Business expenditure — Entitlement provided to assessee for deduction of lease rentals on windmills used for purpose of business

Business expenditure — Entitlement provided to assessee for deduction of lease rentals on windmills used for purpose of business — as held by MumTrib in Addl CIT v Weizmann Ltd; ITA No. 4603/Mum/2008, 15 April 2011

Decided on: 7 March 2011

Deduction under s 80HHC — Allowability of deduction under s 80HHC while computing the book profit under s 115JB in spite of the fact that the deduction under s 80HHC computed under cl (a), (b) and (c) of sub-s (3) or sub-s (3A) is Nil.

Deduction under s 80HHC — Income on sale of DEPB licence is represented by entire sale proceeds of the licence and there is no logical justification in bifurcating the value of the sale consideration realised by the exporter on the transfer of the DEPB credit.

Deduction under s 80HHC — Income on sale of DEPB licence is represented by entire sale proceeds of the licence and there is no logical justification in bifurcating the value of the sale consideration realised by the exporter on the transfer of the DEPB credit.

Deduction under s 80HHC — If the assessee carrying on more than one business, only the business of which export was a part was required to be taken into consideration for computing deduction.

Business expenditure — Deduction under s 36(1)(iii) — As long as the assessee has sufficient interest free funds, the presumption to be taken is that the investments are made out of such interest free funds.

Business expenditure — Deduction under s 36(1)(iii) — Mere fact of allowing interest free advance at a rate lower than the rate on which borrowings are made, cannot justify the disallowance of interest on borrowed funds.

Business expenditure — The CIT(A) was justified in making ad-hoc disallowance on account of foreign travelling expenses since the complete details of expenses were not provided by the assessee.

In favour of: The Assessee.

Remission or cessation of liability — To invoke the provisions of s 41(1), the first requirement is as to whether in the assessment of the assessee, an allowance or deduction has been made in respect of loss, expenditure or the trading liability incurred by the assessee.

The assessee claimed expenditure on account of payment of lease rental to M/s Weizmann Homes Limited, in respect of windmill. The AO noted that the lease rental expenses was disallowed in AY 1998–1999 on account of the fact that the said asset was purchased in the year 1997–1998 being sold to the manufacture in AY 1998–1999, who in turn sold the same to W from whom the assessee company took back the windmill on lease. Thus the AO disallowed the payment of lease rent. In an appeal filed by the assessee the CIT(A) following the decision of the Tribunal in the assessee’s own case for the AY 1998–1999 and 1999–2000 directed the AO to delete the addition. Being aggrieved, the revenue has filed the present appeal.

The issue is whether the CIT(A) erred in deleting the addition made by the AO against disallowance of lease rental, paid on windmill, ignoring the fact that the assessee company with mutual understanding first purchased and then sold back to manufacturer and again purchased through its sister concern from whom it has borrowed the same on lease.

The CIT(A) has followed the decision of the ITAT in assessee’s own case for the AY 1998–1999 and 1999–2000 on similar facts, wherein, the Tribunal has allowed the deduction of lease rental on this windmill. Thus impugned order is upheld.

In favour of: The Assessee.

In the course of the assessment proceedings, the AO noticed the profits eligible for deduction under s 80HHC have been claimed to be Rs 43,26,431, even though no deduction under s 80HHC is claimed because the gross total income during the year was nil. In the computation of total income as per the normal provisions other than s 115JB, the assessee has claimed deduction under s 80HHC at Nil while working out the book profit under s 115JB, the assessee has deducted Rs 43,26,431 on account of profit eligible for deduction under s 80HHC. The AO asked the assessee to explain as to why the deduction under s 80HHC, as actually claimed in the return and not the profits said to be eligible for deduction under s 80HHC, be reduced from the book profit under s 115JB. It was explained before the AO that the deduction under s 80HHC is allowable as per s 115JB(2)(iv). The AO rejected the explanation of the assessee and determined the book profit under s 115JB. The CIT(A) allowed the assessee’s appeal. Being aggrieved, the revenue has filed the present appeal.

