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2016 (8) TMI 774 - ITAT BANGALORE

2016 (8) TMI 774 - ITAT BANGALORE - TMI - Transfer Pricing Adjustment on account of interest on delayed realization of marketing expenses from Associated Enterprises (AEs) - Held that:- The transaction is otherwise capable of generating income but due to the related parties decided not to charge or pay to each other the basic character and nature of transaction would not change. Hence we do not find any substance in the arguments and propositions raised by the ld. counsel for the assessee that p .....

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ction of providing services to the AE and therefore both has to be clubbed and aggregated for the purpose of determination of ALP. - Disallowance of electricity expenses - Held that:- In the case of the assessee on hand, no employment/service condition was relied upon or produced by the assessee either before the authorities below or before us to show that it was an obligation of the assessee company to pay the electricity bill of the residence of the Director. Accordingly, in the facts and .....

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extension of the existing business of the assessee. Further the assessee has claimed before us that the assessee is having sufficient non- interest bearing fund. Therefore no disallowance of interest was contended before us. Since the Assessing Officer has given only a passing reference without examining the details of the availability of the assessee's own fund therefore in the facts and circumstances of the case, we are of the opinion that this issue requires a proper examination and verifica .....

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a tool for the assessee to develop further accounting software and therefore undisputedly the said expenditure is having an enduring benefit for a long period of time. Similarly, the expenditure on Tally dictionary and manual in various languages is also one time expenditure for creating/acquiring the software to be used in long run. Accordingly, we do not find any error or illegality in the order of the authorities below treating these expenditure as capital in nature. However, since the Assess .....

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the assessee that the foreign trip of the Directors were for any business purpose. In the absence of any terms and conditions of the service of the Directors that they will be allowed to travel for personal foreign trip, this expenditure cannot be considered as laid out wholly and exclusively for the purpose of business of the assessee as per section 37(1) of the Act. Accordingly, we do not find any error or illegality in the orders of the authorities below. - Disallowance of claim of bad de .....

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case as well as the various precedents stated above, we are of the considered opinion that when the claim of bad debts written off in question was an allowable claim against the income of the assessee prior to the transfer and was also allowable claim in the hands of the subsidiary post transfer then the retransfer of the said debts to the assessee as per the agreement between the parties would not change its character from allowable deduction under Section 36(1)(vii) to a non-allowable capital .....

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n 143(3) r.w.s. 144C in pursuant to the directions of the Dispute Resolution Panel (in short DRP ) dt.28.9.2011 for the Assessment Year 2007-08. 2. The assessee has raised the following grounds : GROUNDS RELATING TO NATURAL JUSTICE The learned Assessing Officer has erred in passing the order, without considering all the submissions and/or without appreciating properly the facts and circumstances of the case and the law applicable. 2. GROUNDS RELATING TO PROCEDURE The learned Assessing Officer ha .....

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ounts computed under chapter X. (ii) the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under chapter X. (iii) there is no provision in chapter X indicating that it would override the computation provisions of business income or the normal understanding of the term "income". 4. GROUNDS ON DETERMINATION OF ARMS LENGTH PRICE & ADJUSTMENT MADE THEREON The lear .....

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ds the Arms Length price without appreciating the fact that the DRP has given directions without specifically meeting with the objections filed by the appellant. iv) ignoring the fact that the TPO has quantified an adjustment towards notional interest on debtors which is an issue which was not' referred to him for determining the arms length price and the action of the TPO is beyond jurisdiction. v) ignoring the ratio laid down by the High Court of Delhi in the case of Commissioner of Income .....

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troduced w.e.f 01.06.2011 which confirms the fact that prior to 01.06.2011 the TPO could not have' exercised such power. vii) ignoring the fact that not charging interest on debtors cannot be considered as an international transaction within the meaning of section 928 of the Act and therefore no adjustment could be made towards arms length price. viii) ignoring the fact that in the absence of any interest being charged, there is no international transaction within the meaning of section 928 .....

