2017 (4) TMI 1518 - AT - Income Tax

Tribunal Ruling on Income, Expenditure, and Depreciation

M/s Rhodia Specialty Chemicals India Ltd. (Formerly known as M/s Albright & Wilson Chemicals India Ltd.) Versus Addl. CIT – Circle 6 (1), Mumbai AND DCIT -7 (2), Mumbai Versus M/s Rhodia Specialty Chemicals India Ltd. (Formerly known as M/s Albright & Wilson Chemicals India Ltd.)

The Tribunal directed the Assessing Officer to delete the addition made due to a mismatch of AIR data with the Assessee's accounts. The Tribunal upheld ... Addition made for the mismatch of AIR data with the Assessee’s accounts - HELD THAT:- Assessing Officer has not provided the transaction-wise and party-wise details to the Assessee for reconciliation and in the absence of such complete details simply because the Assessee could not reconcile the figure matching with the AIR data, addition cannot be made solely based on such AIR information. However, the Assessee out of ₹ 5,34,631/- has given the details and explanation to an amount of ₹ 4,93,466/-. Therefore, following the decision M/S. AF. FERGUSON & CO., C/O DELOITTE HASKINS & SELLS [2015 (1) TMI 306 - ITAT MUMBAI] we direct the Assessing Officer to delete the addition. Correct head of income - interest earned on fixed deposits from banks and interest received on deposits with MIDC or MSEB - assessable under the head income from business or income from other sources - HELD THAT:- Almost similar issue has been considered by the Jurisdictional High Court in the case of CIT Vs. Swani Spices Pvt. Ltd [2010 (4) TMI 751 - BOMBAY HIGH COURT] wherein the Assessee received income from discounting bills and inter corporate deposits from out of surplus funds and claimed as business income for the purpose of deduction u/s 80HHC of the Act. The Jurisdictional High Court considering various decisions held that income received by way of bill discounting charges and interest on inter corporate deposits would not fall under the head of profits and gains of business or profession but would fall under the head income from other sources. The Hon’ble Supreme Court in the case of Pandian Chemicals Ltd. [2003 (4) TMI 3 - SUPREME COURT] held that interest from deposits with electricity board is not income derived from business of the undertaking. Respectfully following the above said decisions, we hold that interest on fixed deposits with banks, interest on deposits with MIDC / MSEB would not fall under the head of profits and gains of business of profession but would fall under the head income from other sources. These grounds are dismissed. Disallowance/addition on account of debit balances of creditors written off - CIT (Appeals) held that this amount is capital and is not revenue in nature and therefore not allowable u/s 37(1) - HELD THAT:- The Chennai Bench in the case of Sterling Agro Products Processing Pvt. Ltd[2011 (8) TMI 460 - ITAT CHENNAI] considering the decision of Woodward Governor India Pvt. Ltd. [2009 (4) TMI 4 - SUPREME COURT] held that losses on account of irrecoverable amounts which were advanced to parties for supply of raw materials, agricultural produce etc. would result in definitely to be a loss to Assessee and such loss would lie in revenue field. Thus We hold that the write off of all advances made to parties for rendering services / supply of material it is a revenue expenditure allowable u/s 37(1) or u/s 28 of the Act. We hold that since the Assessee has written off only the advances made to parties for supply of materials / services, and it is not actually credit balances written off, the provisions of Section 41(1) are not attracted. Thus ground nos. 4 and 5 are allowed. TDS u/s 195 - disallowing infrastructure service management fees and smart SMS fees u/s 40(a)(i) of the Act for non deduction of TDS - HELD THAT:- Lower authorities have not thoroughly examined the nature of services rendered by RAP to the Assessee and also whether they are rendered outside India or rendered in India. No such finding is given by the lower authorities - services were rendered by RAP to the Assessee and RAP is a resident of Singapore but it is not clear as to the detailed services rendered by RAP vis-àvis the agreement and where such services were rendered to Assessee whether in abroad or in India and how they were rendered. These findings of fact are necessary to examine as to whether RAP has rendered technical services to the Assessee within the meaning of the provisions of section 9(1)(vii) r.w.s. 195 - Assessing Officer should examine thoroughly this issue with reference to the nature of services rendered by RAP, by calling complete details from the Assessee and ascertaining whether these services were rendered outside India or in India to the Assessee and how they were rendered and also to examine the applicability of the decision of this Tribunal in Ashok Piramal Management Corporation Ltd [2016 (11) TMI 113 - ITAT