2016 (6) TMI 1438 - AT - Income Tax

Tribunal Ruling on Tax Treatment of Business Income, Capital Receipts, Expenses, and Disallowances

Asst. Commissioner of Income Tax, Range-3 (2), Mumbai Verus M/s LML Ltd And Vice-Versa And Dy. Commissioner of Income Tax, Range-3 (2) Versus M/s LML Ltd.

Asst. Commissioner of Income Tax, Range-3 (2), Mumbai Verus M/s LML Ltd And Vice-Versa And Dy. Commissioner of Income Tax, Range-3 (2) Versus M/s LML Ltd. ... Issues Involved:1. Treatment of compensation received on termination of Joint Venture Agreement.2. Treatment of forfeiture of advance share application money.3. Disallowance of legal expenses.4. Disallowance of interest on interest-free advances to associated concerns.5. Disallowance of interest on dues from associated concerns.6. Disallowance of technical know-how fees under section 40(a)(i).7. Disallowance under section 40A(9) for contributions to clubs and funds.8. Disallowance of pre-operative expenses.9. Treatment of expenditure on obtaining ISO 9002 and World Class Manufacturing certificates.10. Treatment of bad debts as capital loss.11. Addition on account of assessable value of goods imported for job work.12. Disallowance of provision for doubtful debts and advances.13. Disallowance of prior period expenses.14. Disallowance of gifts to employees and guests.15. Disallowance of payments of royalty and technical know-how fees.Detailed Analysis:1. Treatment of Compensation Received on Termination of Joint Venture Agreement:The compensation received by the assessee on the termination of the Joint Venture Agreement with Piaggio was treated as a capital receipt. The Tribunal held that the compensation was attributable to restrictive covenants imposed on the assessee, adversely affecting its business and profitability. The Tribunal agreed with the CIT(A) that the compensation was for the impairment of the profit-making apparatus and hence was a capital receipt, not liable for taxation as business income or capital gain.2. Treatment of Forfeiture of Advance Share Application Money:The amount of Rs. 8.80 crores received as advance share application money from Piaggio was treated as a capital receipt. The Tribunal upheld the CIT(A)'s decision, noting that the amount was received as share application money and not as a loan or advance for trading purposes. The Tribunal also noted that the amount was not taxable under section 41(1) as it was not a trading liability.3. Disallowance of Legal Expenses:The Tribunal upheld the CIT(A)'s decision to allow the legal expenses of Rs. 574.96 lakhs incurred by the assessee to defend itself in legal suits filed by Piaggio. The Tribunal noted that the expenses were incurred to protect the assessee's business interests and were therefore allowable as business expenses.4. Disallowance of Interest on Interest-Free Advances to Associated Concerns:The Tribunal upheld the CIT(A)'s decision to delete the disallowance of Rs. 2.03 crores made by the AO on account of interest-free advances to VCCL Ltd. The Tribunal noted that the amount of Rs. 13.55 crores was repaid by VCCL to the assessee, rendering the AO's premise for disallowance baseless.5. Disallowance of Interest on Dues from Associated Concerns:The Tribunal upheld the CIT(A)'s decision to delete the disallowance of Rs. 4.05 crores made by the AO on account of interest on dues from Esslon Synthetics Ltd. The Tribunal noted that the amount was part of the sale consideration for the transfer of the Fibre Business and was not an advance or loan given to the associated concern.6. Disallowance of Technical Know-How Fees under Section 40(a)(i):The Tribunal upheld the CIT(A)'s decision to delete the disallowance of technical know-how fees paid to AVL Austria. The Tribunal noted that the services were rendered outside India and were not taxable in India under the old India-Austria DTAA.7. Disallowance under Section 40A(9) for Contributions to Clubs and Funds:The Tribunal reversed the CIT(A)'s decision and upheld the disallowance of Rs. 5,81,936/- under section 40A(9) for contributions to LML Executive Club, LML Officers Club, LML Ladies Club, and Workers Benevolent Fund, following the precedent set in earlier years.8. Disallowance of Pre-Operative Expenses:The Tribunal directed the AO to verify whether the amount of Rs. 3,76,81,000/- had already been reduced from the pre-operative expenditure and to rectify the mistake if the amount had already been reduced.9. Treatment of Expenditure on Obtaining ISO 9002 and World Class Manufacturing Certificates:The Tribunal upheld the CIT(A)'s decision to treat the expenditure on obtaining ISO 9002 and World Class Manufacturing certificates as revenue expenditure, noting that the expenditure was incurred wholly and exclusively for the purpose of business.10. Treatment of Bad Debts as Capital Loss:The Tribunal upheld the CIT(A)'s decision to allow the amount of Rs. 17.59 crores as a bad debt written off, noting that the amount was a sundry debt and not a capital asset.11. Addition on Account of Assessable Value of Goods Imported for Job Work:The Tribunal deleted the addition of Rs. 1,20,93,180/- made by the AO on account of the assessable value of components imported for job work, noting that the components were received free of cost and used in the assessee's business.12. Disallowance of Provision for Doubtful Debts and Advances:The Tribunal directed the AO to examine whether the provision for doubtful debts and advances had been debited to the profit and loss account and simultaneously reduced from the debtors' account, and to allow the deduction if the conditions were met.13. Disallowance of Prior Period Expenses:The Tribunal restored the issue of prior period expenses of Rs. 26.27 lakhs to the AO for fresh examination, directing the AO to consider the assessee's submissions and the decision of the Supreme Court in Taparia Tools Ltd.14. Disallowance of Gifts to Employees and Guests:The Tribunal upheld the disallowance of 10% of the expenses on gifts to employees and guests, noting that the onus was on the assessee to show that the entire expenditure was incurred wholly and exclusively for business purposes.15. Disallowance of Payments of Royalty and Technical Know-How Fees:The Tribunal upheld the disallowance of royalty payments to M/s Daelim Motors Co. Ltd, Korea, and M/s China Terminal & Electrical Co Ltd., Taiwan, as not pressed by the assessee. However, the Tribunal deleted the disallowance of payments for technical know-how fees, noting that the services were rendered outside India and were not taxable in India at the time of payment.