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olled transaction to substantiate the stand that such method has been adopted. xii) ignoring the ratio laid down by the Hon'ble ITAT, Mumbai in the case of M/s.Nimbus Communications Ltd V. ACIT Circle 11 (1), Mumbai (2010) 38 SOT 246 (Mum), wherein it has been held that no adjustment -towards interest can be quantified on bills outstanding for services rendered. xiii) ignoring the ratio laid down by the Hon'ble ITAT, Murnbai in the case of M/s.Nimbus Communications Ltd for the A.Y.2004-0 .....

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Assessing Officer has erred in i) disallowing ₹ 6,76,598/- out of the electricity expenses claimed by the appellant. ii) not appreciating the fact that Mr. Bharat Goenka for whose residence the electricity expenses were incurred, operates from the residence also for the reason that the product manufactured and marketed by the appellant is of such nature that it needs the intellectual input of Mr.Bharat Goenka who in fact invented the product being Tally Accounting Package. Ground No.6 - T .....

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; 62,22,859/- out of the interest claimed as not revenue on the ground that on capital work in progress of ₹ 5,07,98,8501- interest at 12.25% is required to be disallowed. ii) ignoring the position of law laid down under the provisions of section 36(1 )(iii) of the Act, wherein the interest on capital borrowed is allowable as revenue once such funds are utilized for the purpose of the business activity. iii) quantifying an arbitrary disallowance at 12.25% on the amount of ₹ 5,07,98,8 .....

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in the earlier years. vi) quantifying an arbitrary disallowance ignoring the ratios laid down by various courts that unless supported by specific material evidence, the principle of res- judicata is required to be followed. vii) quantifying a disallowance out of the interest expenses without establishing the nexus between the borrowed funds on which interest was claimed and the capital work -in-progress. viii) quantifying a disallowance out of interest expenses ignoring the that the appellant c .....

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lopment expenses to the extent of ₹ 39,86,733/- is capital in nature and allowable as revenue. ii) ignoring the fact that expenditure to the extent of ₹ 14,44,012/- out of the above represented expenses revenue in nature incurred in the process of development of a new accounting package which was shelved and therefore ought to be allowed as revenue. iii) ignoring the fact that expenditure to the extent of ₹ 20,92,721/- out of the above represented expenses revenue in nature in .....

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n this issue wherein the Assessing Officer has recommended that the expenditure of ₹ 4,50,000/- be allowed and under the circumstances, the same could not have been disallowed in the assessment. Ground No. 9.- The learned Assessing Officer erred in i) disallowing foreign travel expenses to the extent of ₹ 21 ,03,465/- Ion the ground that the same was incurred for the foreign travel of directors Mr.Bharat Goenka and Mrs. Sheela Goenka and therefore cannot be allowed as expenditure. ii .....

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fact that these are trade debtors were consequent to sale of Tally packages in the earlier years by the appellant and under law if not recovered are to be allowed as bad debts. iii) ignoring the fact that M/s.Tally India Pvt Ltd is a subsidiary of the appellant and therefore under the provisions of section 47(iv) of the Act any transaction of transfer of asset is not regarded as a transfer and the debt continued to be the debts of the appellant. iv) ignoring the fact that though the marketing d .....

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n nature and offered for tax and the intermediary transaction of transfer and retransfer would not vary the nature of debt. Ground No.11 In view of the above and the other grounds to be adduced at the time of hearing, the appellant prays that the Hon'ble Tribunal may kindly delete i) the addition of ₹ 4,60,42,886/- made consequent to adjustment of arms length price. ii) the addition of ₹ 6,76,599/- under electricity expenses. iii) the addition of ₹ 5,42,999/- out of foreign .....

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ub-grounds are independent and without prejudice to one another. The appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at the time of hearing of the appeal so as to enable the Income Tax Appellate Tribunal to decide the appeal according to law. The appellant prays accordingly. 3. The Ground Nos.1 to 3 are general in nature and does not require any specific adjudication. 4. Ground No.4 is regarding Transfer Pricing Adjustment .....

