2016 (1) TMI 132 - AT - Income Tax

Assessee's Appeal Partly Allowed with Adjustments on Book Profits and International Transactions

The appeal of the assessee was partly allowed, with adjustments made on provisions for gratuity and leave encashment while computing book profits under ... MAT computation - adjustment on account of provision for gratuity and leave encashment while computing the book profits for the purpose of Section 115JB - Held that:- As decided in own case claim of the assessee has to be accepted in the light of decision of Hon’ble Supreme Court in the case of Bharat Earthmovers Vs CIT (2000 (8) TMI 4 - SUPREME Court) wherein it has been held that liability incurred by the assessee under the leave encashment scheme applicable to its employees proportionate to the entitlement earned by the employees subject to ceiling on accumulation not being a contingent liability, provision made thereof is deductible. Therefore, this claim of the assessee has to be accepted. The AO is directed to delete the addition made on account of provision for leave encashment, The contents of the learned counsel for the assessee is that actuarial report is on the record, therefore, the provisions should not be treated as unascertained liability. This report has not been relied upon by the revenue authorities below. There are specific defect in the report. Taking into consideration the findings of the ITAT in assessment year 2000-01, defects in the report and the claim of assessee that in assessment year 2000-01, a miscellaneous application has already been filed. We deem it appropriate to set aside this issue to the file of the Assessing Officer for re-adjudication. - Decided in favour of assessee for statistical purposes. Adjustment on account of provision for bad debts while computing book profits u/s 115JB - Held that:- Assessee was fair enough to conceal that issue is against the assessee as per the explanation 1 to Section 115JB of the Act. - Decided against assessee Adjustment to the value of international transactions of export of guar gum and pet chips - Held that:- Assessee had not gained, the AE had not paid anything and the commodities were sold to the AE at the same price at which those were purchased from the local market, just to retain the Star Export House status. The loss incurred by the assessee was only on account of foreign exchange fluctuation. The structure of the transaction was such for the assessee that it could not make any profit or incur any loss as the transactions were not being undertaken for the sake of any profit. We, therefore, are of the view that the addition made by the AO and sustained by the ld. CIT(A) on account of arm’s length price was not justified because the adjustment on account of arm’s length price of international transactions In the present case, the assessee did not make any profit and sold the goods to the PWT at the same price at which it was purchased from the local market and the PWT in turn sold the commodities to the customers at the same price at which these were bought from the assessee. Therefore, the international transactions with PWT met the arm’s length standard. Therefore, by keeping in view the totality of the facts as discussed herein above the addition sustained by the ld. CIT(A) is deleted. - Decided in favour of assessee Re-computation of depreciation - contention of the Revenue is that explanation 5 to Section 32(i) of the Income Tax, which is inserted with effect from 01.04.2002 was clarificatory in nature and therefore the Assessing Officer has rightly disallowed the depreciation - Held that:- Issue has been decided in favour of the assessee by the Hon’ble Jurisdictional High Court in the preceding assessment years ranging from 1997 to 2001 [2011 (3) TMI 679 - DELHI HIGH COURT ] held that fact remains that in the previous years, i.e., in the year 1995-1996 and 1996-97, the Assessee had not claimed any depreciation. When the assessment order in question was in the assessment year 1997-1998, bringing down the value of the asset purchased by showing notional depreciation for the year 1995-96 and 1996- 97 and allowing the depreciation on the written down value in this manner would be clearly wrong when the depreciation in the previous year has not been claimed at all. - Decided in favour of assessee Allowability of the expenditure on the improvement of lease hold premises u/s 37(1) - Held that:- As decided in assessee's own case expenditure to be treated as Revenue in nature. The finding of fact is a direction that improvement were made in the lease premises by erecting temporary wooden portion and structure, and therefore, the same were revenue in nature and even eligible for deduction under Section 37(i) of the Act. - Decided in favour of assessee Addition being 1/10th of preliminary expenses - CIT(A) deleted the addition - Held that:- Issue has been decided in favour of the assessee by the Hon’ble Jurisdictional High Court in the preceding assessment years ranging from 1997 to 2001 [2011 (3) TMI 679 - DELHI HIGH COURT ] held as there is no reason to disallow the same as it is clear that the Revenue had accepted to amortize the aforesaid expense over a period of ten years and, therefore, for all these ten years, the expenditure is eligible for deduction under Section 35D of the Act.