2012 (10) TMI 1113 - AT - Income Tax

Tribunal Decisions on Tax Issues: Disallowances, Deductions, and Levies

The Tribunal partly allowed both the assessee's and the revenue's appeals. Various issues such as disallowance under section 43B for statutory duties, ... Allowability of deduction under section 43B on payment basis - treatment of unutilized MODVAT / RG23A balance - allowability of PLA balances / excise duty on spare parts as payment under section 43B - classification of expenditure on application software - revenue expenditure v. capital expenditure - retrospective effect of deletion of proviso to section 43B in relation to superannuation/PF contributions - characterisation of subsidy under sales tax rules as capital receipt v. revenue receipt - interaction of section 43B with section 145A and duty drawback / export drawback - deduction under section 35DDA for VRS payments (one fifth rule) - allowability of payments made under protest as deductible on payment basis - treatment of foreign payments and obligation to deduct tax at source under section 195 / disallowance under section 40(a)(i) - application of Explanation to section 73 - speculative loss v. capital loss - allowability of foreign exchange loss on revenue account and depreciation on capitalised forex fluctuation (section 43A) - remand to assessing officer for determination in light of High Court decision on method for apportioning interest expenses (section 14A)Allowability of deduction under section 43B on payment basis - treatment of unutilized MODVAT / RG23A balance - Whether amounts representing excise duty / MODVAT (RG23A balances) and related duties are allowable as deduction under section 43B in the year of payment or only in the year of adjustment/set off. - HELD THAT: - The Tribunal held that unutilized MODVAT (RG23A) balances as at the year end do not amount to payment of excise duty and therefore are not allowable under section 43B in the year in which the credit remains unexpired; this principle follows the Special Bench decision in DCIT v. Glaxo SmithKline Consumer Healthcare Ltd. However, where the assessee in the year under consideration has actually adjusted the RG23A balance against excise duty payable on manufactured goods, that adjusted amount is deductible in the year of adjustment. Applying these principles, the Tribunal (i) disallowed claims in respect of unutilized RG23A balances for the year but (ii) allowed deduction to the extent the assessee carried out set offs/adjustments in the year under consideration (observations and conclusion at paras 9-11). [Paras 9, 10, 29]Unutilized MODVAT/RG23A balances are not deductible under section 43B in the year they remain unutilized; deduction is allowable in the year when such balance is adjusted against excise liability.Allowability of PLA balances / excise duty on spare parts as payment under section 43B - Whether PLA/PLA R&D cess / excise duty on spare parts (PLA balances) paid during the year are deductible under section 43B. - HELD THAT: - Relying on the Tribunal's Special Bench authority and earlier ITAT decisions in the assessee's own case, the Tribunal accepted that PLA balances representing excise duty / R&D cess paid to cover duty on goods removed from bonded warehouses amount to payment of duty and are deductible under section 43B. The Tribunal noted this view is supported by precedents and earlier years' orders of the Tribunal and High Court (para 13 and cited paras from later orders). [Paras 13]PLA balances/ excise on spare parts paid in the year are deductible under section 43B.Treatment of sales tax paid on inputs and sales tax recoverable under section 43B - interaction of section 43B with section 145A - Whether sales tax paid on purchase of inputs and sales tax recoverable/adjustable are deductible under section 43B in the year of payment or only in the year of adjustment, having regard to section 145A. - HELD THAT: - The Tribunal followed coordinate Bench decisions in the assessee's earlier years: sums paid/appearing on account of sales tax on inputs do not amount to allowable payments under section 43B in the year when they merely form part of purchase/closing stock under the method of accounting; instead, deduction arises in the year when adjustment/set off is made against tax on finished goods. Applying that principle, the Tribunal dismissed the assessee's claim for the full amounts but allowed deduction to the extent of adjustments actually made in the year (paras 11-12). [Paras 11, 12]Sales tax on inputs and sales tax recoverable are allowable under section 43B only in the year when such amounts are adjusted/ set off; mere inclusion in purchase/stock (section 145A) does not permit immediate deduction.Classification of expenditure on application software - revenue expenditure v. capital expenditure - Whether expenditure on purchase of application software is capital expenditure or an allowable revenue deduction. - HELD THAT: - The Tribunal, following the jurisdictional High Court decisions (notably CIT v. Asahi India Safety Glass Ltd.) and subsequent authorities, concluded that expenditure on application software in the facts of this case was not of enduring nature and required periodic upgradation; therefore it qualified as revenue expenditure and was allowable. The Tribunal overturned the CIT(A)'s confirmation of disallowance and allowed the claim (para 15). [Paras 