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AE, Tally Solutions FZ LLC, Dubai, UAE. The services are rendered on time and material basis. 2.1 Financial Results. The financials of the company for the FY 2006-07 are as under : Description Rs. Operating Revenue 28,16,18,522 Operating Cost * 15,48,26,006 PBIT 12,67,92,516 PBIT as % of Cost 81.89% *Exceeding provision for doubtful advances, investment written off, forex loss and interest expenses. 2.2 International transactions The following are the new international transactions entered into .....

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ppropriate method. But, the taxpayer selected gross profit to operating revenues as the profit level indicator. Under TNMM, it is the net profit that is realized from international transactions have to be compared with net profit realized by an uncontrolled enterprise. This office carried out a separate analysis for software development services and searched for suitable comparables in Prowess and Captialine databases by applying certain criteria. The search yielded 26 comparables with arithmeti .....

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of ₹ 28,16,18,522 at arm s length by noting the fact that the assessee s margin at 81.89% in comparison to the mean margin of comparables at 25.14%. However the TPO proposed to proceed to apply the provisions of Chapter X by treating the outstanding due with the AE as international transaction. The TPO observed that the assessee has extended credit facility similar to a working capital loan to its AE without charging any interest. Similarly uncontrolled transaction would have provided for .....

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axpayer has extended credit facility similar to a working capital loan to its AEs without charging any interest. Similar uncontrolled transaction would have provided for interest. In view of this fact the international transaction representing extended credit facility without charging interest is not at arm s length price, within the meaning of section 92C(3)(a), (b) and (c) of the Income Tax Act read with Rule 10B(1)(a) of the Income Tax Act, the arm s length interest is determined by following .....

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inancial health as that of the tax payer s associated enterprises is considered. In view of the above discussion, the interest rate of 14% p.a. (average yield on unrated bonds for the FY 2006-07) was proposed to be adopted as the uncontrolled interest rate to arrive at the interest charged at arm s length. The taxpayer in its letter dt.5.3.2010 did not raise any specific objection on the interest rate except arguing that no interest is chargeable on the receivables based on business income. Acco .....

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ation of the sale proceeds to the AE does not constitute an international transaction. He has referred to the Section 92(1) of the Income Tax Act, 1961 (in short 'the Act') and submitted that the provisions of Chapter X can be applied only for computation of income arising from an international transaction having regard to the ALP. When a transaction does not result any income or no income arises from the transactions then the same cannot be the subject matter of computation of ALP as pe .....

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ny interest or has any right to charge interest on the outstanding due to the AE then the question of computation of income having regard to the ALP does not arise as per the provisions of Chapter X of the Income Tax Act, 1961. For applying the provisions of Chapter X income must arise from the transaction. In the absence of any income arising from the transaction the computation of ALP is not mandated under Chapter X of the Act. In support of his contention, he has relied upon the decision of H .....

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ssue of completing the measure of ALP to the value for consideration of itself does not arise. There must be an international value which is chargeable to tax for invoking the provisions of Chapter X. 4.2.1 Alternately the ld. counsel has submitted that it is not an independent international transaction when the TPO has accepted the international transactions provided to the AE at arm s length. Therefore no separate adjustment can be made by treating the extension of the credit period to the AE .....

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mitted that the transaction of allowing credit to the AE for abnormal period is covered under the definition of international transactions under Section 92B r.w. Explanation. He has also referred to the service agreement between the assessee and AE and submitted that the assessee is entitled to charge interest on delayed payment from the AE therefore the transaction of extending the credit period for abnormal period is an international transaction and the income from the said international trans .....

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sessee. It is pertinent to note that if the argument advanced by the ld. counsel for the assessee is accepted then it would result to render the provisions of Chapter X redundant. The proposition advanced by the ld. counsel for the assessee would lead to the situation where in a case the assessee is charging less price in comparison to the arm s length price from its AE then the said transaction would be decided as per the provisions of Chapter X by comparing the same with uncontrolled comparabl .....

