TaxTMI 
TaxTMI 
TaxTMI 
2017 (12) TMI 570
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....Rs, 41,49,335 although the appellant has followed mercantile system of accounting. 2. The learned CIT (A) LTU erred in upholding the action of the Assessing Officer in disallowing the interest expenditure payable to Micro, Small and Medium Enterprises under Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act, 2006) amounting to Rs. 3,84,256. 3. The learned CIT (A) LTU erred in upholding the action of Assessing Officer in taxing the receipt towards second instalment in respect of Technical know-how from M/s Motogen under the head business income instead of long-term Capital gains, despite agreeing with appellant's contention that "right to use" falls within the ambit of "Capital asset". 4. The learned CIT (A) LTU erred in upholding the action of Assessing Officer in not granting the deduction u/s 80JJAA in respect of the workmen who were employed by the appellant during the year but whose duration of working in that year was less than 300 days. 5. The learned CIT(A) LTU erred in upholding the action of Assessing Officer in allowing weighted deduction u/s 35(2AB) on the net expenditure of Rs. 41,36,02,776 as against gross expenditure of Rs. 76,31,93,039. ....
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....l in assessee's own case for assessment years 1994-05 and 1999-00 wherein the action of the CIT (A) on disallowing interest payable to Central Excise Department has been upheld by the Tribunal. Respectfully following the same, his ground of appeal (No.8) of the assessee is rejected". From the above Para, what is seen that this issue is covered against the assessee by the tribunal order in assessee's own case for the assessment years 2000-01 & 2001-02 and hence, this ground of the assessee is rejected by respectfully following this Tribunal order." Thus it is clear that this issue is covered against the assessee by the decisions of this Tribunal in assessee's own case. Accordingly following the earlier orders of this Tribunal cited supra, we do not find any error or illegality in the orders of authorities below qua this issue. This ground of assessee's appeal is dismissed. 5. Ground No.2 is regarding disallowance of interest expenditure payable to Micro, Small & Medium Enterprises. This issue is involved only in the appeal for the Assessment Year 2008-09. 6. The assessee has debited a sum of Rs. 3,84,256 as interest in respect of Micro, Small & Medium Enterpr....
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....egarded as a penal in nature then the said expenditure is otherwise not allowable under Section 37 of the Income Tax Act, 1961 (in short 'the Act'). Hence, in view of the specific provisions under MSMED Act, 2006 for payment of interest to the MSME being penal in nature and having the overriding effect of Sections 15 to 23, we do not find any error or illegality in the orders of the authorities below in disallowing this claim of interest paid to the MSME. 8. Ground No.3 is addition on account of the amount received in respect of technical knowhow from M/s. Motogen under the head 'Business Income' as against the claim of the assessee as Long Term Capital Gains (LTCG). This ground is common in both the appeals. 9. The assessee had entered into technical colloboration agreement in October, 1999 with Robert Bosch GmbH (in short Bosch) with respect to manufacture and sale of various automobile equipment products and spares as well as components of contract products like Alternator/ Dynamo, Starter Motor, Wiper Motor, Small Motor and Spares of the components. Under this agreement Bosch granted to the assessee nonexclusive, non-transferable rights to use patent and patent applic....
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....d that when the assessee is not having any ownership, then the question of transfer of ownership does not arise. He has relied upon the orders of the authorities below. 12. We have considered the rival submissions as well as the relevant material on record. There is no dispute that the assessee was granted license by parent company Bosch under the collaboration agreement for manufacturing of contract products. As per the terms of the agreement the license was granted for use of patented technology which is a nontransferable right as it was specified that the grant of license was nonexclusive and non-transferable right to use and patented applications. The assessee after taking permissions from the Bosch has sub-licensed the right to use of patented technology which has not resulted extinguishing right vested with the assessee. The transfer of capital asset is necessarily ceases the ownership or right in the property in the hand of the transferor and it gets vested in the hand of transferee. Therefore, in the case of transfer the right or ownership of transferor is completely extinguished and it is vested with the transferee. In the case on hand, the assessee is vested with the rig....
