TaxTMI 
TaxTMI 
2018 (9) TMI 64
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.... its grounds of appeal has challenged addition sustained by the Ld.CIT(A) in respect of disallowance on account of adjustment to closing stock towards unutilized Modvat credit, treatment of capital expenditure on brand 'Epilex', exclusion of 90% of other income while calculating deduction u/s 80HHC, disallowance of interest income and cash discount while granting deductions u/s 80I & 80IA, disallowance of expenditure incurred in relation to exemption income u/s 14A of the Income-tax Act, 1961, and disallowance of computer software expenses being capital in nature. The revenue, vide its grounds of appeal has challenged the action of the Ld.CIT(A) in allowing deductions towards professional fees paid to DSP Merryll Lynch while calculating deduction u/s 35AB of the Income-tax Act, 1961 and calculation of sales turnover exclusive of sales-tax, excise duty, trade discount, etc. while calculating deduction u/s 80HHC of the Income-tax Act, 1961. 3. The brief facts of the case extracted from ITA No.6606/M/2002 for AY 1999-2000 are that the assessee is a company engaged in the business of manufacturing pharmaceuticals, filed its return of income for AY 1999-2000 on 28-12-1999 declaring t....
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....998-99. 5. We have heard both the parties and perused the material available on record. The issue of addition towards revaluation of closing stock including unutilized Modvat credit has been considered by the coordinate bench in the light of decision of Hon'ble Bombay High Court in the case of CIT vs Indo Nippon Chemicals Co Ltd (supra) and held that where in the closing stock, unutilized Modvat credit is adjusted, similar adjustment should be made to opening stock also. The relevant portion of the order is extracted below:- 26. On this issue, we note that the Id. Commissioner of Income Tax (Appeals) has decided the issue in favour of the assessee by placing reliance upon the Hon'ble Bombay High Court decision in the case of CIT vs. Indo Nippon Chemical Co. Ltd. [2000] 245 ITR 384 (Bom). Hence, we do not find any infirmity in the order of the Id. Commissioner of Income Tax (Appeals) on this issue. The order of the Id. Commissioner of Income Tax (Appeals) in this regard may be gainfully referred as under: 10. As clearly mentioned in the assessment order for the assessment year 98-99, the case of the appellant is covered by the jurisdictional High Court decis....
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....knowhow cannot be treated as knowhow for the purpose of claim of deduction u/s. 35AB. Hence, he has held that the marking knowhow should be excluded while computing the deduction u/s. 35AB and, hence, he had ordered the enhancement. We find that the Hon'ble Bombay High Court in the case of Glenmark Pharmaceuticals Ltd. (supra) has held that where marketing know-how agreement led to an improvement in assessee's existing business resulting in higher sales and, consequently, higher profitability, the amounts spent on marketing know-how would result in improving profits of business on acquired brands as this knowledge would assist in improving marketing strategy, expenses incurred by assessee for acquiring marketing know-how would be revenue, and merely because it was outsourced, it would not cease to be revenue expenditure. Here we find that it is not the case of the Revenue that the above said marketing knowhow has not lead to increase in sales and higher profitability as expounded by the Hon'ble Bombay High Court as above. In such circumstances, when the assessee only claims deduction u/s. 35AB, the same cannot be denied by the Id. Commissioner of Income Tax (Appeals) by....
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.... of core business activity and whatever revenue generated from such sale needs to be included in computing deduction u/s 80HHC of the Act. 11. We have heard both the parties and perused the materials available on record. The issue of insurance claim received on transit insurance for the purpose of computation of deduction u/s 80HHC is no longer res integra. The Hon'ble Bombay High Court in the case of CIT vs Pfizer Ltd 330 ITR 62 (Bom) has considered similar issue in the light of deduction u/s 80HHC and held that insurance claim for loss of stock in trade must stand on the same footing as the income that would have been realized by the assesse on sale of stock in trade. Insurance claim on account of the stock in trade does not constitute an independent income or a receipt of any other similar nature to brokerage, interest, rent or charges as long as such a receipt would not be subject to deduction of 90% under Explanation to section 80HHC of the Act. Similarly, on the issue of sale of scrap, the Hon'ble High Court in the case of Bangalore Clothing Co vs CIT 260 ITR 371 (Bom) held that revenue generated from sale of scrap was akin to manufacturing activities relating to export bu....
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....vailable on record. The ITAT has considered interest from customers on delayed payments in the light of provisions of sections 80I & 80IA and by following the decision of Hon'ble Bombay High Court in the case of CIT vs Vidyut Corporation (supra) held that interest from customers is eligible for computation of deductions u/s 80I& 80IA of the Income-tax Act, 1961. Insofar as cash discount is concerned though the issue has come up for our discussion for first time during the year under consideration, fact remains that the assessee has failed to furnish evidence to prove that cash discount is part of its core business activity of income eligible for deductions u/s 80I & 80IA of Income-tax Act. Therefore, we are of the considered view that the AO was right in disallowing cash discount while computing deductions u/s 80I & 80IA of the Income-tax Act, 1961. Accordingly, we uphold disallowance made by the AO and reject ground taken by the assessee. 14. The next issue that came up for our consideration from departmental appeal is disallowance of professional fees paid to DSP Merryll Lynch while computing deduction u/s 35AB of the Act. The Ld.AR for the assessee, at the time of hearing sub....
