TaxTMI 
TaxTMI 
2021 (9) TMI 1432
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.... Assessment Year 2010-11. On 23.10.2012 the assessment has been referred to the Transfer Pricing Officer-1, Kochi under Section 92CA of the Income Tax Act, 1961 (for short 'the Act'). On 29.01.2014, the Joint Director of Income Tax, Transfer Pricing Officer-1, Kochi, made the order under Section 92CA(3) of the Act. The Assessing Officer through Annexure-B draft assessment order dated 28.03.2014 proposed to finalize the income tax return of the assessee assessed total income as Rs.481,78,02,530/-. The assessee raised objections to the draft assessment order dated 28.03.2014. The issues were referred to Dispute Resolution Panel (DRP), Bangalore, for decision and direction in terms of Section 144C of the Act. The DRP, through Annexure-C dated 26.12.2014, issued directions under Section 144C(5) of the Act to the A.O. The Assessing Officer, through Annexure-D order dated 18.02.2015, finalized the assessment for the Assessment Year 2010-11, determining the total income of the assessee as Rs.458,92,01,660/-. The assessee, aggrieved by the order in Annexure-D dated 18.02.2015, filed ITA No.223/Coch/2015 before the Income Tax Appellate Tribunal (for short 'the Tribunal'), Co....
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....er for ascertaining the exact nature of the impugned expenditure and decision afresh? 1.2 Whether the Hon'ble ITAT, in the facts and circumstances of the case as well as in law, is right in holding without appreciating the fact that the assessee company had claimed loan processing fee and bank charges as forming part of expenditure incurred in connection with setting up of new unit at Chennai before coming to the conclusion that the above expenditure was administrative nature as contended by the assessee? 3.1 The assessee claims as revenue expenditure a sum of Rs.26,97,79,538/-. The assessee claims to have expended Rs.26,97,79,538/- as part of the expansion of its business activity in the process incurred as direct and indirect expenditure for setting up the new manufacturing plant at Chennai. The nature of expenditure during the setup period comprises expenditure incurred on salaries, travelling and the commercial expenditure met by the staff/consultants involved and engaged by the assessee in the capacity expansion of assessee's manufacturing capacity. The assessee claimed the said expenditure, as revenue expenditure, as the assessee intended to horizontally e....
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....city building. The effort of the assessee in establishing a new unit at Chennai is a horizontal expansion of the capacity building at a new location. Capitalization is required for the purpose of accounting standards and when it comes to the Income Tax Act, the expenditure is incurred as simple and revenue expenditure, to bring into existence a new plant. The Tribunal did not miss any of the important aspects in appreciating the claim of the assessee made as revenue expenditure. He relies on the judgments reported in Sakthi Sugars (supra), Jay Engineering Works Ltd, v. Commissioner of Income Tax (2009) 311 ITR 405 (Delhi), Commissioner of Income Tax v. Havells India Ltd. (2013) 352 ITR 376 (Delhi), Commissioner of Income Tax v. Relaxo Footwears Ltd (2007) 293 ITR 231 (Delhi)., and Deputy Commissioner of Income-Tax v. Core Health Care Ltd. (2008) 298 ITR 194 SC for demonstating the ratio of counts in treating the expenditure as revenue expenditure, prays for answering the questions in favour of the assessee and against the Revenue. 6. The substantial questions deal with the amount expended by the assessee towards preoperative expenses for establishing a plant, whether would const....
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....al cost of an asset has no relevancy in relation to Section 36(1)(iii). The proviso inserted in section 36(1)(iii) by the Finance Act, 2003, with effect from April 1,2004, will operate prospectively. Held accordingly, that the assessee was entitled to deduction under section 36(1)(iii) prior to its amendment by the Finance Act,2003, in relation to money borrowed for purchase of machinery even though the assessee had not used the machinery in the year of borrowing. Decision of the Gujarat High Court in Deputy CIT v Core Health Care Ltd. [2001]251 ITR 61 affirmed on this point. Held also, remanding the matters to the High Court, that the questions: (a) whether advertisement expenses incurred by the assessee to create a brand image with enduring benefit are allowable as revenue expenditure (b) whether the Tribunal had erred in granting deduction under Section 35D regarding short-term loan, in view of the Explanation to Section 35D(3) which refers only to long-term borrowings, and (c) whether the Tribunal had erred in directing deduction under Section 80HH and 80-I on the miscellaneous income of Rs.26,64,113 being income on sale of empty con....
