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Income Tax Appellate Tribunal, DELHI ‘D’ BENCH,
Before: SHRI N.K. BILLAIYA, & SHRI KULDIP SINGH
PER N.K. BILLAIYA, ACCOUNTANT MEMBER,
This appeal by the assessee is preferred against the order of the Commissioner of Income Tax [Appeals]-III, New Delhi dated 30.12.2008 pertaining to A.Y 2004-05.
The substantive grievances of the assessee read as under:
The CIT (Appeals) has erred in holding that the appellant is not 1) entitled to claim an enhanced relief OR deduction in the proceedings u/s 153A of the IT Act. The CIT (Appeals) has erred in holding that the provisions of 2) Section 153A of the IT Act are for the benefit of Revenue and not for the benefit of tax payers. Such conclusions are opposed to the provisions contained in Section 153A of the IT Act. It is contended that the sum of Rs.8,44,18,024/- representing 3) sublicense fees pertains to the Corporate Unit. The findings of lower authorities that such sub-licensing income of Rs.8,44,18,024/- pertains to Baddi Unit is opposed to evidences on record. The lower authorities have erred in holding that the depreciation 4) of Rs. 15,00,000/- on technical know-how acquired pertains to and is referable to Baddi Unit. Such findings are opposed to evidences on record. Such conclusion of CIT (Appeals) is erroneous inasmuch as that in subsequent year the CIT (Appeals) holds that depreciation is allowable to Baddi Unit, Jammu Unit and Corporate Office. It is contended that the proportionate administrative expenses of 5) Rs.42,74,051/- is referable to Corporate Office only. The finding of the lower authorities that such expenses of Rs.42,74,051/- pertains to Baddi Unit is opposed to evidences on record. It is contended that the interest income of Rs.8,58,417/- is 6) eligible for relief u/s 80-IC of the IT Act. 7) The provisions of Section 234B of the IT Act are not applicable.”
Vide application dated 12.12.18, the assessee has also raised an additional ground and the request reads as under:
“The permission is hereby craved to raise the following specific additional ground:
“That the Assessing Officer, while computing the deduction u/s 80-IB/80-IC of the Income-tax Act, 1961, ought to have excluded the income from licensing of technical know-how, i.e. royalty not on the gross basis but on net basis after adjusting the royalty paid for that also.”
The aforesaid additional ground does not require the elaboration of any new facts other than the facts already available on record. The fact of the case is that the assessee had acquired technical know-how for the manufacture of Slider Zipper assembly and a Zipper Slider assembly with diaphragm for flexible packages products from Mr. Ashok Chaturvedi vide Agreement dated 21st July 2003.
As per clause No. 2.2 of the Agreement, the appellant was permitted sub-license know-how and technical knowledge to other parties in India or abroad as per prior consent and consideration for this right to license. Later on, vide Supplementary Agreement dated 25th July 2003, Mr. Ashok Chaturvedi permitted the appellant to sublicense such technical know-how to other parties subject to a minimum payment of Rs.25 lakhs per month.
Thereafter, the appellant shared such technical know-how with other parties, i.e. M/s Flex Industries Ltd., NOIDA and M/s Golden Dirham, UAE. During the year under consideration, the Assessing Officer, while computing the deduction u/s 80-IB/80-IC of the IT Act, observed that the sub-licensing fee received by the appellant from M/s Flex Industries Ltd. and M/s Golden Dirham, UAE is not an income derived from the manufacturing activity of the industrial undertaking set up at Baddi and Jammu. Hence not eligible for deduction u/s 80- IB/80- IC of the IT Act. But the royalty paid by the appellant to Mr. Ashok Chaturvedi is directly linked with the manufacturing activity undertaken at Baddi and/or Jammu units and then allocated payment of royalty under the Agreement to the Baddi and Jammu units in proportion to their respective turnover.
