TaxTMI 
TaxTMI 
2018 (6) TMI 1711
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....earned CIT(A). 2. On facts and in circumstances of the case and in law, the Learned CITA) has erred in upholding disallowance of club expenses, aggregating to Rs. 2,31,157 on the alleged ground that vouchers substantiating the claims were not produced before the Learned CITA). 3. On facts and in circumstances of the case and in law, the Learned C1TA) has erred in upholding disallowance made by the Learned A() by applying provisions of Rule 8D of the Income-tax Rules, 1962 ("the Rules") while making a disallowance under Section 14A of the Income-tax Act, '1961 ("the Act") 4. On facts and in circumstances of the case and in law, the Learned CITA) has erred in upholding disallowance of gift expenses, aggregating to Rs. 19,95,476. 5. On facts and in circumstances of the case and in law, the Learned CITA) has erred in confirming disallowance of compensation payment of Rs. 75,00,000 to Mr. SS Mohla on the alleged ground that the same is in the nature of commission on which tax has not been deducted as per provisions of Section 40(a)(ia) of the Act. 6. On facts and in circumstances of the case and in law, the Learned CIT(A) has erred in not....
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....has been completed under section 143(3) on 27.10.11 determining the total income at Rs. 101,29,01,750/-, inter alia making various additions like disallowance of club expenses, disallowance under section 14A, disallowance of product trial expenses treating it as capital in nature, disallowance of gift expenses, disallowance of compensation paid to employee under section 40(a)(ia), rejection of bad debt claim, disallowance of written off of doubtful advances, disallowance of payments made to associate concern under section 40A(2) etc. The AO also rejected various additional claims made by the assessee on the ground that additional claims made by the assessee cannot be allowed at this stage without filing revised return by relying upon the decision of Hon'ble Supreme Court in the case of Goetz India Ltd. vs. CIT 284 ITR 323. 3. Aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A). The assessee has filed elaborate written submissions on additions made by the AO which has been reproduced by the Ld. CIT(A) in his order. The Ld. CIT(A) after considering relevant submissions of the assessee partly allowed the appeal, wherein he has deleted additions....
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....,157/- on the ground that the assessee failed to furnish evidences. It is the contention of the assessee that it has filed details for balance amount of Rs. 2,30,623/- before the Ld. CIT(A) vide its submission dated 22.01.13. Such details have been furnished before us in the form of paper book. Therefore, we are of the considered view that the issue needs to be reexamined by the AO, in the light of evidences filed by the assessee. Hence, we set aside the issue to the file of AO and direct him to consider the issue afresh after affording a reasonable opportunity of hearing to the assessee. 6. The next issue that came up for our consideration is disallowance of expenses incurred in relation to exempt income under section 14A of the Income Tax Act, 1961. The facts with regard to the impugned order are that during the year under consideration the assessee had earned dividend income of Rs. 1,03,17,000/- which was claimed exempt under section 10(34) of the Act. The assessee also had made suomoto disallowance of Rs. 21,26,636/- in its return of income. However, such disallowance has been revised to Rs. 4,15,300/- vide its submission dated 23.08.11 before the AO. The AO has disallowed t....
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....36/-. However, such disallowance has been recomputed to Rs. 4,15,300/- during the course of assessment proceedings. The dispute is with regard to computation worked out by the AO by invoking rule 8D(2) of Income Tax Rules, 1962. According to the assessee, no disallowance is called for in respect of interest expenses as it has not invested any borrowed funds in mutual funds which earned exempt income which is evident from the fact that its own funds are more than value of its investments. The assessee further contended that when mixed funds are available, both interest free and interest bearing, then a presumption would arise that investment could be out of interest free funds available with the assessee. We find force in the arguments of the assessee for the reason that the Hon'ble Bombay High Court in the case of "CIT vs. Reliance Utilities and Power Ltd." (2009) 313 ITR 340 (Bom) has held that when mixed funds are available a general presumption is drawn that the investments in securities which earn the exempt income are out of own funds. Therefore, we are of the considered view that once the assessee has proved the availability of own funds in excess of value of investments, the....
