TaxTMI 
TaxTMI 
2014 (4) TMI 743
X X X X Extracts X X X X
X X X X Extracts X X X X
....preciation on obsolete assets, VRS expenses, bad debts and advances written off, capital gains etc., By the impugned order, CIT(A) deleted part of the addition. Against this order of CIT(A), both assessee and revenue are in appeal before us. Assessee has also filed cross objection. 3. In the appeal filed by the assessee (i.e. ITA No.3703/Mum/2004), the assessee has raised following grounds :- 1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) (hereinafter referred to as the learned CIT(A) ) has erred in determining the annual rateable value of the property let out to Messrs United Breweries Limited at Rs.24,00,000 for computing the income under the head "House Property" as against the municipal value adopted by the appellant for computing the same. He ought not to have done so. 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in not deleting the entire addition under section 92 of the Income-tax Act, 1961 (hereinafter referred to as "the Act")) which was made to the extent of Rs.10,56,64,492 by the learned assessing officer. He ought not to have done so. 3. On the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the CIT(A) erred in directing the AO to recompute the income from house property taking annual ratable value of the flat at Rs.24,00,000/-. (ii) On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the AO to work out the profit by taking the cost of raw materials at rates at which the supplies are made by the Korean concerns to other pharma companies with an increase of 10 % thereof instead of actual cost declared by the assessee while invoking the provisions of section 92 of the Act. (iii) On the facts and in the circumstances of the case and in law, the CIT(A) erred in restricting the disallowance of interest u/s.l4A of the Act when the nexus between the sale of assets and investment in shares is not established by the assessee. (iv) On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the AO to exclude the excise duty from the total turnover while computing the eligible deduction u/s.80HHC. (v) On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the AO to exclude only processing charges and bad debts from the total turnover while computing the eligibl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....perty "Hoechst House", was let out to M/s VB Limited by the assessee on a monthly rent of Re.1 besides interest free deposit of Rs.2.20 crores. The income from the fifth floor was however, not calculated on the rent of Re.1 per month. The Municipal Corporation fixed the book value of the fifth floor at Rs.1,44,058/-, being 1/5th of the total value so fixed. The income from the fifth floor was thus paid by the assessee at Rs.1,26,146/-. Disagreeing, the AO held that the rent of Re.1 per month charged by the assessee did not represent the sum for which the property might reasonably be expected to let from year to year, as contemplated under the provisions of Section 23(1)(a) of the IT Act. Since floor did not let out to M/s VB Limited, which held 26 percent share in the assessee-company. Mr. Vijay Mallya, the Chairman of the UB Limited, was also the Chairman of assessee-company. The AO determined the reasonable rent of the floor after taking into account the comparative rent charged by the assessee from tenant of the said floor. Thus, the fair rent of the fifth floor was fixed by the AO at Rs.1,20,56,040/- the income from the fifth floor was thus computed at Rs.96,44,832/-. The learn....
X X X X Extracts X X X X
X X X X Extracts X X X X
....value determined by Municipal Corporation for the year under consideration. Hence, this ground of the assessee is allowed for statistical purposes, whereas the ground raised by the Revenue is dismissed. 6. Ground No.2 is regarding addition u/s.92 in respect of purchases of Cefotaxime Sodium & Roxythromycin. Facts in brief are that in respect of manufacturing pharmaceutical formulation in the form of tablets, capsules, injections etc., the assessee has claimed a loss. However, the AO did not accept assessee's claim of loss and observed that assessee has reduced profit by inflating price of raw materials which has gone into its production. The AO observed that purchase price paid for Cefotaxime Sodium was Rs.55,347.34 per kg., is higher than the price paid by other importers, accordingly, the AO invoked provisions of Section 92 and made addition of Rs.10.56 crores. By the impugned order, CIT(A) partly allowed assessee's claim after having following observations :- "9. The submission made by the appellant's representative has been considered. As cited above, the issue in so far as the applicability of the provisions of Section 92 of the Act is concerned, it is a repetitive i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in Income Tax Appeal No.1528/2009 vide order dated 8-9-2009 in assessee's own case has decided similar issue in favour of the assessee. Our attention was also invited to the order of Tribunal in assessee's own case for the A.Y.1996-97 & 1997-98, dated 16-5-2007, wherein exactly similar issue was dealt with and following conclusions were arrived at :- "28. In view of the above we hold that the transaction between the assessee and the non-resident company was not an "arranged transaction". The certificates produced by the assessee from various parties establish that the assessee did not buy the product cefoaxime sodium at a price higher than the price at which the same product was sold to others. Accordingly, we hold that the assessing officer failed to establish a case where provisions of section 92 could be applied to disown the loss incurred by the assessee. Therefore, we do not find a reason to take a different view than the one arrived at by the learned CIT(A). We therefore reject the ground of the Revenue." 