2019 (2) TMI 2142 - AT - Income Tax

Assessee entitled to s.10AA deduction for value-added exports; AO limited to s.14A/Rule 8D disallowance equal to exempt income

ITAT MUMBAI upheld most of the CIT(A)'s findings: the assessee was eligible for deduction under s.10AA due to value-addition via customization and prior ... Addition u/s 10AA - assessee was primarily engaged in trading activities and not in any kind of manufacturing and, therefore, not eligible for any deduction u/s 10AA - CIT(A) deleted addition - HELD THAT:- Since the customization was done by the assessee as per the requirement of the client and thus the process itself involves a lot of value addition. Even during the course of appellate proceedings, the assessee furnished various details, like various parts or items required to assemble a fire fighting systems, which are imported and then filling of gases and further customization depending upon the requirement of clients. Even otherwise, the claim u/s 10AA was made by the assessee for the first time in the year AY 2009-10 and the present year is the fourth such year in which such claim has been made and in earlier three years this claim has been allowed by the AO after due verification. Hon’ble Supreme Court in the case of Radhasaomi Satsang [1991 (11) TMI 2 - SUPREME COURT] had held that in the absence of any material change, justifying the revenue to take a different view of the matter, if there was no change, the AO could not take a different view. Apart from that in the case of Sunil Kumar Ganeriwal [2011 (11) TMI 499 - ITAT MUMBAI] wherein it was held that once a particular stand has been taken by the AO in the earlier years, the same should not be changed unless and until there is material difference in the circumstances of the case. Since the Ld. CIT(A) had rightly appreciated the facts of the present case in correct perspective and even no new facts or contrary judgments have been brought on record before us in order to controvert or rebut the findings so recorded by Ld. CIT(A). No reasons to interfere into or deviate from the findings recorded by the Ld.CIT(A). Hence, we are of the considered view that the findings so recorded by the Ld. CIT (A) are judicious and are well reasoned. Resultantly, this ground raised by the revenue stands dismissed. Disallowance of sales tax dues - CIT(A) had decided the issued by relying upon the decision of wherein it had been held that the interest expenses are incidental and arises out of the business of the assessee and being compensatory in nature has direct nexus with the business operations. Treating the expenditure as credit rating fees as revenue expenditure instead of capital expenditure treated by the AO - Nature of expenditure - We find that the above amount was paid to the credit rating agency, Crisil Ltd which evaluates the affairs of the assessee and grants it investments related ratings. On the basis of credit rating given by the agency, the assessee had raised loans of Rs 300 crores in nature of working capital loan. Since, this amount of was paid annually to Crisil, therefore after examining the fact, the Ld. CIT(A) had rightly treated the said expenses as revenue expenses. Moreover, no new facts or contrary judgments have been brought on record before us in order to controvert or rebut the findings so recorded by Ld. CIT(A). Therefore, we see no reasons to interfere into or deviate from the findings recorded by the Ld.CIT(A). Hence, we are of the considered view that the findings so recorded by the Ld. CIT (A) are judicious and are well reasoned. Resultantly, this ground raised by the revenue stands dismissed. Disallowance of rent expenses - Assessee had entered into a Leave and License agreement dated 14.02.2011 with M/s Bombay Intelligence Securities India Ltd as per which a property was taken on monthly rent of Rs 2,25.000/- and service charges @ 10.3%. The agreement was for a period of 12 months. Thus, the rental expenditure of 21/2 months for a period of 15.02.2011 to 31.03.2011, though accrued in AY 2011-12, however, due to late receipt of debit note from the said company, this rent of 21/2 months for the AY 2011-12 had been claimed by the assessee during the current year i.e. AY 2012-13. Whereas this rent of Rs. 6,20,437/- was actually paid in subsequent year on the basis of the debit note. Therefore CIT(A) allowed the expenses in the year under consideration while relying upon the judgment of Herbalife International Ltd [2016 (5) TMI 697 - DELHI HIGH COURT] directed to allow the expenditure correctly. Additions u/s 14A read with I.T. Rules 8D(2)(ii) - working of Rule 8D when there was an exempted income of Rs. 1,25,000/- only - HELD THAT:- We find that in the case of Joint Investment Pvt. Ltd [2015 (3) TMI 155 - DELHI HIGH COURT] had held that section 14A or rule 8D of the I.T. Rules 