue vide para nos.8 to 12 and held that royalty expenses paid by the assessee 1.5% of its sales to M/s CVG, Germany is a revenue expenditure. Following our above view we dismiss this ground of Revenue. 32. Ground No.2 of Revenue's appeal is as under: On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the addition of ₹ 2,25,463/- made on account of disallowance of excess claim o .....

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ible for depreciation @ 15% and, therefore, the excess depreciation claimed by the assessee at ₹ 2,25,463/- was rightly disallowed by the Assessing Officer and ld. CIT(A) was not justified in deleting the same and therefore order of ld. CIT(A) to be set aside and that of Assessing Officer be restored on this issue. 34. On the other hand, ld. AR submitted that the expenditure in question was incurred for electric installation to support control panel, power control centers etc. which are co .....

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diture on electrical equipment and machinery attached to the plant and machinery by observing as under :- "6.2 I have considered the submissions of the ld. AR and the facts of the case. On a perusal of the details of additions to gross block, I find that mainly electrical equipment and accessories attached to the plant & machinery has been grouped by the assessee company under the head electrical installations. On the other hand, items such fans, light fixtures are grouped under furnitu .....

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e. This ground of Revenue is dismissed. 36. Ground No.3 of Revenue's appeal reads as under :- 3. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the addition of ₹ 4.04,874/- made on account of disallowance of bad debts written off on the basis of the submissions made by the assessee during the appellate proceedings without giving due opportunity to the AO for verification of the additional facts admitted by the ld. CIT(A). 37. Ld. DR suppo .....

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re petty amounts on account of non-recovery of expenses, item at no.4 is on account of bad debts occurred as the advance was made for supply of raw material and on cancellation of the order the advance was not received back and item no. 5 represent is an advance paid to a Software Company for implementing ERP system but the Software Company neither implemented the ERP nor refunded the amount and the assessee has also filed a suit in the court for its recovery and, therefore, has been treated the .....

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ucing the expenses claimed. Hence the write off in the current year was allowable. The disallowance of ₹ 1,000/-, ₹ 550/- and ₹ 1,100/- are therefore directed to be deleted. 10.3 The disallowance of ₹ 26,224/- and ₹ 3,76,000/- stand on different footing. They do not represent any debt which has been written off but rather advances made to suppliers of goods and services, which however did not materialize in the supply of contracted goods and services. The assessee h .....

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h could not be recovered and, therefore, they have been written off in the current year because the same has already suffered taxation in earlier year when they were actually not claimed as expenditure and, therefore, rightly claimed as paid debts. However, the amount of ₹ 26,224/- and ₹ 3,76,000/- are advances given by the assessee to acquire the raw material and implementation of ERP system but for some reason these two transactions could not be completed and the advances could not .....

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's appeal reads as under :- 4. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the addition of ₹ 82,62,000/- made u/s 68 of the Act without appreciating the fact that the assessee had failed to fulfill the basic conditions such as furnishing of necessary evidence regarding creditworthiness of the creditor and the genuineness of the transaction and confirmation from the creditor. 41. Ld. DR supported the order of Assessing Officer, wherein .....

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CVG, Germany. Ld. AR further submitted that Assessing Officer ought to have appreciated that M/s CVG, Germany was the holding company of assessee-company already having equity shares worth ₹ 5.10 crores before this new investment of ₹ 82,62,000/- made during this year. The holding company's credential has already been examined by many Government Agencies including the Department of Industrial Policy & Promotion, Ministry of Commerce and Industries which has given approval to .....

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on made by Assessing Officer u/s 68 of the Act. 43. We have heard the rival contentions and perused the material on record. We find from the records that there was FDI by holding company of the assessee company at ₹ 82.17 lacs for subscribing to 82,62,000 shares of assessee company of ₹ 10/- each i.e. acquiring equity shares worth ₹ 82.62 lakhs and Assessing Officer has added this amount of ₹ 82.62 lacs to the income of assessee under the provisions of section 68 by treat .....

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d Industry, Govt. of India dated 21.5.2001 for registration number for foreign collaboration between M/s CVG, Gernany and assessee. (3) Certificate of foreign inward remittance dated 2.2.2005 issued by IDBI Bank Ltd. bearing Sl.No.0019598 certifying that EURO 150,000.00 equivalent Indian ₹ 82,71,000.00 has been received towards share application money from M/s CVG through remitting bank DEUTSCHE BANK AG vide TT No.1809400058, dt.26th May,2004. (4) Acknowledgement letter dated 15.3.2005 iss .....

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nt holder is to prepare on KYC report (know your client) and for preparation of KYC report/information is sought by the receiving bank from the remitting bank about the genuineness and identity of the party sending the money. Only after the satisfaction of the receiving bank i.e. the bank where the assessee holds the a/c. and after complying the provisions of RBI then only the amount is credited to the account of the account holder and the same process was completed by IDBI Bank Ltd. in the case .....

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sessee in relation to FDI receipt towards share application money for investment in 82,62,000 equity shares of ₹ 10/- each received from the holding company for investment in the subsidiary company and the identity of the holding company stands well proved from the letter of Ministry of Commerce and Industry, Department of Industrial Policy & Promotion which has granted registration for the foreign collaboration between M/s CVG and the assessee. In these circumstances, we are of the co .....

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basic conditions such as furnishing of necessary evidence regarding creditworthiness of the creditor and the genuineness of the transaction and confirmation from the creditor. 49. The ld. DR supported the order of Assessing Officer. 50. On the other hand, the ld.AR relied on the order of CIT(A) and submitted that the amount of ₹ 56,30,000/- held by the Assessing Officer as unexplained credit in fact represent amount received by assessee in the prior financial year i.e. FY 2003-04. The sai .....

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during the year and not prior to that year. In the present case the amounts under consideration was received in the prior year and the assesssee was duly assessed during the said year u/s 143(3) and the ld. Assessing Officer had not found any reason to treat the same as unexplained credit during the said assessment. By treating a loan which was actually received in the prior year, the ld. Assessing Officer has made an addition which is not tenable under section 68 of the Act. It is further note .....

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