TaxTMI 
TaxTMI 
2012 (1) TMI 252
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....41(1) of the Income Tax Act. The Appellant submits that the Assessing Officer be directed to delete the said addition." 3. The assessee is a company which is engaged in the business of making abrasives. It also deals in ceramic and plastics. In the preceding assessment years, the Assesseee had availed of the benefits of deferral of sales tax offered by the Government of Maharashtra as an incentive for rapid industrialization of the developing regions of the State of Maharashtra. The Sales tax Incentive Scheme was availed by the Assesseee in respect of its plant at Butibori Industrial Area at Nagpur (Butibori Plant). In accordance with the Sales tax Incentive Scheme, 1993, the sales tax collected in respect of the Butibori Plant was credited separately to Sales tax Account. Set-off, if any, available on the purchases was debited to this account with corresponding credit to purchases. The net Sales tax deferral was then transferred to the Deferred Sales tax liability account grouped under "Unsecured Loan" in the Balance Sheet of the Assesseee. The sales tax, payment of which has been deferred under the Incentive scheme, is deemed to have been paid for the purpose of the Bombay Sal....
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....d, consequently, no benefit would arise to the assessee in terms of section 41(1)(a). There is no dispute that material facts of the case before us are the same as were the facts before the Special Bench in Sulzer's case. Learned Departmental Representative, however, makes elaborate submission in support of his stand that the Special Bench decision in the case of Sulzer India Limited (supra) calls for a reconsideration and that it is not correct. He submits that even though the issue is covered by the Special Bench decision, we must take independent view of the matter since the Special Bench decision is, what he terms as, per incurium. Broadly, his stand is that what is to be taxed under the head 'profits and gains of business and profession' and if a benefit like part remission of the deferred sales tax liability is not taxable as a profit of the business, it can be taxed as gains of business. It is then pointed out that the circular relied upon by the Special Bench was in the context of Section 43B and it cannot be construed to be of application in all the matters relating to the Income Tax Act. It is also pointed out that sales tax authorities are not in the business....
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....deduction has been made in respect of loss, expenditure or the trading liability incurred by the assessee. (ii) The assessee must have subsequently (i) obtained any amount in respect of such loss or expenditure or (ii) obtained any benefit in respect of such trading liability by way of remission or cessation thereof . In case either of these events happen, the deeming provision enacted in closing part of sub-section (1) comes into play. (iii) The amount obtained by the assessee or the value of benefit accruing to him is deemed to be profit and gain of the business or profession and it becomes chargeable to income-tax as an income of that previous year. [Para 70] Further, on a plain reading of section 41(1), it is also clear that the provisions contained in section 41(1) do not make any distinction between any contractual trading liability or any statutory trading liability. Even if any statutory liability is remitted or ceased of, or any amount, whether in cash or in any other manner, has been obtained in respect of the expenditure incurred by way of statutory liability, the same would be deemed to be the profit and gain of the business of the assessee and would, ....
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.... made to sub-section (4) of section 38 of the Bombay Sales Tax Act, 1959 by substituting the 4th proviso which provides for payment of Net Present Value (NPV) of deferred taxes under the package scheme of incentives, the State Government by Notification No. STR-12.02/CR-102/taxation-1, dated 16- 11-2002, introduced rule 31D in the Bombay Sales Tax Rules, 1959 (BST Rules) laying down the procedure for determination of such NPV. The procedure for determination of NPV of the amount of deferred taxes having been published, the Deferral Units may exercise the option under 4th proviso to sub-section (4) of section 38 of the Bombay Sales Tax Act, 1959 of pre-maturely repaying at NPV, the amount of deferred taxes. Rule 31D of the Bombay Sales Tax Rules has been provided with a table and the notes below it for determination of NPV. For example, the payment of BST Rs. 27,903 and CST Rs. 70,171 due on 1-5-2003 was deposited on 30-12-2002, i.e., four months before the due date, the discounted percentage of deferred tax to be paid as NPV was prescribed in the said table at 96.4955 per cent and, accordingly, the NPV amount of BST and CST was worked out at Rs. 26,925 and Rs. 67,712, respectively,....