1962, cannot be interpreted so as to mean that the entire exempt income is to be disallowed. The window for disallowance was indicated in section 14A and was only to the extent of disallowing expenditure ‘incurred by the assessee in relation to the tax exempt income’. This proposition or portion of the exempt income surely cannot swallow the entire amount. Thus it was held that the disallowance can only be to the extent of expenditure income incurred by the assessee in relation to tax exempt income. In the decision rendered in the case of K. Ratanchand and Co. [2015 (10) TMI 2171 - ITAT AHMEDABAD] wherein it was held that addition u/s 14A cannot be more than exempt income. Thus, such disallowance should not exceed the quantum of exempt income. Whereas the judgments cited by Ld. DR are not relevant and applicable to the facts of the present case. Resultantly, the decision of Ld. CIT(A) on this ground is set aside and AO is directed to restrict the addition to the extent of exempt income earned by the assessee during the year under consideration. Accordingly, this ground raised by the assessee is allowed. Disallowing the Depreciation on Motor Car - assessee had claimed depreciation @ 50% in respect of motor car, while the AO had allowed the same only @ 15% - HELD THAT:- As assessee failed to establish the vehicle under consideration was actually a commercial vehicle in the nature of truck, etc, and not a motor car. Therefore, CIT(A) after appreciating the facts had rightly concluded that assessee is not entitle for depreciation @ 50% as the medium passenger motor vehicle will not include a maxicab as is defined in the Motor Vehicle Act. Disallowance on adhoc basis without any valid or cogent reasons - In our view, the assessee’s books of accounts were not rejected and the AO had accepted the assessee’s accounts which have been duly audited, therefore no disallowance is permissible for non-production of evidence of expenditure claimed by the assessee. The additions on the basis of estimation is not permissible on the flimsy ground particulary when all these documents have been duly audited and audited books of accounts and balance sheet have not been rejected by the AO. In this respect, we respectfully follow the judgment rendered in the case of R. G. Buildwell Engineers Ltd. [2018 (10) TMI 252 - SC ORDER] and Gurudev Singh [2017 (8) TMI 178 - ITAT CUTTACK] ISSUES PRESENTED AND CONSIDERED 1. Whether deduction under section 10AA is allowable where the assessee's activities involve importation of parts followed by assembling, fabrication, re-engineering, gas filling and customization - i.e., whether such activities constitute 'manufacturing' as contemplated for SEZ/section 10AA purposes and whether revenue can change its earlier consistent view without material change. 2. Whether sales tax demand and interest paid (post-assessment) are allowable as business expenditure (deduction under section 37 or otherwise) where the liability crystallized and payment was made during the year. 3. Whether fees paid to a credit rating agency (initial rating + annual surveillance) are capital or revenue expenditure where the rating relates to working-capital borrowing and the fees are recurring in nature. 4. Whether rental payments relating to an earlier assessment year but paid in the year under consideration (on receipt of a late debit note) are allowable in the year of payment. 5. Whether disallowance under section 14A read with Rule 8D can exceed the amount of exempt income (dividend) and appropriate limitation of Rule 8D computation. 6. Whether depreciation at higher block rate (50%) is allowable for a vehicle claimed as commercial where facts do not establish the asset as a commercial vehicle (truck/maxicab) rather than a motor car; i.e., proper classification for depreciation rates. 7. Whether ad hoc disallowance (10% reduced to 5% by CIT(A)) of conveyance and travel expenses is permissible where books are audited and supporting vouchers are not specifically rejected. 8. Whether issues not decided by the CIT(A) (loss on sale in block, bad debts, other expenses) require remand for fresh speaking adjudication. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Deduction under section 10AA: manufacture vs trading; consistency Legal framework: Section 10AA permits deduction in respect of export profits of SEZ units. 