In other words, while computing the eligible profits for the purpose of Section 80-IB and 80-IC of the IT Act, the Assessing Officer excluded the income as received by the appellant on account of sharing of the technical know-how by way of sub-licensing has been excluded on a gross income though under the law it is only the net income which is required to be excluded. In other words, the Assessing Officer ought to have excluded the royalty income net basis, i.e. after reducing the amount received on account of sharing of such technical know-how from the gross payment and then the residual figure should be allocated to the respective units in proportion to their turnover. For this purpose, the assessee relied upon the judgment of Gujarat High Court in CIT vs. Nirma Ltd. in 367 ITR 12.”
Before proceeding further, let us understand the facts of the case as emanating from the records. The return u/s 139(1) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act'. was filed on 31.10.2004 which was revised on 31.03.2006. A search action u/s 132 of the Act took place on 23.2.2006 which means that on the date of search, the revised return filed on 31.03.2006 did not attain finality as the time limit for taking the return for scrutiny assessment u/s 143(2) of the Act was available with the AO.
Pursuant to the notice u/s 153A of the Act, the assessee filed its return of income. The assessee declared income of Rs. 6,76,43,647/-.
While scrutinising the return of income, the AO noticed that the original return filed u/s 139 of the Act on 31.10.2004 was at NIL income after claiming deduction u/s 80IC of the Act amounting to Rs. 9,13,69,859/-. Tax was paid on the book profit u/s 115JB of the Act. The AO further noticed that the revised return filed on 31.03.2006 was at an income of Rs. 7,67,16,085/- after claiming deduction 80IC amounting to Rs. 1,46,53,774/-. The AO found that the revised income was computed by the assessee after excluding the income of Rs. 844,18,024/- received by him on account of licence fees and the same was excluded from the deduction claimed u/s 80IC of the Act. The AO further found that in the return filed u/s 153A of the Act, the assessee has declared income of Rs. 6,76,43,647/- after claiming deduction u/s 80IC amounting to Rs. 2,37,26,211/-. According to the AO, the assessee has increased the amount of deduction claimed u/s 80IC over the earlier figure of Rs. 1,46,53,774/-. The AO was of the firm belief that by doing so, the assessee has manipulated its books of account. The AO was further of the opinion that the assessee again filed a return u/s 153A of the Act showing lesser income than that declared in the return filed u/s 139 of the Act.
The first issue needs to be addressed is can the assessee do so what he has done and which is not in accordance with the law as per the AO.
The relevant provisions of section 153A of the Act read as under:
“153A. (1) Notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, in the case of a person where a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A after the 31st day of May, 2003, the Assessing Officer shall— (a) issue notice to such person requiring him to furnish within such period, as may be specified in the notice, the return of income in respect of each assessment year falling within six assessment years referred to in clause (b), in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139;
(b) assess or reassess the total income of six assessment years immediately preceding the assessment year relevant to the previous year in which such search is conducted or requisition is made : Provided that the Assessing Officer shall assess or reassess the total income in respect of each assessment year falling within such six assessment years: Provided further that assessment or reassessment, if any, relating to any assessment year falling within the period of six assessment years referred to in this sub-section pending on the date of initiation of the search under section 132 or making of requisition under section 132A, as the case may be, shall abate.”
It can be seen from the above extracted provisions of section 153A of the Act that pending assessments on the date of search shall get abated. As mentioned elsewhere, since the period of limitation for issuing notice u/s 143(2) of the Act did not expire, the revised return filed on 31.03.2006 did not attain finality and has to be considered as pending assessment which got abated.
This means that the return filed pursuant to notice u/s 153A of the Act has to be considered as a fresh return and the assessee is free to return income as per provisions of law and the same has nothing to do with any income returned previously u/s 139 of the Act. This means that the assessee is free to claim any new deduction which he is legally entitled for and compute its taxable income accordingly. To this extent, the action of the lower authorities is unlawful and is accordingly set aside.
The next bone of contention relates to the exclusion of income received on account of licence fees from the deduction earlier claimed u/s 80IC of the Act along with the exclusion of the expenditure claimed on account of foreign exchange fluctuation loss, tours and travelling expenses, deprecation as intangible assets and administrative expenses.
