2015 (4) TMI 1114 - AT - Income Tax

Tribunal affirms various tax decisions on know-how fees, interest income, depreciation, and dividend deductions.

The Tribunal upheld the CIT(A)'s decisions on various tax issues, including the deduction of lump sum know-how fees under Section 37(1) as capital ... Deduction under Section 37(1) in respect of lump sum know how fees - Held that:- In view of introduction of provisions of section 35AB of the Act which were inserted by the Finance Act, 1985 w.e.f. 01.04.1986, we are of the view that in cases of payment of lump sum consideration for acquiring technical know-how, the provisions of section 35AB of the Act are attracted and the expenditure is not allowable under section 37(1) of the Act, which is general provision and specifically excludes expenditure covered under sections 30 to 36 of the Act. Consequently, the said expenditure is to be amortized under section 35AB of the Act and cannot be allowed as a deduction in the year in which the liability to pay the said amount accrues. The Hon’ble Supreme Court in Drilcos (India) (P.) Ltd. Vs. CIT (2012 (9) TMI 299 - SUPREME COURT ) had held that after insertion of section 35AB of the Act, where the expenditure is to be used in business of assessee, section 35AB of the Act would come into play and the provisions of section 37(1) of the Act are not applicable for units established prior to 01.04.1998. Following the same parity of reasoning, we hold that provisions of section 35AB of the Act are to be applied to the lump sum consideration paid for acquisition of technical know-how by the assessee. Non-deduction of tax at source on the balance two installments, which were paid in the succeeding assessment years, in view of the provisions of section 40(a)(i) - Held that:- The Ahmedabad Bench of the Tribunal in APS-Star Industries Ltd. Vs. DCIT (2002 (3) TMI 202 - ITAT AHMEDABAD-B ) had also held that what is material for section 35AB of the Act is not the actual amount paid during the year but the amount in respect of which liability had been incurred for acquiring technical know-how. We hold so. The CIT(A) after holding the assessee to be eligible for deduction under section 35AB of the Act on the full amount, had not allowed the claim of the assessee in view of non-deduction of tax at source on the balance two installments, which were paid in the succeeding assessment years, in view of the provisions of section 40(a)(i) of the Act. Admittedly, the assessee had deducted tax at source on the installment paid during the financial year and has paid tax at source on the balance installments in the succeeding years. In this regard, we find merit in the plea of learned Authorized Representative for the assessee that this was at best of the case of short deduction of tax and not non-deduction of tax at source and there was no merit in invoking the provisions of section 40(a)(i) of the Act. Thus we allow the alternate plea raised by the assessee that the provisions of section 35AB of the Act are to be applied on the total liability of ₹ 8.82 crores and 1/6th on said amount is to be allowed as deduction in the hands of the assessee. Computation of deduction under section 80HHC - Held that:- Items of income i.e. interest on inter-corporate deposits, bank interest, NSC interest and interest received on income-tax refunds are the items to be excluded while computing profits eligible for deduction under section 80HHC of the Act. No merit in the plea of assessee as the training course fees in no way can be attributed to export business and hence cannot form part of profits of business, which are eligible for deduction under section 80HHC of the Act. Inclusion of interest income received from the Income-tax Department in the hands of the assessee - Held that:- The assessee before us fairly pointed out that the issue is to be decided against the assessee. In view thereof, we uphold the order of CIT(A) in holding that the total interest paid by the assessee in the year under consideration i.e. ₹ 10,82,787/- is to be added to the income of the assessee Depreciation on pollution control and energy savings devices - Held that:- In view of the second proviso to section 32(1) of the Act, wherein asset is acquired and put to use for the purpose of business for less than 180 days in that previous year, then the deduction under section 32(1) of the Act in respect of such asset is to be restricted to 50% of the amount prescribed. The assessee was entitled to claim depreciation @ 100%. However, since the asset was acquired in use for less than 180 days, the depreciation had to be allowed at 50%, in view of the provisions of the Act Computation of deduction under section 80M - Held that:- We find that in assessee’s own case (supra), the Tribunal had also come to the finding that both the dividend from UTI or dividend from master shares of UTI were under the umbrella of UTI and w.e.f. 01.04.1996, no deduction under section 80M of the Act would be available to the assessee. Following the same parity of reasoning, we uphold the order of CIT(A) Issues Involved:1. Deduction under Section 37(1) of the Income-tax Act, 1961 in respect of lump sum know-how fees.2. Computation of relief under Section 80HHC.3. Addition of interest income paid on Income-tax.4. Depreciation on pollution control and energy savings devices.5. Deduction under Section 80M of the Act.Detailed Analysis:1. Deduction under Section 37(1) of the Income-tax Act, 1961 in respect of lump sum know-how fees:The assessee claimed a deduction of Rs. 8,82,46,665/- under Section 37(1) for lump sum know-how fees paid under a collaboration agreement. The Assessing Officer (AO) rejected this claim, allowing only Rs. 47,80,002/- under Section 35AB, considering the know-how fees as a capital asset. The CIT(A) upheld the AO's decision, noting that the benefits from the technical know-how were of an enduring nature, thus falling under Section 35AB. The Tribunal confirmed this view, stating that Section 35AB applies to any lump sum consideration for acquiring know-how, irrespective of whether the expenditure is capital or revenue in nature. The Tribunal also ruled that the provisions of Section 40(a)(i) for non-deduction of tax at source were not applicable in this case, treating it as a short deduction of tax.2. Computation of relief under Section 80HHC:The CIT(A) excluded certain interest incomes from the profits of the business for computing deduction under Section 80HHC, including interest on inter-corporate deposits, bank interest, NSC interest, and interest received on income-tax refunds. The Tribunal upheld this exclusion, following its earlier decision in the assessee's case for the assessment year 1996-97, which held that these interest incomes had no nexus with the business activity and were to be assessed as income from other sources.3. Addition of interest income paid on Income-tax:The CIT(A) held that the gross interest paid on income-tax should be disallowed instead of the net amount. The Tribunal confirmed this, noting that the interest paid under sections 234A, 234B, and 234C was not deductible as per Section 40(a)(ii) of the Act. The assessee's plea to consider only the net interest was rejected, and the total interest paid was added to the income.4. Depreciation on pollution control and energy savings devices:The assessee claimed 100% depreciation on certain pollution control and energy savings devices, but the CIT(A) restricted it to 50% as the assets were used for less than 180 days. The Tribunal upheld this restriction, citing the second proviso to Section 32(1), which mandates that depreciation for assets used for less than 180 days should be restricted to 50% of the prescribed amount.5. Deduction under Section 80M of the Act:The CIT(A) rejected the assessee's claim for deduction under Section 80M on dividends received from Master shares of UTI, based on the amendment by the Finance Act, 1993, which disallowed such deductions from the assessment year 1996-97. The Tribunal upheld this decision, aligning with its previous ruling in the assessee's case for the assessment year 1995-96, which concluded that no deduction under Section 80M was available for dividends from UTI or Master shares of UTI post the amendment.Conclusion:The Tribunal's judgment addressed each issue comprehensively, upholding the CIT(A)'s decisions on the applicability of Sections 35AB and 40(a)(i), the exclusion of certain interest incomes under Section 80HHC, the non-deductibility of interest paid on income-tax, the restriction on depreciation claims, and the denial of deductions under Section 80M. The appeal was partly allowed, providing clarity on the treatment of technical know-how fees and other tax-related computations.