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....tute or read words into it which are not there. This being so, it was to be opined that the first requirement of section 41(1) has not been fulfilled in the facts of the case. [Para 104] The other requirement of section 41(1) is that the assessee must have subsequently: (i) obtained any amount in respect of such loss and expenditure, or (ii) obtained any benefit in respect of such a trading liabilities by way of remission or cessation thereof . In the instant case, the sales tax collected by the assessee during the years 1989- 90 to 2001-02 amounting to Rs. 752.01 lakhs was treated by the State Government as a loan liability payable after 12 years in six annual/equal instalments. Subsequently, pursuant to the amendment made to the fourth proviso to section 38(4) of the Bombay Sales Tax Act, 1959 which provides that where an entitlement certificate has been granted to the eligible unit for availing of the incentives by way of deferment of sales tax, etc., such eligible unit may, in respect of the periods during which the said certificate is valid, at its option, prematurely pay in place of the amount of tax deferred by it an amount equal to the net present value of the defe....
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....n. Even assuming for the sake of argument that the assessee did not get modified eligibility certificate or the repayment of loan paid by the assessee at its NPV of future sum, then in those circumstances, merely because the assessee had passed necessary entries in its books of account, it could not be held that there was any cessation or remission of liability. [Para 106] The assessee was liable to pay sales tax amounts collected from 1-11-1989 to 31-10-1996, payments of which were deferred under the scheme, and the amounts were payable after twelve years in six equal annual instalments commencing from 1-5-2003, which meant that the liability was payable in future. Later on, the State Government came out with a scheme by which it was provided that if some dealers opted, then they could pay the future liability at a discounted value or what one may call net present value immediately. Thus, in this situation, it could not be construed as remission of liability, because the State Government had not waived of any of the liability as given in the illustrations. Had the State Government accepted lesser amount after twelve years or reduced such instalments, then it could have be....
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....o claim deduction of the dividend income. Under section 80M deduction is allowed only on the net dividend income i.e. gross dividend income (-) expenses incurred in earning dividend income. According to the assessee it did not incur any expenses in earning dividend income and, therefore, the entire dividend income should be allowed as deduction under section 80M of the Act while computing total income. The AO was however of the view that the assessee had large Corporate Office/Head Office and incurred indirect expenses. He was of the view that the investment portfolio which yielded dividend income had to be monitored and supervised. He was, therefore, of the view that the claim of the assessee that no expenses were incurred to earn dividend income cannot be accepted. The AO estimated 10% of the gross dividend as indirect expenses attributable to the earning of the dividend income and accordingly reduced a sum of Rs. 3,06,643/- while allowing deduction under section 80 M of the Act. 7. On appeal by the assessee the CIT(A) reduced the disallowance from 10% to 5%. The CIT(A) erroneously referred to the provisions of section 14A of the Act. It has to be mentioned here that in A.Y 20....
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.... a banking company under section 20(1) into the deductions contemplated by section 80M. Section 20(1) contains a rule of proportionality of expenses and interest and that rule is based on estimation of expenditure whereas, deduction under section SOM is allowable on net dividend arrived at after taking into account actual expenditure incurred for the purposes of earning such dividend unless the facts of a particular case warrant otherwise. The Special Bench of ITAT Chandigarh in the case of Punjab State Industrial Development Corporation vs. DCIT 102 ITD 1 (Chd) (SB) has also taken the view that for the purpose of Section 80M only actual expenditure incurred has to be taken into consideration and there was no question of taking expenditure on estimate or presumption basis. Submission of learned counsel for the assessee based on the aforesaid decision supports the plea of the assessee that adhoc estimation of expenses for earning dividend income as made by the revenue authorities was not correct." 9. The ld. Counsel for the assessee also submitted that provisions of section 14A of the Act, could not be applied when the dividend income was exempt and in this regard referr....