Facts relating to this issue relates to the Memorandum of Agreement between Shri Ashok Chaturvedi and the assessee made on 21/07/2003 which is exhibited at pages 92 to 97 of the paper book wherein it has been mentioned that Shri Ashok Chaturvedi has gained substantial extensive experience in manufacturing of flexible packaging and its related activities and is developing /inventing new technical know-how pertaining to product and is willing and desirous to licence and transfer the technology and know-how for commercial exploitation to the assessee. The consideration was fixed at lumpsum one-time payment of Rs. 60 lakhs by issue and allotment of Rs. 6 lakhs equity shares of Rs. 10 each in the assessee company and royalty payment @ 2.50 per meter of the product produced and accounted for each month.
Supplementary agreement was executed on 25.07.2003 by which it was agreed that Shri Ashok Chaturvedi would give permission to the assessee to sub-licence know-how and technical knowledge to the parties in India and abroad for which the assessee agreed to pay minimum royalty of Rs. 25 lakhs. Pursuant to this supplementary agreement, the assessee received licence fee from Golden Dirham, UAE Rs. 2,73,21,250/- and Flexi Industries Ltd Rs. 5,70,96,774/- totalling to Rs. 8,44,18,024/-. In its return filed u/s 139, the assessee had claimed the deduction u/s 80IC of the Act on this sub-licence income also. Realising that it is not entitled for deduction u/s 80IC of the Act on this income, in the return filed u/s 153A of the Act, the assessee excluded this income from the claim of deduction u/s 80IC of the Act. The assessee further excluded depreciation on intangible assets at Rs. 15 lakhs, allocable administrative expenses at Rs. 42,74,051/- totalling to Rs. 57,71,051/- resulting into the exclusion of net sub-licence income at Rs. 7,86,43,973/-.
Though the AO did not take any adverse view in so far as exclusion of income from sub-licencing fee from the claim of deduction u/s 80IC of the Act, but dismissed the claim of royalty expenditure as appropriated by the assessee.
In our understanding of the facts, as discussed hereinabove, we are of the considered opinion that the assessee is very much entitled to deduction of the expenses which have direct nexus with earning of sub licence fees meaning thereby that the assessee is entitled for exclusion of income from licencing of technical know how not on the gross basis but on net basis after adjusting royalty expenses which have direct nexus with the income from sub licence fees.
A perusal of the assessment order shows that the AO did not allow claim of netting off of sub licence fees because the assessee in its return filed u/s 139 of the Act had shown the licence fees received from the two parties mentioned elsewhere on gross basis. Further, the AO did not allow the claim of royalty payment to Shri Ashok Chaturvedi since in the profit and loss account filed with the return of income u/s 139 of the Act the assessee had claimed Rs. 2,90,57,352/- which was debited to the profit and loss account. However, while scrutinising the return filed u/s 153A of the Act, only Rs. 40,57,352/- has been claimed to have been incurred in baddi unit while remaining Rs. 2.50 crores has been shifted to corporate unit and the AO has held that there are no two units and baddi unit and corporate unit are one and the same. The AO further found that the depreciation of Rs. 15 lakhs has been claimed on lumpsum one-time payment of Rs. 60 lakhs for technical know-how and administrative expenses of Rs. 42,74,051/- has been claimed as deduction from sub-licence fee for enhancing the amount of deduction u/s 80IC of the Act over the amount that had already been claimed in the revised return u/s 139 of the Act.
We find that the AO is simply carried away by treating the return filed u/ss 139 and 153A of the Act as separate returns for deciding the claim of the assessee.
As mentioned elsewhere, since the return filed before the date of search did not attain finality, return filed u/s 153A of the Act has to be treated as having been filed for the first time and claim of deduction has to be considered only and only on the basis of income computed for filing return u/s 153A of the Act. The action of the AO/CIT(A) is not only erroneous but also against the relevant provisions of the law.
Considering the facts of the case in hand in totality as discussed hereinabove, we set aside the findings of the CIT(A) and allow the appeal of the assessee including the additional ground raised by it.
In the result, the appeal of the assessee in is allowed.
The order is pronounced in the open court on 12.07.2018.