2007 (3) TMI 313 - AT - Income Tax

Tribunal Allows Significant Deductions for Market Development, Bad Debts, and Unrealized Benefits; Partially Upholds Expenses.

Itw Signode India Limited. Versus Deputy Commissioner Of Income-Tax.

The Tribunal ruled in favor of the assessee on several issues. It allowed the deduction of Rs. 1,06,43,227 for market development expenses, recognizing ... Preliminary expenses envisaged in s. 35D - Expenditure incurs after the commencement of business - industrial undertaking or setting up of a new industrial unit - manufacture of state of art packaging systems - Deduction u/s 36(1)(vii) - Written off - bad debt - Deduction u/s. 80HHC - HELD THAT:- It is not unknown to anyone that the market gets flooded with new innovative products everyday. It is also not uncommon that the manufacturers of such products always try to package them in a sophisticated way to attract customers. Secondly, automation in every activity is the order of the day and hence new machines are also being evolved to hasten the process of packaging with efficiency and efficacy. The assessee therefore has to keep on innovating new products and improving the existing products to cope up with the expanding market and consumerism. For this it requires dedicated department which keeps on conducting surveys of various types. It is in connection with this department that the assessee has incurred various expenses. As mentioned by the assessee, this department has been treated as a separate cost centre and hence its expenses are shown separately. To cope up with its expanding activities and production, the assessee has to install new plants or new machinery. Installing such new plants or machinery is sometimes loosely referred to as setting up a new unit. The contention of the assessee before the CIT(A) that it has set up new units was in this context and not in the context in which it is envisaged in s. 35D. Therefore, there is no gainsaying that the assessee has put up new industrial unit and hence the expenditure in connection therewith should be amortised u/s 35D. The assessee has not launched any new product worth its name. The production of Edge Board which is a new product introduced during the year is too insignificant to be considered. Thus, considering the overall facts of the case, we do not see any reason to apply the provisions of s. 35D. The AO is directed to allow full deduction of the expenditure as claimed by the assessee. Deduction u/s 36(1)(vii) - Written off in respect of inter-corporate deposit (ICD) - 'commercial expediency'- HELD THAT:- In the present case, it is not the case of the Department that the ICD placed with Shaw Wallace was for some personal reasons. Inter-corporate deposits are quite common and corporate houses accommodate each other on short-term basis on grounds of commercial expediency. Earning of interest on surplus funds is on grounds of commercial expediency as such income would ultimately augment the working capital of the assessee. Therefore, placing of ICDs is in the usual course of business and a company doing so need not be in money lending business. If placing of ICDs is in the normal course of business, the loss arising therefrom cannot be anything else but arising in the usual course of business. It was the judgment of the assessee that the debt due from Shaw Wallace has become irrecoverable. It was not without any reason that the assessee judged the debt to have become bad and irrecoverable. The ICD was initially for 90 days. At the end of this period, it was rolled over again for another 90 days. At the end of the second period of 90 days, Shaw Wallace issued a cheque which it could not honour. If these are not good enough reasons to consider a debt as irrecoverable, what else is required. It is further interesting to note that the interest accrued on this very ICD is also claimed as a bad debt and the AO has allowed the same. Therefore, considering the facts of the case, the claim of the assessee for deduction is allowed. Disallowance on bad debt on account of unrealized benefit under advance license scheme - HELD THAT:- The fact that the outstanding balance due from Glen View includes commission and lease rent does not find a mention in the order of the AO as well as the CIT(A). However, papers placed in the paper book do reveal this fact and these papers were certainly before the lower authorities as the certificate appended to the paper book indicates. Therefore, it cannot be said to be a new fact brought on record. The financial position of the Glen View must not have been healthy, and hence, had the assessee not advanced any money to Glen View, the assessee would have been the sufferer for want of supplies of straps. Thus, to serve the needs of its own business, the assessee had to keep on pumping funds to Glen View. This is nothing but pure commercial expediency which has been discussed in detail in respect of ground NO. 1. In fact, the case of the assessee here is much stronger than what it was in ground No. 1. Further, the balance does include lease rent and commission due from Glen View which was offered for taxation in the earlier years. Therefore, the condition laid down in s. 36(1)(vii) is also fulfilled. Accordingly, we delete the disallowance. Deduction u/s. 80HHC - 90% of Gross interest or Net Interest exclude from the business profit - HELD THAT:- We are inclined to follow the judgment of the Delhi High Court in the case of CIT vs. Shri Ram Honda Power Equip [2007 (1) TMI 86 - HIGH COURT, DELHI] as it is well established that between two views expressed, the one which is favourable to the assessee should be accepted. Therefore, respectfully following the same we direct the AO to exclude 90 per cent of net interest from the business profits. With regard to the observation of the CIT(A) that the AO has taken the same amount of interest as was taken by the assessee, we may only add that if the assessee has taken gross amount on some mistaken belief, it should not be prevented from taking the net amount because after all correct income has to be determined in accordance with law. Therefore, this ground of the assessee is upheld. In the result, the appeal of the assessee for asst. year 1996-97 is allowed and the one for asst. year 1997-98 is partly allowed. Issues Involved:1. Disallowance of Rs. 1,06,43,227 as market development and analysis group expenses.2. Write-off of Rs. 1,00,00,000 in respect of inter-corporate deposit (ICD) due from Shaw Wallace & Company Ltd.3. Write-off of Rs. 28,02,328 as interest payable by Shaw Wallace.4. Write-off of Rs. 1,26,95,765 as bad debt due from Glen View Plastic Systems (P) Ltd.5. Write-off of Rs. 69,16,756 as bad debt on account of unrealized benefit under advance license scheme.6. Exclusion of 90% of gross interest instead of net interest for computing deduction under Section 80HHC.7. Disallowance of expenditure on food and beverages and expenses in connection with the maintenance of a transit house.Detailed Analysis:1. Disallowance of Rs. 1,06,43,227 as Market Development and Analysis Group Expenses:The assessee claimed a deduction of Rs. 1,06,43,227 as market development and analysis group expenses, which was treated as deferred revenue expenditure in the books. The AO invoked Section 35D, treating the expenditure as capital in nature due to its long-term benefits. The CIT(A) upheld the AO's view, noting contradictory statements from the assessee regarding the setup of new units. The Tribunal, however, found that the assessee did not set up a new industrial unit but rather expanded its existing operations. The Tribunal directed the AO to allow the full deduction, stating that the provisions of Section 35D were not applicable.2. Write-off of Rs. 1,00,00,000 in Respect of Inter-Corporate Deposit (ICD) Due from Shaw Wallace & Company Ltd.:The assessee wrote off Rs. 1 crore placed as ICD with Shaw Wallace, claiming it as a bad debt. The AO disallowed the claim, viewing it as a capital loss and not a revenue debt. The CIT(A) upheld the AO's decision, noting that the debt was not of a revenue nature and was subsequently recovered. The Tribunal allowed the claim, emphasizing that placing ICDs is a common commercial practice and the debt became irrecoverable when Shaw Wallace's cheque bounced. The Tribunal also noted that the interest on the ICD was allowed as a bad debt, supporting the assessee's claim.3. Write-off of Rs. 28,02,328 as Interest Payable by Shaw Wallace:The assessee argued that the interest on the ICD was notional and illusory once the principal was written off. The AO added the interest as notional income, which the CIT(A) upheld. The Tribunal deleted the addition, agreeing with the assessee's contention that the interest was notional and should not be added as income.4. Write-off of Rs. 1,26,95,765 as Bad Debt Due from Glen View Plastic Systems (P) Ltd.:The assessee wrote off advances given to Glen View, a sister concern, claiming it as a bad debt. The AO and CIT(A) disallowed the claim, viewing the advances as capital in nature and a premeditated arrangement. The Tribunal found that the advances included lease rentals and commission, which were part of the assessee's income in earlier years, fulfilling the conditions of Section 36(1)(vii). The Tribunal allowed the write-off, recognizing the commercial expediency of the advances.5. Write-off of Rs. 69,16,756 as Bad Debt on Account of Unrealized Benefit Under Advance License Scheme:The assessee wrote off the unused balance of advance licenses due to changes in the duty structure, claiming it as a bad debt. The AO and CIT(A) disallowed the claim, viewing the entries as notional and not actual expenditure. The Tribunal allowed the write-off, noting that the notional benefit was credited to the P&L account and its write-off was necessary to reflect the true state of affairs.6. Exclusion of 90% of Gross Interest Instead of Net Interest for Computing Deduction Under Section 80HHC:The AO excluded 90% of gross interest from business profits for computing deduction under Section 80HHC. The CIT(A) upheld the AO's computation. The Tribunal directed the AO to exclude 90% of net interest, following the Delhi High Court's judgment in the case of Shri Ram Honda Power Equip.7. Disallowance of Expenditure on Food and Beverages and Expenses in Connection with the Maintenance of a Transit House:The assessee's ground against the disallowance of expenditure on food and beverages and maintenance of a transit house was rejected, following the Supreme Court's judgment in the case of Britannia Industries Limited vs. CIT.Conclusion:The appeal for the assessment year 1996-97 was allowed, and the appeal for the assessment year 1997-98 was partly allowed.