2026 (2) TMI 725 - AT - Income Tax

Capital v Revenue characterisation determines taxability; multiple issues remitted to AO while specific receipts classified for taxation consequence.

Allocation of common head office expenses and common income must be made to eligible industrial units when computing deductions under the relevant export ... Allocation of head office expenses unconnected with the undertakings for calculation of deduction under section 80IB and section 10B - HELD THAT:- As in the assessee’s own case [2024 (11) TMI 818 - ITAT MUMBAI] AO is directed to allocate common expenses and common income to the eligible units, while computing the deduction u/s 10B and section 80-IB of the Act as per the direction issued by the Tribunal in earlier years. Adjustment to the value of closing stock of raw materials and packaging materials on account of the unutilised balance of CENVAT credit - Since, it is a case of method of accounting and since it is stated that there will be no impact on the profit under both Exclusive method and Inclusive method of accounting, following the decision rendered by the Co-ordinate Bench in AY 2006-07 [2012 (12) TMI 458 - ITAT MUMBAI] we restore this issue to the file of the AO for examining the claim of the assessee. Reducing the export turnover by the amount of unrealised sales proceeds while computing deduction u/s 80-HHC - We have considered the submissions of both sides and perused the material available on record. We find that while deciding a similar issue in assessee’s own case in Hindustan Unilever Ltd [2023 (8) TMI 1700 - ITAT MUMBAI] following the decision rendered in assessee’s own case for the assessment year 2000-01 restored similar issue to the file of the AO. Denial of deduction u/s 10B of the Act in respect of internal transfer - In the assessee’s own case for the assessment year 2001-02 while deciding the issue in favour of the assessee, following the decision of Granite Mart Ltd [2020 (5) TMI 238 - KARNATAKA HIGH COURT] to hold that the amount of internal transfer between two EOUs of the assessee is to be considered for the purpose of arriving at the profit eligible for exemption under section 10B of the Act. It is also to be noted here that since the impugned amount is an internal transfer which is shown as sales in one EOU and as expenditure in the other EOU, there is merit in the contention that at entity level it is tax neutral. We delete the addition made by the AO denying the amount of internal transfer as claimed under 10B - We delete the impugned addition made by the AO and the amount of internal transfer is directed to be included in the sales of respective units for determining the export profits for computing the deduction under section 10B. Nature of receipt - Taxability of the compensation received by the assessee on termination of the agreement for the use of the “Savlon” trademark - Revenue or capital receipt - definition of the term “income” under section 2(24) - HELD THAT:- Applying the test laid down in Kettlewel Bullen and Co. Ltd. [1964 (5) TMI 4 - SUPREME COURT] we are of the considered view that the compensation paid to the assessee pursuant to the Termination Agreement dated 09/10/2003 was in the ordinary course of business and there was no loss to the profit-making apparatus of the assessee and rather it was a compensation for loss of profit itself. Further, the Assignment Agreement was entered into by the assessee in the ordinary course of its business. Thus, the amount received was in the course of business as the contract with NR Jet was part of the assessee’s business of manufacturing and selling soaps, and any receipt on account of such contract being terminated can only be a trading receipt. It is further pertinent to note that the termination of the assignment of the trademark did not affect the trading structure of the assessee’s business, as the assessee is in the business of manufacturing several brands of soap, and the termination of the contract was a normal incident of the assessee’s business. Receipt of compensation by the assessee for relinquishment of its licensed user rights of the trademark “Savlon” and for releasing NR Jet obligations under the Assignment Agreement is a revenue receipt and is assessable to tax. Taxability of a discount on the repayment of a loan - revenue or capital receipt - Discount earned by the assessee on prepayment of Sales Tax liability under the Sales Tax Deferment Scheme floated by the State of Maharashtra is a capital receipt, and thus, is not exigible to tax. Reducing the profits and gains of the business by 90% of compensation received, discount on prepayment of Sales Tax and other miscellaneous income for the purpose of computation of deduction under section 80-HHC - Profits of the business of an assessee will have to be first computed under the head “Profits and Gains of Business or Profession” in accordance with the provisions of sections 28 to 44D of the Act. In the computation of such profits of business, receipts of income which are chargeable as profits and gains of business u/s 28 of the Act will have to be included. Similarly, different expenses which are allowable under sections 30 to 44D have to be allowed as expenses. After including such receipts of income and after deducting such expenses, the total of net receipts are profits of the business of the assessee computed under the head “Profits and Gains of Business or Profession” from which deductions are to be made under Clauses (1) and (2) of Explanation (baa) to section 80-HHC of the Act. Discount on prepayment of Sales Tax, we have arrived at the conclusion in the foregoing paragraphs that the same is capital in receipt. Therefore, we do not find any merit in the findings of the lower authority in reducing 90% of the discount on prepayment of Sales Tax while computing the deduction u/s 80-HHC of the Act. Compensation received by the assessee upon termination of the trademark license