'Manufacture' for SEZ purposes includes make, produce, fabricate, assemble, process, re-engineering, etc., per SEZ Act definition relied upon. Precedent treatment: Reliance on Supreme Court authority that revenue should not take a different view in later years absent material change; and on tribunal/high-court decisions applying consistency principle in assessments. Interpretation and reasoning: The Tribunal examined factual matrix - import of parts, subsequent assembling, fitting, fabrication, filling of gas, customization to client specifications - and found value-addition processes consistent with the SEZ Act definition of 'manufacture.' Prior years' treatment (allowance of section 10AA claim by AO for three earlier years) and the absence of material change weighed heavily; authority was cited that res-judicata principles in spirit prevent revenue from reversing a sustained factual finding without new material. The AO's conclusion that purchases and sales descriptions matched did not rebut assembled/fabricated nature supported by documents and SEZ approval permitting manufacture/import and export subject to conditions. Ratio vs. Obiter: Ratio - where demonstrable assembling/reengineering/customization creates distinctive product, such activities constitute 'manufacture' for section 10AA purposes; prior consistent acceptance by revenue binds subsequent assessments absent material change. Obiter - ancillary remarks on specific invoice descriptions. Conclusion: Deduction under section 10AA was correctly allowed; AO's disallowance set aside. Revenue's ground dismissed. Issue 2 - Allowability of sales tax dues and interest (section 37 and related principles) Legal framework: Business expenditure deductible if wholly and exclusively for business; interest/penalty characterization (compensatory vs punitive) relevant; crystallization of liability in year of payment matters for deductibility. Precedent treatment: Reliance on Supreme Court and High Court decisions treating such interest/compensatory payments as allowable business expenses where they arise from business operations and liability crystallized; Gujarat High Court decision and Supreme Court authority (Lakshmidevi Sugar Mills) applied. Interpretation and reasoning: Interest component paid pursuant to sales tax demand was treated as compensatory and having direct nexus with business operations; documentation (challans, sales tax orders) produced; AO's technical objection that only pre-assessment payments are allowable was rejected in view of authorities holding that when liability crystallizes and payment occurs in the year, expense is allowable. No contrary material was produced to rebut precedents. Ratio vs. Obiter: Ratio - interest/penalties of compensatory nature paid on account of statutory dues, where liability crystallizes and are incidental to business, are deductible. Obiter - specific breakdown of principal vs interest in facts. Conclusion: Disallowance of Rs.6,00,794 (sales tax dues and interest) was rightly deleted; revenue's ground dismissed. Issue 3 - Credit rating fees: capital v. revenue Legal framework: Distinction between capital and revenue expenditure - expenses incurred to create/protect capital asset or benefit enduringly are capital; recurring expenses for facilitating working capital/borrowing typically revenue. Precedent treatment: General principles applied; no specific conflicting authority relied upon by revenue in record. Interpretation and reasoning: Fees paid to a rating agency were split into initial rating (one-time) and recurring surveillance fee; however, the rating related only to working-capital borrowing (not to raising funds for fixed assets), loans were for working capital and enhanced based on rating, and surveillance fee was recurring annually per agreement - thus character of expense is revenue. CIT(A) accepted recurrence and nexus to working capital borrowings; Tribunal found no contrary material and upheld revenue characterization as revenue expenditure. Ratio vs. Obiter: Ratio - fees for credit rating where rating facilitates working-capital borrowing and includes recurring surveillance fees are revenue expenditure. Obiter - treatment where rating is integral to raising long-term capital might attract different view. Conclusion: Expenditure of Rs.7,00,000 treated as revenue and allowed; revenue's ground dismissed. Issue 4 - Prior period rent claimed in current year on payment (late debit note) Legal framework: Deductibility depends on accrual/crystallization of liability and proper year of allowance; courts/tribunals have permitted allowance in year liability crystallized/paid where genuine and supported by documents. Precedent treatment: Reliance on decisions (including a High Court and tribunal authorities) permitting deduction in the year of crystallization/payment where genuine and books not manipulated. Interpretation and reasoning: Rental for 21/2 months pertaining to earlier AY was claimed in current year because debit note was received and payment made in current year; genuineness not disputed; analogous authorities allowed prior period expenses where liability crystallized in the year under consideration. No evidence of mala fide or double claim; therefore allowance appropriate. Ratio vs. Obiter: Ratio - genuine prior-period