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.... 80JJAA was restricted to additional wages paid to employees who have worked for more than 300 days during the relevant period irrespective of whether they were employed on a permanent basis or otherwise. The AO, accordingly, ascertained that additional wages paid to those who had worked for less than 300 days was Rs. 25,64,771/- 30% of which worked out to Rs. 7,69,431/- which was required to be disallowed. At the appellate stage, the appellant reiterated that in the case of permanent workmen, the question of whether they worked for 300 days or more did not arise. 15.1.1 In view of the facts of the case as discussed in the preceding paragraphs, the AO gave a categorical finding that the wages paid to employees who had worked for less than 300 days in this year cannot be considered for the purposes of deduction u/s 80JJAA. It is of relevance that sec.80JJAA specifically defines the term 'regular workmen' in clause (ii) of the Explanation to the section. It is a cardinal rule of interpretation that where the language used by the Legislature is clear and unambiguous, the plain and natural meaning of the words should be supplied to the language used and resort to any rule of ....
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....ions of sec.80JJAA of the Act for the sake of ready reference; "Section 80JJAA... [Deduction in respect of employment of new employees. (1) Where the gross total income of an assessee to whom section 44AB applies, includes any profits and gains derived from business, there shall, subject to the conditions specified in sub-section (2), be allowed a deduction of an amount equal to thirty per cent, of additional employee cost incurred in the course of such business in the previous year, for three assessment years including the assessment year relevant to the previous year in which such employment is provided. (2) No deduction under sub-section (1) shall be allowed,- (a) if the business is formed by splitting up, or the reconstruction, of an existing business: Provided that nothing contained in this clause shall apply in respect of a business which is formed as a result of re-establishment, reconstruction or revival by the assessee of the business in the circumstances and within the period specified in section 33B; (b) if the business is acquired by the assessee by way of transfer from any other person or as a result of any business reorganisation; (c) unless the assessee....
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....ely prior to their amendment by the Finance Act, 2016, shall apply to an assessee eligible to claim any deduction for any assessment year commencing on or before the 1st day of April, 2016.'. [(1) Where the gross total income of an assessee, [being an Indian company,] includes any profits and gains derived from the manufacture of goods in a factory, there shall, subject to the conditions specified in sub-section (2), be allowed a deduction of an amount equal to thirty per cent. of additional wages paid to the new regular workmen employed by the assessee in such factory, in the previous year, for three assessment years including the assessment year relevant to the previous year in which such employment is provided.] (2) No deduction under sub-section (1) shall be allowed- [(a) if the factory is acquired by the assessee by way of transfer from any other person or as a result of any business re-organisation;] (b) unless the assessee furnishes along with the return of income the report of the accountant, as defined in the Explanation below sub-section (2) of section 288 giving such particulars in the report as may be prescribed. Explanation.-For the purposes of this secti....
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....n in the present year even if such work men was employed in the preceding year for more than 300 days but in the present year, such work men was not employed for 300 days or more. In this view of the matter, we find no infirmity in the order of the ld. CIT (A) on this issue. 24. Now we examine the applicability of the judgment of the Hon'ble Apex Court cited by the ld. AR of the assessee. In our considered opinion, the issue in dispute in that case was entirely different and therefore, this judgment is not applicable in the present case. 25. In our considered opinion, the Board Circular No.772 also does not render any help to the assessee. Hence, this ground is rejected."' In view of the earlier order of this Tribunal in assessee's own case, we uphold the order of the authorities below qua this issue. 15. Ground No.5 is regarding restriction of deduction under Section 35(2AB) of the Act on net expenditure as against the gross expenditure. 16. The assessee's Research & Development facility was approved by the DSIR vide order approval dt.12.12.2008. During the course of assessment proceedings, the assessee revised its claim of weighted deduction under Section 3....
