TaxTMI 
TaxTMI 
2025 (4) TMI 2121
X X X X Extracts X X X X
X X X X Extracts X X X X
....dun and Saswad which are eligible for deduction under section 80IB/80IC of the Income Tax Act, 1961 (the Act). The facts pertaining to AY 2004-05 is that the assessee filed the return of income for AY 2004-05 on 01.11.2004 declaring a total income of Rs. 9,92,16,326/-. The assessee filed the revised return on 04.10.2006 declaring the total income of Rs. 13,22,38,635/- under the normal provisions of the Act and a book profit of Rs. 62,69,31,436/- under section 115JB of the Act. The case was selected for scrutiny and statutory notices were duly served on the assessee. The Assessing Officer (AO) made various disallowances/ additions against which the assessee preferred further appeal before the CIT(A). The CIT(A) gave partial relief to the assessee and both the assessee and the revenue are in appeal against the order of the CIT(A). The AO made similar additions for AY 2005-06 which are confirmed by the CIT(A). The assessee is in appeal against the order of the CIT(A) before us. 3. The issues contended by the assessee through various grounds for AY 200405 and AY 2005-06 are as tabulated. Issue AY 2004-05 AY 2005-06 Disallowance of Recreational Expenses Ground No.1 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted by the assessee during assessment proceedings. We observe from the record that Assessing Officer followed similar pattern of disallowance from the preceding assessment years and also Ld. CIT(A) has followed the same by restricting the disallowance @5% relying on the order of preceding assessment year. It is rightly brought to our notice by the Ld.AR of the assessee that in the preceding assessment year there was a specific section under section 37(2) of the Act to disallow the entertainment expenditures incurred by the assessee. Since section 37(2) was omitted from the A.Y. 1998-99, the expenditure on the welfare of the employees is recognized as an allowable expenditure. Therefore, the expenses incurred by the assessee on the welfare of the employees are allowed as expenditure. Since the expenditure incurred are relating to lunch, refreshment, tea, coffee etc., which was also confirmed by the Assessing Officer, therefore, this expenditure is purely relating to refreshment expenditure incurred by the assessee for the benefit of the employees. Therefore, in our view, this expenditure is incurred wholly for the purpose business and Assessing Officer cannot resort to disallow cert....
X X X X Extracts X X X X
X X X X Extracts X X X X
....AO is deleted." 9. The facts for the year under consideration are identical and that the revenue did not bring any new material on record for us to take a different view. Therefore respectfully following the above decision, we direct the AO to delete the disallowance made towards Miscellaneous Expenditure. Depreciation on Non-compete Fees 10. The assessee has acquired Trademark 'Meal Maker' from Plastomech during the Financial Year relevant to AY 2003-04. Along with the purchase of Trademark the assessee has entered into a non-compete agreement with M/s Sonic Biochem Extractions Pvt. Ltd. (Sonic Biochem) for a period of 20 years since the Trade Mark was earlier assigned by Plastomech to Sonic Biochem. The assessee in this regard made a payment of Rs. 1,55,66,250/- to Sonic Biochem towards non-compete fee. The assessee in the books of accounts capitalized the said amount as intangible asset and claimed deprecation on the same @ 25%. The AO while completing the assessment for AY 2003-04 held that the amount paid towards non-compete fees cannot be treated as intangible asset and therefore depreciation cannot be allowed under section 32(1)(ii) of the Act. However, the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e agreement with Sonic Biochem to restrict Sonic Biochem from using the Trademark. As part of the agreement the assessee has paid a sum of Rs. 1,55,66,250/-. The assessee in AY 2003-04 capitalized the said amount and claimed depreciation at 25%. The AO disallowed the depreciation in AY 2003-04 for the reason that non-compete fee does not fall within the meaning of intangible asset as given in section 32(1)(ii) of the Act and that the assessee cannot claim depreciation on the same. The AO however allowed 5% of the amount capitalized as a deduction. Therefore, the issue for our consideration is whether the non-compete fee will fall within the definition of intangible asset qualified for depreciation under section 32 of the Act. In this regard we notice that the Hon'ble Bombay High Court in the case of Piramal Glass Ltd. (supra) has considered a similar question of law where it has been held that "3. Question No. (a) noted above pertains to the decision of the Tribunal to grant depreciation on the Assessee's payment of non-compete fees. According to the Revenue, this being an intangible asset, no depreciation under Section 32 of the Income Tax Act, 1961 ('the Act&....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bserved that on perusal of the meaning of the categories of specific intangible assets referred to in section 32(1)(ii) of the Act preceding the term "business or commercial rights of similar nature" it is seen that intangible assets are not of the same kind and are clearly distinct from one another. The legislature thus did not intend to provide for depreciation only in respect of the specified intangible assets but also to other categories of intangible assets which may not be possible to exhaustively enumerate. It was concluded that the assessee who had acquired commercial rights to sell products under the trade name and through the network created by the seller for sale in India were entitled to deprecation. In the present case, Mr.Patel was erstwhile partner of the assessee. The assessee had made payments to him to ward off competence and to protect its existing business. Mr.Patel, in turn, had agreed not to solicit contract or seek business from or to a person whose business relationship is with the assessee. Mr. Patel would not solicit directly or indirectly any employee of the assessee. He would not disclose any confidential information which would include the past....