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e case where the assessee is charging or receiving the price under the international transaction then there cannot be any computation of income having regard to the ALP where the related parties decided not to charge any price of the international transaction and consequently the said provision of Chapter X would be conveniently circumvented by each and every assessee having international transaction with the AE by not charging any price or receiving any price from the international transaction. .....

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as under : 38. If the above provision is contrasted with the provisions of Chapter X of the Act and in particular Section 92 thereof, it would be noticed that the crucial words "shall be chargeable to income tax" which are found in Section 42(2) of the 1922 Act are absent in Chapter X of the Act. We pointed out this difference in the two provisions to the learned Solicitor General and he agreed that the above difference exists. However, according to him this was in view of the fact th .....

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s /charges to tax total income of the previous year. This would take us to the meaning of the word income under the Act as defined in Section 2(24) of the Act. The amounts received on issue of shares is admittedly a capital account transaction not separately brought within the definition of Income, except in cases covered by Section 56(2) (viib) of the Act. Thus such capital account transaction not falling within a statutory exception cannot be brought to tax as already discussed herein above wh .....

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Bombay Tyres India Ltd. Vs. Union of India reported in 1984 (1) SCC 467 wherein it was held that the charge of excise duty is on manufacture while the measure of the tax is the selling price of the manufactured goods. In this case also the charge is on income as understood in the Act, and where income arises from an International Transaction, then the measure is to be found on application of ALP so far Chapter X of the Act is concerned. The arriving at the transactional value/ consideration on t .....

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n fruits and tree. Income is a flow while capital is a fund. The Privy Council in CIT v/s. Shaw Wallace & Co., Ltd. 6 ITC 178 (PC) has colourfully stated "Thus income has been likened pictorially to the fruit of a tree or the crop of a field. It is essentially the produce of something which is often loosely spoken of as capital." It is clear from the above observation of the Hon'ble High Court that there is a classical distinction between the income and capital which has been e .....

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e do not find any substance in the arguments and propositions raised by the ld. counsel for the assessee that provisions of Chapter X are not applicable in this case. 5. As regards the alternative plea, we find that an identical issue has been considered by this Tribunal in a series of decisions. In the case of M/s. Goldstar Jewellery Ltd. Vs. JCIT (supra), Mumbai Bench of the Tribunal while dealing with an identical issue has held in para 8 as under : 8. We have considered the rival submissions .....

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proposed adjustment of ₹ 2,49,95,139/-. The DRP though concurred with the view of the Assessing Officer/TPO on the issue of international transaction, however, the adjustment was reduced by applying the interest rate of 7% instead of 18.816% applied by the TPO. The first issue raised by the assessee is whether the aggregate period extended by the assessee to the AE which is more than the average credit period extended to the non-AE would constitute international transaction. We are of the .....

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transaction. However, this transaction of allowing the credit period to AE on realization of sale proceeds is not an independent international transaction but it is a closely linked or continuous transaction along with sale transaction to the AE. The credit period allowed to the party depends upon various factors which also includes the price charged by the assessee from purchaser. Therefore, the credit period extended by the assessee to the AE cannot be examined independently but has to be cons .....

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ely linked is also supported by OECD transfer pricing guidelines. In order to examine whether the number of transactions are closely linked or continuous so as to aggregate for the purpose of evaluation what is to be considered is that one transaction is follow-on of the earlier transaction and then the subsequent transaction is carried out and dependent wholly or substantially on the earlier transaction. In other words, if two transactions are so closely linked that determination of price of on .....

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of credit period allowed to the AE for realization of sale proceeds without having sale to AE. The credit period extended to the AE cannot be treated as a transaction stand alone without considering the main transaction of sale. The sale price of the product or service determined between the parties is always influenced by the credit period allowed by the seller. Therefore, the transaction of sale to the AE and credit period allowed in realization of sale proceeds are closely linked as they are .....

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the AE is an international transaction, however, for the purpose of determining the ALP, the same has to be clubbed or aggregated with the sale transactions with the AE. Even by considering it as an independent transaction the same has to be compared with the internal CUP available in the shape of the credit allowed by the assessee to non AE. When the assessee is not making any difference for not charging the interest from AE as well as non-AE then the only difference between the two can be con .....