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....ur consideration as well: ""34. From the above decisions the test for identifying an expenditure as to whether it is a revenue expenditure or capital expenditure can be stated as under (1) If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, it would be a capital expenditure. (2) If on the other hand, it is not made for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is a revenue expenditure. (3) For instance if the interest paid was in respect of the asset, which was acquired on an outright basis than it was intimately linked with the value of the asset. That determines the character of the expenditure and it was capital in nature. Keeping the about tests in mind, when we examine the case on hand, the various kinds of expenditures relating to the sum of 6,84,78,570/-, the details of which have been mentioned in paragraphs 19 and 20, disclose that all those expenditures were incurred in the relevant years for the purpose of manufacture of sugar in the respective factories with a view....
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....reasing the business of the assessee and, therefore, rightly treated and held as revenue expenditure by the Tribunal. The question, again, is not whether the assessee should be called upon to capitalise and claim depreciation; the question is whether the claim of the assessee conforms the deduction permissible under Section 37(1) of the Act. In the facts and circumstances of this case, we are of the view that the preoperative expenses amounting to Rs.26,97,79,538/- incurred by the assessee are revenue expenses, and are correctly so held by the Tribunal. The above view is fortified by a catena of decisions in favour of the assessee. We do not, as a matter of fact, see any reason distinguishable in the case on hand to accept the contest of the Revenue. For the above reasons and discussion, substantial question Nos.1, 1.1 and 1.2 are answered in favour of the assessee and against the Revenue. 7. Substantial Question No.2: "2. Whether the Hon'ble ITAT, in the facts and circumstances of the case as well as in law, is justified in directing to delete the addition of Rs.4,70,07,847/- being loan processing fee and bank charges claimed as revenue expenditure relating to s....
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....assessee. The said "commitment charges" was upfront payment. We have also examined the contract between IDBI and the assessee. In the case of Addl. CIT v. Akkamamba Textiles Ltd. [1997] 227 ITR 464, this court has held that com mission paid by the assessee to the banker and the insurance company was admissible deduction under section 37 of the Income-tax Act, 1961. To the same effect is the judgment of this court in the case CIT v. Sivakami Mills Ltd. [1997] 227 ITR 465. For the aforestated reasons, we answer question No. (1) in favour of the assessee and against the Department. We may clarify that both the above judgments allow deduction under section 37 of the 1961 Act and not under section 36(1)(iii) of the 1961 Act. In this case, the Tribunal has allowed the claim under section 37 and not only section 36(1)(iii), hence there is no infirmity therein. As regards question No. (2) it may be stated that the assessee established a phosphoric acid project as an extension to its present business activities and for that purpose obtained a foreign currency loan from IDBI which in turn was refinanced by COFACE subject to the assessee paying finance charges to COFACE which accordi....
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....ision, section 35(2AB) should be liberally interpreted and deduction allowed in view of Hon'ble Supreme Court decision in Bajaj Tempo Ltd. Reported in 62 Taxman 480 bereft of the prerequisite of a certificate of DSIR? 10. The circumstances relating to substantial question No.3 are that the assessee under Section 35(2AB) claimed weighted deduction amounting to Rs.5,79,01,415/-. The assessee could establish before the ITAT that it is entitled to claim the expenses, salaries etc. and the Tribunal disallowed the weighted deduction amounting to Rs.2,89,50,708/-. The assessee claims to have incurred the said expenses for utilising the services of an employee working in the subsidiary of the assessee and the salaries paid in this behalf to the personnel employed by the assessee. The ITAT accepted the claim of assessee under Section 35(2AB) in respect of Rs.3,89,00,000/- being salary paid to Peter Becker in charge of the All India facility at Limda (Gujarat). The assessee also claimed a further sum of Rs.1,89,00,000/- spent towards clinical trial activities for testing new tyres outside India. The A.O. in the draft assessment order noted that the amount has been incurred outside the....
