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2018 (6) TMI 1711

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....ces of the case and in law, the Learned CITA) has erred in upholding disallowance of club expenses, aggregating to Rs. 2,31,157 on the alleged ground that vouchers substantiating the claims were not produced before the Learned CITA). 3. On facts and in circumstances of the case and in law, the Learned C1TA) has erred in upholding disallowance made by the Learned A() by applying provisions of Rule 8D of the Income-tax Rules, 1962 ("the Rules") while making a disallowance under Section 14A of the Income-tax Act, '1961 ("the Act") 4. On facts and in circumstances of the case and in law, the Learned CITA) has erred in upholding disallowance of gift expenses, aggregating to Rs. 19,95,476. 5. On facts and in circumstances of the case and in law, the Learned CITA) has erred in confirming disallowance of compensation payment of Rs. 75,00,000 to Mr. SS Mohla on the alleged ground that the same is in the nature of commission on which tax has not been deducted as per provisions of Section 40(a)(ia) of the Act. 6. On facts and in circumstances of the case and in law, the Learned CIT(A) has erred in not appropriately adjudicating oil disallowance of Rs. 19,04,044 being write-off of ....

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....king various additions like disallowance of club expenses, disallowance under section 14A, disallowance of product trial expenses treating it as capital in nature, disallowance of gift expenses, disallowance of compensation paid to employee under section 40(a)(ia), rejection of bad debt claim, disallowance of written off of doubtful advances, disallowance of payments made to associate concern under section 40A(2) etc. The AO also rejected various additional claims made by the assessee on the ground that additional claims made by the assessee cannot be allowed at this stage without filing revised return by relying upon the decision of Hon'ble Supreme Court in the case of Goetz India Ltd. vs. CIT 284 ITR 323. 3. Aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A). The assessee has filed elaborate written submissions on additions made by the AO which has been reproduced by the Ld. CIT(A) in his order. The Ld. CIT(A) after considering relevant submissions of the assessee partly allowed the appeal, wherein he has deleted additions made by the AO towards disallowance of product trial expenses and disallowance of written off of doubtful debts, howeve....

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....etails for balance amount of Rs. 2,30,623/- before the Ld. CIT(A) vide its submission dated 22.01.13. Such details have been furnished before us in the form of paper book. Therefore, we are of the considered view that the issue needs to be reexamined by the AO, in the light of evidences filed by the assessee. Hence, we set aside the issue to the file of AO and direct him to consider the issue afresh after affording a reasonable opportunity of hearing to the assessee. 6. The next issue that came up for our consideration is disallowance of expenses incurred in relation to exempt income under section 14A of the Income Tax Act, 1961. The facts with regard to the impugned order are that during the year under consideration the assessee had earned dividend income of Rs. 1,03,17,000/- which was claimed exempt under section 10(34) of the Act. The assessee also had made suomoto disallowance of Rs. 21,26,636/- in its return of income. However, such disallowance has been revised to Rs. 4,15,300/- vide its submission dated 23.08.11 before the AO. The AO has disallowed the expenditure incurred in relation to exempt income under section 14A by invoking rule 8D(2)(i), rule 8D(2)(ii) & rule 8D(2)(....

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.... with regard to computation worked out by the AO by invoking rule 8D(2) of Income Tax Rules, 1962. According to the assessee, no disallowance is called for in respect of interest expenses as it has not invested any borrowed funds in mutual funds which earned exempt income which is evident from the fact that its own funds are more than value of its investments. The assessee further contended that when mixed funds are available, both interest free and interest bearing, then a presumption would arise that investment could be out of interest free funds available with the assessee. We find force in the arguments of the assessee for the reason that the Hon'ble Bombay High Court in the case of "CIT vs. Reliance Utilities and Power Ltd." (2009) 313 ITR 340 (Bom) has held that when mixed funds are available a general presumption is drawn that the investments in securities which earn the exempt income are out of own funds. Therefore, we are of the considered view that once the assessee has proved the availability of own funds in excess of value of investments, then the question of disallowance of interest expenses under rule 8D(2)(ii) does not arise. In this case, the assessee has filed nece....

