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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: Shri Saktijit Dey & Shri G Manjunatha
O R D E R Per G Manjunatha, AM : This appeal filed by the assessee is directed against the order of the AO u/s 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 pursuant to directions of Dispute Resolution Panel and it pertains to assessment year 2006-07. The assessee has raised the following grounds of appeal:-
On the facts and in the circumstances of the case and in law the Learned DClT erred in disallowing an amount of Rs. 2,24,57,168 under section 14A,as per the directions of the Dispute Resolution Panel, while computing the income under section 11 5JB as well as under the provisions other than section 11 5JB. On the facts and in the circumstances of the case and in 2. law, the Learned DClT erred in holding that the provisions of section 14A of the Act are applicable to the Appellant, although no deduction was claimed under section 10A. Without prejudice to the above grounds of appeal and in the 3. alternative, the Learned DCIT erred in not appreciating that the provisions of section 14A does not apply to loss. Without prejudice to the above grounds of appeal and in the 4. alternative, the Learned DCIT erred in not appreciating that the amount of Rs.2,24,57,168 represented a loss of the unit at Chennai and section 14A does not apply to loss. On the facts and in the circumstances of the case and in 5. law, the Learned DClT erred in holding that the expenses incurred amounting to Rs.22,86,948 in respect of stamp duty and professional fees (Rs.12,74,100 + Rs.10,12,848) for setting up the STPI division at Chennai is capital in nature. On the facts and in the circumstances of the case and in 6. law, the Learned DClT erred in making a double disallowance of Rs.22,86,948 in respect of stamp duty and professional fees (Rs.12,74,100 + Rs.10,12,848) for setting up the STPI division at Chennai which already formed a part of the disallowance made under section 14A thereby not following the directions given by the Honorable Dispute Resolution Panel. 7. a) On the facts and in the circumstances of the case and in law, the Learned DCIT erred in disallowing an amount of Rs. 16,13,260 as per the provisions of section 40(a)(ia) of the Act. b) On the facts and in the circumstances of the case and in law, the Learned DCIT erred in disallowing, as per the directions of the Dispute Resolution Panel, expenses incurred on distribution of samples of Rs. 1,50,800 under the provisions of section 40(a)(ia). c)On the facts and in the circumstances of the case and in law, 7. the Honorable Dispute Resolution Panel erred in not giving any finding for the expenditure) amounting to Rs.8,77,051 (1,50,800+85, 800+88,896 +68,875 +4,82,740) representing payment towards hall hire charges, food, travelling and interview expenses
Without prejudice to the above grounds of appeal
, and in the alternative, the DCIT be directed to grant deduction in the year in which the tax is deducted and paid.
8. On the facts and in the circumstances of the case and in law, the learned DCIT erred in disallowing an amount of Rs.5,68,529 in respect of legal and professional fees u/s 40(a)(ia) although tax had been deducted at source thereon, thereby not following the directions of the Honorable Dispute Resolution Panel
9. On the facts and in the circumstances of the case and in law, the learned DCIT erred in disallowing u/s 40(a)(ia) an expense aggregating to Rs68,875 on hire of hall a though provisions of section 1941 were not applicable.
10. On the facts and in the circumstances of the case and in law, the learned DCIT erred in restricting the claim of set off of business loss to Rs. 4,27,10,713 as per the directions of the Dispute Resolution Panel as against Rs.10,51,00,000 claimed by the appellant in the return of income.
11. On the facts and in the circumstances of the case and in law, the Learned DCIT erred in treating the expenditure incurred on miscellaneous hardware expenses amounting to Rs. 8,61,215 as capital in nature and adding the same to the total income
12. Without prejudice to Ground No. 9 and in the alternative, the Learned DCIT erred in not granting depreciation on miscellaneous hardware expenses amounting to Rs. 8,61,215 held as capital in nature.
13. On the facts and in the circumstances of the case and in law the Learned DCIT erred in not reducing the provision for Fringe Benefit Tax amounting to Rs. 7,50,000 while computing book profit under section 115JB.
14. On the facts and in the circumstances of the case and in law the Learned DCIT erred in not granting credit of tax deducted at source amounting to Rs.63,80,046. 5.0n the facts and in the circumstances of the case and in law the Learned DCIT erred in not granting credit of advance tax paid aggregating to Rs.57,00,000.”