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.... the decision of the Bombay High Court in the case of New Great Insurance Co. Ltd. (1973) 90 ITR 348 to the assessment year in question without considering the effect of the amendment operative from 1st April, 1968, and in thus holding that the assessee would be entitled to the deduction under S. 80M on the gross dividend before deduction of the proportionate management expenses?" The Hon'ble Bombay High Court made the following observation. "In our view, the question as framed does not really arise out of the Tribunal's " order since the only question which was agitated before the Tribunal was whether the deduction under s. 80M of the Act was to be computed with reference to the gross dividend income without deducting therefrom the proportionate management expenses and the Tribunal, relying on the decision of this Court in Sahu Brothers (Saurashtra) Pvt. Ltd. (?) and in the case of New Great Insurance Co. Ltd. (supra), held that the relief under s. 80M was to be computed with reference to the gross dividend income. It appears clear that the aforesaid question seems to be finally concluded by the decision of the Supreme Court in the case of CIT vs. South Indian ....
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....he appeals are allowed. The application under S.256(2) of the IT Act, made by the revenue shall be deemed to have been allowed, a reference made and answered in the manner indicated above. (underlining by us for emphasis) It is significant to note that the issue before the Hon'ble Supreme Court in the case of Distributors(Baroda) Pvt. Ltd. (supra) was as to whether deduction under section 80M of the Act had to be allowed on the gross dividend or net dividend. The Hon'ble Supreme Court held that deduction under section 80M is to be calculated with reference to the net dividend i.e. cross dividend (-) expenses incurred in earning the dividend income. The question as sought to be raised by the revenue before the Hon'ble High Court was modified by the Hon'ble Supreme Court as can be seen from the underlined portion of the judgment referred to above and the question was as to whether deduction u/s.80-M was to be allowed on net dividend or gross dividend. It is clear from the judgment of the Hon'ble supreme court that the question whether the adhoc deduction of expenses can be made from the gross dividend while deduction under section 80M of the Act was ne....
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.... of the assessee and, therefore, not in the nature of income under the head "profits and gains of business or profession" within the meaning of explanation- baa of section 80HHC of the Act. Following were the income so considered by the AO. Agency commission 45,10,200/- Interest 2,19,66,122/- Less: Interest on income tax refund 1,00,52,306/- 1,19,13,816/- Less: Interest income shown as income From other sources 30,25,866/- 88,87,950/- Service charges 2,22,82,736/- Pre payment of sales tax 2,32,48,277/- Scrap sales 1,90,60,008/- Insurance claim received 1,62,246/- Brokerage on investments (reduced for (baa) purpose) 3,99,241/- Compensation from guarantees 11,11,900/- Royalty 71,080/- DVC lining charges 30,000/- Penalty recovered for returned cheques 4,42,000/- Sales tax refund 27,13,822/- Others 13,270/- 8,13,90,689/- Less: Already allocated Agency commission 45,10,200/- Brokerage on invest....
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....terest, brokerage, commission etc. also go into computation of business profit Parliament thought it fit to exclude only 90% of the receipts in order to ensure that the expenditure which is incurred by the assessee in earning receipts which have gone into the computation of business profits is taken care of. The Hon'ble Court further held that the Parliament has approved adhoc deduction of 10% from such incomes on account of expenses incurred in earning the receipts. Once the Parliament has so legislated it cannot be said that 90% gross interest received by the assessee has to be reduced from the profits and gains of business for the purpose of computing deduction under section 80HHC and not the net interest. In CIT vs. Ravindranathan Nair (Supra) the Hon'ble Supreme Court equated processing charges derived by the assessee by processing cashew nuts for other exporters was not income of the nature referred to in the proviso to Explanation -baa of section 80 HHC of the Act and cannot be said to be profit derived from the business of export. 17. After considering the rival submissions we are of the view that the decision of the Hon'ble Suprem Court in the case of Ravind....