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s is not a transaction of loan or advance to the AE but it is only an excess period allowed for realization of sales proceeds from the AE. Therefore, the arm s length interest in any case would be the average cost of the total fund available to the assessee and not the rate at which a loan is available. Accordingly, we direct the Assessing Officer/TPO to re-do the exercise of determination of ALP in terms of above observation. By following the said decision the Tribunal in the case of Informatio .....

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ed only with the lending or borrowing of money and not in case of sale. We express no opinion on the above reasoning of the ITAT and keep that reasoning open for debate in an appropriate case. However, in the facts of the present case, the specific finding of the ITAT is that there is complete uniformity in the act of the assessee in not charging interest from both the Associated Enterprises and non-Associated Enterprises debtors and the delay in realization of the export proceeds in both the ca .....

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he A.O/TPO to redo the exercise of determination of ALP by considering the credit period allowed in realization of sales proceeds as closely linked transaction with the transaction of providing services to the AE and therefore both has to be clubbed and aggregated for the purpose of determination of ALP. 6. Ground No.5 is regarding disallowance of electricity expenses. 6.1 During the course of assessment proceedings, the Assessing Officer noted that the assessee has debited an amount of ₹ .....

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ot accept this explanation of the assessee as the assessee did not furnish any supporting evidence. Accordingly, the Assessing Officer disallow the payment of electricity expenses and added to the total income of the assessee. The assessee challenged the action of the Assessing Officer before the DRP. The DRP has not given any specific finding except the confirmation of action of the Assessing Officer. 6.2 Before us, the ld. counsel for the assessee reiterated the contentions raised before the a .....

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re it cannot be allowed as an expenditure incurred wholly and exclusively for the purpose of business of the assessee. He has relied upon the orders of the authorities below. 6.4 We have considered the rival submissions as well as the relevant material on record. There is no such condition in the employment contract of the Director in question that the assessee company will bear the electricity expenditure of the residence of the Director. The Assessing Officer has emphatically stated in the ass .....

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and conditions on which they were appointed, it was not proper on the part of the AO to disallow 1/6th of the expenditure incurred by the assessee on maintenance of its vehicles. Sec. 309 of the Companies Act, 1956, provides the modality for determining the remuneration payable to directors, including any managing or full-time director. Such remuneration is payable either as stated in the articles of association of the company or in accordance with the resolution or if provided by articles, by a .....

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ny other benefit or amenity free of charge or at a concessional rate, (c) any expenditure which would have been incurred by the director but for such expenditure having been incurred by the company, (d) any expenditure incurred by the company for the purpose of any insurance on the life, etc. Therefore, it is clear that the expenditure incurred by the assessee-company on maintenance of vehicles which were available to the directors for their personal use would fall within the meaning of "re .....

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Thus it is clear that the expenditure incurred by the assessee in the said case for maintenance of vehicle was part of the remuneration as well as terms and conditions of the employment/service contract. Therefore the same was considered as business expenditure. In the case of the assessee on hand, no such employment/service condition was relied upon or produced by the assessee either before the authorities below or before us to show that it was an obligation of the assessee company to pay the e .....

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n loan to subsidiaries. The Assessing Officer observed that this foreign exchange loss on loan is capital in nature and therefore the claim of the assessee to the extent of the said amount was disallowed. 7.2 We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. The issue of allowability of foreign exchange loss has to be considered in view of the Hon'ble Supreme Court in the case of CIT Vs. Woodward .....

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ee fund which could have been used for the purpose of capital work in progress. Accordingly, the Assessing Officer has disallowed the proportionate interest expenditure amounting to ₹ 62,22,859 by applying 12.25% average prime lending rate. 8.2 Before us, the ld. counsel for the assessee has submitted that the expenditure of capital work in progress has been incurred for business asset therefore, the provisions of section 36(1)(iii) is applicable in respect of the claim of interest. He has .....