2. The brief facts of the case are that the assessee company, engaged in the business of trading in pharmaceutical products filed its return of income for the assessment year 2006-07 on 30-11-2006 declaring total
Nil after setting off of earlier losses under normal provisions of the Act and book profit of Rs.9,19,69,250 u/s 115JB of the Act. The case has been selected for scrutiny and notice u/s 143(2) and 142(1) of the Act were issued. In response to the said notices, the assessee filed various details, as called for by the AO from time to time. The AO has passed draft assessment order u/s 144C(1) r.w.s. 143(3) on 31-12-2009 proposing to assess total income of the assessee at Rs.9,75,83,390 and a copy of the same has been served on the assessee. In response to the same, the assessee company has filed its objections against the draft assessment order before the DRP-II, Mumbai. The DRP-II, Mumbai, vide its order u/s 144C(5) dated 27-09-2010 made a detailed discussion in its order and rejected grounds 4 & 6; however, in the proceedings under consideration, discussion is being made in respect of issues relating to relief allowed by the DRP. The AO has passed final assessment order u/s 143(3) r.w.s.
144C(13) on 28-10-2010 determining the total income at Rs.9,16,95,580 interalia making addition / disallowance towards disallowance u/s 14A, disallowance of capital expenditure, disallowance of expenditure u/s 40(a)(ia), disallowance of miscellaneous hardware expenses and additions u/s 92CA of the Income-tax Act, 1961. The AO also made adjustments towards book profit u/s 115JB towards disallowance u/s 14A. Aggrieved by the assessment order, the assessee is in appeal before us. 3. The first issue that came up for our consideration from grounds 1 to 4 is disallowance u/s 14A in respect of expenditure amounting to Rs.2,24,57,168 incurred for setting up STPI unit at Chennai holding it as inadmissible in terms of section 14A of the Act. The AO observed that since the auditor has quantified the disallowance to be made u/s 14A and the assessee has not offered any explanation, disallowed the same u/s 14A of the Act and also made adjustments of similar amount to the book profit computed u/s 115JB of the Income-tax Act, 1961. The Ld.AR for the assessee submitted that in the absence of any exempt income, there is no question of disallowance u/s 14A of the Act. The Ld.AR further submitted that during the year under consideration, the STPI unit at Chennai has not commenced its business operations and the assessee has not claimed any deduction u/s 10A of the Act. Therefore, the question of disallowance u/s 14A does not arise. In this regard he relied upon the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd vs CIT 94 CCH 2 (Del). The Ld.AR made an alternative submission inasmuch as the provisions of section 14A are not applicable to section 10A as the former provides for disallowance of expenditure incurred for earning exempt income whereas section 10A provides for deduction for income earned by eligible units.
Therefore, the AO was incorrect in disallowing expenditure by invoking provisions of section 14A of the Act. In this regard, he relied upon the decision of ITAT, Mumbai Bench in the case of Meditap Specialities Pvt Ltd vs ACIT 33 CCH 360. The Ld.AR further submitted that section 10A of the Act is a provision for deduction and not exemption provision, therefore, the AO was incorrect in disallowing expenditure incurred for setting up STPI unit at Chennai which is generating income which is deductible u/s 10A by invoking section 14A of the Income-tax Act, 1961 which provides for disallowance of expenditure incurred in relation to exempt income which does not form part of total income.
The Ld.DR, on the other hand, supported the orders of the AO to argue that the AO has rightly invoked section 14A to disallow expenditure incurred for setting up STPI unit as the income from STPI unit is tax exempt u/s 10A of the Act. Though the auditor had quantified disallowance to be made u/s 14A, the assessee has failed to disallow expenditure in its computation and hence, the AO was right in disallowing impugned expenditure and his order should be upheld.
We have heard both the parties, perused the material available on record and gone through the orders of authorities below. The AO disallowed expenditure incurred towards setting up of STPI unit at Chennai
14A of the Act. According to the AO, the tax auditor has quantified the expenditure to be disallowed u/s 14A towards expenditure incurred for setting up STPI unit at Chennai. It is the contention of the assessee that no disallowance can be made u/s 14A, when there is no exempt income. The assessee further contended that STPI unit at Chennai did not commence its activities during the year under consideration and the assessee has not claimed any deduction u/s 10A, therefore, the AO was erred in disallowing expenditure u/s 14A of the Act. We find force in the arguments of the assessee for the reason that the Hon’ble Delhi High Court in the case of Cheminvest Ltd vs CIT (supra) has observed that when there is no exempt income, disallowance of expenditure u/s 14A cannot be made. Therefore, we direct the AO to delete addition made towards expenditure incurred for setting up of STPI unit u/s 14A of the Act. We further direct the AO to delete adjustment made towards book profit computed u/s 115JB of the Income-tax Act, 1961. As a result, grounds raised by the assessee are allowed.