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.... The expenses claimed on the trial runs are accepted. Weighted deduction amounting to 50% on the actual amount spent is also granted by expanding the scope and applicability of Section 35(2AB). The provision in Section 35(2AB) since being an incentive provision, the Tribunal could have done well, by firstly reading the section literally and applying the case pleaded by the assessee to the unambiguous expression in Sec.35(2AB). The claim of assessee for weighted deduction does not satisfy the basic requirements of Section 35(2AB). Therefore, the disallowance by the Assessing Officer is correct and legal, the view taken by the Tribunal, particularly, by placing reliance on Cadila case suffers from a serious infirmity in law. He prays for setting aside the view of the Tribunal by answering the question in favour of revenue. 10.2 Mr.Joseph Markos contends that the assessee has utilised the available in-house facilities and brought into existence a few next generation tyres. The assessee does not have a suitable track or facility to test the tyres developed at the R&D facility, Limda. The clinical trial/track expenses claimed by the assessee are for utilising the facility of assessee....
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....reads as follows: "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 things specified in the list of 11th schedule incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority then, there shall be allowed a deduction of a sum equal to [one and one half] times of expenditure so incurred. " 10.5 The assessee satisfies that it is engaged in the business of manufacture of an article or thing i.e. tyres and tyres are not included in the Eleventh schedule and now, the assessee claims expenditure on scientific research towards clinical trials for availing the facility of its subsidiary in Germany. The claim of assessee does not satisfy the 2nd and 3rd limbs of Section 35(2AB) i.e. expenditure of scientific research on in-house research and development facility. The expenditure clears to be more in the nature of revenue expenditure and the expenditure is also incurred at a facility not approved by the prescribed authority. 10.6 In o....
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....sessee that the same was incurred out of commercial expediency. 4.1 Whether the Hon'ble ITAT, in the facts and circumstances of the case and in law is correct in applying the judgment of the Hon'ble Supreme court in SA Builders reported in 288 ITR 01 to allow the above claim? 11. The assessee during the assessment year 2010-2011 sold its 100% shareholding in Apollo Tyres A.G., Switzerland (ATAG) to Apollo Tyres Cyrus Pvt.Ltd., (ATC). The assessee had shown a loss of Rs.4,07,24,151/- on sale of its share in ATAG in favour of ATC. The said amount is claimed as business expenditure and sale of shares is necessitated by business expediency. DRP examined the total circumstances surrounding the sale of assessee's interest in one subsidiary, in favour of another subsidiary and rejected the claim by recording a finding as follows: "11.6 It is also pertinent to point out that in submissions to ground no eighteen where the issue of interest charge on convertible loan given to the subsidiary ATAG has been contested the assessee has averred as follows: In this regard, it is respectfully submitted that the AE is principally an investment company/brand o....
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....e Tribunal hereunder: "25. We have heard the rival submissions. The appellant has submitted during the course of assessment proceedings, that the objective of ATAG was undertaking sales and marketing related activities for the brand of the appellant in Singapore. The said factual assertion has not been rebutted by the AO in the impugned assessment order. There is nothing on record to show that the said subsidiary company was doing any activity completely independent and unrelated to the activities carried out by the appellant company. Thus, the claim of the appellant that the investment was made for commercial purpose and not for purpose of accretion of investment cannot be rejected. The only thing that was required to be examined in the present case was whether the expenditure was made as a prudent business man for the purpose of business. Int he case of S.A.Builders v CIT, 288 ITR 1, the Hon'ble Supreme Court held as under: "The expression 'commercial expediency' is an expression of wide import and include such expenditure as a prudent business man incurs for the purpose of business. The expenditure may not have been incurred under any legal obligati....