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....profits and Gains of business or profession" under Explanation (baa) below section 80 HHC." 22. On Gr.No.1 raised by the Revenue in it's appeal, the CIT(A) held as follows: "8.2. I have carefully considered the material on record. Following the judgment of the Hon'ble Bombay High Court in the case of CIT vs. Bangalore Clothing Ltd. 260 ITR 371 and my own order for A.Y 2002- 03, the scrap sales at Rs. 1,90,60,008, insurance claim at Rs. 1,62,246/- service charges at Rs. 2,22,82,736/- and DVC charges at Rs. 30,000/- are operational receipts which are not covered by explanation baa." 23. This Tribunal however has in assessee's own case taken a contrary view as can be seen at para 38 of the order of the Tribunal extracted above for A.Y 2004-05. As far as sale of scrap, service charges and refund of sales tax are concerned this Tribunal in assessee's own case in ITA No.434/M/09 and 406/M/09 for A.Y. 2004-05 was pleased to consider the issue and held as follows: "33. In ground no. 3, the Assessing Officer has raised the following grievances: 3(a) On the facts and circumstances of the case and in law, the CIT(A) erred in directing the Asses....
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....eal before us. 38. Having heard the rival contentions and having perused the material on record, we are of the considered view that the service charges receipts are not in respect of export business and should be excluded as such, what is to be excluded is the earnings from service charges, on net basis, because there are direct and clearly identifiable expenses incurred to earn the same, and any other approach will result in distortion of results. Accordingly, while we uphold the grievance of the Assessing Officer, we also uphold the grievance of the assessee raised in the cross objection. 39. As regards exclusion of scarp sales and sales tax refund, learned representatives agree that the issues are covered in favour of the assessee by decisions of the coordinate benches in the cases of Kodak India Pvt Ltd (8923/Mum/04) and Diamond Dyechem Ltd (ITA 3342/Mum/06), copies of which were placed before us. Learned Departmental Representative, however, dutifully relied upon the stand of the Assessing Officer. Consistent with the stand taken by the coordinate benches, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter." 24. As c....
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....ssessee has established a direct nexus between interest bearing fixed deposits and the "interest charging" borrowed funds. The Commissioner of Income-tax (Appeals) directed the Assessing Officer to allow the netting of interest income and interest expenses. The view of the Commissioner of Income-tax (Appeals) was confirmed in appeal by the Income-tax Appellate Tribunal. On further appeal the Hon'ble Bombay High Court held as follows: "The special deduction under section 80HHC of the Income-tax Act, 1961, is available to an assessee engaged in the export of goods or merchandise outside India to the extent of the profits specified in subsection (1B) of the provision. Clause (a) of sub-section (3) of section 80HHC provides that where the exported goods are manufactured by the assessee, the deduction under sub-section (1) would be in accordance with the formula stated therein. The formula is that the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee. Explanation (baa) was inserted by the Fi....
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....see in earning these receipts would have gone into the computation of the profits and gains of business or profession and a distortion would be caused if the entirety of the income generated from the receipts alone were to be excluded. It is in order to obviate such a distortion that Parliament mandated that ninety per cent. of the receipts would be excluded. Once Parliament has legislated both in regard to the nature of the exclusion and the extent of the exclusion, it would not be open to the court to order otherwise by rewriting the legislative provision. The task of interpretation is to find out the true intent of a legislative provision. Hence for the purpose of Explanation (baa) to section 80HHC the gross interest on fixed deposits in the bank received by the assessee should be considered for the purposes of working out the deduction under section 80HHC and not the net interest." The aforesaid decision of the Hon'ble Bombay High Court has not been brought to the notice of the Tribunal while it decided the case for A.Y 2004- 05. In the light of the aforesaid decision of the Hon'ble Bombay High Court, We, are of the view that the grievance of the assessee as projecte....