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....val is granted by the competent authority i.e. DSIR giving the details of the expenditure then the Assessing Officer has no jurisdiction to tinker with the said details given in the approval. He has further contended that this Tribunal has also no jurisdiction to entertain and decide the issue of deduction under Section 35(2AB) of the Act so far as the quantum of expenditure has been considered by the DSIR while granting the approval. In support of his contention, he has relied upon the following decisions : (i) CIT Vs. Mastek Limited 228 Taxmann 377 (Guj) (ii) ACIT Vs. ECIL 140 ITR 221 (Hyd) (iii) CIT Vs. Southern Vikas India Limited 335 ITR 117 (Del) Thus the learned Departmental Representative has submitted that if the deduction is not found as per the provisions of the Act then the Tribunal has no jurisdiction to decide the issue without seeking the opinion of the prescribed authority. He has further contended that the assessee is entitled to weighted deduction only to the extent of the expenditure approved by the DSIR in the certificate and therefore neither the Assessing Officer nor the appellate authority to decide the quantum or expenditure which will be eligible to ....
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....e and the receipts of the R&D centre, the issue in the appeal is only regarding the computation of quantum of deduction under Section 35(2AB) of the Act which is in the domain of the Assessing Officer and not subject matter of the competent authority i.e. DSIR. He has further submitted that the guidelines as relied upon by the learned Departmental Representative are dt.26.5.2009 which are subsequent to the assessment year under consideration. Therefore, at the time of granting the approval these guidelines were not applicable in the case of the assessee. 20. We have considered the rival submissions as well as the relevant material on record. In the case of the assessee, approval for the Assessment Year 2007-08 was granted by the DSIR vide order dt.12.12.2008 wherein the total cost of in-house research facility and break up of expenditure has been given in para 9 as under : " Total cost of in-house research facility, giving break-up of expenditure on land and buildings : (Rs. in lakhs) A.Y 2007-08 Capital expenditure (land & building) --- Capital Expenditure (other than land & building) 1008.71 Recurring expenditure 3249.60 Total cost of in-house R&D facility 42....
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....se of any income earned by the said R&D centre, the same has to be part of the total income of the assessee and therefore such income cannot be reduced from the expenditure for the purpose of computing the deduction under Section 35(2AB) of the Act. An identical issue was considered by the Bombay Bench of the ITAT in the case of ACIT Vs. Wockhardt Limited (supra) in paras 10 to 12 as under : "10. We have carefully considered the submissions of the rival parties and perused the material available on record. 11. Section 35(2AB) reads as under : (2AB)(1) Where a company engaged in the business of bio-technology or in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on inhouse research and development facility as approved by the prescribed authority62, then, there shall be allowed a deduction of a sum equal to 63[two] times of the expenditure so incurred. Explanation.-For the purposes of this clause, "expenditure on scientific research", in relation to drugs and pharmace....
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.... at a sum of Rs. 12,57,00,920. What is now to be examined is the guidelines of the Department of Scientific and Industries Research, which the prescribed authority under section 35(2AB)(3) and (4) of the Act, has to follow before granting approval of the scientific research carried out by the assessee as eligible for deduction under section 35(2AB). A copy of the guidelines of the Department of Scientific and Industries Research is at pages 27 to 33 of the assessee's paper book. Guideline 5(vii) is relevant for the present case and it reads as follows : "(vii) Assets acquired and products, if any emanating out of research and development work done in approved facility, shall not be disposed off without approval of the Secretary, DSIR. Sales realisation arising out of the assets sold shall be offset against the research and development expenditure of the research and development centre claimed under section 35(2AB) for the year in which such sales realisation accrues under section 35(2AB) of the Income-tax Act, 1961. Expenditure claimed for deduction under the sub-section shall be reduced to that extent." 13. ........ 14. ........ 15. ........ 16. The Department of Sci....
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....e this issue to the file of Assessing Officer for limited purpose of verification of the said amount received by the assessee and claimed as income of the R&D centre and then allow the claim of the assessee in view of the above observations and findings." Thus it is clear that the Tribunal while deciding this issue has followed the decision of Hon'ble jurisdictional High Court in the case of DCIT Vs. Microlab (supra) as well as decision of the Hon'ble Madras High Court in the case of CIT Vs. Wheels India Pvt. Ltd. 336 ITR 513 wherein it was held that the income earned by the assessee from the R & D Centre cannot be reduced for the for the purpose of allowing the deduction under Section 35(2AB) because the said income is part of the total income of the assessee. Accordingly in principle the issue was decided in favour of the assessee that the income earned by the assessee from R&D Centre cannot be reduced from the expenditure for the purpose of deduction under Section 35(2AB) of the Act. However, since the relevant details and facts were not available before the Tribunal to give a finding about the nature of the receipt whether income /revenue or reimbursement of the expen....