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....xable income, is justified in treating everything as commercial expediency and allow the claim. Therefore, the decisions have been in a very abstract manner applied the case on hand. 11.4 Mr.Joseph Markos next contends that the Tribunal since is entitled to record a finding of fact, however, by applying the principles of law in an abstract way accepted the case of assessee that the commercial expediency is present in the case on hand, which has driven the assessee to sell its interest in one subsidiary in favour of another subsidiary and the reported judgments are fully applicable to the case on hand. Alternatively, without prejudice to the first argument, it is contended that this Court in its jurisdiction under Section 260A if is not convinced with the approach of the Tribunal, remand the matter and leave it open to the Tribunal to re-examine the issue. This Court avoids entertaining a detailed examination of the case of both the parties which may lead to this Court recording the findings of the fact for the first time. In other words the issue is remanded to the Tribunal for a decision afresh. 12. The Dispute Resolution Panel recorded that ATAG Subsidiary, undertaking mark....
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....f business expenditure, in such consideration this Court would be entering into a simple fact by re-examining the case of both sides for the first time. We are of the view that the Tribunal reconsiders this issue after taking note of the entire circumstances, the tenability of the claim and records such finding commensurate to the material on record. Thereafter party aggrieved, certainly can approach this Court under Section 260A. Having regard to the above consideration, the question is answered in favour of the Revenue and against the assessee wit, i.e., matter remitted to Tribunal for disposal in accordance with law. Question No.5 Whether the Hon'ble ITAT is factually correct in holding that since foreign exchange gain of Rs.4,72,34,591/- was offered by the assessee in assessment year 2011-2012, addition in A.Y.2010-11 will amount to double addition, when in fact the foreign exchange gain of Rs.4,72,34,591/- offered in A.Y. 2011-12 has been removed from A.Y.2011- 12 based on the direction of the Dispute Resolution Panel?. 13. Addition in assessment year 2010-11 will amount to double addition when in fact to foreign exchange gain of Rs.4,72,34,591/- offered in ....
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....ed the reasons recorded by the Tribunal in paragraph nos.29 to 31 of the order under appeal. The Tribunal, as a matter of fact, found in categorical terms, the error which was committed by the DRP/Assessing Officer. Now the revenue is commending the very same argument and such argument is untenable, unless and until the fallacy in the findings recorded by the Tribunal is established within the scope of Section 260A. The Revenue has not made up a ground for interfering with the findings recorded by the Tribunal. Suffice to note that the decision of the Supreme Court in Woodward Governor India P. Ltd. and ONGC are applicable to the case on hand. The correct proposition is applied and the Tribunal had recorded a finding in favour of the assessee. We do not, for brevity, propose to re-state the very reasons, we are in complete agreement in the order under appeal. On the contrary, the Revenue failed to make out a case warranting interference of this Court under Section 260A of the Act. We accept the findings recorded by the Tribunal. Hence Substantial question no.6 is answered in favour of the assessee and against the Revenue. Question no.7 Substantial Question No.7: ....
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....in favour of the Revenue and against the assessee. The entitlement of assessee for claim is not accepted on the ground that the assessee is required to claim the deduction in the year in which the expenses are incurred/services received and the claim made has to be considered in the applicable Assessment Year by the Department. Hence the question is answered in favour of revenue and the findings of the Tribunal are set aside. Question No.8 7. Whether on the facts and in the circumstances of the case, is the Tribunal right to delete the difference between the conversion rate of Rs.44.57/CHF and Rs.42.88/CHF?" 16. The Revenue though has raised the additional ground could not substantiate with. The ground refers to the direction issued by the Tribunal. The direction is preceded by reasons and they are self-explanatory. For immediate appreciation, we prefer to excerpt the reasons weighed with the Tribunal for partly allowing the claim of assessee under these heads: "42. The appellant had sold its equity holding in its wholly owned subsidiary Apollo Tyres AG to its associate enterprise namely Apollo Tyres (Cyprus) Pvt. Ltd for a consideration of CHF 2.26 million.....