TMI Blog2018 (6) TMI 1711X X X X Extracts X X X X X X X X Extracts X X X X ..... prove availability of own funds. Hence, we are of the considered view that the AO was incorrect in disallowing interest expenses under rule 8D(2)(ii) of Income Tax Rules, 1962 and accordingly direct him to delete disallowance of interest expenses worked out under rule 8D(2)(ii). Disallowance of direct expenses under rule 8D(2)(i) - suo moto disallowance by assessee - AO has not recorded his satisfaction before disallowing further expenses - HELD THAT:- We find no merits in the arguments of the assessee for the reason that the AO has arrived at a satisfaction by rejecting computation worked out by the assessee towards suo-moto disallowances which means that the AO has considered the nature 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). Disallowance of gift expenses - assessee has failed to file any evidenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en obviously such deposits are coming within the ambit of bad debts written off under section 36(1)(vii) of the Act. If the assessee has given such deposit out of its borrowings then obviously it does not fulfill the conditions prescribed under section 36(2) of the Act. Hence, the Ld. CIT(A) has rightly set aside the issue to the file of AO to verify whether such advances are trade advances or not. Therefore, we are of the considered view that the Ld. CIT(A) was right in setting aside the issue to the file of the AO to verify the nature of advances. There is no grievance is caused to the assessee. The assessee can file necessary evidences before the AO to prove whether such advances are in the nature of trade advances or not. Hence, we are inclined to uphold the findings of the Ld. CIT(A) and reject the ground raised by the assessee. Disallowance of irrecoverable advances - debit balance outstanding in DEPB provision account and amount receivable for duty drawback for recovery from Vietnam exports as the same were irrecoverable - 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. CIT(A) the AO has allowed unrealized foreign exchange loss. Therefore, we are of the considered view that there is no merits in the ground taken by the assessee and accordingly we reject ground taken by the assessee. Non adjudication of additional ground by Ld. CIT(A) - ground filed by the assessee relating to the allowance of claim which was wrongly disallowed by the assessee while filing the return of income u/s 40(a) - HELD THAT:- we find that the assessee is within its right to raise the additional ground qua the deduction not claimed before the AO during the year. The assessee has raised the issue before the first appellate authority who has not adjudicated the same. In our opinion, the issue needs to be restored to the file of the Ld. CIT(A) so that the same could be decided on merits. The case of the assessee is squarely covered by the ratio laid down in the case of CIT vs. CIT vs. Pruthvi Brokers and Shareholders Pvt. Ltd. [ 2012 (7) TMI 158 - BOMBAY HIGH COURT] as held that the assessee can raise before the appellate authorities any additional ground qua the deduction which was not claimed in the return of income. Disallowance of product trial expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pholding disallowance of gift expenses, aggregating to ₹ 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 ₹ 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 ₹ 19,04,044 being write-off of doubtful deposits by the Appellant and merely directing the Learned AO for verification of claim. 7. On facts and in circumstances of the case and in law, the Learned CITA) has erred in upholding disallowance made by the Learned AO in respect of irrecoverable advances written off (in the nature of Duty Entitlement Pass Book Scheme credit and Duty drawback) aggregating to ₹ 51,45,651. 8. On facts and in circumstance of the case and in law, the Learned CIT(A) has erred in confirming disallowance under section 40A(2) of the Act of ₹ 22,45,472, being 50% of payment made to Bayer Polychem Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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, however, confirmed additions made by the AO towards disallowance of gift expenses, disallowance of compensation for failure to deduct TDS under section 40(a)(ia) of the Act, write off of bad and doubtful advances, disallowance of irrecoverable advances written off, disallowance of payments made to associate concern under section 40A(2) of the Act, however, allowed partly relief in respect of disallowance of payment of club membership fees and disallowance of expenditure under section 14A and also set aside the issue of disallowance of unrealized foreign exchange gain for furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance 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 ₹ 1,03,17,000/- which was claimed exempt under section 10(34) of the Act. The assessee also had made suomoto disallowance of ₹ 21,26,636/- in its return of income. However, such disallowance has been revised to ₹ 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)(iii) and determined disallowance of ₹ 48,16,710/- and made additions of ₹ 26,90,074/- after reducing suo-moto disallowance made by the assessee of ₹ 21,26,636/-. According to the AO, as per the provisions of section 14A of the Act, disallowance of expenses incurred in relation to exempt income ought to be made irrespective whether the exempt income was earned or not. The AO further observed that the assessee has not maintained separate books of accounts pertaining to its exempt income and incurred c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 necessary details to prove availability of own funds. Hence, we are of the considered view that the AO was incorrect in disallowing interest expenses under rule 8D(2)(ii) of Income Tax Rules, 1962 and accordingly direct him to delete disallowance of interest expenses worked out under rule 8D(2)(ii). 