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....tion by rejecting computation worked out by the assessee towards suo-moto disallowances which means that the AO has considered the nature of expenses incurred by the assessee and also disallowances quantified in the light of exempt income earned for the year and hence we are of the considered view that the AO was right in invoking rule 8D(2)(iii) to quantify disallowance in respect of expenses incurred in relation to exempt income. Hence, we are of the considered view that there is no error in the computation worked out by the AO under rule 8D(2)(iii). 10. The next issue that came up for consideration is disallowance of gift expenses of Rs. 19,95,476/-. The assessee had incurred gift expenses which were given to employees, the dealers, customers and other business associates and some gifts to government officials on festival occasions. Details of expenses were submitted to the AO. The AO disallowed gift expenses on the ground that the assessee had failed to furnish evidences for actual utilisation of gift items, their necessity and purpose of business and accordingly, disallowed the entire expenditure incurred by the assessee. It is the contention of the assessee that expenses i....
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....llowed such expenditure under section 40(a)(ia) of the Income Tax Act, 1961. The Ld. CIT(A) confirmed additions made by the AO by holding that there was no employer employee relationship at the time of payment of such compensation, however, the said payment was purely in nature of disputed commission and the assessee ought to have deducted the tax on the same. Since assessee failed to deduct TDS on commission payment the AO was right in disallowing such compensation under section 40(a)(ia) of the Act. 13. The Ld. A.R. for the assessee submitted that compensation paid to Mr. SS Mohla is one time, full and final settlement which was paid as per the settlement before Hon'ble Delhi High Court and also such payment is made for the purpose of restraining Mr. SS Mohla from sharing any confidential document, information, business and trade secret of the assessee with any competitor or third party. The assessee further contended that nowhere in the said agreement it is stated that the payment made to Mr. SS Mohla is in lieu of commission for securing orders, therefore, the question of deduction of TDS does not arise. In this regard, the Ld, A.R. relied upon certain judicial precedents, i....
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....The said deposits consist of earnest money given to customers, distributors and government agencies which were written off as irrecoverable. The AO disallowed write off of bad debts on the ground that the conditions prescribed under section 36(2) were not satisfied as the said deposits were never a trading deposits but balancing items, hence, deduction could not be allowed under section 36(1)(vii) of the Act. The Ld. CIT(A) partly allowed the claim of the assessee by holding that though the write off of deposits would not fall within the purview of section 36(1)(vii), it would be allowable as business loss under section 28 of the Act, provided the deposits were trade advances. Accordingly, directed the AO to verify the nature of advances and allow only trade advances. 16. The Ld. A.R. submitted that placing deposits with customers, distributors and government agencies at the time of submitting tenders was a business requirement and such deposits are incurred wholly and exclusively for the purpose of business. The Ld. A.R. further submitted that the said write off is allowable under section 37(1) of the Act, being revenue in nature and incurred wholly and exclusively for the purp....
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....in the nature of trade advances or not. Hence, we are inclined to uphold the findings of the Ld. CIT(A) and reject the ground raised by the assessee. 18. The next issue that came up for consideration is disallowance of irrecoverable advances of Rs. 51,45,651/-. The assessee has claimed a deduction of write off of advances which includes debit balance outstanding in DEPB provision account and amount receivable for duty drawback for recovery from Vietnam exports as the same were irrecoverable. The AO disallowed written off of irrecoverable advances on the ground that such advances were not bad debts of customers and hence could not be allowed under section 36(1)(vii) of the Act. The AO further observed that the assessee failed to show cause how these advances were irrecoverable. It is the contention of the assessee that export incentive in the form of duty entitlement of pass book accrued at the time of exports are offered to tax at the time of export and corresponding amount is shown under receivable as advance due. The assessee further contended that the objective of this scheme was to offset the incidence of customs duty by giving credit for tax is paid. To claim the set off of....