14, 15]Expenditure on application software was held to be revenue expenditure and allowed as deduction.Retrospective effect of deletion of proviso to section 43B in relation to superannuation/PF contributions - Whether late payment of contribution to superannuation fund (paid within the financial year but after statutory due date) is deductible. - HELD THAT: - Applying the Supreme Court's decision in CIT v. Alom Extrusions Ltd., the Tribunal held that the deletion of the second proviso to section 43B is retrospective (with effect from 1.4.1988) and therefore contributions to superannuation/ provident funds paid within the relevant financial year (and before return filing due date) are deductible. The Tribunal accordingly allowed the claim (para 16). [Paras 16]Superannuation fund contributions paid within the financial year are deductible in view of retrospective operation of the proviso deletion.Classification of interest and rent as business income or other sources - deduction under section 80HHC linked to business income - Whether interest on securities and rent from land are business income (for purposes of section 80HHC) or income from other sources. - HELD THAT: - The Tribunal followed earlier adverse precedents in the assessee's own case and the jurisdictional High Court: the interest and rent concerned were treated as income from other sources rather than business income. Consequently the assessee's claim for inclusion of these receipts as business profits for section 80HHC computation was rejected (paras 17-19). [Paras 17, 19]Interest on securities and rent from land classified as income from other sources; claim for 80HHC recomputation dismissed.Deduction under section 35DDA for VRS payments (one fifth rule) - Whether the entire VRS expenditure should be allowed as revenue deduction under section 37(1) instead of limiting relief to one fifth under section 35DDA. - HELD THAT: - The Tribunal held that under the statutory scheme the assessee was only entitled to one fifth deduction as per section 35DDA and that one fifth had been allowed by the AO during the year; the additional ground seeking full deduction was without merit and dismissed (para 22). [Paras 22]VRS expenditure relief is confined to one fifth under section 35DDA; additional claim for full deduction rejected.Character of subsidy under sales tax rules as capital receipt v. revenue receipt - Whether the sales tax concession/subsidy retained by the assessee is a capital receipt (not taxable) or revenue receipt (taxable). - HELD THAT: - The Tribunal admitted the additional ground and received additional evidence but did not decide the substantive characterisation on the record: in view of the factual matrix and subsequent documentation (including state rule clarifications and reliance on Ponni Sugars and related authorities), the Tribunal restored the issue to the file of the Assessing Officer for fresh adjudication in accordance with law (para 24 and 24.1). [Paras 24]Issue restored/remanded to the Assessing Officer for decision on the nature of the sales tax subsidy (capital v. revenue) after taking admitted additional evidence.Interaction of section 43B with section 145A and duty drawback / export drawback - allowability of customs duty paid for export/import under section 43B and interplay with duty drawback - Whether customs duty paid on imports (including on goods imported for export and duties in transit/with vendors) is deductible under section 43B when duty drawback or inclusion under section 145A may make the item revenue neutral. - HELD THAT: - Following earlier Tribunal and High Court authorities in the assessee's own case, the Tribunal upheld the CIT(A)'s allowance for custom duty paid on imports in multiple contexts: (i) customs duty on goods imported for export where export had taken place and drawback did not automatically accrue; (ii) customs duty included in closing stock with vendors or held by the assessee under inclusive accounting; and (iii) customs duty on goods in transit/under inspection where bills of entry dated within the financial year were shown. The Tribunal rejected the revenue's contention that duty drawback or section 145A treatment precluded deduction and dismissed those revenue grounds (paras 25-38, 30-35). [Paras 30, 32, 34, 36, 38]Customs duty actually paid in the relevant year is deductible under section 43B in the factual contexts considered; duty drawback/section 145A treatment does not automatically bar deduction where payment/adjustment has actually occurred.Allowability of payments made under protest as deductible on payment basis - Whether duties and taxes paid under protest (excise, central/local sales tax) are deductible under section 43B in the year of payment. - HELD THAT: - Relying on consistent Tribunal decisions in the assessee's earlier years, the Tribunal held that amounts paid under protest to statutory authorities are statutory liabilities crystallized and, being actually paid, are deductible under section 43B; if ultimately recovered, refunds will be assessable then. The CIT(A)'s allowances on this ground were sustained (paras 39-44, 41). [Paras 39, 41, 44]Duties/taxes paid under protest and actually paid in the year are deductible under section 43B.Treatment of excess consumption and MODVAT reversals - Whether additions for alleged excess consumption of raw material / unexplained input differences and