2020 (2) TMI 62 - AT - Income Tax

Appeal partially granted on waiver, pension, and credit issues; disallowed capital loss claims.

The Tribunal partially allowed the appeal, granting relief on the waiver of advances, special pension liability, and Modvat credit issues. However, it ... Write-off or waiver of advance given to its subsidiary - Whether allowable as deduction under Section 36(1)(vii)/37(1)/28 and/or any other provision of the Act? - HELD THAT:- In the present case, it is not in dispute that the assessee earned interest income of ₹ 39,00,00,000/- and assignment charges of ₹ 10,45,00,000/- from the transaction of development of NGE land. Following the ratio laid down by the Hon'ble Supreme Court in the case of T. Veerabhadra Rao [1985 (7) TMI 2 - SUPREME COURT] which has been applied by the Hon'ble Bombay High Court in Shreyas S Morakhia [2012 (3) TMI 103 - BOMBAY HIGH COURT] we find that the income offered by the assessee in the form of interest and assignment charges formed part of the entire debt owned by the assessee from NGE and since the assessee had offered to tax a part of the debt, the requirement of Section 36(2) of the Act stood satisfied and the assessee is eligible to claim the deduction under Section 36(1)(vii). Since we have accepted the plea of the assessee for deduction of the said sum in terms of Sec. 36(1)(vii) of the Act, the alternate pleas made by the assessee for deductibility of the said sum in terms of Sec. 37(1) of the Act or as a 'business loss' in terms of Sec. 28 of the Act, are rendered academic and are not being adjudicated for the present. Accordingly, Ground of appeal no. 1 of the assessee is allowed. Disallowance of claim of Short Term Capital Loss and Long Term Capital Loss claimed by the assessee on sale of assets used for Research & Development activities for which deduction under Section 35 of the Act was already claimed by the assessee holding it to be double deduction - HELD THAT:- Issue is decided against the assessee by the Tribunal in assessee's own case [2013 (9) TMI 522 - ITAT, MUMBAI] holding that the claim of short term and long term loss will amount to double deduction, which is not permissible. Since there is no change in facts, following the decision of our co-ordinate Bench in assessee's own case, this Ground of appeal is decided against the assessee. Disallowance of claim of special pension liability based on actuarial valuation - HELD THAT:- Since the Assessing Officer himself has allowed the claim of the assessee under Section 35DDA of the Act in subsequent years, we direct the Assessing Officer to allow the claim under Section 35DDA of the Act for the year under consideration as the nature of payment in all the years is the same, there being no change in facts. Thus, on this Ground, assessee partly succeeds. Addition of value of closing stock on account of unutilised MODVAT Credit applying the provisions of Section 145A - HELD THAT:- Irrespective of the method of accounting followed by the assessee, i.e. 'Inclusive method', wherein the taxes are included in the opening stock, purchases, etc. or the 'Exclusive method', the MODVAT credit does not have any impact on the profit of the assessee. Thus, following the ratio laid down by the Hon'ble Supreme Court in the case of Indo Nippon Chemicals Co. Ltd. [2003 (1) TMI 8 - SUPREME COURT] and Diamond Dye Chem Ltd. [2017 (7) TMI 616 - BOMBAY HIGH COURT] we set-aside the order of the CIT (A) and direct the Assessing Officer to delete the addition made on account of unutilised MODVAT credit. This Ground of appeal is accordingly allowed. Manner of computation of deduction under Section 80HHC - HELD THAT:- Receipts by way of income from Services rendered and Property Development activity is concerned, undoubtedly the same are in respect of activities which fall within the ambit of 'income from business', a treatment which has been accepted by the Revenue in the past years also. AO has excluded 90% of the above items by applying Explanation (baa) to Sec. 80HHC of the Act on the premise that said receipts are not directly related to exports. Pertinently, the said position taken by the Assessing Officer is in variance with his stand in the earlier assessment years, as contended by the Ld. Representative for the assessee. Earnings by way of Services rendered and Property Development activity as well as income from scrap is an integral part of diverse activities being carried out by the assessee and the income has otherwise also been assessed from such activities as business income. In fact, the Ld. Representative pointed out, without controversion, that such receipts do figure as a part of 'total turnover' of business for the purpose of computing deduction under Section 80HHC of the Act. We are also in agreement with the Ld. Representative that so far as scrap