9. In so far as disallowance of direct expenses under rule 8D(2)(i) the assessee itself has computed a sum of ₹ 4,15,300/- and there is no dispute with regard to such disallowances. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r consideration is disallowance of gift expenses of ₹ 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 on festival occasions. The assessee further contended that the said expenses were incurred to facilitate smooth conduct of business, therefore, the AO was incorrect in disallowing such expenses. 11. Having heard both the sides and considered material on record, we do not find any merits in the arguments of the assessee for the reason that the assessee has failed to file any evidences to prove necessity of gifts given to employees, associates and gove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 parties and perused the material on record. There is no dispute with regard to the fact that there is no employer and employee relationship between the assessee and Mr. SS Mohla. When compensation was paid to Mr. SS Mohla he was no longer an employee of the assessee. The assessee itself admitted that it has paid commission to Mr. SS Mohla for securing orders on their behalf. Since the dispute cropped up between the assessee and Mr. SS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), 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 Making India Ltd. vs. CIT 59 DTR 401(Del HC). 17. We have heard the rival submissions of both the parties and perused the material on record. The AO disallowed write off of irrecoverable deposits on the ground that such deposits were never a trading deposits, but balancing items and same could not be allowed under section 36(1)(vii) of the Act, as the condition prescribed under section 36(2) were not satisfied. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 from the date of export. If the application is not made within the time frame, the DEPB balance lapses. The assessee has verified the DEPB claims and found that all claims are outstanding for more than six months and they are not claimable and hence an amount of ₹ 39,39,160/- was written off. 19. We have heard both the parties and perused the material on record. There is no dispute with regard to the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts 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 ₹ 2,58,00,129/-. This includes both realized as well as unrealized foreign exchange loss. Out of the said amount a sum of ₹ 1,68,39,128/- pertains to unrealized foreign exchange loss arising out of revaluation of trade receivables as per accounting standard 11 issued by the ICAI. The AO disallowed unrealized and realized foreign exchange loss on the ground that such loss is in nature of notional loss which was provided in the books of accounts on marked to market basis, therefore, cannot be allowed as deduction. The Ld. CIT(A), b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of ₹ 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 the material on record, we find that the assessee is within its right to raise the additional ground qua the deduction not claimed before the AO during the year. The assessee has raised the issue before the first appellate authority who has not adjudicated the same. In our opinion, the issue needs to be restored to the file of the Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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 that molecules/ products are researched and developed by the Appellants parent company i.e. Bayer CropScience AG ('BCS AG ) in Germany. Out of the pre-developed molecules/ products, specific molecules / products are identified by the Appellant for further development, registration and sale in India. 2.3.1.3 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Authority-replies given by BCSL Product Registration granted by the Registration Authority 2.3.1.10 The Appellant is making payment to research associations and institutions for conducting bio-efficacy and toxicology analysis on its existing line of products, which are care goosed in the boo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducts 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 are in the nature of revenue expenses, if without incurring such expenses, it would not have been possible for the assessee to carry on business. 2.3.7.3 The test of enduring benefit alone is not conclusive for treating any expenditure as capital expenditure and it is necessary, to ascertain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 trial expenses. 2.3.8.1 Without prejudice to the aforesaid contentions that the product trail expenses ought to be considered as revenue in nature and allowed as deduction, the Appellant wishes to submit as under: 2.3.8.2 Since the Learned AO has alleged that the expenses incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al) 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 ₹ 4,29,72,544/- towards product trial expenses under the head 'miscellaneous expenses . The AO found that out of total ₹ 4.29 crores incurred, a sum of ₹ 2,05,23,457/- alone was paid to recognized associations /universities /organizations, etc which gets covered u/s.35(1)(ii) and noticed that the balance ₹ 2,24,49,087/- was not covered u/s.35 hence, did not allow the same as expenditure. The question as to whether the expenses incurred for getting registration with statutory authorities towards new product develope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed . 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. further submitted that in assessee s own case for A.Y. 2006-07, the ITAT has decided the issue in favour of assessee, wherein it has been held that product trial expense is allowable under section 37 of the Act. The Ld. A.R. further submitted that p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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