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Income Tax Appellate Tribunal, DELHI BENCHES : E : NEW DELHI
Before: SHRI R.S. SYAL & MS SUCHITRA KAMBLE
ORDER PER BENCH: These four cross appeals – two by the assessee and equal number by the Revenue – relate to assessment years 2007-08 and 2008-09.
Since some of the issues raised in these appeals are common, we are, therefore, proceeding to dispose them off by this consolidated order for the sake of convenience.
Assessment Year 2007-08
Ground No.1 of the Revenue’s appeal is against the deletion of addition of Rs.6,95,404/- made by the assessee on account of Commission. Facts of this ground are that the assessee paid commission for the above sum which was disallowed by the Assessing Officer for ITA Nos.6143 &6180 /Del/2013 & lack of any documentary evidence in support of such payment. The ld.
CIT(A), following his view for the assessment year 2006-07, deleted the addition. The Revenue is aggrieved against the deletion of this addition.
After considering the rival submissions and perusing the relevant material on record, we find that similar issue has been decided by the Tribunal in the assessee’s own case in its order dated 18.01.2016 for the A.Ys. 2004-05 to 2006-07. Addition made on the same count for the A.Y. 2006-07 has been deleted by observing that the commission was paid to Directors as per Board Resolution, after due deduction of tax at source. In the absence of any distinguishing feature having been brought to our notice by the ld. DR in the facts of the instant year vis-à-vis the preceding year, respectfully following the precedent, we uphold the deletion of disallowance.
Ground No.1.2 is against the deletion of disallowance of Foreign commission payment by invoking the provisions of section 40(a)(i) of the Act. The factual matrix of this ground is that the assessee paid commission to foreign agents for a sum of Rs.48,17,517/-. The ITA Nos.6143 &6180 /Del/2013 & Assessing Officer opined that tax ought to have been deducted at source from this payment. In the absence of the assessee having withheld any tax before payment, the Assessing Officer made disallowance u/s 40(a)(i) of the Act. The ld. CIT(A) vide para on page 6 of the impugned order, directed the Assessing Officer to verify if the relevant Circular of CBDT was withdrawn subsequent to the date on which the payment was made by the assessee. If it was so, then, the addition should not be sustained. That is how, the ld. CIT(A) restored the matter to the Assessing Officer with necessary direction.
After considering the rival submissions and perusing the relevant material on record, we find that the ld. CIT(A) has simply restored the matter to the file of Assessing Officer for making necessary verification in regard to the applicability of the relevant Circular to the commission payment, which is germane to the issue. Finding no fault with this direction, we uphold the impugned order. This ground is not allowed.
Ground No.2 of the Revenue’s appeal is against allowing relief in respect of deduction u/s 80IC. The assessee claimed deduction u/s 80IC
ITA Nos.6143 &6180 /Del/2013 & for a sum of Rs.19,16,38,092/-. The Assessing Officer rejected this claim following the view taken in earlier year. The ld. CIT(A), following orders passed by his predecessor for the A.Ys. 2004-05 to 2006-07, decided the issue of ‘substantial expansion’ in favour of the assessee. Ground No.1 of the assessee’s appeal is also in respect of deduction u/s 80IC which was disallowed by the Assessing Officer on certain items of income such as Commission, Incentives and Service charges etc. The Assessing Officer held such items of income as not `derived from’ industrial undertaking and, hence, ineligible for deduction u/s 80IC. The ld. CIT(A) did not accept the assessee’s claim on this score. That is how both the sides are in appeal on their respective stands.
After considering the rival submissions and perusing the relevant material on record, we find that issue relevant to the Revenue’s appeal came up for consideration before the Tribunal in the assessee’s own case for the preceding year. The Tribunal has upheld the granting of deduction u/s 80IC on the question of ‘substantial expansion.’
ITA Nos.6143 &6180 /Del/2013 & Respectfully following the same, we dismiss the Revenue’s ground. As regards the eligibility of deduction u/s 80IC on items of income, such as, Commission, Export incentive and Service charges etc., the Tribunal has restored this matter vide page 44 of its order for a fresh adjudication at the end of the AO. Respectfully following the precedent, we also set aside the impugned order on this score and remit the matter to the file of Assessing Officer for deciding it in conformity with the directions given by the Tribunal in its earlier order.
The only other ground which survives in the Revenue’s appeal is against deduction for `Prior period expenses’. The assessee claimed deduction for a sum of Rs.29,11,799/- by claiming this amount as `Prior period expenses’. The Assessing Officer negatived the assessee’s claim. The ld. CIT(A) set aside the assessment order on this issue and directed the Assessing Officer to verify if these expenses actually arose during the year even though pertaining to earlier year. If so, then, the amount should be allowed as deduction. The Revenue is upset with this direction.
ITA Nos.6143 &6180 /Del/2013 &
After considering the rival submissions and perusing the relevant material on record, we do not find any infirmity in the impugned order.
Direction has been given for verification if the liability for the expenses got crystalised during the year. Under mercantile system of accounting, an expenditure becomes deductible when it is incurred and an expenditure is incurred when liability to pay it is crystalised. We, therefore, approve the view taken by the ld. CIT(A) which is in conformity with the above principle of recording expenses under the mercantile system of accounting. This ground is not allowed.
The ld. AR did not press Ground No.2 of the assessee’s appeal, which is hereby dismissed.
In the result, both the appeals are partly allowed for statistical purposes.