6.2 The relevant observation in the order of Hon'ble Bombay High Court, dated 8-9-2009, reads as under :- "1. Heard learned Counsel for parties. 2. Following two....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt has not filed any further appeal before the Hon'ble High Court. 7.2 As the facts and circumstances during the year under consideration are same, respectfully following the decision of the Tribunal in assessee's own case, we do not find any merit in the action of the AO for declining assessee's claim of depreciation on obsolete assets. 8. Ground No.4 is in regard to fair market value as on 01.04.1981 for computation of LT capital gain on sale of 2 plots of Mulund factory land to Mafatlal Dyes & Chem and Nicholas Piramal. It was fairly conceded by the ld. AR that this issue is covered by the decision of the Tribunal in assessee's own case for A.Y.1998-99 and 1999-2000 against the assessee. Therefore, respectfully following the order of the Tribunal in assessee's own case, we dismiss this ground of assessee and decide in favour the Department. 9. Ground No.5 is regarding disallowance u/s.14A. Learned AR stated that this issue has been decided by the Tribunal in assessee's own case for A.Y.1990-91 and 1998-99 in favour of the assessee, against which the department has not filed any appeal before the High Court. Precise observation of the Tribunal for the A.Y.1998-99 reads a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erving that assessee company stopped manufacturing certain industrial products permanently at this Mulund unit, therefore, business of assessee, as far as manufacturing of those particular products was concerned, is stopped. As per the AO, VRS expenses incurred by the assessee is only allowable to it in case of going concern. As per AO, the business expenditure is allowed for a business only when it is carried on by the assessee, where the business has been closed down and not merely suspended, the compensation paid to the employees while winding up the business should not be allowed as a deduction. The AO also observed that expenditure claimed by the assessee is not in the nature of VRS expenses but it is expenses incurred for compulsory retrenchment, as per AO this is the cost incurred by the assessee for winding up and not to reach its business. It is not at all covered by the Scheme of VRS. By the impugned order, the CIT(A) by observing that entire sum disallowed by the AO does not partake the character of retrenchment compensation and that part of the amount is one time character of ex-gratia payment that the employees are eligible to receive even otherwise on retirement or re....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... following the judgment of the Hon'ble Apex Court in the case of ACG Associated Capsules (supra), held as under :- "2.10.2 We have perused the records and considered the matter carefully. The dispute is regarding applicability of provision of Explanation (baa) to processing charges and sales tax refund and setoff. As regards the processing charges, the issues is covered by the judgement of Hon'ble Supreme Court in case of Ravindranathan Nair (295 ITR 228) in which it has been held that the processing charges form an independent item of income like commission rent etc. and, therefore, 90% of the same is required to be reduced from profit of business as per Explanation (baa). We therefore hold the processing charges will be covered by Explanation (baa). The issue of applicability of provision of Explanation (baa) to seals tax refund had been considered by the Hon'ble High Court of Bombay in case of Dresser Rand (322 ITR 449) in which it has been held that receipts like recovery of freight insurance, packing charges, sales tax refund and service income will not be part of business profit and has to be considered for reduction as per Explanation (baa). Subsequently, however Hon'ble ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. 12.1 We have considered rival contentions and found that before the AO assessee has furnished reasons for writing off bad debts along with details of bad debts written off. The reasons cited by the assessee in the case of bad debts pertain to old unreconciled balance, short payment against invoices, consignment loss in transit, amount short paid etc. As per our considered view the amount so written off by the assessee is eligible for deduction as bad debts or business loss. Merely because the AO was not convinced with the efforts made by the assessee for recovery of the bad debts, no disallowance can be made in view of the decision of the Hon'ble Supreme Court in the case of TRF, 323 ITR 397 (SC). 