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....iate concern on the ground that the payments were excessive and unreasonable. It is the contention of the assessee that for disallowance to be made under section 40A(2)(b) of the Act, the AO first ought to have formed an opinion that the payment was excessive in nature and then to compare with prevailing market rates. The AO has disallowed 50% of amount paid to associate concern without comparing such payments to the prevailing market rates. 21. Having heard both the sides and considered material on record, we find force in the arguments of the assessee for the reason that the assessee has furnished necessary details of payment made to its subsidiary company for rendering services. The AO has made adhoc disallowance of 50% without any reference to comparable cases to come to the conclusion that payments made by the assessee are excessive and unreasonable. Hence, we direct the AO to delete additions made towards disallowance of payments made under section 40(2)(b) of the Income Tax Act, 1961. 22. The next issue that came up for consideration is disallowance of unrealized foreign exchange pertaining to trade receivables. The assessee claimed a total foreign exchange loss of Rs.....
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....no merits in the ground taken by the assessee and accordingly we reject ground taken by the assessee. 25. The issue raised in ground No.11 is with regard to non adjudication of additional ground by Ld. CIT(A) as filed by the assessee relating to the allowance of claim of Rs. 2,35,60,494/- which was wrongly disallowed by the assessee while filing the return of income under section 40(a) of the Act. 26. The facts in brief are that the assessee while computing the total income has wrongly disallowed a sum of Rs. 2,35,60,494/- under section 40(a) of the Act on the belief that tax at source has not been deducted on the same as per the provision of the Act. Subsequently in A.Y. 2009-10 it was realized by the assessee that TDS was not applicable on the said expenses and accordingly the same were claimed in the return of income for A.Y. 2009-10. However, the AO during the assessment proceedings did not allow the deduction of the said sum on the ground that the same pertains to the earlier year and not admissible during the year. 27. In the appellate proceedings, the assessee filed the additional ground vide letter dated 12.07.2013 before the first appellate authority requesting fo....
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.... 4.1 The AO had discussed the issue in para 6 of the assessment order. The appellant is engaged in the business of manufacture and marketing of pesticides and insecticides which are toxic in nature and hence it is mandatory to get products registered with Central Insecticides Board & Regulatory Committee of India. As a part of registration process, the product trials are required to be conducted to check whether the product could be used for certain other crops or seeds. The trials are conducted with approved research institutes. The AO was of the view that the new product trial run expenses gives enduring benefit and it enables the appellant company to enter into a new market and hence it was of capital in nature. The expenses are specifically allowed u/s.35 and hence, the same cannot be allowed u/s.37 as it was of capital in nature. 4.2 The submission of the Product Trial Process is as follows: 2.3.1 "Modus operandi of the Product Trial Process is as follows: 2.3.1.1 Since the Appellant is in the business of manufacturing and marketing pesticides and insecticides which are toxic in nature, the Appellant carries out certain in-house checks and an....
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....esses under taken by the Appellant and the research associations and institutions is detailed as under for ease of understanding: BCSL identifies products (from various products developed by BCS AG) for further development, registration and sale in India Internal development analysis and checking is carried out by BCSL in the field on very small-scale for ascertaining the product suitability to Indian agro-climatic conditions The results are discussed in internal meetings and products are given 'go-ahead' for initiating the product registration process Product quality, bio-efficacy and toxicology analysis with the approved research association/university/college 1) Bio-efficacy & Residues-Field analysis at State Agricultural University ("SAUs"), Government Institutes & Private Laboratories 2) Toxicology analysis in Private Laboratories 3) Chemistry & Packaging at Quality Assurance & Development Department Laboratories ("QADDL") of BCSL Preparation of "Registration Dossier" Product quality, bio-efficacy and toxicology analysis reports received from research associations/university/colleges/other institutions is analysed ....