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....y 2004 Rs.6.5Ocr. During the previous year, the assessee prepaid the above referred debentures in view of surplus funds at its disposa1. According to the assessee it was a conscious business decision to reduce its interest cost for the financial year 2002-03 to 2004-05. By prepaying the debenture the reduction of interest expense of the assessee was as given below: Financial Year Interest Saved (Rs) 2002-03 30,19,150 2003-04 92,59,699 2004-05 13,17,452 TOTAL 1,35,96,301 The assessee negotiated with Birla MF and convinced the fund manager for early redemption. The fund manager was not ready for early redemption due to the assessee's strong credit record and ability to serve the liability. After holding several meetings with Birla MF from time to time, it was decided to prepay the debentures with a prepayment premium of Rs. 65,80,000/-. 29. The prepayment premium of Rs. 65,80,000/- was claimed as deduction as revenue expenditure, According to the assessee the expenditure was neither incurred for the initiation of a business, nor for extension of a business, nor for a substantial replacement of equipment. It has not res....
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....the Assessee to avoid a recurring revenue expenditure in future, the same would be revenue expenditure. Further reliance was placed on the decision in the case of Madras Auto Service (P) Ltd., was that the assessee was a company carrying on the business of sale of motor parts. Its head office was at Madras. It had a branch at Bangalore. Under an agreement of lease the assessee obtained certain premises for a period of thirty nine years at Bangalore. Under the terms and conditions of the lease, the lessee (that is to say the assessee), had the right to demolish at its own expense the existing premises and appropriate to itself all the material, thereof, without paying to the lessors any compensation and construct a new building thereon to suit the purpose of their business as per the plan approved by the lessors. Under clause 2 of the lease deed, the lessee was required to pay a rent of Rs. 1,000 per month for the first fifteen years, Rs. 1,500 per month for the next ten years, Rs. 1,650 per month for the next ten years and Rs. 2,000 per month for the remaining years. The lease deed further provided that the new construction shall, right from the commencement of the work, be the pro....
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....461 (Raj) and CIT vs. Tungabhadra Industries Ltd. 207 ITR 563 (Cal) for the proposition that premium payable on redemption of debentures are revenue expenditure. 33. The learned D.R. relied on the order of the CIT(A). Her alternate submission in case the premium on redemption of debentures is held to be revenue expenditure was that the premium paid should be spread over to the tenure of the debenture and cannot be allowed in one lump sum. In this regard reliance was placed by the learned counsel for the Assessee on the decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. vs. CIT 225 ITR 802 (SC). 34. We have considered the rival submissions. The nature of expenditure incurred in connection with borrowings on debentures has been explained by the Hon'ble Calcutta High Court in the case of Tungabhadra Industries Ltd. (supra) as follows: "A share is clearly distinct and different from a debenture. It is wellsettled that the taking of a loan does not lead to acquisition of any capital asset or any advantage of an enduring nature. The loan is a liability and cannot be considered as an advantage irrespective of the purpo....
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....re expenditure in one year might give a very distorted picture of the profits of a particular year. Thus in the case of Hindustan Aluminium Corporation Ltd. v. CIT [1983] 144 ITR 474, the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question. Issuing debentures at a discount is another such instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures." 35. In the present case, we are concerned with a case where debentures were redeemed much prior to the period for which they were issued. In other words, the contractual terms of issue of the debentures were not fulfilled and there was a novation of contract between the Assessee and the debenture holders. In such circumstances, we are of the view that the year in which the expe....