6. The next issue from ground 5 & 6 that came up for our consideration is disallowance of expenditure amounting to Rs.10,12,848 incurred in respect of legal and professional fees and Rs.12,74,100 in respect of stamp duty. The AO disallowed expenditure incurred towards legal and STPI unit on the ground that expenditure incurred is in the nature of capital expenditure. The AO disallowed the impugned expenditure on the ground that expenditure incurred for setting up of STPI unit which was going to provide working apparatus giving enduring benefit to the assessee. It is the contention of the assessee that professional expenditure were incurred for Oracle migration accounting and project control software for STPI division which is in the nature of revenue expenditure which does not give any enduring benefit to the assessee. The assessee has not created any new asset which would give enduring benefit but only changed the present software system into Oracle software. The assessee further contended that membership fees paid to STPI, a government of India undertaking according to the norms set up by STPI authorities are in the nature of recurring expenditure. The assessee further submitted that stamp duty incurred for registration of lease agreements is also in the nature of revenue expenditure as the assessee is not deriving any enduring benefit out of lease agreement. In this regard he relied upon the decision of Hon’ble Bombay High Court in the case of CIT vs Cinecita (P) Ltd 137 ITR 652 (Bom). Alternatively the assessee submitted that if the said expenditure is held to be capital in nature, depreciation ought to be allowed on the same.
Having heard both the sides and considered the materials available on record, we find that the expenditure incurred is in the nature of professional expenditure for Oracle migration and accounting software for STPI unit and annual membership fees paid to STPI, a government of India undertaking are in the nature of recurring expenditure which does not give any enduring benefit to the assessee. We further notice that stamp duty incurred for registration of lease agreement is also revenue expenditure irrespective of period of lease. This legal proposition is supported by the decision of Hon’ble Bombay High Court in the case of CIT vs Cinecita (P) Ltd (supra) wherein it was held that expenditure on registration fee, stamp duty and solicitor’s fee incurred in connection with registration of lease deed is revenue expenditure irrespective of period of lease. Therefore, we are of the view that the AO was erred in treating the expenditure as capital in nature. However, the Ld.AR for the assessee stated that the expenditure incurred towards legal and professional fees and stamp duty for registration of lease agreements is also disallowed u/s 14A in respect of expenditure incurred for setting up STPI unit at Chennai in addition to separate disallowance made by the AO. The AO has granted relief in the rectification order dated 10-03-2011. However, there is no clarity as to under which disallowance relief is granted. We find that the AO has made
STPI unit at Chennai u/s 14A and also made separate addition towards capital expenditure. Though relief is granted in the rectification order dated 10- 03-2011, there is no clarity on the issue as to whether the relief was allowed towards addition made u/s 14A or addition made under the head ‘legal and professional charges’. Therefore, we are of the view that the issue needs to be re-examined by the AO and hence, we set aside the issue to the file of the AO and direct him to give a finding as to whether relief is given towards addition made under the head ‘legal and professional charges’ or disallowance u/s 14A of the Act.
The next issue that came up for our consideration from ground 7 to 8 is disallowance of expenditure u/s 40(a)(ia) mounting to Rs.16,13,260 on account of non deduction of tax at source. The AO has disallowed various expenditure incurred by the assessee like professional fees, purchase of samples, hall hire charges and food charges for failure to deduct tax at source under respective provisions of the Act.
The Ld.AR for the assessee contended that though the AO has made addition towards various expenditure, rectified the mistakes vide rectification order dated 10th March, 2011 in respect of professional fees paid to M/s Kurien & Kurien for Rsw.5,25,000 and professional fees paid to M/s Dynamic Cargo Pvt Ltd for Rs.43,529. Insofar as other expenditure like purchase of samples, hire charges of hall and food charges, all are in the nature of reimbursement of expenses for which the provisions of TDS has no application. In this regard, he relied upon the decision of the Hon’ble Supreme Court in the case of GE India Technology Centre (P) Ltd vs CIT 372 ITR 456 (SC).
Having heard both the sides and considered material on record, we find that the assessee has filed various details to support its arguments in the form of bills and confirmations from person to whom the amount has been paid. According to the assessee, all these expenses are reimbursement of expenditure incurred by third parties on behalf of the assessee without any profit element. The assessee further contended that reimbursement of expenditure is outside the purview of provisions of section 194C / 194J; therefore, there is no obligation on the part of the assessee to deduct TDS. 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 Siemens Aktiongesellschaft 310 ITR 320 (Bom) has held that payment by way of reimbursement of expenditure incurred on behalf of payer is not income chargeable to tax in the hands of the payee. The Hon’ble Supreme Court in the case of GE India Technology Centre (P) Ltd vs CIT (supra)
observed that if the payment does not contain the element of income, the payer cannot be made liable to deduct tax at source. However, the facts are not clear. Though the assessee claims to have reimbursed the expenditure, on perusal of the details filed by the assessee it appears that most of the expenditure like hall hire charges and food charges are incurred for the purpose of conducting interview are directly incurred by the assessee. Insofar as reimbursement of interview charges to certain parties, the assessee has filed some confirmation letters to prove that these are reimbursement of expenses. Therefore, we are of the view that the issues need to be re-examined by the AO afresh; hence we set aside the issue to the file of the AO and direct him to consider the issue afresh after affording an opportunity to the assessee.