Assessment Year 2008-09
The first ground of the Revenue’s appeal is against allowing of deduction u/s 80IC in respect of Unit-1 amounting to Rs.50,34,885/-.
The Assessing Officer, following his view about the ‘substantial 7
ITA Nos.6143 &6180 /Del/2013 & expansion’, did not allow deduction u/s 80IC from income under Unit-1.
The ld. CIT(A) overturned the assessment order on this point.
Having gone through the factual matrix of this ground, we find that the facts are, mutatis mutandis, similar to those of preceding year.
While dealing with the identical issue, we have upheld the impugned order granting deduction u/s 80IC in respect of Unit-1, which, in turn, is based on the view taken by the Tribunal in the assessee’s own case in preceding year. We, therefore, uphold the same. This ground is not allowed.
Ground No.2 is against the deletion of disallowance of deduction u/s 80IC amounting to Rs.1,21,27,566/- against income from Unit-2.
Succinctly, the facts of this ground are that the Assessing Officer found the assessee to have made stock transfers from Unit-1 to Unit-2 for a sum of Rs.4.76 crore. The AO noticed that the assessee declared total profit before depreciation amounting to Rs.8.66 crore on a turnover of Rs.33.99 crore from Unit-2. It was opined that deduction could not be allowed in respect of inter-unit transfer of stock. By proportionately
ITA Nos.6143 &6180 /Del/2013 & working out the amount of profit relatable to stock transfer worth Rs.4.76 crore, the Assessing Officer denied deduction u/s 80IC amounting to Rs.1,21,27,566/-. The ld. CIT(A) deleted the addition. The Revenue wants restoration of the disallowance.
After considering the rival submissions and perusing the relevant material on record, we find that there is no provision u/s 80IC which debars inter-unit transfers of stock. The only provision, as rightly noted by the ld. CIT(A) with reference to transfer of goods and services, is contained in section 80IC(7) read with section 80IA(8), whose relevant part is as under:-
“Sec.80-IC(7): The provisions contained in sub-section (5) and sub- sections (7) to (12) of section 80-IA shall so far as may be, apply to the eligible undertaking or enterprise under this section. Sec.80-IA (8): Where any goods [or services] held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods [or services] held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration if any for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods [or services], as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer in either case has been made at the market value of such goods [or services] as on that date.
ITA Nos.6143 &6180 /Del/2013 & Provided that, where in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. Explanation – For the purpose of this sub-section ‘market value’ in relation to any goods or services means the price that such goods [or services] would ordinarily fetch in the open market.”
It is manifest from the language of section 80IA(8) that the Assessing Officer can recompute deduction u/s 80IC by taking stock transfer at market value, if the transfer of stock from ineligible business to eligible business does not correspond to its market value. In the instant case, the assessee purchased raw material in Unit-1 from independent parties which was transferred to newly set up Unit-2 on cost to cost basis without any mark up. This finding is contained in para 4.4.4 of the impugned order, which has not been controverted by the ld. DR with any material. Thus, it is clear that the stock transfer from Unit- 1 to Unit-2 corresponds with its market value. As the assessee is otherwise eligible for deduction u/s 80IC in respect of Unit-1, which has also been granted by the Assessing Officer to that extent, we hold that the proportionate disallowance made by the Assessing Officer, on an ITA Nos.6143 &6180 /Del/2013 & inapt interpretation of the provision, cannot be sustained. We, therefore, uphold the impugned order on this issue. This ground is not allowed.
Ground No.3 of the Revenue’s appeal is against the direction given by the ld. CIT(A) on deduction of Rs.16,41,607/- being the amount of Prior period expenses. Here again, we find that the Assessing Officer as well as the ld. CIT(A) proceeded in the same manner as they did it for the preceding year. As the ld. CIT(A) has restored the matter to the file of Assessing Officer with a direction as discussed above, following the view taken for the assessment year 2007-08, we are not inclined to disturb the impugned order on this score.
Ground No.1, 2, 2.1 and 2.3 of the assessee’s appeal are against not allowing deduction u/s 80IC in respect of Commission, Export incentive and Service charges etc. As the facts and circumstances of these grounds are similar to those of earlier year, we set aside the impugned order and remit the matter to the file of Assessing Officer for deciding it in conformity with the direction given by the Tribunal in its earlier order.
ITA Nos.6143 &6180 /Del/2013 &
Ground No.2.2 of the assessee’s appeal is against confirmation of disallowance of Rs.1,13,550/- towards Software expenses, which was treated by the Revenue authorities as capital expenditure. The assessee claimed deduction of Rs.1,13,550/- towards Software expenses. The ld. CIT(A) approved the view of the Assessing Officer in treating it as a capital expenditure, but, directed to allow depreciation on the amount capitalized.
We have heard the rival submissions and perused the relevant material on record. On a specific query, though the ld. AR placed on record a copy of the account of `Software development expenditure’ incurred by it, but, full details of such expenses were not available. In the absence of such details, we cannot adjudicate upon the treatment of such expenditure as revenue or capital. We, therefore, set aside the impugned order and remit the matter to the file of the Assessing Officer for deciding the issue afresh, after allowing a reasonable opportunity of being heard to the assessee.
ITA Nos.6143 &6180 /Del/2013 &
In the result, both the appeals are partly allowed for statistical purposes.
The order pronounced in the open court on 22.03.2017.