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....ner of Income Tax (Appeals). The order of the Id. Commissioner of Income Tax (Appeals) in this regard may be gainfully referred as under: 13. The appellant had excluded sales-tax, excise duty and trade discount from"" the total turnover in working out the profits derived from the export in accordance with the apportionment formula laid down in section 80HHC(3). The A.O. however included these items in the total turnover and thus reduced the profits derived from the export by increasing the denominator in the formula. The issue regarding exclusion of sales tax and excise duty from the total turnover for the purpose of section 80HHC is squarely covered by the jurisdictional High Court decision in the case of CIT vs. Sudarshan Chemcial Industries Ltd. 245 ITR 769 (Bom). In this decision it was held that it is only the actual sale price which is relevant to the total turnover and the profits derived from the export cannot be reduced artificially by including in the denominator such levies as sales tax and excise duty. The High Court has further held that in view of the use of common word 'turnover' in export turnover as well as total turnover, the two must have common ....
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.... and gone through the orders of authorities below. We have also considered case laws relied upon by the assessee. The issue of disallowance of interest u/s 14A when mixed funds are more than the amount of investments in shares and securities which yielded exempt income is no longer res integra. The jurisdictional High Court in the case of CIT vs HDFC Bank Ltd (supra) has considered the issue and held that when mixed funds, i.e. interest free and interest bearing funds are used to make investment in shares and securities, which yielded exempt income, then a presumption is drawn that investments in shares and securities is out of its own funds and no part of interest expenditure could be disallowed u/s 14A of the I.T. Act. This legal proposition is further strengthened by the decision of Hon'ble Bombay High Court in the case of CIT vs Reliance Utilities & Power Ltd (supra) wherein the ratio laid down in CIT vs HDFC Bank Ltd has been re-iterated. Therefore, we are of the considered view that once assessee proved with necessary evidence that its own funds including interest free funds are more than the amount of investments, then no interest could be disallowed u/s 14A of the Act. But,....
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....ddition made towards professional fees paid to DSP Merryll Lynch. 24. The next issue that came up for our consideration from revenue's appeal is sales-tax, excise duty, trade discount, etc. to be included in total turnover for computation of deduction u/s 80HHC of the Act. We have considered similar issue in ITA No.6606/Mum/2002. The reasons given by us in preceding paragraphs in ITA No.6606/Mum/2002 shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we direct the AO to exclude sales-tax, excise duty, trade discount, etc. while computing total turnover for computation of deduction u/s 80HHC of the Act. 25. In the result, appeal filed by the assessee is partly allowed for statistical purpose and appeal filed by the revenue is dismissed. ITA 5625/Mum/2005 & ITA 4367/Mum/2005 (AY 2001-02) 26. The first issue that came up for our consideration is disallowance of interest expenditure u/s 14A of the Act. We have considered similar issue in ITA No.7824 /Mum/2004. The reasons given by us in preceding paragraphs in ITA No.78214 /Mum/2004 shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we set aside the issue to the ....
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....expenditure. 30. We have heard both the parties and perused material available on record. Any expenditure to be qualified for deduction u/s 37(1) of the Act it should be expended wholly and exclusively for the purpose of business of the assessee and it should not be in the nature of personal expenses or capital expenses. If any expenditure incurred is in the nature of capital expenditure which gives enduring benefit to the assessee, then such expenditure needs to be capitalized. In this case, the claim of the assessee is that expenditure incurred under the head software expenses are routine expenses paid for acquiring licence to use software and also in the nature of annual maintenance expenses, therefore, the AO was incorrect in disallowing such expenditure only on the ground that these are in the nature of capital expenditure. We find that the assessee has incurred software expenses, which are in the nature of cost of service of personnel, licence fees for software and AMC expenses for various softwares including software for accounting sales and debtors, software support for pay roll division, software maintenance and support for marketing royalty obligations and other day to....
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....le of the AO with similar directions. 35. The next issue that came up for our consideration is disallowance of marketing know how paid for brand 'Epilex'. We have considered similar issue in ITA No.6606/Mum/2002. The reasons given by us in preceding paragraphs in ITA No.6606/Mum/2002 shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we direct the AO to delete addition towards disallowance of deduction u/s 35AB in respect of payment of marketing know how' for brand 'Epilex' and professional fees paid to DSP Merryll Lynch. 36. The next issue that came up for our consideration is exclusion of 90% of other income being insurance claim and sale of scrap while computing deduction u/s 80HHC of the Income-tax Act, 1961. We have considered similar issue in ITA No.6606/Mum/2002. The reasons given by us in preceding paragraphs in ITA No.6606/Mum/2002 shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we direct the AO to follow the findings given by us in ITA No.6606/Mum/2002 for this year also. 37. The next issue that came up for our consideration is disallowance of interest income for computation of deduction u/s 80I & 8....