related MODVAT reversals are justified. - HELD THAT: - On the facts the Tribunal found the assessee's accounting system, stock reconciliations and the small percentage of negative variance (well within tolerable limits) persuasive; earlier years' Tribunal and CESTAT decisions in the assessee's own case supported deletion. The Tribunal therefore deleted the additions for alleged excess consumption and allowed MODVAT/input difference claims to the extent supported by precedent (paras 45-50, 47-50). [Paras 45, 47, 49, 50]Additions for excess consumption and related MODVAT reversals were deleted; MODVAT/input differences allowed as per earlier Tribunal findings.Allowability of foreign exchange loss on revenue account and depreciation on capitalised forex fluctuation (section 43A) - Whether foreign exchange losses on revenue account are deductible and whether depreciation is allowable on capitalised exchange rate variation in the period prior to the 2003 amendment to section 43A. - HELD THAT: - Following jurisdictional High Court and Tribunal precedents (notably Woodward Governor India), the Tribunal held that (i) revenue account exchange losses are deductible; and (ii) depreciation on capitalised foreign exchange fluctuation (prior to the Finance Act amendment with effect from AY 2003 04) is allowable because the amendment is prospective. The CIT(A)'s allowances were sustained (paras 51-53, 66-67). [Paras 51, 53, 66, 67]Exchange loss on revenue account deductible; depreciation allowable on capitalised forex fluctuation for years prior to the prospective amendment to section 43A.Remand to assessing officer for determination in light of High Court decision on method for apportioning interest expenses (section 14A) - Whether the disallowance under section 14A (apportionment of interest expense) should stand or be re examined. - HELD THAT: - In view of the recent Division Bench decision of the jurisdictional High Court in Maxopp Investment Ltd., the Tribunal considered the factual and legal matrix and concluded that the matter should be remanded to the Assessing Officer for fresh determination in accordance with that authority and applicable law (para 58). [Paras 58]Issue remanded to the Assessing Officer for recomputation/decision on section 14A disallowance in light of relevant High Court authority.Treatment of foreign payments and obligation to deduct tax at source under section 195 / disallowance under section 40(a)(i) - application of Explanation to section 73 - speculative loss v. capital loss - Whether foreign commission/advertising payments made outside India required TDS under section 195 (and hence are disallowable under section 40(a)(i)) and whether certain share redemption losses are speculative losses under Explanation to section 73. - HELD THAT: - For foreign payments, the Tribunal followed earlier orders in the assessee's case: where payments to non residents do not give rise to income chargeable to tax in India (services rendered outside India), section 195 does not require deduction and section 40(a)(i) disallowance is not attracted; the CIT(A)'s deletions were therefore upheld (paras 60-61). For the share redemption loss, the Tribunal accepted that the shares were held as investments (not stock in trade); the loss on redemption was a capital loss (long term) and not a speculative loss under the Explanation to section 73; the CIT(A)'s view was upheld (paras 62-64). [Paras 60, 61, 62, 63, 64]Foreign payments for services rendered outside India are not subject to TDS under section 195 and not disallowable under section 40(a)(i); the loss on redemption of long term investment shares is a capital loss, not a speculative loss under Explanation to section 73.Final Conclusion: The Tribunal partly allowed and partly dismissed the cross appeals: it applied settled precedents to disallow unutilized MODVAT/RG23A balances under section 43B while allowing deductions where actual adjustments/payment/PLA balances were made in the year; it allowed deduction for PLA balances/ excise on spare parts, allowed software expenditure as revenue deduction, accepted retrospective relief for superannuation contributions, rejected the assessee's reclassification of interest/rent as business income, confined VRS relief to one fifth under section 35DDA, remanded the sales tax subsidy (capital v. revenue) issue to the AO for fresh decision, sustained multiple allowances (customs/excise duties paid, payments under protest, MODVAT reversals, forex items, club membership, long term capital loss treatment), and remitted the section 14A matter to the AO in light of relevant High Court authority. Issues Involved:1. Disallowance u/s 43B for various statutory duties.2. Disallowance of software expenses as capital expenditure.3. Classification of interest income and rent as business income or income from other sources.4. Deduction u/s 80HHC.5. Levy of interest u/s 234B.6. Deduction for VRS payments.7. Sales-tax subsidy as capital receipt.8. Custom Duty on goods for export purposes.9. Excise Duty on inputs.10. Custom Duty on closing inventory with vendors.11. Custom Duty on closing stock.12. Custom Duty paid in advance on goods in transit.13. Excise Duty paid under protest.14. Central and Local Sales Tax paid under protest.15. Excess claim of consumption of stock.16. MODVAT on input differences.17. Loss on account of foreign exchange fluctuation.18. Depreciation