agreement and other miscellaneous income, we are of the considered view that even though these receipts are revenue in nature, but it has to be firstly determined whether they fall under the head “Profits and Gains of Business or Profession”. Only thereafter, the question of deduction as provided under Clause (1) and (2) of Explanation (baa) to section 80-HHC of the Act arises. Since this exercise has not been conducted by the AO as to whether the compensation received and other miscellaneous income fall under the head “Profits and Gains of Business or Profession”, we restore this issue to the file of the AO for necessary examination of this aspect. Computation of depreciation after reducing the capital subsidy received by the assessee from the Written Down Value (“WDV”) -CIT(A) dismissed the ground raised by the assessee on this issue as the assessee failed to produce the details of the scheme under which capital subsidy was received against its plant and machinery. Therefore, in the interest of justice and fair play, we deem it appropriate to grant one more opportunity to the assessee to place on record necessary evidence in support of its claim that the subsidy was granted for the purpose of inducing the industry to set up units in certain selected backward areas and not for the purpose of meeting a portion of the cost of assets. Accordingly, this issue is restored to the file of the AO for de novo adjudication. Applicability of the rate of tax on dividend specified in the Double Taxation Avoidance Agreement (“DTAA”) between India and the country of residence of the non-resident shareholders, while levying Dividend Distribution Tax (“DDT”) u/s 115-O of the Act on payment of dividend by the assessee to the non-resident shareholder - We restore this issue to the file of the AO for de novo adjudication, in light of the decision of Colorcon Asia (P.). Ltd. [2025 (12) TMI 677 - BOMBAY HIGH COURT] after necessary examination of various aspects, such as applicability of the DTAA, rate of DDT levied under section 115-O of the Act vis-à-vis the rate of tax on dividend provided in the respective DTAA, etc. Computation of deduction u/s 80-HHC after reducing royalty income - Tribunal in assessee’s own case for the assessment year 1995- 96 and the decision of its predecessor in assessee’s own case for the assessment years 2002-03 and 2003-04 held that the royalty income is not to be reduced from the profit and gain of business and profession for calculating deduction under section 80-HHC of the Act. Since the issue is recurring in nature and has been decided in favour of the assessee. Allowability of the deduction claimed under section 10B of the Act in respect of the Kidderpore Unit acquired by the assessee from Lipton India Exports Ltd - We find that while deciding similar issue in assessee’s own case for the assessment year 2001-02 the Coordinate Bench of the Tribunal in assessee’s own case in ACIT vs. Hindustan Unilever Ltd. [2023 (8) TMI 1700 - ITAT MUMBAI] following the decision of GE Thermometrics India Pvt. Ltd. [2015 (1) TMI 10 - KARNATAKA HIGH COURT] held that the assessee is entitled for claiming deduction with respect to, inter alia, Kidderpore Unit acquired from Lipton India Exports Ltd. for the unexpired period since subsections 9 and 9A of section 10B of the Act were omitted without saving clause, and therefore, the same are not applicable to the case of the assessee. TP Adjustment - adopting the Transactional Net Margin Method (“TNMM”) as the most appropriate method, benchmarked the international transactions entered into by it with associated enterprises at an entity level - HELD THAT:- Tribunal in assessee’s own case for the assessment years 2005-06 [2024 (11) TMI 818 - ITAT MUMBAI] and 2006-07 [2012 (12) TMI 458 - ITAT MUMBAI] has rejected the cherry-picked segregation of transactions and upheld the entity level TNMM benchmarking of the very same international transactions entered into by the assessee in the year under consideration. Addition to be deleted. Issues: (i) Whether common head-office expenses and common income must be allocated to eligible industrial undertakings for computing deduction under sections 10B and 80-IB; (ii) Whether unutilised CENVAT credit must be adjusted in valuation of closing stock under section 145A; (iii) Whether unrealised export proceeds should be excluded from export turnover for deduction under section 80HHC; (iv) Whether miscellaneous income of EOUs (sale of scrap) and internal transfers qualify for exemption under section 10B; (v) Whether compensation received on termination of Savlon trademark agreement is capital or revenue; (vi) Whether discount on prepayment of deferred sales tax is taxable or capital receipt (section 41); (vii) Whether 90% reduction under Explanation (baa) to section 80HHC as applied by AO requires re-examination; (viii) Whether capital subsidy must be reduced from WDV for depreciation; (ix) Whether Dividend Distribution Tax under section 115-O should be levied at DTAA rate on dividends paid to non-resident shareholders.Issue (i): Whether common head office expenses and common income must be allocated to eligible units for computing deduction under sections 10B and 80-IB.Analysis: The Tribunal examined prior coordinate-bench decisions in the assessee's own cases for adjacent years and found no change in facts or law for the year under consideration. The earlier Tribunal rulings directed allocation of common expenses and accepted allocation of certain common income to eligible units. The present matter was decided following those precedents and in line with NTPC principle admitting legal additional grounds.Conclusion: The Assessing Officer is directed to allocate common head office expenses and common income to eligible units while computing deduction under sections 10B and 80-IB. (In favour of Revenue)Issue (ii): Whether unutilised CENVAT credit must be adjusted in valuation of closing stock under