The issue is whether the deduction under s 80HHC is allowable while computing the book profit under s 115JB in spite of the fact that the deduction under s 80HHC computed under cl (a), (b) and (c) of sub-s (3) or sub-s (3A) is Nil.

The issue under consideration is squarely covered by the decision of a co-ordinate Bench in the case of DCIT v M/s Glenmark Laboratories Ltd in ITA No 4155/M/2007 for the AY 2004–2005, wherein, the Tribunal following the decision of the ITAT (SB) in the case of Syncome formulations (I) Ltd) has affirmed the view of the CIT(A) deleting the similar addition. In any event, the view taken by the Tribunal in Special Bench decision in the case of Syncome Formulations now stands approved by Hon’ble Supreme Court in the case of Ajanta Pharma Ltd v CIT (327 ITR 305).

In favour of: Revenue.

The AO noticed that the assessee has received export incentives on account of profit from sale of Duty Entitlement Pass Book (DEPB) licenses and has computed the deduction under s 80HHC on the same. It is also noticed that the total export turnover is Rs 38,29,93,698, which is more than Rs 10 crores. The AO disallowed the claim of the assessee under s 80HHC on the DEPB licenses and has reduced 90% of sale price of DEPB licence in computing the adjusted profit for the purpose of determining deduction. In an appeal, the CIT(A) directed the AO to re-compute the adjusted profit for determining s 80HHC deduction, taking into account 90% of only the profits on the sale of DEPB license and by taking only the profit element on sale of DEPB licence and not the entire sale proceeds. Being aggrieved, the revenue has filed the present appeal.

The issue is whether the CIT(A) erred in directing the AO to re-compute the adjusted profit from DEPB, after reducing the reasonable cost of DEPB from the sale consideration, for computing the deduction under s 80HHC.

The issue is now squarely covered by the judgment of Hon’ble jurisdictional High Court in the case of CIT v Kalptaru Colours and Chemicals, 328 ITR 451 wherein it was held that the income on sale of DEPB licence is represented by entire sale proceeds of the licence and “there is no logical justification in bifurcating the value of the sale consideration realised by the exporter on the transfer of the DEPB credit” as has been directed by the CIT(A) in this case. In the present case, while a loss has been computed because of segregation of the sale proceeds of the DEPB licence but once entire amount is taken as income, it will obviously be a positive figure. The relief granted by the CIT(A) is vacated and restore the order of the AO.

In favour of: The Assessee.

The issue is whether the CIT(A) erred in directing the AO to re-compute the deduction under s 80HHC by taking the turnover of the taxable division only on “standalone” basis and ignoring the turnover of the other divisions, without considering the provision of s 80AB, which talk about the gross profit of the assessee and not of the Division.

The issue is covered by the decision of the ITAT in assessee’s own case for the AY 1998–1999, 1999–2000 wherein it was held that the assessee company was engaged in diversified business activities and each business was distinct and separate from another. For this purpose the assessee company had several division viz Textile Division, Lease and Hire Purchase Division; Power Generation Division, Foreign Exchange Division and Financial and Other Services Division. These activities were distinct and separate from each other. For this purpose the assessee had maintained separate books of account in respect of each division and separate P and L accounts and separate balance sheet were prepared in respect of each division. For the purpose of annual accounts of the company as a whole the accounts of various divisions were consolidated and a consolidated P and L accounts and balance-sheet was also prepared. In the case of an assessee carrying on more than one business it was only the business of which export was a part was required to be taken into consideration and not other business which had nothing to do with the export business. The claim of the assessee for deduction under s 80HHC on Textile Division on stand alone basis is justified. There is no reasons to disturb the conclusions arrived at by the CIT(A), since the CIT(A) has followed the decision of the Tribunal directing the AO to compute the deduction under s 80HHC in respect textile division on “standalone” basis taking into account the total turnover and business profits of textile division only.

In favour of: The Assessee.