on enhanced liability.19. Disallowance u/s 14A.20. Disallowance u/s 40(a)(i).21. Loss on sale of shares.22. Depreciation on Foreign Exchange Fluctuation.23. Membership fee.Summary:1. Disallowance u/s 43B for various statutory duties:The assessee claimed deductions for various statutory duties paid during the year u/s 43B. The Tribunal upheld the disallowance of excise duty on inputs based on the Special Bench decision in Glaxo Smithkline Consumer Health Care Ltd. but allowed the deduction for the opening balance of RG23A. Sales tax paid on components and sales tax recoverable were disallowed as per earlier ITAT decisions. Excise duty on spare parts was allowed following the decision in Modipon Ltd.2. Disallowance of software expenses as capital expenditure:The Tribunal allowed the software expenses as revenue expenditure, citing the decision in CIT v. Asahi India Safety Glass Ltd., which held that expenditure on application software is allowable as a revenue deduction.3. Classification of interest income and rent:The Tribunal upheld the classification of interest income and rent from land as income from other sources, based on the decision of the Delhi High Court in the assessee's own case for AY 1985-86.4. Deduction u/s 80HHC:The Tribunal dismissed the ground for reclassifying interest income and rent from land as business income for computing deduction u/s 80HHC, following the decision of the Delhi High Court in the assessee's own case.5. Levy of interest u/s 234B:The Tribunal held that the levy of interest u/s 234B is mandatory and consequential.6. Deduction for VRS payments:The Tribunal dismissed the additional ground for the entire VRS payment as revenue expenditure, as the assessee was entitled to 1/5th of the total claim as per section 35DDA.7. Sales-tax subsidy as capital receipt:The Tribunal restored the issue of sales-tax subsidy to the Assessing Officer for deciding as per law, considering the additional evidences and the decision in CIT vs. Ponni Sugars and Chemicals Ltd.8. Custom Duty on goods for export purposes:The Tribunal upheld the CIT (A)'s decision allowing the deduction for custom duty paid on goods imported for export purposes, following earlier ITAT decisions.9. Excise Duty on inputs:The Tribunal upheld the disallowance of excise duty on inputs, following the decision in Glaxo Smithkline Consumer Health Care Ltd.10. Custom Duty on closing inventory with vendors:The Tribunal upheld the CIT (A)'s decision allowing the deduction for custom duty paid on closing inventory with vendors, following earlier ITAT decisions.11. Custom Duty on closing stock:The Tribunal upheld the CIT (A)'s decision allowing the deduction for custom duty paid on closing stock, following earlier ITAT decisions.12. Custom Duty paid in advance on goods in transit:The Tribunal upheld the CIT (A)'s decision allowing the deduction for custom duty paid in advance on goods in transit, following earlier ITAT decisions.13. Excise Duty paid under protest:The Tribunal upheld the CIT (A)'s decision allowing the deduction for excise duty paid under protest, following earlier ITAT decisions.14. Central and Local Sales Tax paid under protest:The Tribunal upheld the CIT (A)'s decision allowing the deduction for Central and Local Sales Tax paid under protest, following earlier ITAT decisions.15. Excess claim of consumption of stock:The Tribunal upheld the CIT (A)'s decision deleting the addition for excess claim of consumption of stock, following earlier ITAT decisions.16. MODVAT on input differences:The Tribunal upheld the CIT (A)'s decision allowing the deduction for MODVAT on input differences, following earlier ITAT decisions.17. Loss on account of foreign exchange fluctuation:The Tribunal upheld the CIT (A)'s decision allowing the deduction for loss on account of foreign exchange fluctuation, following earlier ITAT decisions and the Supreme Court decision in CIT v Woodward Governor India P. Ltd.18. Depreciation on enhanced liability:The Tribunal upheld the CIT (A)'s decision allowing the depreciation on enhanced liability due to custom duty paid and capitalized on plant and machinery, following earlier ITAT decisions.19. Disallowance u/s 14A:The Tribunal remanded the issue of disallowance u/s 14A to the Assessing Officer to be decided in view of the recent decision of the Delhi High Court in Maxopp Investment Ltd.20. Disallowance u/s 40(a)(i):The Tribunal upheld the CIT (A)'s decision deleting the disallowance u/s 40(a)(i) for payments made outside India, following earlier ITAT decisions and the Supreme Court decision in G E India Technology Cen. P. Ltd. v. CIT.21. Loss on sale of shares:The Tribunal upheld the CIT (A)'s decision treating the loss on sale of shares as long-term capital loss, not speculative loss, following earlier ITAT decisions.22. Depreciation on Foreign Exchange Fluctuation:The Tribunal upheld the CIT (A)'s decision allowing the depreciation on foreign exchange fluctuation, following earlier ITAT decisions and the Supreme Court decision in CIT v Woodward Governor India P. Ltd.23. Membership fee:The Tribunal upheld the CIT (A)'s decision allowing the deduction for membership fee, following earlier ITAT decisions and the decisions in Otis Elevators Co. (India) Ltd v CIT and American Express International Banking Corporation v CIT.Conclusion:Both the appeal of the assessee and the appeal of the revenue were partly allowed.