income is concerned, since it has been generated from production process and assessee is not in the business of sale of scrap, any income from such scrap tantamounts to recoupment of cost of raw material/production and, therefore, is includible in the 'profits of business' for the purpose of Sec. 80HHC of the Act. The requirement of reducing 90% of such receipts from the 'profits of business' as contained in Explanation (baa) to Sec. 80HHC of the Act, in our view, is not relevant qua the aforesaid three receipts, since same are in the nature of operational incomes. Thus, on this aspect, assessee succeeds. Insofar as receipt from Royalty is concerned, the same has been rightly excluded as required by Explanation (baa) to Sec. 80HHC of the Act by the Assessing Officer, which is hereby affirmed. Insofar as the alternate plea of the assessee for exclusion of the same from the figure of total turnover is concerned, the Assessing Officer shall verify the same and thereafter decide on the plea of the assessee afresh. Thus, this Ground of appeal is partly allowed. Issues Involved:1. Deduction in respect of waiver of advances.2. Claim of short-term and long-term capital loss on sale of R&D assets.3. Claim of special pension liability based on actuarial valuation.4. Addition on account of unutilized Modvat credit.5. Claim of deduction under Section 80HHC on certain receipts.Detailed Analysis:1. Deduction in Respect of Waiver of Advances:The assessee claimed a deduction of Rs. 15,11,15,380/- representing the waiver of advances given to its subsidiary, MGDL. The waiver was due to the prolonged process of getting clearances for property development. The assessee argued that the deduction should be allowed under Sections 36(1)(vii), 37(1), or 28 of the Income Tax Act. The Assessing Officer rejected the claim on several grounds, including the failure to meet the conditions under Section 36(2), lack of Board authorization, and the capital nature of the expense. The CIT (A) upheld this disallowance. However, the Tribunal allowed the deduction under Section 36(1)(vii) by noting that the waiver was indeed written off in the books and that the interest income from the advances had been offered to tax in previous years, fulfilling the conditions of Section 36(2).2. Claim of Short-Term and Long-Term Capital Loss on Sale of R&D Assets:The assessee claimed a short-term capital loss of Rs. 6,93,040/- and a long-term capital loss of Rs. 1,29,78,811/- on the sale of R&D assets. The Assessing Officer disallowed the claim, considering it a double deduction since the entire cost of the assets had already been allowed as a deduction under Section 35. The Tribunal upheld this disallowance, following its earlier decision in the assessee's own case, which held that claiming both deductions would amount to double deduction.3. Claim of Special Pension Liability Based on Actuarial Valuation:The assessee claimed Rs. 1,27,75,558/- as a special pension liability based on actuarial valuation. The Assessing Officer disallowed the claim, treating it as a contribution to an internal corpus. The CIT (A) upheld this disallowance. However, the Tribunal allowed the alternative claim for a proportionate deduction under Section 35DDA, noting that the Assessing Officer had allowed such deductions in subsequent years.4. Addition on Account of Unutilized Modvat Credit:The Assessing Officer added Rs. 17,13,97,088/- to the value of closing stock under Section 145A, representing unutilized Modvat credit. The CIT (A) directed the Assessing Officer to re-compute the profits after adjusting the opening stock, purchases, and sales. The Tribunal directed the deletion of the addition, relying on the Bombay High Court's decision in Diamond Dye Chem Ltd., which held that unutilized credit cannot be directly added to the income of the assessee.5. Claim of Deduction Under Section 80HHC on Certain Receipts:The assessee claimed that certain receipts should be included in the business income for computing deductions under Section 80HHC. These receipts included income from services rendered, property development activity, scrap, and royalty. The Assessing Officer excluded 90% of these receipts from the 'profits of business' under Explanation (baa) to Section 80HHC. The Tribunal held that income from services rendered, property development activity, and scrap should be included in the 'profits of business' as they are part of regular operations. However, it upheld the exclusion of royalty income but directed the Assessing Officer to verify and exclude the same from the total turnover.Conclusion:The Tribunal allowed the appeal partly, granting relief on the waiver of advances, special pension liability, and Modvat credit issues, while upholding the disallowance of capital loss claims and partially allowing the claim under Section 80HHC.