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iance Utilities & Power Ltd. 313 ITR 340 (Bom). 8.3 On the other hand, the learned Departmental Representative has submitted that the Assessing Officer has given finding that the assessee is not having his own fund therefore the assessee has utilized the borrowed fund for capital work in progress. Accordingly the Assessing Officer is justified in disallowing the proportionate interest expenditure. He has relied upon the orders of the authorities below. 8.4 We have considered the rival submis .....

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nt non- interest bearing fund. Therefore no disallowance of interest was contended before us. Since the Assessing Officer has given only a passing reference without examining the details of the availability of the assessee's own fund therefore in the facts and circumstances of the case, we are of the opinion that this issue requires a proper examination and verification of the fact with regard to the availability of sufficient fund with the assessee for the purpose of capital work in progres .....

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sessee company has debited an amount of ₹ 39,86,733 towards the following : a. System Development in relation to Tally Asset Rs.14,44,012. b. Tally Dictionary and Reference Manual Translation (Hindi, Marathi, Gujarathi, Bengali, Punjabi, Tamil, Kannada, Telugu, Malayalam, English) Rs.20,92,721. c. Web Consultancy and Development Rs.4,50,000 Rs.39,86,733. The Assessing Officer was of the view that the above expenditure was capital in nature and therefore it was disallowed. Before the DRP th .....

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imed towards subscription for web site for providing information to Tally customers. Such payment is made at ₹ 50,000 per month. The expenditure is incurred in the business interest of the assessee and is an allowable expenditure. The DRP did not accept the contention of the assessee as regards the expenditure on system development in relation to Tally Ascent as well as Tally Dictionary and reference manual and held that the said expenditure has given enduring benefit to the assessee compa .....

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relied upon the orders of the authorities below and submitted that the enduring benefit would be received by the assessee on account of the said expenditure not limited to the financial year under consideration. 9.3 We have considered the rival submissions as well as the relevant material on record. We find that the expenditure incurred for system development in relation to Tally Ascent which is a tool for the assessee to develop further accounting software and therefore undisputedly the said ex .....

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reciation on the said amount is allowable as per the rate applicable. Accordingly, we direct the Assessing Officer to allow depreciation on this amount. 10.1 Ground No.9 is regarding disallowance of foreign expenses. The Assessing Officer noted that the assessee has debited an amount of ₹ 36,47,254 towards travel expenses. On verification of record, it was found that the said amount includes the sum ofRs.21,03,465 incurred towards travel of Mr. Bharat Goenka and Smt. Sheela Goenka, Directo .....

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avel of the Directors was for business purpose, the Assessing Officer disallowed the expenditure of ₹ 21,03,465. The DRP has confirmed the disallowance made by the Assessing Officer. 10.2 Before us, the ld. counsel has reiterated the contentions raised before the authorities below and submitted that the expenditure has been incurred wholly and exclusively for the business purpose of the assessee as the travel was undertaken by the Directors of the assessee company. 10.3 On the other hand, .....

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company vide its letter dt.29.11.2010 has contended that Mr. Goenka and Mrs. Sheela Goenka the Director of the assessee company travelled to get away from daily Hustle-Bustle. 12.4 This enables them to recharge their Batteries and Provides tremendous opportunity for New Discovery and perspective. It further contends that they meet local customers and potential business partners. It is clear from the explanation furnished before the Assessing Officer that the foreign travel by the Directors was .....

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n the orders of the authorities below. 11. Ground No.10 is regarding disallowance of claim of bad debts. 11.1 During the Financial Year relevant to Assessment Year under consideration the assessee company transferred its software business division (sales and marketing of Packet software products and services and incidental thereto) to its wholly owned subsidiary Tally (India) Private Limited ( TIPL ) on a going concern basis with effect from 1.2.2006 for a lumpsum consideration of ₹ 121,42 .....

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tors. The same would be transferred to the assessee as part of deal. On realization of the facts that TIPL would not be able to recover the sundry debtors transfer as part of software business division the sundry debtors amounting to ₹ 37,94,44,180/- were retransferred to the assessee by the TIPL. The assessee written off the entire amount of ₹ 37,94,44,180 however in computation of income the assessee claimed only an amount of ₹ 16,25,61,749 after an adjustment of amount of &# .....