The next issue that came up for our consideration is restricting the claim of set off of business loss to Rs.4,27,10,713 as against Rs.10.51 crores as claimed by the assessee. The Ld. AR for the assessee submitted that the issue is squarely covered by the decision of ITAT, Mumbai Bench in assessee’s own case for the assessment years 1997-98 to 1999-2000 in dated 08-07-2016. We find that the co-ordinate bench considered similar issue in the light of provisions of section 71, 72 and after considering the relevant provisions observed that the pre-
Finance Bill, 1999 and, therefore, the provisions of section 72 would be applicable but not provisions of section 71 as held by the AO and the first appellate authority. The relevant portion of the order is extracted below:-
7.1.Before the FAA the assessee argued that the provisions for carry forward, set off of business losses were governed by section 72 and not by section 71(l)(i), that the proviso in connection with the continuance of business had been omitted by the Finance Act, 1999 w.e.f. 1.4.2000.After considering the submission of the assessee the FAA held that as per the proviso of Section 72 the unabsorbed losses that were discontinued could be set off against the profit and gains, if any, of that business, that the assessee had no business income for the year, that the 7.2.The AR made the same submission that were advanced before FAA. He referred to memorandum explaining the provision in Finance bill 1999, that ihe assessee was entitled to bring forward business losses of the earlier years. The DR relied upon the order of the FAA. 7.3.We have heard the rival submissions and perused the material before us in our opinion provisions of section 72 would be applicable in the present case and not the provisions of section 71 ,as held by the AO and the FAA.We further find that the pre-condition of continuation of business has been dispensed with by the Fin bill 1999. Therefore, we are of the opinion that the claim made by the assessee should have been allowed. Reversing the order of the FAA,we decide the issue in favour of the assessee. Considering the facts and also consistent with the view taken by the co- ordinate bench, we are of the view that the AO was erred in restricting set off of brought forward business losses; hence, we direct the AO to allow brought forward losses as claimed by the assessee. 12. The next issue that came up for our consideration from grounds 11 &
12 is disallowance of miscellaneous hardware expenditure amounting to Rs.8,61,215 and depreciation on miscellaneous hardware expenditure. The AO disallowed miscellaneous hardware expenditure on the ground that expenditure incurred under the head ‘miscellaneous hardware expenditure’ is in the nature of capital expenditure. The Ld.AR for the assessee at the time of hearing did not press the grounds challenging disallowance made by the AO towards miscellaneous hardware expenditure; however, requested to give a direction to allow depreciation on the miscellaneous hardware expenditure, if treated as capital expenditure. We find force in the arguments of the assessee for the reason that once a particular expenditure has been disallowed as capital expenditure, the AO is bound to allow depreciation allowable on such capital expenditure as per the provisions of the Act.
Therefore, we direct the AO to allow depreciation on miscellaneous hardware expenditure treated as capital expenditure. Hence, the ground of assessee is dismissed.
The next issue that came up for our consideration from ground 13 is adjustments towards provision for fringe benefit tax amounting to Rs.7,50,000 for book profits computed u/s 115JB of the Income-tax Act, 1961. The Ld.AR for the assessee submitted that the AO was erred in not reducing provision for Fringe Benefit Tax while computing book profit u/s 115JB even though the CBDT vide circular No.8 of 2005 clarifies that Fringe Benefit Tax is an allowable deduction in computing book profit u/s 115JB of the Act. We find that though the assessee has taken a ground on the issue, on perusal of the assessment order of AO as well as directions of the DRP u/s 144(5), the AO has not made any adjustments to book profit computed u/s 115JB of the Act. The AO has accepted book profit computed by the assessee without any modification except addition made u/s 14A in respect of expenditure incurred for STPI unit at Chennai. Therefore, we are of the view that the issue is not emanating from the orders of lower authorities; hence, there is no merit in the ground raised
by the assessee.
14. The next issue that came up for our consideration from grounds 14 & 15 is against non granting of credit for tax deducted at source and advance- tax paid. The Ld.AR for the assessee submitted that the AO has allowed credit for TDS as well as advance tax paid in the rectification order dated 10-03-2011 and hence, he did not want to press grounds 14 &
15. Hence, these grounds are dismissed, as not pressed.
15. In the result, appeal filed by the assessee is partly allowed for statistical purpose.
Order pronounced in the open court on 22nd November, 2017.