section 145A.Analysis: The Tribunal followed the coordinate-bench precedent in the assessee's own case and observed this issue concerns method of accounting and requires de novo examination by the AO; the matter was restored for fresh examination consistent with earlier directions.Conclusion: The issue is restored to the file of the Assessing Officer for examination; ground allowed for statistical purposes. (In favour of Assessee)Issue (iii): Whether unrealised export proceeds should be excluded from export turnover for deduction under section 80HHC.Analysis: Following earlier Tribunal decisions in the assessee's own case, the Tribunal remitted the matter to the AO for de novo consideration and for the assessee to furnish details regarding realisation of export proceeds.Conclusion: The issue is restored to the file of the Assessing Officer for fresh adjudication; ground allowed for statistical purposes. (In favour of Assessee)Issue (iv): Whether miscellaneous income (sale of scrap) of EOUs and internal transfers qualify for exemption under section 10B.Analysis: The Tribunal applied the 'derived from' nexus test and relied on binding and coordinate-bench precedents (including GE BE and Granite Mart decisions and the assessee's own prior years), holding that incidental receipts like scrap and inter-unit transfers that arise from manufacturing operations satisfy the requisite nexus and that internal transfers between EOUs should be treated in computing exempt profits; prior orders remitted similar issues for AO reconsideration.Conclusion: Miscellaneous income issues remitted to AO for fresh consideration as per Tribunal direction; internal transfers are to be included in sales of respective EOUs and addition deleted. Grounds allowed (miscellaneous income allowed for statistical purposes; internal transfer claim allowed). (In favour of Assessee)Issue (v): Whether compensation of Rs. 12.50 crore received on premature termination of Savlon trademark agreement is capital or revenue.Analysis: Applying established tests and authorities (including Gillanders, Best & Co., P.H. Divecha, Kettlewell Bullen), the Tribunal examined the Assignment and Termination Agreements' terms. It found the payment to be consideration for relinquishment of license rights and release of obligations, not a sale of an enduring capital asset or an effective non-compete that impaired the assessee's profit-making structure; hence the receipt characterised as trading receipt.Conclusion: The Rs. 12.50 crore receipt is a revenue receipt and assessable to tax; assessee's grounds on this issue are dismissed. (In favour of Revenue)Issue (vi): Whether discount on prepayment of deferred sales tax is taxable income or a capital receipt.Analysis: Following the Supreme Court decision in Balakrishna Industries and consistent coordinate-bench treatment, the Tribunal found that the scheme amounts to premature discharge of a quantified liability (NPV) and does not satisfy conditions of section 41(1) for deeming the waiver/discount a taxable remission; accordingly the discount is a capital receipt.Conclusion: Discount on prepayment of sales tax is capital in nature and not exigible to tax; grounds allowed. (In favour of Assessee)Issue (vii): Whether 90% reduction under Explanation (baa) to section 80HHC as applied by AO is correct in relation to compensation, discount and miscellaneous receipts.Analysis: The Tribunal noted Explanation (baa) requires determination whether receipts form part of 'Profits and Gains of Business or Profession' before applying 90% reduction. It held discount on prepayment is capital (not to be reduced), compensation and miscellaneous receipts require AO to first determine their head (business income or otherwise) and remitted the matter for fresh examination.Conclusion: Issue restored to the AO for determination whether receipts fall under 'Profits and Gains of Business or Profession'; ground allowed for statistical purposes. (In favour of Assessee)Issue (viii): Whether capital subsidy must be reduced from WDV for computation of depreciation.Analysis: The Tribunal found the assessee had not produced scheme details; in interest of justice it restored the matter to AO for de novo adjudication with direction to permit the assessee to produce evidence and be heard.Conclusion: Issue remitted to Assessing Officer for fresh adjudication; ground allowed for statistical purposes. (In favour of Assessee)Issue (ix): Whether DDT levied under section 115-O on dividends paid to non-resident shareholders must be at the rate prescribed by the applicable DTAA.Analysis: The Tribunal considered recent High Court authority (Colorcon Asia) holding DTAA rates apply to DDT (via section 90(2) and legislative history, and Tata Tea precedents) and directed remittance of the issue to AO for de novo adjudication in light of that decision.Conclusion: Additional ground restored to the AO for de novo adjudication in light of DTAA applicability; ground allowed for statistical purposes. (In favour of Assessee)Final Conclusion: The Tribunal applied binding and coordinate-bench precedents, allowed or remitted multiple issues to the Assessing Officer for fresh consideration and disposed of discrete substantive questions-granting relief to the assessee on several points (including characterisation of sales-tax discount, internal transfers, and multiple remittals) while rejecting the assessee's claim on trademark compensation; overall the appeal is partly allowed for statistical purposes.Ratio Decidendi: Where issues raise questions of statutory interpretation or accounting treatment previously decided in the assessee's own case by coordinate benches, those rulings govern the same factual matrix; receipts are taxed according to their true nature (capital v. revenue) by applying established nexus and source tests, and remittal to the Assessing Officer is appropriate where factual or method-of-accounting inquiries remain to be made.