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alternative, capital loss of ₹ 16,25,61,749 at the best is allowable in Assessment Year 2009-10 as per the agreed terms . Thirdly, the Assessing Officer observed that the claim of the assessee would be allowable if it prove beyond reasonable doubt that the sundry debtors were not realizable by TIPL after it has taken effective steps to recover the amounts. The assessee challenged the action of the Assessing Officer before the CIT (Appeals) but could not succeed. 11.2 Before us, the learne .....

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company transferred this sale and marketing division to its wholly owned subsidiary TIPL under Slump Sale Agreement and pursuant to the said sale the assets and liabilities including debtors and creditors have been transferred to TIPL with an understanding that if the debtors are not realized by the TIPL then same shall be transferred to the assessee. During the year under consideration as agreed between the parties the unrealized debts have been retransferred by the TIPL to the assessee. Thus .....

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g division was for the purpose of better control over the business on the core areas. Thus the transfer of the division has business purposes in view of the fact that a division was transferred to the wholly owned subsidiary. The losses having nexus with the business are allowable deduction under Income Tax Act. In support of his contention the learned Authorised Representative of the assessee has relied upon Hon'ble Rajasthan High Court in the case of CIT Vs. Anjani Kumar 259 ITR 11 and sub .....

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acquire agricultural land to set up a factory but when agriculture land was not acquired no asset was came into existence. Therefore there is no question of allowing depreciation on such asset. The learned Authorised Representative has relied upon the decision of Hon'ble Supreme Court in the case of Badridas Daga Vs. CIT 34 ITR 10 and submitted that when the employee of the assessee withdrew the money from the bank account and misappropriate the same, the claim of business loss was disallow .....

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s. The learned Authorised Representative has pointed out that within a period of 3 years means any of the years between the first year to third year and not at the end of the third year. Thus once the assessee has written off the amount that being not-realisable/recoverable which has satisfied the requirement of claim as deduction as well as complied with the terms of transfer agreement. He has further contended that the assessee shall not be required to prove that the debts have become non-reco .....

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the sundry debtors as agreed upon between the parties. The assets and liabilities were transferred with clear understanding that unrealized debtors would be retransferred to the assessee within a period of three years. On retransfer of the sundry debtors, the consideration receivable from TIPL on slump sale has been reduced to the extent of unrealized debtors. Thus in effect the debtors were returned as part of settlement of consideration. The learned Authorised Representative has submitted tha .....

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) of the Act. He has also relied upon the following judgments : a) CIT Vs. T. Veerabhadra Rao & K. Koteswara Rao & Co. 155 ITR 152 (SC). b) CIT Vs. Nainital Bank Ltd. (1965) 55 ITR 707 (SC). 11.3 On the other hand, the learned Departmental Representative has submitted that once the debts were transferred being part of the slump sale then the claim of the assessee is not allowable as it will be a capital loss being reduction of consideration of slump sale. Even the capital loss of the amo .....

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ment it is a condition that there could be transfer of entire undertaking or entity and therefore part of undertaking is not permissible. A slump sale includes a transfer of entire assets and liabilities and the consideration is lump sum consideration of the entire business an individual asset and liability is not permissible. The bad debts in any case does not belong to the assessee but to the transferee TIPL and therefore the assessee cannot claim the deduction of the bad debts written off. He .....

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he said division were transferred to TIPL. The Assessing Officer has noted that the assessee has disclosed the arrangements between the assessee and its subsidiary in the accounts for the Assessment Year 2006-07 that it may have to recognize eventual loss if any arising out of non-realisation of the sundry debtors transferred to TIPL. The said note to accounts has been placed at page 53 of the paper book as under : 1. Transfer of business to subsidiary During the financial year, the company as ; .....