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....ature of expenses incurred by the assessee and also disallowances quantified in the light of exempt income earned for the year and hence we are of the considered view that the AO was right in invoking rule 8D(2)(iii) to quantify disallowance in respect of expenses incurred in relation to exempt income. Hence, we are of the considered view that there is no error in the computation worked out by the AO under rule 8D(2)(iii). 10. The next issue that came up for consideration is disallowance of gift expenses of Rs. 19,95,476/-. The assessee had incurred gift expenses which were given to employees, the dealers, customers and other business associates and some gifts to government officials on festival occasions. Details of expenses were submitted to the AO. The AO disallowed gift expenses on the ground that the assessee had failed to furnish evidences for actual utilisation of gift items, their necessity and purpose of business and accordingly, disallowed the entire expenditure incurred by the assessee. It is the contention of the assessee that expenses incurred under gift expenses are wholly and exclusively for the purpose of business which are given to employees, dealers and customers....

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....that there was no employer employee relationship at the time of payment of such compensation, however, the said payment was purely in nature of disputed commission and the assessee ought to have deducted the tax on the same. Since assessee failed to deduct TDS on commission payment the AO was right in disallowing such compensation under section 40(a)(ia) of the Act. 13. The Ld. A.R. for the assessee submitted that compensation paid to Mr. SS Mohla is one time, full and final settlement which was paid as per the settlement before Hon'ble Delhi High Court and also such payment is made for the purpose of restraining Mr. SS Mohla from sharing any confidential document, information, business and trade secret of the assessee with any competitor or third party. The assessee further contended that nowhere in the said agreement it is stated that the payment made to Mr. SS Mohla is in lieu of commission for securing orders, therefore, the question of deduction of TDS does not arise. In this regard, the Ld, A.R. relied upon certain judicial precedents, including the decision of Hon'ble Supreme Court in the case of CIT vs. Ashok Leyland Ltd. (1972) 86 ITR 549. 14. We have heard both the part....

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....O disallowed write off of bad debts on the ground that the conditions prescribed under section 36(2) were not satisfied as the said deposits were never a trading deposits but balancing items, hence, deduction could not be allowed under section 36(1)(vii) of the Act. The Ld. CIT(A) partly allowed the claim of the assessee by holding that though the write off of deposits would not fall within the purview of section 36(1)(vii), it would be allowable as business loss under section 28 of the Act, provided the deposits were trade advances. Accordingly, directed the AO to verify the nature of advances and allow only trade advances. 16. The Ld. A.R. submitted that placing deposits with customers, distributors and government agencies at the time of submitting tenders was a business requirement and such deposits are incurred wholly and exclusively for the purpose of business. The Ld. A.R. further submitted that the said write off is allowable under section 37(1) of the Act, being revenue in nature and incurred wholly and exclusively for the purpose of business. In this regard, he relied upon certain judicial precedents, including the decision of Hon'ble Delhi High Court in the case of Mohan....

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.... 18. The next issue that came up for consideration is disallowance of irrecoverable advances of Rs. 51,45,651/-. The assessee has claimed a deduction of write off of advances which includes debit balance outstanding in DEPB provision account and amount receivable for duty drawback for recovery from Vietnam exports as the same were irrecoverable. The AO disallowed written off of irrecoverable advances on the ground that such advances were not bad debts of customers and hence could not be allowed under section 36(1)(vii) of the Act. The AO further observed that the assessee failed to show cause how these advances were irrecoverable. It is the contention of the assessee that export incentive in the form of duty entitlement of pass book accrued at the time of exports are offered to tax at the time of export and corresponding amount is shown under receivable as advance due. The assessee further contended that the objective of this scheme was to offset the incidence of customs duty by giving credit for tax is paid. To claim the set off of the import duty payable against the DEPB balance, the assessee should make application to the Customs Authorities within the time limit of 24 months fr....