MUMBAI] and decide the issue in accordingly. Disallowance of prior period expenses incurred on survey fees and maintenance charges - as per AO expenses were not incurred during the assessment year under consideration, but were incurred in the prior years and therefore they cannot be allowed as deduction in the year of actual payment as Assessee is following mercantile system of accounting - HELD THAT:- If there is no difference in the rate of tax in the year in which the expenditure pertains to and the year in which the Assessee has claimed the expenditure as prior period expenses we do not see any reason not to allow such expenditure. Therefore, we direct the Assessing Officer to verify as to whether there is rate difference in tax or not and if there is no difference in rate of tax apply the decision of the jurisdictional High Court in the case of CIT Vs. Nagri Mills Co. Ltd. [1957 (9) TMI 30 - BOMBAY HIGH COURT] and allow the claim of the Assessee. The Assessing Officer shall also examine the ratio of decision in the case of Phalton Sugar Works Ltd [1985 (10) TMI 68 - BOMBAY HIGH COURT] and find out whether the expenses have crystalized and quantifiable during the year under consideration and allow the expenditure during this year accordingly. This ground is allowed for statistical purpose. Assessability of income on account of insurance claim, rent recovery, scrap sale and miscellaneous income - business income OR income from other sources - HELD THAT:- CIT (Appeals) after elaborate discussion and consideration of the submissions of the Assessee and the findings of the Assessing Officer held that on examination of facts on record, receipts on account of insurance claim, rent recovery, scrap sale & miscellaneous income have to be treated as business income as they are inextricably linked with the business. The Revenue could not rebut the findings of the Ld. CIT (Appeals) and the submissions of the Assessee before the Ld. CIT (Appeals). In our view insurance claim and scrap sales are income from business. Rent recovered and miscellaneous income cannot be business income of the Assessee. Thus we direct the AO to treat the receipt from insurance claim and scrap sales as business income and rent recovered and miscellaneous income as income from other sources. This ground is partly allowed. Nature of expenses - repairs and maintenance - revenue or capital expenditure - HELD THAT:- Since similar expenditures were allowed as revenue expenditure for preserving and maintaining the existing assets by the Tribunal in Assessee’s own case which the Ld. CIT (Appeals) followed, we do not find any valid reason to interfere with the reasoning and the decision of the Ld. CIT (Appeals). Hence order of the Ld. CIT (Appeals) is sustained. Grounds raised by the Revenue on this issue are rejected. TDS u/s 194H - provision for payment to Equant Technology Service (I) Private Limited - Addition u/s 40(a)(ia) - HELD THAT:- As could be seen from the above, the Assessee has made only a provision which was reversed in subsequent year and therefore there is no liability to deduct TDS on such provision. It is also submitted that excess provision reversed so offered to tax in the subsequent year. Therefore, we do not find infirmity in the order passed by the Ld. CIT (Appeals). This ground is dismissed. Nature of expenses - software expenses - revenue v/s capital expenditure - Treated as revenue expenditure by CIT (Appeals) instead of capital expenditure by AO - HELD THAT:- In the case of CIT Vs. Raychem RPG Ltd [2011 (7) TMI 953 - BOMBAY HIGH COURT]confirmed the order of the Tribunal and held that software expenditure incurred by the Assessee is not part of profit making apparatus of Assessee and therefore expenditure is revenue expenditure. In this case, the Tribunal followed the special bench decision in the case of Amway India Enterprises Vs. DCIT [2008 (2) TMI 454 - ITAT DELHI-C]and held that since the software does not form part of profit making apparatus of the Assessee, the same is to be allowed as revenue expenditure. Thus we uphold the order of the Ld. CIT (Appeals). This ground of appeal is dismissed. Depreciation on Ambernath Unit - period for which asset is used - HELD THAT:- It is undisputed fact that the assets of Ambernath Unit were put to use by the Assessee during April to July 2008 during the assessment year under consideration. Therefore, when once the assets of a block are put to use during the year depreciation cannot be denied on the ground that they are subsequently sold by the Assessee. Even if the Assessee sold the Ambernath unit subsequently at least till the period of the asset put to use i.e. July 2008 depreciation is allowable. As relying on SWATI SYNTHETICS LTD. case [2009 (12) TMI 667 - ITAT MUMBAI] we affirm the order of the Ld. CIT (Appeals) in allowing depreciation on Ambernath plant. The grounds of revenue on this are dismissed. Issues