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.... find any merits in the objections raised by the ld. DR. 22. Ground No.6 is regarding disallowance under Section 14A of the Act. 23. This issue is involved only in the Assessment Year 2008-09. During the course of assessment proceedings, the Assessing Officer asked the assessee to furnish the working under Section 14A r.w. Rule 8D of disallowance of expenditure in respect of exempt income. The assessee filed the working with the Assessing Officer wherein the assessee made disallowance on account of indirect administrative expenses of Rs. 1,45,512. The assessee made disallowance on the basis of cost incurred regarding number of persons involved and number of man hours spent and multiplied by ratio of average investment on which income is exempt. The Assessing Officer did not accept this working of the assessee and worked out the disallowance under Rule 8D on account of interest expenditure of Rs. 2,33,135 and on account of indirect administrative expenses of Rs. 30,63,052. Thus the Assessing Officer made a total disallowance of Rs. 34,41,699 inclusive of the disallowance made by the assessee itself of Rs. 1,45,512. The assessee challenged the action of the Assessing Officer before....
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....rt has disapproved the action of the Assessing Officer in invoking Section 14A and Rule 8D(2) of Rules where the Assessing Officer has disallowed exemption without recording his satisfaction. The Hon'ble High Court has further observed that the recording of satisfaction to show as to why voluntary disallowance made by the assessee was unreasonable and unsatisfactory and it is a mandatory requirement of law. Thus the jurisdiction to apply Section 14A of the Act contemplates satisfaction of condition precedent therein on the part of the Assessing Officer. Hence, the Learned Senior Counsel for the Assessee has submitted that the disallowance made by the Assessing Officer is not sustainable when the assessee has given a reasonable and proper computation of disallowance by taking into consideration the man hours of the senior management in the ratio of exempt income and taxable income. 26. On the other hand, the learned Departmental Representative has submitted that the assessee has made huge investment and therefore, high level administration is involved in taking the decision of investment. The quantum of disallowance to be computed as per the Rule 8D and therefore the Assessing ....
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....ied a sum of Rs. 3,22,426 as expenditure incurred in earning tax free income dividend income which does not form part of the total income and which is to be disallowed u/s. 14A of the Act. 34. The break-up of the sum of Rs. 3,22,426 is not specifically given, but is stated to be relating to management fee, legal & professional charges, security transaction charges and NSDL charges. It is thus clear that the assessee by implication had claimed that there was no expenditure incurred by way of interest, either directly or indirectly, which is attributable to the borrowed funds which were used for the purpose of investment which yielded tax free income. 35. The AO observed that Schedule G to the Financial Statements of the assessee had shown investment to the tune of Rs. 28,45,29,937 in shares mutual funds of various companies. He was of the view that such investments cannot be made routinely. No prudent businessman would make any investment without applying the resources wisely. Obviously this entails expenditure, direct as well as indirect. He thereafter proceeded to make disallowance u/s. 14A of the Act, which is given as annexure to the assessment order and enclosed as ANNEXU....
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....en of proof on the assessee has become "more stringent, so that rather than showing existence of sufficient capital, the matter would be required to be examined from the stand point of utilization of the borrowed interest bearing funds." In the absence of categorical utilization certificate from the bank, the CIT(A) was of the view that there was no evidentiary support of the assessee's claim. Hence, the disallowance u/s.14A of the Act as made by the AO was upheld by the CIT(A). 39. Aggrieved by the order of CIT(A), the assessee has raised ground No.2. 40. We have heard the rival submissions. A copy of the availability of funds and investments made was filed before us which is at pages 38 to 42 of the assessee's paperbook and the same is enclosed as ANNEXURE-III to this order. It is clear from the said statement that the availability of profit, share capital and reserves & surplus was much more than investments made by the assessee which could yield tax free income. 41. The Hon'ble Bombay High Court in Reliance Utilities & Power Ltd. 313 ITR 340 (Bom) has held that where the interest free funds far exceed the value of investments, it should be considered that i....
