2022 (4) TMI 702 - AT - Income Tax

Tribunal decisions on ESI payments, royalty, and disallowance under Section 14A for AY 2011-12 and 2014-15

The Tribunal partially allowed the appeal for AY 2011-12, dismissing the revenue's grounds on disallowance of delayed ESI payments and disallowance under ... Belated remittance of employees' contribution on ESI & PF - Deposits after due date as prescribed under the relevant act but before the due date of filing of return of income - HELD THAT:- We find that this issue stand covered in assessee’s favor by the decision of Hon’ble High Court of Madras in the case of CIT V/s M/s Industrial security and intelligence India Private Limited [2015 (7) TMI 1063 - MADRAS HIGH COURT]wherein it was held that if the assessee had deposited employees’ contribution towards PF and ESI after due date as prescribed under the relevant act but before the due date of filing of return of income then no disallowance could be made u/s 43B. Also in Adyar Anand Bhawan Sweets India Pvt. Ltd. [2021 (12) TMI 558 - ITAT CHENNAI] has held that the amendment to Sec.36(1)(va) by way of insertion of explanation-2 would operate prospectively only. Therefore, respectfully following the same, we confirm this issue in assessee’s favor. The ground thus raised stand dismissed. Nature of Royalty payments/Management Service Charges - revenue or capital expenditure - royalty was to be paid for use of ISS Brand - AO held that the expenditure was held to be capital in nature - HELD THAT:- The undisputed position that emerges is that the assessee is using the trade name as well as management services under contractual terms. The payment was to be made on annual basis and the same was based on fixed percentage of net sales turnover. Upon termination of the agreement, the benefits/licenses/services were to lapse and the assessee was to return the manuals, reports etc. No new asset was acquired by the assessee. The assessee merely acted as user. Therefore, it could not be said that the rights acquired by the assessee were enduring in nature. The Ld. CIT(A), in our considered opinion, has clinched the issue in the correct perspective and therefore, the same would not require any interference on our part. The grounds raised by the revenue, in this regard, stand dismissed. Disallowance u/s 14A - assessee earned exempt dividend income - assessee submitted that investments were out of internal accruals - AO computed aggregate disallowance u/r 8D(2) which comprised-off of interest disallowance u/r 8D(2)(ii) and indirect expense disallowance u/r 8D(2)(iii) - CIT(A) directed Ld. AO to exclude strategic investments to compute the disallowance and also to verify if the own funds were more than the investment - HELD THAT:- So far as the exclusion of strategic investment is concerned, the directions of Ld. CIT(A) stand reversed in the light of the decision of Hon’ble Supreme Court in the case of Maxopp Investment Limited [2018 (3) TMI 805 - SUPREME COURT] - At the same time, no infirmity could be found in the direction of Ld. CIT(A) for verification of plea of own funds since a presumption would run in assessee’s favor that the investments were out of own funds in case own funds exceed the investments made by the assessee. Additionally, Ld. AR has pleaded that there is no opening and closing investments and therefore, no disallowance could be computed u/r 8D(2). However, this plea could not be accepted in revenue’s appeal. Finally, finding no infirmity in the order of Ld. CIT(A), we dismiss the ground raised by the revenue. The appeal stands partly allowed in terms of our above order. Computation of books profit u/s 115JB for disallowance u/s 14A - HELD THAT:- We concur with the adjudication of Ld. CIT(A) since no disallowance could be computed in the absence of exempt income. Further, the disallowance could not be added back to Book Profits u/s 115JB as per the decision of Special Bench of Delhi Tribunal in ACIT V/s Vireet Investment (P) Ltd. [2017 (6) TMI 1124 - ITAT DELHI]. Finding no infirmity in the impugned order, we dismiss the grounds urged by the revenue. The appeal stands dismissed. Issues Involved:1. Disallowance of delayed payment of ESI.2. Nature of Royalty payments/Management Service Charges.3. Disallowance under Section 14A.Issue-wise Detailed Analysis:(i) Disallowance of delayed payment of ESI:The assessee delayed remittance of employees' ESI contribution, leading to a disallowance of Rs. 26.60 Lacs added to the income. The CIT(A) allowed the claim based on various decisions, notably the Hon'ble Bombay High Court in CIT V/s Ghatge Patil Transporters Ltd. and the Hon'ble Madras High Court in CIT V/s M/s Industrial Security and Intelligence India Private Limited, which held that if the employees' contribution towards PF and ESI is deposited before the due date of filing the return, no disallowance could be made under Section 43B. The Tribunal found this issue in the assessee’s favor, confirming the CIT(A)'s decision and dismissing the revenue's ground.(ii) Nature of Royalty payments/Management Service Charges:The assessee paid Rs. 332.67 Lacs as royalty to M/s ISS A/S Denmark for using the ISS Brand and management services, calculated as a percentage of annual sales turnover. The AO considered this as capital expenditure, allowing depreciation. However, the CIT(A) concluded that these payments were for the right to use and not for acquiring any capital asset, relying on decisions such as Alembic Chemicals Works Co. Ltd., Jubilant Foodwork Pvt. Ltd., and Hero Honda Motors Ltd. The Tribunal upheld the CIT(A)'s view, noting that the payments were annual and based on sales turnover, with no acquisition of new assets, and dismissed the revenue's grounds.(iii) Disallowance under Section 14A:For AY 2011-12, the assessee earned exempt dividend income of Rs. 2.84 Lacs. The AO disallowed Rs.0.39 Lacs under Rule 8D(2). The CIT(A) directed the AO to exclude strategic investments and verify if the own funds exceeded the investments, in which case no disallowance should be made, following decisions like HDFC Bank Ltd. and Hotel Savera. The Tribunal reversed the exclusion of strategic investments based on the Supreme Court's decision in Maxopp Investment Limited but upheld the CIT(A)'s direction to verify the own funds, dismissing the revenue's grounds.For AY 2014-15, the assessee earned no exempt income, yet the AO disallowed Rs.0.19 Lacs under Rule 8D(2)(iii). The CIT(A) directed deletion of the disallowance if no exempt income was earned, citing Redington India Ltd. V/s Addl. CIT and held that disallowance could not be added to Book Profits under Section 115JB, following the Special Bench decision in ACIT V/s Vireet Investment (P) Ltd. The Tribunal concurred with the CIT(A), dismissing the revenue's appeal.Conclusion:The Tribunal partly allowed the appeal for AY 2011-12 and dismissed the appeal for AY 2014-15.