Involved:1. Addition due to mismatch of AIR data with the Assessee's accounts.2. Classification of interest income from fixed deposits and deposits with MIDC/MSEB.3. Disallowance of debit balances of creditors written off.4. Disallowance of infrastructure service management fees and smart SMS fees under Section 40(a)(i) for non-deduction of TDS.5. Disallowance of prior period expenses.6. Classification of income from insurance claims, rent recovery, scrap sale, and miscellaneous income.7. Classification of expenditures on repairs and maintenance as revenue or capital expenditure.8. Disallowance under Section 40(a)(ia) regarding provisions.9. Allowance of depreciation on Ambernath Unit.Detailed Analysis:1. Addition due to mismatch of AIR data with the Assessee's accounts:The Assessing Officer (AO) added Rs. 61,732 due to a mismatch between AIR data and the Assessee's books. The Assessee reconciled up to Rs. 4,93,466 and attributed the remaining Rs. 41,165 to personal expenses of employees. The AO did not provide specific details for the mismatch, making reconciliation difficult for the Assessee. Following the precedent set in AF Ferguson & Co., the Tribunal held that additions based solely on AIR data without specific details are unsustainable. The AO was directed to delete the addition.2. Classification of interest income from fixed deposits and deposits with MIDC/MSEB:The AO classified interest income from fixed deposits and deposits with MIDC/MSEB as income from other sources, denying the Assessee's claim to classify it as business income. The Tribunal upheld this classification, citing the Supreme Court's decision in Pandian Chemicals Ltd. and the Bombay High Court's decision in Swani Spice Mills Pvt. Ltd., which held that such interest income does not fall under profits and gains of business.3. Disallowance of debit balances of creditors written off:The AO disallowed Rs. 7,64,057 claimed as write-off of creditors' balances, treating it as cessation of liability under Section 41(1). The Tribunal, however, held that the write-off of advances made for services/materials is revenue expenditure allowable under Section 37(1) or as business loss under Section 28. The Tribunal also clarified that Section 41(1) does not apply as these were not credit balances written off.4. Disallowance of infrastructure service management fees and smart SMS fees under Section 40(a)(i) for non-deduction of TDS:The AO disallowed Rs. 14,77,863 paid to Rhodia Asia Pacific Pte Ltd. (RAP) for non-deduction of TDS, treating it as fees for technical services. The Tribunal remanded the issue to the AO for thorough examination of the nature of services rendered by RAP, whether they were rendered outside India, and the applicability of the decision in Ashok Pyramal Management Corporation Ltd., which held that retrospective amendments do not create liability for TDS if the payment was made before the amendment.5. Disallowance of prior period expenses:The AO disallowed Rs. 1,28,331 as prior period expenses. The Tribunal directed the AO to verify if there was any difference in the tax rate between the years the expenses pertained to and the year they were claimed. If no difference existed, the expenses should be allowed in the current year, following the Bombay High Court's decision in CIT Vs. Nagri Mills Co. Ltd.6. Classification of income from insurance claims, rent recovery, scrap sale, and miscellaneous income:The AO classified these incomes as income from other sources. The Tribunal held that insurance claims and scrap sales are business income, while rent recovery and miscellaneous income are income from other sources, partially allowing the AO's classification.7. Classification of expenditures on repairs and maintenance as revenue or capital expenditure:The AO treated Rs. 96,27,579 as capital expenditure. The Tribunal upheld the Ld. CIT (Appeals)'s decision that these were revenue expenditures, following the precedent in the Assessee's own case for earlier years and considering that the expenses were for maintaining existing assets without resulting in new assets or enduring benefits.8. Disallowance under Section 40(a)(ia) regarding provisions:The AO disallowed Rs. 1,85,465 for non-deduction of TDS on provisions. The Tribunal upheld the Ld. CIT (Appeals)'s decision that no disallowance is attracted as the provision was reversed in the next year and offered to tax, following the Mumbai Bench's decision in Industrial Development Bank of India Vs. ITO.9. Allowance of depreciation on Ambernath Unit:The AO denied depreciation on the Ambernath Unit, citing its discontinuation. The Tribunal upheld the Ld. CIT (Appeals)'s decision allowing depreciation, noting that the unit was used for part of the year and once assets are part of the block, depreciation is allowable even if the unit is subsequently sold, following the Bombay High Court's decision in GR Shipping Ltd.