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....s 35AB in respect of payment of marketing know how' for brand 'Epilex' and professional fees paid to DSP Merryll Lynch. 43. The next issue that came up for our consideration from assessee's appeal is deduction u/s 80IB in respect of other income being interest on housing loan to employees, interest on car loan, interest others and other interest including sundry receipts. The Ld.AR for the assessee, at the time of hearing, submitted that he did not want to press the ground and hence, ground taken by the assessee is dismissed, as not pressed. 44. The next issue that came up for our consideration from revenue appeal is deduction u/s 80M in respect of dividend declared for Rs. 1,68,13,000. The facts with regard to the impugned dispute are that during the year, the assessee company has received dividend income of Rs. 1,68,13,000 from wholly owned subsidiary company. The assessee also declared dividend of Rs. 18,33,61,200. The assessee has claimed deduction u/s 80M in respect of dividend income of Rs. 1,68,13,000, since it has declared dividend in the year under consideration. The AO has disallowed deduction claimed u/s 80M on the ground that deduction claimed u/s 80M is notpermis....
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....igible for deduction u/s 80M in respect of dividend received from wholly owned subsidiary company. Hence, we direct the AO to delete addition made towards disallowance u/s 80M of the Act. 46. In the result, the appeal filed by the assessee is partly allowed and appeal filed by the revenue is dismissed. ITA No.6192/Mum/2010 (AY 2005-06) 47. The first issue that came up for our consideration is disallowance of expenditure incurred in relation to exempt income u/s 14A of the Act. The AO has determined disallowance of expenditure incurred in relation to exempt income u/s 14A of the Act, by invoking rule 8D(2) of I.T. Rules, 1962. The AO has determined disallowance of Rs. 1,60,488 u/r 8D(2)(i) as per the working furnished by the assessee, vide its letter dated 24-11-2008. The AO also determined disallowance of interest expenses of Rs. 7,61,589. The AO further disallowed a sum of Rs. 97,00,341 @0.5% of the average value of investments as per Rule 8D(2)(iii). It is the claim of the assessee that Rule 8D(2)(ii) & 8D(2)(iii) & section 14A are prospective in nature and, therefore, for years prior to such insertion, disallowance to be made on reasonable basis without resorting to pro....
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....urred for the year under consideration. The assessee claims that various Courts and Tribunals have directed the AO to estimate 1 to 2% of exempt income towards expenses incurred in relation to exempt income. The assessee has relied upon the decision of ITAT, Mumbai in the case of Greaves Leasing Finance Ltd 52 SOT 22, where the ITAT has restricted disallowance to the extent of 1% of exempt income. The Hon'ble Delhi High Court in the case of Oriental Structure Engineers Pvt Ltd in IT 605 of 2012 has directed the AO to restrict disallowance to 2% of exempt income. Although the Courts have considered various rates for the purpose of determination of disallowance contemplated u/s 14A, yet, the fact remains that prior to AY 2008-09 disallowance should be worked out on reasonable basis having regard to the quantum of dividend income earned by the assessee and expenditure incurred for the relevant period. In this case, the assessee has earned huge dividend income of Rs. 6,84,37,043, therefore, considering the facts and circumstances of this case and also keeping in view of various judicial precedents, we are of the considered view that 5% of exempt income towards expenses incurred in rela....
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....efited the parent company of the assessee. The AO further observed that although the assessee has claimed advertisement expenses after netting off of reimbursement received from its parent company, failed to file necessary evidence to justify expenditure incurred in respect of medical conference expenses of Rs. 1,76,07,027 and giveaways of Rs. 2,89,30,776. The assessee was also not able to justify the expenditure with any supporting evidence. Therefore, he disallowed net advertisement expense of Rs. 3,42,24,626 (Rs.9,57,98,037 - Rs. 6,15,73,411). It is the claim of the assessee that expenditure incurred under the head 'advertisement & publicity' are wholly and exclusively incurred for the purpose of business of the assessee and no part of the expense is incurred to benefit the parent company. The expenditure incurred under the head 'advertisement & publicity' mainly relates to promoting sales of the assessee which includes medical conference, giveaways and other expenses. Out of the total expenses of Rs. 9,57,98,037, a sum of Rs. 6,15,73,411 has been reimbursed by M/s Navnordisk which has been credited to the advertisement expenditure account. Therefore, merely for the reason that ....
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....that the assessee has failed to file any evidences to justify medical conference expenses and giveaways. The AO further observed that the assessee was not able to justify the expenditure and also failed to clarify the break of such huge amount with proper supporting evidences. Although the assessee claims to have filed various details before the AO to justify advertisement expenditure incurred for the year, the fact remains that the AO has recorded categorical finding any that assessee failed to file any evidence to justify such expenditure. Therefore, we are of the considered view that the issue needs to be re-examined by the AO in the light of claim of the assessee that it has furnished necessary evidence to prove advertisement expenses. Hence, we set aside the issue to the file of the AO and direct him to consider the explanation of the assessee in the light of our discussion in preceding paragraphs. If the assessee is able to file necessary evidence with proper justification for incurring such expenses, then the AO is directed to allow advertisement expenses incurred by the assessee. 58. The next issue that came up for our consideration is addition towards disallowance of de....