12.2 From the record we find that out of the total disallowance of Rs.11,22,804/- claimed as bad debts written off, the CIT(A) confirmed the disallowance of Rs.4,64,239/- against which assessee is in further appeal before us. The precise observation of the CIT(A) while restricting the disallowance to Rs.4,64,239/- was as under :- ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in CIT v. E.C. Jacob [1973] 89 ITR 88 [FB], the Bombay High Court in CIT v. Home Industries and Co. [1977] 107 ITR 609 and CIT v. Michel Postel [1978] 112 ITR 315 and the Madhya Pradesh High Court in CIT v. Jaswantlal Dayabhai[1978] 114 ITR 798, have taken the view that the receipt on the transfer of goodwill generated in a business is not subject to income-tax as a capital gain. On the other side lies the view taken by the Gujarat High Court in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 and the Calcutta High Court in K.N. Daftary v. CIT[1977] 106 ITR 998, that even if no cost is incurred in building up the goodwill of the business, it is nevertheless a capital asset for the purpose of capital gains, and the cost of acquisition being nil the entire amount of sale proceeds relating to the goodwill must be brought to tax under the head "Capital gains". It is apparent that the preponderance of judicial opinion favours the view that the transfer of goodwill initially generated in a business does not give rise to a capital gain for the purposes of income-tax. Upon the aforesaid consideration, Civil Appeal No. 1146(T) of 1975 and Civil Appeal No. 1378 of 1976 must be dismissed. C....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d hereinabove. 15. Ground No.(iii) in Revenue's appeal is regarding disallowance of interest attributable to tax free investment income in Chiron Behring Vaccines Pvt. Ltd.. Learned AR, at the outset, submitted that the very issue has been decided by the Tribunal for A.Y.1999-2000 in ITA No4180/Mum/2009 in assessee's own case vide order dated 20-2-2013. The precise observation of the Tribunal reads as under :- "3.3 The fourth dispute is regarding disallowance of interest attributable to tax free income from investment in Chiron Behring Vaccines Private Limited. The assessee had made investment of Rs.4.90 cr in equity shares of Chiron Behring Vaccines Private Limited and the sources of investment had been explained as sale proceeds of Rs.19 cr from sale of assets to the said company. CIT(A) accepted the claim of sale proceeds but confirmed disallowance of interest for 20 days as there was time gap of 20 days between date of investment and date of receipt. No material is placed on record before us to controvert the claim of the assessee regarding availability of sale proceeds. Further while dealing with the appeal of the assessee we have deleted the disallowance of interest eve....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... income would not necessarily include element of export turnover. This aspect needs to be kept in mind while interpreting clause (baa) to the said Explanation. The said clause stated that 90% of incentive profits or receipts by way of brokerage, commission, interest, rent, charges or any other receipt of like nature included in Business Profits, had to be deducted from Business Profits computed in terms of Sections 28 to 44D of the I.T. Act. In other words, receipts constituting independent income having no nexus with exports were required to be reduced from Business Profits under clause (baa). A bare reading of clause (baa)(1) indicates that receipts by way of brokerage, commission, interest, rent, charges etc. formed part of gross total income being Business Profits. But for the purposes of working out the formula and in order to avoid distortion of arriving export profits clause (baa) stood inserted to say that although incentive profits and "independent incomes" constituted part of gross total income, they had to be excluded from gross total income because such receipts had no nexus with the export turnover. Therefore, in the above formula, we have to read all the four variable....
X X X X Extracts X X X X
X X X X Extracts X X X X
....peals filed by the Department are accordingly allowed with no order as to costs. 17.1 This issue has been discussed by us at para 11.2 hereinabove, accordingly the AO to recompute the deduction u/s.80HHC after excluding the net income from processing charges. However, bad debts recovered is neither part of total turnover nor export turnover for the purpose of Section 80HHC, therefore, same is required to be excluded from eligible profit for the purpose of clause (baa). 18. Ground No.(vi) is in regard to recomputation of indirect cost attributable to export of trading goods. Facts in brief are that the assessee is a mixed exporter in the year under consideration and has therefore claimed deduction in terms of clauses (i) and (ii) of Section 80HHC(3)(c) in regard to the export of manufactured goods and trading goods. A further deduction of Rs.56,62,707/- was claimed in terms of the proviso to the Section 80HCC(3) of the Act. In regard to the computation of deduction under the Section, the assessee has expressed grievances in respect of taking the indirect cost for computing the deduction in respect of export of trading goods at a higher amount holding that all expenses not dire....