2015 (6) TMI 247 - AT - Income Tax

Tribunal Rulings: Deduction Disallowance, Section 80HHC, 54EC, Royalty Payments

The Tribunal addressed various issues in the case, including the disallowance of deduction under section 80HHC on interest income, exclusion of profit on ... Computation of deduction u/s 80-HHC - AO not treating interest income as business income but as income for other sources - Held that:- As decided in assessee's own case for AY-2001-02 [2012 (12) TMI 682 - ITAT, Mumbai] and AY-2002-03 [2014 (4) TMI 926 - ITAT MUMBAI] to hold that 90% of net interest income is required to be reduced after deducting expenses incurred having nexus with earning of interest income. Exclusion of profit on foreign exchange and miscellaneous sales of scrap and cocoa shells for computation of deduction u/s 80HHC - Held that:- As decided in own case for the assessment years AYs-1995-96 to 1998-99 that [2010 (10) TMI 1010 - ITAT MUMBAI] the miscellaneous income on account of scrap sales and cocoa shells were found to have direct nexus with the product manufactured by the assessee as it has generated out of manufacturing activities of the assessee, therefore, the same is eligible for deduction u/s 80HHC.As regard foreign exchange gain, the Tribunal has decided this issue against the assessee. Following the earlier years’ order of this Tribunal, the income on account of miscellaneous sale and scrap of cocoa shells is allowed as eligible for deduction u/s 80HHC, whereas the issue of deduction u/s 80HHC in respect of foreign exchange gain is decided against the assessee. - Decided partly in favour of assessee. Deduction in respect of provision of additional duty payable to Third Party Manufactures (TPM) - Held that:- This issue has arisen due to the dispute of excise duty payable by the assessee on the product got manufactured from third party manufacture. The assessee claimed that the excise duty payable on such products should be computed on the price on which the assessee received the product from the manufactures and not on the sale price. Accordingly, the assessee made the provisions in respect of difference between the demand made by the excise department and the claim of the assessee. The Tribunal in the earlier year has decided this issue by holding that the assessee is entitled for deduction only in respect of actual excise duty paid by the assessee. Thus we decide this issue against the assessee as the assessee is entitled for deduction only in respect of actual payment of excise duty. - Decided against assessee. Disallowance of depreciation on marketing knowhow - Held that:- The controversy of allowbility of depreciation on other tangible assets when the AO has accepted the payment in question for goodwill then in view of the judgment of the Hon’ble Supreme Court in the case of M/s SMIFS SECURITIES LTD (2012 (8) TMI 713 - SUPREME COURT), the depreciation is allowable on the marketing knowhow. - Decided in favour of assessee. Capital Gains derived from 'depreciable asset' - whether the deeming fiction created under section 50 is restricted to section 50 only or is it applicable to section 54E of the Income-tax Act as well ? - Held that:- As relying on Sate Bank of India v. D. Hanumantha Rao [1998 (3) TMI 679 - SUPREME COURT] the fiction created under section 50 is confined to the computation of capital gains only and cannot be extended beyond that. Thirdly, section 54E does not make any distinction between depreciable asset and non-depreciable asset and, therefore, the exemption available to the depreciable asset under section 54E cannot be denied by referring to the fiction created under section 50. Section 54E specifically provides that where capital gain arising on transfer of a long-term capital asset is invested or deposited (whole or any part of the net consideration) in the specified assets, the assessee shall not be charged to capital gains. Therefore, the exemption under section 54E of the Income-tax Act cannot be denied to the assessee on account of the fiction created in section 50. The gain arising from the sale of business asset held by the assessee for more than three years would be eligible for deduction under section 54EC of the Act. - Decided in favour of assessee. Interest u/s 234D is applicable to the year under consideration as relying on CIT V/s INDIAN OIL CORPN. LTD [2012 (9) TMI 517 - BOMBAY HIGH COURT] - Decided against assessee. Technical Knowhow Royalty - AO proposed the adjustment of payment of royalty by restricting the amount of royalty for technical knowhow to 1% as against 1.25% claimed by the assessee - CIT(A) deleted the addition - Held that:- As decided in assessee's own case AY-2002-03 [2014 (4) TMI 926 - ITAT MUMBAI] the assessee, in fact is paying a lesser amount, if the payments are compared with the payments towards trademark usage, by the other group companies using the Brand Cadbury in other parts of the world. On the other hand, if we examine the argument taken by the TPO with regard to OECD guidelines. On this point the assessee’s payment is coming to a lesser figure, as discussed in detail by the CIT(A), therefore, sustain the order of the CIT(A) and reject the grounds as claimed by the department. - Decided in favour of assessee. Deduction of Loss on Exchange Fluctuation in respect of Export Earners Foreign Currency Account - Held that:- It is clear from the facts recorded by the ld.CIT(A) that the amount lying in EEFC account represents export proceeds, credited to the said account. The ld.CIT(A) has decided this issue by following WOODWARD GOVERNOR INDIA P. LTD 2009 (4) TMI 4 - SUPREME COURT ). Having regard to the undisputed facts that the balance in the said account represents the amount realised on export sale proceed, therefore, we do not find any error or illegality in the findings of the ld. CIT(A) qua this issue.