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e is no gain or loss on the transfer of the said business. In terms of Slump Sale Agreement dated 01st February 2006 between the company and its subsidiary, Tally (India) Pvt. Ltd., for the sale of the software business division of the company, the company may have to recognize eventual loss, if any arising out of non-realisation of sundry debtors (debtors not realized within three years from the date of the agreement). Transfer to Tally India Pvt. Ltd. a part of the slump sale. However, the Ass .....

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uction by the wholly owned subsidiary of the assessee in respect of these debtors gone bad and becomes unrealizable as these debtors were transferred under the Slump Sale transaction. This proposition was considered by the Hon'ble Supreme Court in the case of CIT Vs. T. Veerabhadra Rao & K. Koteswara Rao & Co. (supra) wherein the Hon'ble Supreme Court has recorded the controversy involved in the case at page 155 as under : 5. It is not disputed that the assessee succeeded to the .....

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of the debt and that the balance of ₹ 15,100 was written off by the assessee as irrecoverable. The question is whether money owed by a debtor under a transaction with a predecessor firm can be written off as irrecoverable in the accounts of its successor, the assessee, in a subsequent year and could be claimed as a bad debt under cl. (vii) of sub-s. (1) of s. 36 of the IT Act, 1961. As it is clear from the relevant facts of the said case that the assessee claimed the deduction on account o .....

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along with the number of other rights comprising the subject of the transfer. If the law permits the transfer to treat the whole or part of the debt as irrecoverable and to claim as deduction on that account it seems difficult to accept that the same right should not be recognized in the transferee. It is merely an incident flowing from transfer of business together with its assets and liabilities from the previous owner to the transferee. The decision which should be on a proper appreciation o .....

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the assessee referred to in sub-cl. (a) must necessarily mean the identical assessee referred to in sub- cl. (b). A successor to the pertinent interest of a previous assessee would be covered within the terms of sub-cl. (b). The successor assessee, in effect, steps into the shoes of his predecessor. It is understandable that if the predecessor is entitled to reduction of the amount as bad debt, the successor shall also be entitled to claim the said deduction. If this analogy is applied to the f .....

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ts original state where the assessee prior to the transfer of the debts to the subsidiary was eligible to have claimed the deduction of bad debts written off. It is not in dispute that the conditions as prescribed under section 36(2) has been satisfied in this case that the amounts of debts has already been considered as part of the income in the earlier year in the hands of the assessee. It is borne out from the record that the assessee has made provision of an amount of ₹ 43,22,86,450 an .....

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k of sundry creditors to the extent of ₹ 21,68,82,431 adjusted against the gross amount of the provision of ₹ 43,22,86,450. Once the sundry creditors written back as well as sundry debtors written off are accepted on parity then the claim of written off amount cannot be given a different treatment by assigning the reason that it is a los in capital field. In any case when this amount of bad debt written off was undisputedly allowable in the hands of the assessee prior to the transfer .....

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lowing the judgment of Hon'ble Supreme Court in the case of CIT Vs. T. Veerabhadra Rao & K. Koteswara Rao (supra) has held in paras 11 & 12 as under : 11. The view which we are inclined to take finds support from a decision of the Supreme Court inCommissioner of Income Tax v T. Veerabhadra Rao. (155 ITR 152) In that case the assessee succeeded to the business of a firm and took over all its assets and liabilities including a debt due from a third party. The assessee carried on the bu .....

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f section 36 were not fulfilled. The Supreme Court held that the recovery of the debt was allowed to be transferred from the transferor to the transferree and if the law permits the transferor to treat the debt as irrecoverable and to claim a deduction on that account, the same right would be recognized as inhering in the transferee. For the purpose of present appeal, the judgment of the Supreme Court is of significance since it decides the issue as to whether the requirements of clause (i) of s .....

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nto account in the income of the assessee for the assessment year 1963-64 when the interest income accruing thereon was taxed in the hands of the assessee. The interest was taxed as income because it represented an accretion accruing during the earlier year on money owed to the assessee by the debtor. The item constituted income because it represented interest on a loan. The nature of the income indicated the transaction from which it emerged. The transaction was the debt, and that debt was take .....

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