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....ce on account of indirect administrative expenses by taking the man hours of the higher administration in proportion of the tax free income and taxable income. Therefore in case the quantum of expenditure worked out under Rule 8D is exceeding the actual expenditure then the workings under Rule 8D fails. Accordingly, when the Assessing Officer has not made an attempt to first find out the expenditure which is attributable to the earning of the exempt income and has directly applied Rule 8D then the matter requires a proper verification and reconsideration. Hence, we set aside this issue to the record of the Assessing Officer to verify and consider the attributable expenditure which is debited to the profit and loss account and relatable to the exempt income and then consider both the proportionate attributable expenditure actually debited to the profit and loss account and the working under Rule 8D for the purpose of disallowance under Section 14A of the Act. 29. In the result, the Ground No.6 of the assessee's appeal is allowed for statistical purpose. Revenue's Appeal: 30. The revenue has raised the following grounds for the Assessment Year 2007-08 : "1. The order of ....
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.... case of CIT Vs. Techno Ltd. 327 ITR 323. Hence we do not find any merit in this ground of revenue's appeal and accordingly the same is dismissed. 34. Ground No.3 is regarding disallowance of expenditure being sublicense fees for SAP and other application software. 35. We have heard the learned DR as well as learned A.R. and considered the relevant material on record. The Assessing Officer has disallowed the expenditure by treating the same as capital in nature whereas the CIT (Appeals) has allowed the claim of the assessee by holding that the expenditure was incurred for application software and therefore, the same is allowable revenue expenditure. 36. The ld. DR has relied upon the decision of Pune Bench of the Tribunal in the case of Sudarshan Chemicals Vs. ACIT 110 ITD 171 and submitted that the Tribunal while considering the identical issue of ERP Implementation has held that this expenditure is towards acquiring intangible asset and therefore is capital in nature. He has also relied upon the decision of Special Bench of Delhi Bench of ITAT in the case of Amway Enterprises Limited Vs. DCIT 111 ITD 112 and submitted that if software having its utility to the assessee for a ....
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....ware having its utility to the assessee for a period beyond two years can be considered as accrual of benefit of enduring nature. However, that by itself will not make the expenditure incurred on software as capital in nature and the functional test as discussed above also needs to be satisfied. (iii) Once the tests of ownership and enduring benefit are satisfied, the question whether expenditure incurred on computer software is capital or revenue has to be seen from the point of view of its utility to a businessman and how important an economic or functional role it plays in his business. In other words, the functional test becomes more important and relevant because of the peculiar nature of the computer software and its possible use in different areas of business touching either capital or revenue field or its utility to a businessman which may touch either capital or revenue field. 60. Having laid down the criteria for determining the nature of expenditure incurred on acquisition of software, whether capital or revenue, we are of the view that these criteria need to be applied to determine the exact nature of expenditure incurred by the assessees in the present cases for ....
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.... Application Support - Bug fixing, Ensuring all applications are functioning properly at all times; * Application Maintenance - Enhancements/changes in the existing applications; and * Application Development - Developing new one time usage IT applications supporting the Appellant's organisational/departmental requirements. ** SAP Maintenance charges - includes expenses incurred towards incorporation of new developments and maintenance of SAP software." Though the assessee has claimed that this is expenditure for application support and SAP maintenance charges however without examination of the relevant invoices and description of the items of expenditure, it is not possible to give a conclusive finding that a particular item of expenditure would fall in the category of capital or revenue. It is pertinent to note that if the expenditure is incurred as an annual recurring maintenance charges or annual upgradation of the existing software then it would be in the nature of revenue. On the other hand, if the expenditure is incurred in replacing the existing software and it is not a recurring annual expenditure then though the life of software is very short, the same would b....