- Decided in favour of assessee. Disallowance made under section 14A - Held that:- AO has allocated Head office expenses in the ratio of net profit and exempt income which cannot be accepted as there is no basis of such allocation of the Head office expenses in proportionate of the income the administrative expenses cannot be apportioned equally on the regular business income and exempt income because the exempt income is earned from mere investment which does not require the same degree of attention and regular administrative management as in the case of regular business activity of the assessee. Thus reasonable basis should be adopted for making disallowance of expenditure under section 14A, we are of the opinion that the reasonable disallowance would be 2% of the exempt income. Accordingly, we modify the orders of authorities below. - Decided partly in favour of assessee. Issues Involved:1. Disallowance of deduction under section 80HHC on interest income.2. Exclusion of profit on foreign exchange and miscellaneous sales for deduction computation under section 80HHC.3. Deduction for provision towards liability of contractual obligation to Third Party Manufacturers.4. Disallowance of depreciation on marketing knowhow.5. Deduction under section 54EC on capital gain from depreciable assets.6. Applicability of section 234D.7. Adjustment of royalty payments for technical knowhow and trademark usage.8. Deduction of loss on exchange fluctuation.9. Disallowance under section 14A.Detailed Analysis:1. Disallowance of Deduction under Section 80HHC on Interest Income:The Tribunal noted that the issue of disallowance of deduction under section 80HHC on interest income was previously addressed in the assessee's own cases for earlier assessment years. It was decided that 90% of net interest income should be excluded after deducting expenses related to earning the interest income. Consequently, the Tribunal set aside the computation of deduction under section 80HHC to the AO with similar directions as given in earlier orders.2. Exclusion of Profit on Foreign Exchange and Miscellaneous Sales for Deduction Computation under Section 80HHC:The Tribunal observed that the issue of excluding profit on foreign exchange and miscellaneous sales of scrap and cocoa shells was addressed in the assessee's own cases for previous years. It was held that miscellaneous income from scrap sales and cocoa shells, having a direct nexus with the manufactured product, is eligible for deduction under section 80HHC. However, the foreign exchange gain was decided against the assessee. The Tribunal allowed the ground in part, allowing deduction for miscellaneous sales but not for foreign exchange gain.3. Deduction for Provision Towards Liability of Contractual Obligation to Third Party Manufacturers:The Tribunal noted that the issue of provision for additional duty payable to Third Party Manufacturers was previously adjudicated against the assessee. The Tribunal held that the assessee is entitled to deduction only for the actual excise duty paid. Following the earlier order, this issue was decided against the assessee.4. Disallowance of Depreciation on Marketing Knowhow:The Tribunal considered the issue of disallowance of depreciation on marketing knowhow. The AO had treated the payment as goodwill and denied depreciation. The Tribunal referred to the judgment of the Hon'ble Supreme Court in CIT V/s SMIFS SECURITIES LTD, which held that goodwill is an asset under section 32 and eligible for depreciation. Accordingly, the Tribunal allowed the claim of the assessee for depreciation on marketing knowhow.5. Deduction under Section 54EC on Capital Gain from Depreciable Assets:The Tribunal upheld the CIT(A)'s decision allowing the deduction under section 54EC on capital gains arising from the sale of depreciable assets. This decision was based on the Jurisdictional High Court's ruling in CIT V/s ACE Builders Pvt. Ltd, which held that gains from the sale of business assets held for more than three years are eligible for deduction under section 54EC.6. Applicability of Section 234D:The Tribunal followed the Jurisdictional High Court's judgment in CIT V/s INDIAN OIL CORPN. LTD, which held that section 234D is applicable from AY 2004-05 onwards. The Tribunal set aside the CIT(A)'s order and restored the AO's decision that section 234D is applicable to the year under consideration.7. Adjustment of Royalty Payments for Technical Knowhow and Trademark Usage:The Tribunal referred to its earlier decision in the assessee's own case, where it was held that the royalty payments on technical knowhow and trademark usage were at arm's length and did not call for any adjustment. Following the earlier order, the Tribunal upheld the CIT(A)'s decision allowing the claim of the assessee.8. Deduction of Loss on Exchange Fluctuation:The Tribunal upheld the CIT(A)'s decision allowing the deduction of loss on exchange fluctuation related to the Export Earners Foreign Currency Account. This decision was based on the Hon'ble Supreme Court's ruling in COMMISSIONER OF INCOME-TAX V/s WOODWARD GOVERNOR INDIA P. LTD, which held that exchange loss arising on trading account is revenue in nature and hence allowable.9. Disallowance under Section 14A:The Tribunal modified the CIT(A)'s order on disallowance under section 14A. The AO's allocation of head office expenses in proportion to exempt income was rejected as there was no basis for such allocation. The Tribunal deemed a reasonable disallowance to be 2% of the exempt income, modifying the orders of the authorities below.Conclusion:The Tribunal's judgment addressed multiple issues, providing detailed analysis and directions based on precedents and legal principles. The decisions were a mix of upholding, modifying, and setting aside the orders of the lower authorities, ensuring consistency with earlier rulings and judicial pronouncements.