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....e and therefore hit by the prohibition laid down in Sec. 43B of the I.T.Act, 1961. Accordingly the disallowance of Rs. 3,66,9 72 u/s. 43B was confirmed. Aggrieved by the order of CIT(A), the Assessee has raised ground No.5 before the Tribunal. 40. We have considered the rival submissions. We are of the view that addition sustained deserves to be deleted. The Hon'ble Supreme Court in the case of Alom Extrusions Ltd. 319 ITR 306 (SC) held that deletion of the second proviso below Sec.43-B of the Act w.e.f. 0-1-4-2004 was clarificatory in nature and therefore will have to be applied retrospectively. Admittedly the payment of employer's contribution had been made by the Assessee on or before the due date for filing return of income. Therefore the payment made on or before the due date for filing return of income has to be allowed as deduction as per the first proviso to Sec.43B of the Act. In view of the aforesaid decision, we direct that the addition sustained by the CIT(A) should be delelted. Gr.No.5 raised by the Assessee is accordingly allowed. ITA No.5512/Mum/07: Revenue's appeal: 41. Gr.No.1 raised by the Revenue has already been decided while deciding Gr.No.....
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.... f) Collections In respect of such export sales Is also looked after by the associated enterprise. g) It is normal policy of the group to pay commission at the rate of 10% on such International sales as against this the Assessee has paid commission at the rate of 12% to its associated enterprise. Letter stating policy was filed in this regard. h) The reason why the Assessee has paid a higher commission in the case of the Singapore office was because one of its own employees, Parag Kunte is stationed In the office of Saint Gobain Abrasives Singapore and his entire salary Is paid by the Singapore company. The object behind this strategy is to Increase export sales in the Far East region. I) When the Assessee has rendered Identical services to a German group company, it has itself earned commission at the rate of 10%, totalling Rs. 18.35 lakhs. j) in certain export transactions, the asessee has made higher payment of commission to outside parties at the rate of 12.5%, the party-wise details of commission paid was also furnished. 42. The Assessee also brought to the notice of the CIT(A), that an identical disallowance was made by the Transfe....
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....e independent enterprises. Therefore, the disallowance u/s. 92C at Rs. 3,18,000/- is not based on correct appreciation on facts. 45. The CIT(A) accepted the above submission of the Assessee and directed the AO to delete the disallowance of Rs. 3,18,000/-. Aggrieved by the order of the CIT(A), the Revenue has raised ground No.2 before the Tribunal. 46. Before us the learned D.R. relied on the order of the AO. The learned counsel for the Assessee relied on the order of the CIT(A). Having considered the rival submissions and the order of CIT(A), we are of the view that the order of CIT(A) does not call for any interference. Admittedly the addition has been made on the basis of similar addition made in AY 02-03. In that year, the AO admitted in his remand report before CIT(A) that the addition made by way of adjustment to ALP was uncalled for. It is also seen that in AY 04-05 in respect of identical transaction, the TPO has not drawn any adverse inference and has accepted international transaction as at ALP. The main reason for paying 12% commission as against the policy of paying commission at 10% to group companies has been explained by the Assessee as owing to one of its key e....
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....al in the case of Rogini Garments (supra) and Hindustan Mint and Agro Products (P.) Ltd. (supra), which are affirmed by the Delhi High Court in the case of Great Eastern Exports (supra). Reliance is also placed on decision of the Kerala High Court in the case of Olam Exports (India) Ltd. (supra) which supports the case of the revenue. 38. We find it difficult to subscribe to the views expressed by the Delhi High Court in interpreting the provisions of section 80-IA(9). In that case, in fact, the Counsel for the revenue had argued (see para 38 of the judgment) that section 80- IA(9) applies at the stage of allowing deduction and not at the stage of computing deduction under other provisions under heading 'C' of Chapter VI-A. It was argued that in the matter of grant of deduction, the first stage is computation of deduction and the second stage is the allowance of the deduction. Computation of deduction has to be made as provided in the respective sections and it is only at the stage of allowing deduction under section 80-IA(1) and also under other provisions under heading 'C' of Chapter VI-A, the provisions of section 80-IA(9) comes into operation. While acc....