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....xisting line of assessee's business, then the expenditure incurred on expansion and diversification of the existing business is allowable as a deduction u/s 37(1) of the Act. This view has been re-iterated by the Punjab & Haryana High Court in the case of CIT vs. Avon Cycles Limited (303 ITR 345). 2.3.6.4 The Appellant has incurred the said expenses solely for the purpose of carrying on and for furtherance of its business activities arid thus, this expenditure ought to be allowed as a deduction. 2.3.3 There is no enduring benefit as a result of product trial expenses 2.3.7.1 It is re-iterated that the Appellant is mandatorily required to get its products registered with the Regulatory Authority before the products can be commercially marketed in India. As a pan of this registration process, various product quality, bioefficacy and toxicology analysis are required to he conducted. Thus, such expenditure is statutorily necessary for Appellant in order to carry on its business activities. Hence, these expenses ought to be allowed as a deduction under section 3 7(1) of the Act. By incurring expenditure on testing of existing line of product....
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....s, would be allowed as a deduction. 2.3.7.7 Accordingly, considering the facts of the case and the judicial pronouncements discussed above, we wish to submit that the expenses incurred by the Appellant on product trial, are revenue in nature and as such allowable under section 37(1) of the Act. 2.3.7.8 Further we would like to submit that the Learned AO, in his assessment order (refer 6th para on page 6), has himself stated that the expenditure on product trials aggregating of Rs. 2,24,49,087 is not covered under section 35 of the Act. Accordingly, where the expenses do not fall within the specific category i.e. section 35 of the Act, the same needs to be allowed as "revenue" expenditure under section 37(1) of the Act. 23.4 We wish to submit that the above stand of the Appellant has been confirmed by the DRP during AY 2007-08 proceedings. For AY 2007-08, the Appellant's facts of the case were identical to the facts of the case for the year under consideration. After duly analysing and verifying the facts of the case for AY 2007-08, the Hon'ble DRP have accepted the contentions of Appellant to allow product trial expenses paid to associations / institu....
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....llant by enabling it to register the product and commercially manufacture and sell the same, it is submitted that such payments could fall within the meaning of "business or commercial right" and thus, eligible for depreciation under section 32 of the Act. 2.3.8.6 Reliance is placed on the following case laws where the meaning of "business and commercial right" has been elaborated: * Techno Shares & Stocks Ltd. & Ors. vs. CIT [327 ITR 323] (SC) * Skyline Caterers (P) Ltd. vs. ITO [118 TTJ 344] (Mumbai Tribunal) * Kotak Forex Brokerage Ltd. vs. ACIT [33 SOT 237] (Mumbai Tribunal) * ACIT vs. American Express Services India Ltd. [ITA 74/2003 ITA 75/2003 ITA 653/2005] (Mumbai Tribunal) * ITO vs Medicorp Technologies India Ltd. [122 TTJ 394] (Chennai Tribunal) * ACIT vs Real Image Tech. (P) Ltd. [120 TTJ 983] (Chennai Tribunal) * Ashoka Info (P) Ltd. vs. ACIT [123 TTJ 77] (Pune Tribunal)." 4.3 I have carefully considered the submissions of the appellant, the impugned assessment order. The product trial run expenditures are incurred by the appellant towards manufacture of a new product in the existing line o....
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....ing only the testing the toxicity and the suitability for application, in the Indian market and expenditure also includes contributions/payments made to approved scientific institutions, CRP is of the view that the expenditure incurred is revenue in nature. All the four decisions cited above fully support such view. The expenditure incurred is allowable as deduction either under section 35(1)(ii) to the extent the relevant conditions are fulfilled and the balance as deduction u/s. 37. Hence, the assessee's claim for deduction is approved. The proposed addition should be dropped/deleted." 4.5 In view of the clear finding given by the Hon'ble DRP, I am of the view that the expenditure which is not covered u/s.35(1)(ii) needs to be allowed u/s.37 and hence, the addition made by the AO is hereby deleted. This ground of appeal is allowed". 31. The Ld. D.R. submitted that the Ld. CIT(A) was erred in directing the AO to consider the additional claim of weighted deduction on account of product trial expenses without examining fulfillment of condition for the same. The Ld. D.R. further submitted that Ld. CIT(A) was not justified in holding that the product trial expenses....