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....ction 40A(2)(b) of the Act, the AO first ought to have formed an opinion that the payment was excessive in nature and then to compare with prevailing market rates. The AO has disallowed 50% of amount paid to associate concern without comparing such payments to the prevailing market rates. 21. Having heard both the sides and considered material on record, we find force in the arguments of the assessee for the reason that the assessee has furnished necessary details of payment made to its subsidiary company for rendering services. The AO has made adhoc disallowance of 50% without any reference to comparable cases to come to the conclusion that payments made by the assessee are excessive and unreasonable. Hence, we direct the AO to delete additions made towards disallowance of payments made under section 40(2)(b) of the Income Tax Act, 1961. 22. The next issue that came up for consideration is disallowance of unrealized foreign exchange pertaining to trade receivables. The assessee claimed a total foreign exchange loss of Rs. 2,58,00,129/-. This includes both realized as well as unrealized foreign exchange loss. Out of the said amount a sum of Rs. 1,68,39,128/- pertains to unrealize....

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....judication of additional ground by Ld. CIT(A) as filed by the assessee relating to the allowance of claim of Rs. 2,35,60,494/- which was wrongly disallowed by the assessee while filing the return of income under section 40(a) of the Act. 26. The facts in brief are that the assessee while computing the total income has wrongly disallowed a sum of Rs. 2,35,60,494/- under section 40(a) of the Act on the belief that tax at source has not been deducted on the same as per the provision of the Act. Subsequently in A.Y. 2009-10 it was realized by the assessee that TDS was not applicable on the said expenses and accordingly the same were claimed in the return of income for A.Y. 2009-10. However, the AO during the assessment proceedings did not allow the deduction of the said sum on the ground that the same pertains to the earlier year and not admissible during the year. 27. In the appellate proceedings, the assessee filed the additional ground vide letter dated 12.07.2013 before the first appellate authority requesting for the admission and adjudication of additional ground on this issue. However, the Ld. CIT(A) did not adjudicate the same. 28. After hearing both the parties and perusing....

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....xic in nature and hence it is mandatory to get products registered with Central Insecticides Board & Regulatory Committee of India. As a part of registration process, the product trials are required to be conducted to check whether the product could be used for certain other crops or seeds. The trials are conducted with approved research institutes. The AO was of the view that the new product trial run expenses gives enduring benefit and it enables the appellant company to enter into a new market and hence it was of capital in nature. The expenses are specifically allowed u/s.35 and hence, the same cannot be allowed u/s.37 as it was of capital in nature. 4.2 The submission of the Product Trial Process is as follows:  2.3.1 "Modus operandi of the Product Trial Process is as follows: 2.3.1.1 Since the Appellant is in the business of manufacturing and marketing pesticides and insecticides which are toxic in nature, the Appellant carries out certain in-house checks and analysis on the existing line of products that can be used on various crops (commercially). For such checking and analysis, the Appellant incurs substantial costs thereon. 2.3.1.2 It is pertinent to note tha....

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....rnal development analysis and checking is carried out by BCSL in the field on very small-scale for ascertaining the product suitability to Indian agro-climatic conditions The results are discussed in internal meetings and products are given 'go-ahead' for initiating the product registration process Product quality, bio-efficacy and toxicology analysis with the approved research association/university/college 1) Bio-efficacy & Residues-Field analysis at State Agricultural University ("SAUs"), Government Institutes & Private Laboratories 2) Toxicology analysis in Private Laboratories 3) Chemistry & Packaging at Quality Assurance & Development Department Laboratories ("QADDL") of BCSL Preparation of "Registration Dossier" Product quality, bio-efficacy and toxicology analysis reports received from research associations/university/colleges/other institutions is analysed and compiled into "Registration Dossier" for submission to the Regulatory Authority for registration. "Registration Dossier" is scrutinized and deficiencies may be raised by the Regulatory Authority-replies given by BCSL "Registration Dossier" is scrutinized and deficiencies may be raised by the Regulatory ....