liabilities which crystallize and are paid in the year under consideration are deductible in that year. Obiter - administrative/accounting errors explanation. Conclusion: Disallowance of rent Rs.6,20,437 deleted; revenue's ground dismissed. Issue 5 - Disallowance under section 14A/Rule 8D: limitation to exempt income Legal framework: Section 14A disallows expenditure in relation to exempt income; Rule 8D prescribes computation. Judicial trend: disallowance must be linked to amount of exempt income and cannot exceed it; proportionality and nexus required. Precedent treatment: Decisions holding Rule 8D/section 14A cannot be applied to disallow expenditure in an amount exceeding exempt income; authorities cited from Delhi High Court and coordinate tribunal bench supporting limitation. Interpretation and reasoning: CIT(A) had upheld substantial addition computed by AO under Rule 8D despite exempt dividend being only ~Rs.1.25 lakh while investments were large; Tribunal held that several authorities constrain disallowance to expenditure incurred in relation to exempt income and that the quantum of disallowance cannot exceed exempt income; AO directed to restrict addition to amount of exempt income. Ratio vs. Obiter: Ratio - section 14A/Rule 8D disallowance must be constrained by nexus to exempt income and cannot exceed quantum of exempt income where no broader nexus shown. Obiter - methodological guidance on computing proportional expenditure not detailed here. Conclusion: CIT(A)'s computation set aside to the extent it exceeded exempt income; AO directed to restrict addition accordingly. Cross-objection ground allowed. Issue 6 - Depreciation on motor car: classification of asset Legal framework: Depreciation rates depend on classification (motor car vs commercial vehicle); eligibility for higher block rate requires proof vehicle is within that asset class (commercial vehicle/truck/maxicab as per Motor Vehicles Act). Precedent treatment: Standard approach - burden to prove classification rests on assessee; documentary/factual proof of commercial use and vehicle type controls rate. Interpretation and reasoning: Assessee claimed 50% but failed to establish that the vehicle was a commercial vehicle rather than a passenger motor car. CIT(A) correctly applied classification principle and allowed depreciation at lower rate applicable; no new facts or contrary authorities produced. Ratio vs. Obiter: Ratio - higher depreciation rate permissible only where asset is, on facts/documentation, a commercial vehicle; absence of evidence requires disallowance of higher rate. Obiter - none significant. Conclusion: Depreciation disallowance upheld; cross-objection ground dismissed. Issue 7 - Ad hoc disallowance of conveyance/travel expenses Legal framework: Additions by estimation permissible only where books/accounts are rejected or evidence absent/fabricated; audited books accepted by AO ordinarily preclude ad hoc disallowance without cogent basis; Supreme Court authorities restrict estimation powers. Precedent treatment: Reliance on Supreme Court authority that estimation additions are inappropriate where books not rejected and audit accepted. Interpretation and reasoning: AO made 10% disallowance for lack of supporting vouchers; CIT(A) reduced to 5% without reasons. Tribunal noted books were audited, accounts accepted by AO, and majority payments made through banking channels; absent specific rejection of books or cogent reasons, ad hoc disallowance was impermissible. Accordingly, disallowance set aside. Ratio vs. Obiter: Ratio - estimation-based disallowances not permissible where audited books are accepted and no cogent reason to reject vouchers; AO must give speaking reasons. Obiter - reduction by CIT(A) without reasons insufficient. Conclusion: Ad hoc disallowance cancelled; cross-objection ground allowed. Issue 8 - Grounds not decided by CIT(A): remand for speaking order Legal framework: Tribunal may remit matters back to lower authority where issues were not adjudicated on merits to secure substantial justice and opportunity to be heard. Precedent treatment: Standard remedial jurisdiction exercised where CIT(A) omitted to decide contentions; remand for fresh, speaking order is appropriate. Interpretation and reasoning: Several grounds (other expenses, loss on sale in block, bad debts) were raised but not decided on merits by CIT(A); Tribunal remitted them to CIT(A) for decision after giving opportunity to assessee to produce evidence and for CIT(A) to pass a speaking order. Ratio vs. Obiter: Ratio - remand appropriate where appellate authority failed to decide issues on merits. Obiter - direction that remand is without prejudice to merits. Conclusion: Matter remanded to CIT(A) to decide specified grounds on merits within directed timeline; those grounds allowed for statistical purposes.