- Decided in favour of assessee Disallowance of advertisements expenses related to glow signs and neon sign - CIT(A) deleted the addition - Held that:- As decided in assessee's own case for the assessment year 1999-2000 by putting the neon signs and glow signs, no asset of permanent nature is created. Simply because self-life of such neon signs is more, may not be of any significance once we keep in mind the important aspect on which the expenditure is incurred i.e. on advertising and marketing - Decided in favour of assessee Issues Involved:1. Ad-hoc disallowance of upfront fees expenditure.2. Adjustment on account of provision for gratuity and leave encashment while computing book profits under Section 115JB.3. Adjustment on account of provisions for bad debts while computing book profits under Section 115JB.4. Adjustment made by the Transfer Pricing Officer (TPO) to the value of international transactions of export of guar gum and pet chips.5. Allowance of depreciation without reducing depreciation for the AYs 1995-96 to 1996-97.6. Allowability of expenditure under Section 37(1) of the Income Tax Act, 1961.7. Addition of 1/10th of preliminary expenses under Section 35D.8. Disallowance of advertisements expenses related to glow signs and neon signs.Detailed Analysis:1. Ad-hoc Disallowance of Upfront Fees Expenditure:The first ground of the assessee's appeal was not pressed and thus dismissed as not pressed.2. Adjustment on Account of Provision for Gratuity and Leave Encashment:The grievance of the assessee relates to the adjustment on account of provision for gratuity and leave encashment while computing the book profits for the purpose of Section 115JB of the Income Tax Act, 1961. The ITAT had previously allowed the issue relating to leave encashment and restored the issue relating to gratuity to the AO for re-adjudication. The issue was restored back to the file of the AO to be adjudicated in the same manner as directed for the assessment year 2001-02.3. Adjustment on Account of Provisions for Bad Debts:The issue was decided against the assessee as per the explanation 1 to Section 115JB of the Act.4. Adjustment Made by the Transfer Pricing Officer:The assessee had exported goods under two categories and aggregated both transactions under Transaction Net Margin Method (TNMM). The TPO found that the losses incurred by the assessee on sale of pet chips and guar gum were unjustified. The TPO applied an arm's length mark-up of 8.53% on the costs incurred on providing support services, resulting in an adjustment of Rs. 12,07,218/-. The ITAT found that the loss incurred by the assessee was only on account of foreign exchange fluctuation and that the structure of the transaction was such that the assessee could not make any profit or incur any loss. The addition made by the AO and sustained by the CIT(A) on account of arm's length price was deleted.5. Allowance of Depreciation without Reducing Depreciation for AYs 1995-96 to 1996-97:The issue was decided in favor of the assessee by the Hon'ble Jurisdictional High Court in the preceding assessment years. The ITAT followed the High Court's decision, finding no merit in the ground of the departmental appeal.6. Allowability of Expenditure Under Section 37(1):The assessee incurred certain expenditure on leasehold assets and claimed it as deductible under Section 37(1). The AO considered the expenditure as capital in nature but allowed depreciation. The CIT(A) directed the AO to allow the expenditure under Section 37(1) as it did not result in any enduring benefit. The ITAT followed the decision of the Hon'ble Jurisdictional High Court in assessee's own case, confirming the allowability of the expenditure.7. Addition of 1/10th of Preliminary Expenses Under Section 35D:The AO disallowed the expenditure, stating that the payments were made to the ROC for an increase in authorized share capital and did not fall within the ambit of Section 35D. The CIT(A) deleted the addition by following the decision of the ITAT in assessee's own case. The ITAT noted that the issue had been settled by the Hon'ble Jurisdictional High Court, confirming the allowability of the expenditure under Section 35D.8. Disallowance of Advertisements Expenses Related to Glow Signs and Neon Signs:The AO disallowed the expenses incurred on glow signs and neon signs, treating them as capital in nature. The CIT(A) deleted the disallowance by following the order of the ITAT in assessee's own case. The ITAT noted that the issue had been settled by the Hon'ble Jurisdictional High Court, confirming that the expenditure was revenue in nature and allowable.Conclusion:- The appeal of the assessee was partly allowed.- The appeal of the department was dismissed.