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eated as part of indirect cost of trading exports without appreciating the fact that the branches did not carry out any activity relating to trading export. He ought not to have done so." 18.4 We found that this issue is covered by the decision of the Tribunal in assessee's own case for A.Y.1998-99 in ITA No.4179/Mum/2003, vide order dated 12-12-2012, wherein the Tribunal has upheld the action of AO for computing profit of trading export after having detailed discussion, which reads as under :- "10 We have considered the rival submissions as well as the relevant material on record. Though, the issue before us is limited only to the extent of a finding of the CIT(A) pertaining to the expenditure incurred at Hyderabad branch office to be taken as part of indirect cost for working out the deduction u/s 80HHC (3)(b). However, the said finding of the CIT(A) is based on the view taken by the Commissioner of Income Tax(Appeals) that u/s sub.sec. 3(b) of sec. 80HHC, indirect cost attributable to export includes the items of expenditure only if it has some connection, link, attributes to export. This proposition propounded by the CIT(A) is apparently against the provisions of section ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion to export of trading goods only; but the entire indirect cost incurred for the total turnover has to be allocated in the ratio of export turnover of trading goods to the total turnover which itself makes it clear that only such portion of the total indirect cost in the ratio of export turnover of the trading goods to the total turnover shall be allocated for the purpose of computing the profits derived from such export u/s 80HHC(3)(b). 10.5 Though the revenue has not filed any appeal against the findings of the CIT(A); however, the revenue, being the respondent can raise an plea against sustainability of the order of the CIT(A); but the effect of such plea would be only to the extent of defence against the appeal and if the respondent/revenue succeeds in the said ground/plea, then the appeal of the appellant/assessee would fail. 10.6 The scope of raising a plea against the sustainability of the impugned order as the respondent defended against the appeal filed by other party has been provided under Rule 27 of ITAT Rules; therefore, though the impugned order of the CIT(A) would stand and will have full effect in so far as it is against the revenue; but if the plea raised b....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... disconnected with the export activity, it cannot be taken as part of the indirect costs, Therefore, the Assessing Officer has definitely gone beyond what is provided in the Act to workout the indirect cost attributable to export of trading goods. 29. In order to determine correctly the indirect cost, the appellant's representative was asked to furnish the details of trading export activities. In this regard the details reveal that the trading goods exports comprise partly of goods imported and partly purchased locally either from Mumbai or elsewhere. It was submitted that the material department of the company procured items of trading exports. All actions and formalities for exports are carried out by Export Department. Expenses of both these departments are booked as Head Office Expenses. The appellant's representative furnished the details of Head Office Expenses. It was claimed that some of the expenses incurred therein are for domestic activities and only expenditure amounting to Rs.29,04,71,863/- is such that is to be taken as somehow attributable to exports to be taken as part direct expenses. A perusal of the details show that as far as the Head Office Expenses is conce....
X X X X Extracts X X X X
X X X X Extracts X X X X
....9 (SC), wherein the Hon'ble Supreme Court has held as under :- The aforesaid discussion would show that where an assessee has an export turnover exceeding Rs. 10 crores and has made profits on transfer of DEPB under clause (d) of section 28, he would not get the benefit of addition to export profits under third or fourth proviso to sub-section (3) of section 80HHC, but he would get the benefit of exclusion of a smaller figure from "profits of the business" under Explanation (baa) to section 80HHC of the Act and there is nothing in Explanation (baa) to section 80HHC to show that this benefit of exclusion of a smaller figure from "profits of the business" will not be available to an assessee having an export turnover exceeding Rs. 10 crores. In other words, where the export turnover of an assessee exceeds Rs. 10 crores, he does not get the benefit of addition of ninety per cent, of export incentive under clause (iiid) of section 28 to his export profits, but he gets a higher figure of profits of the business, which ultimately results in computation of a bigger export profit. The High Court, therefore, was not right in coming to the conclusion that as the assessee did not have the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... which may be necessary." 21.1 Assessee is also in appeal (ITA No.635/Mum/2006) against the order of CIT(A) for upholding penalty on short-term capital gains computed by AO. 21.2 We have heard rival contentions and found that the AO has initiated penalty proceedings under Section 271(1)(c) with respect to the addition made u/s.92 of the Act (Rs.10,56,64,492/-), b) inadmissible and wrong claim of deduction on account of VRS expenses (Rs.15,08,52,250/-), c) suppression of short-term capital gain on sale of trademarks (Rs.5,53,63,662/-) and d) wrong claim of depreciation amounting to Rs.34,43,610/-. 21.3 By the impugned order, the CIT(A) deleted the penalty imposed with respect to addition made under Section 92 by following the order of earlier assessment order, wherein similar penalty imposed by the AO was deleted by the CIT(A) in Appeal No.214/2004-05, dated 18-11-2005. The CIT(A) also deleted penalty imposed with respect to expenditure disallowed on VRS by observing that two views are possible for such expenditure, therefore, the issue has become debatable one on which no penalty can be imposed. Similarly, with respect to penalty imposed for denial of claim of depreciation....