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....rpose of carrying on and for furtherance of its business activities arid thus, this expenditure ought to be allowed as a deduction.  2.3.3 There is no enduring benefit as a result of product trial expenses 2.3.7.1 It is re-iterated that the Appellant is mandatorily required to get its products registered with the Regulatory Authority before the products can be commercially marketed in India. As a pan of this registration process, various product quality, bioefficacy and toxicology analysis are required to he conducted. Thus, such expenditure is statutorily necessary for Appellant in order to carry on its business activities. Hence, these expenses ought to be allowed as a deduction under section 3 7(1) of the Act. By incurring expenditure on testing of existing line of products of the Appellant which may /may not be used on another crop or seed, no benefit of enduring nature accrues to the Appellant. It is "revenue expenditure" in nature. 2.3.7.2 In the decision of the Hon'ble High Court of Kerala in the case of CIT vs Kerala State Industrial Development Corporation Ltd (182 ITR 62), it was held that expenses incurred in investigation research and feasibility study ....

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....he expenditure on product trials aggregating of Rs. 2,24,49,087 is not covered under section 35 of the Act. Accordingly, where the expenses do not fall within the specific category i.e. section 35 of the Act, the same needs to be allowed as "revenue" expenditure under section 37(1) of the Act. 23.4 We wish to submit that the above stand of the Appellant has been confirmed by the DRP during AY 2007-08 proceedings. For AY 2007-08, the Appellant's facts of the case were identical to the facts of the case for the year under consideration. After duly analysing and verifying the facts of the case for AY 2007-08, the Hon'ble DRP have accepted the contentions of Appellant to allow product trial expenses paid to associations / institutions (other than the institutions notified under section 35(1)(ii) of the Act for which weighted deduction is allowable) as revenue in nature and allowed deduction for the same under section 37(1) of the Act. Copy of directions issued by DRP for AY 2007-08 is attached herewith vide Annexure 7, page 132 to 143 of Paperbook for ready reference. 2.3.5 Without prejudice to the above submissions of the Appellant, depreciation be allowed on such product tria....

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....44] (Mumbai Tribunal) * Kotak Forex Brokerage Ltd. vs. ACIT [33 SOT 237] (Mumbai Tribunal) * ACIT vs. American Express Services India Ltd. [ITA 74/2003 ITA 75/2003 ITA 653/2005] (Mumbai Tribunal) * ITO vs Medicorp Technologies India Ltd. [122 TTJ 394] (Chennai Tribunal) * ACIT vs Real Image Tech. (P) Ltd. [120 TTJ 983] (Chennai Tribunal) * Ashoka Info (P) Ltd. vs. ACIT [123 TTJ 77] (Pune Tribunal)." 4.3 I have carefully considered the submissions of the appellant, the impugned assessment order. The product trial run expenditures are incurred by the appellant towards manufacture of a new product in the existing line of business. Since the insecticides and pesticides are toxic in nature, such products needs to be registered with the regulatory authority as mentioned above. Before getting the registration, the product has to be tested for its efficacy and toxicity. The appellant had debited a sum of Rs. 4,29,72,544/- towards product trial expenses under the head 'miscellaneous expenses'. The AO found that out of total Rs. 4.29 crores incurred, a sum of Rs. 2,05,23,457/- alone was paid to recognized associations /universities /organizations, etc which gets covered u/s.3....

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.... 4.5 In view of the clear finding given by the Hon'ble DRP, I am of the view that the expenditure which is not covered u/s.35(1)(ii) needs to be allowed u/s.37 and hence, the addition made by the AO is hereby deleted. This ground of appeal is allowed". 31. The Ld. D.R. submitted that the Ld. CIT(A) was erred in directing the AO to consider the additional claim of weighted deduction on account of product trial expenses without examining fulfillment of condition for the same. The Ld. D.R. further submitted that Ld. CIT(A) was not justified in holding that the product trial expenses do not fall in the ambit of section 37 of the Act, as the same relates to capital expenditure. The Ld. D.R. further submitted that the Ld. CIT(A) allowed the claim of the assessee without appreciating the fact that the product trial expenses are giving enduring benefit to the assessee therefore, it is a capital in nature and not allowable under section 37 of the Act. 32. It is the contention of the assessee that product trial expenses are incurred to develop product before a product can be used on particular crop. Therefore, such expenses are deductable under section 37 of the Act. The Ld. A.R. furt....