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of section 80IA, income has to be derived from the eligible unit, that means the income has to be determined on the basis of revenue generated by the eligible unit and expenses incurred in the specific eligible unit and no other outside cost to be included unless there is direct nexus to it. In the given case, the assessee has already submitted stand alone revised profit and loss account to demonstrate that the eligible unit has already absorbed all the relevant expenses like manufacturing, marketing and relevant finance cost. The AO tries to allocate the general corporate expenses which has no direct nexus to the operation of the eligible units. Therefore, we direct the Assessing Officer delete the allocation of corporate office expenses and depreciation. Accordingly, the ground raised by the assessee is allowed." 17. Respectfully following the above decision of the Co-ordinate Bench we direct the AO to delete the allocation made towards corporate office expenses and head office depreciation. Allocation of finance cost to undertakings eligible for deduction under section 80IB 18. During the year under consideration the assessee has incurred total finance charges of Rs. 2,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....appeal before the Bench on this issue. 6.2) Ld. AR of the appellant company has argued that these two undertakings were generating cash surplus month after month and they have not utilised any part of the dealership deposits, in fact, these two undertakings are providing funds to the head office and not seeking funds from the head office and hence deduction u/s. 80IA should not be restricted as mentioned by the Ld. AO in the assessment order. The Ld. AR of the appellant has mentioned that this issue is covered in its favour by the order of Hon'ble ITAT in earlier year vide paragraph 28 to 32 at pages 22 to 26. Hence, it was pleaded that the addition made by the Ld. AO should be deleted. 6.3) The Ld. DR has supported the orders of the Ld. AO and the Ld. CIT(A). 6.4) After hearing both sides, it is decided to respectfully follow the order of the ITAT of the earlier year in principle in this year also. But, the Ld. AO is directed to verify these units are generating surplus in this year also and if so, the order of Hon'ble ITAT of earlier year had to be followed by him. Accordingly, Ld. AO may take a decision based on facts." 20. Respectfully foll....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Ld. CIT(A) should be deleted. 5.3) Ld. DR relied on the orders of the lower authorities. 5.4) After hearing both sides, it was decided to follow decision of Hon'ble ITAT in appellant's own case for A.Y. 1995-96 in principle, but the Ld. AO is directed to see whether in these two units, only parachute oil is manufactured and if the R&D expenditure claimed by the appellant does not relate to Parachute oil manufacturing then appellant would succeed in his argument. After verifying the factual position, Ld. AO is directed to take decision accordingly." 23. The facts for the year under consideration being identical we remit the issue back to the AO respectfully following the above decision of the coordinate bench with similar directions. It is ordered accordingly. Allocation of Foreign Travelling Expenses 24. The AO during the course of hearing allocated the Foreign Travel Expenses to the tune of Rs. 12,57,998/- to the Goa Unit for the reason that the Goa Unit has made exports for an amount of Rs. 7,30,53,572/-. The ld. AR in this regard submitted that a similar addition was made by the AO during the AY 1999-2000 and that the CIT(A) has deleted the sai....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eration cannot be sustained. 26. We heard the parties and perused the material on record. From the observations of the CIT(A) for AY 1999-2000 as extracted hereinabove, we notice that the revenue has accepted the claim of the assessee that every item of expenses is tracked business and service division-wise and that allocation is made on actual amount spent. For the year under consideration we notice that the assessee has already allocated a sum of Rs. 19,95,421/- incurred on foreign travel expenses to the eligible unit. The AO has made further allocation for the reason that the ratio of export turnover made by the eligible unit as compared to the total export turnover is much more than the amount allocated and accordingly made the additional allocation of Rs. 12,57,998/-. In our considered view making allocation of foreign expenses merely for the reason that eligible unit has made exports cannot be accepted more so when the foreign travel expenses actually incurred by the undertaking is already allocated to the eligible unit. The AO other than taking the proportion of export turnover of the undertaking to the total export turnover of the assessee did not bring any other factual....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ht to be made under section 80IA(9) r.w.s. 80IB(13). We notice that a similar issue has been considered by the Co-ordinate Bench in assessee's own case for AY 1999-2000 where it has been held that "8.4) After hearing both sides, it is seen that the Ld. AO has not given any reasoning for reducing deduction claimed u/s. 80HHC of the Act. Here, the facts are not very clear. The Ld. AO is directed to see facts and figures submitted by the appellant company in this connection and follow the decision of Hon'ble Bombay High Court in the case of Associated Capsules (P) Ltd. (supra) as mentioned above." 30. Respectfully following the above decision of the Co-ordinate Bench we remit the issue back to the AO with a similar direction. It is ordered accordingly. Primary Adjustment in respect of guarantee commission 31. The AO noticed that the assessee in the Transfer Pricing Report furnished under section 92E relating to International Transaction entered by the assessee with its Associated Enterprises (AE) that the assessee has not charged commission on guarantee given to its AE in Bangladesh. The AO based on the T.P. Report filed by the assessee for AY 2006-07 made an....