The assessee borrowed funds and paid interest thereupon. The AO disallowed the interest expenditure on the ground that borrowed funds have been advanced to the sister concern. The AO observed that the assessee could not establish the nexus between availability of interest free/surplus fund and diversion thereof to sister concern and thus disallowed interest expenditure and added back to the income of the assessee. In an appeal filed by the assessee the CIT(A) deleted the disallowance. Being aggrieved, the revenue has filed the present appeal.

The issue is whether the AO was justified in disallowing interest on borrowed funds on the ground that borrowed funds have been advanced to the sister concern.

The assessee has own fund of Rs 72.63 crores as against diversion of Rs 7.26 crores. Perusal of the impugned order also reveals that the assessee has established one to one nexus. It has been held by jurisdictional High Court in the case of CIT v Reliance Utilities and Power Ltd as long as assessee has sufficient interest free funds, the presumption to be taken is that the investments are made out of such interest free funds.

In favour of: The Assessee.

The assessee has borrowed unsecured loan @ 15% interest and also advanced certain loans to its sister concerns @ 15% interest. However, in case of two companies, ie M/s Imperial Assets and Capital Management P Ltd, and M/s Ve-Cares Driers and Cleaners P Ltd, the assessee has allowed interest bearing advances @ 14% and 10%, respectively. Before the AO, the assessee could not furnish satisfactory explanation regarding nexus for advancing of surplus/interest funds. Thus the AO disallowed the excess interest expenditure. In an appeal the CIT(A) deleted the disallowance. Being aggrieved, the revenue has filed the present appeal.

The issue is whether the CIT(A) was justified in deleting the disallowance of interest expenditure ignoring the fact that the same was incurred on diversion of higher interest bearing fund to directors close friends, at lower interest rate that too without any business need. The issue is whether the CIT(A) was justified in deleting the disallowance of interest expenditure ignoring the fact that the same was incurred on diversion of higher interest bearing fund to directors close friends, at lower interest rate that too without any business need.

What has been disallowed is interest paid by the assessee on the ground that borrowings at higher rate of interest have been diverted as interest bearing advances at lower rate, even though it is not in dispute that the assessee had sufficient interest free funds available and even as commercial expediency of the advances is not even called into question. Mere fact of allowing interest free advance at a rate lower than the rate on which borrowings are made, cannot justify the impugned disallowance, but then, on the facts of this case, there is nothing more than this arithmetic to justify the impugned disallowance.

In favour of: The Assessee.

The assessee incurred an expenditure on foreign travelling. The AO asked the assessee to furnish the details of miscellaneous expenses, which could not be complied with. Therefore, in the absence of any documentary evidences, and the purpose of travel, the AO disallowed one fourth of total expenditure. In an appeal, the CIT(A) allowed the ticket expenses in full, he restricted the disallowance out of the balance expenses to 20%, as against 25% disallowed by the AO. Being aggrieved, the revenue has filed the present appeal.

The issue is whether the CIT(A) erred in directing the AO to restrict the disallowance of personal foreign travel expenses.

The requisite details of travelling, such as names of persons travelling and purpose of travel, etc are on record, and since complete details of expenses, other than ticket expenses, are not placed; an adhoc disallowance of 20% is made towards personal expenses. As for ticket expenses, since there is no dispute about the fact, evidence or justification of expenses, the entire amount is allowed in full by the CIT(A). No infirmity found in approach of the CIT(A).

In favour of: The Assessee.

The AO noticed that in the computation of income, attached to the return, the assessee has reduced its profit on account of remission of bank liabilities. The claim of the assessee was that since the assessee never claimed any deduction in respect of amounts so waived by the bank, it could not be added to his income under s 41(1). It was also submitted that the said amount could not be brought to tax in the hands of the assessee under s 28(iv) either. It was pointed out that the banker, ie Vyasya Bank Ltd, has extended NCD facility of Rs 7.50 crores, specifically for the purpose of meeting capital expenditure of the company, and only part amount of the said NCD was written back after due settlement with the banker. Reliance was placed by the assessee on the Hon’ble Gujarat High Court judgment in the case of CIT v Chetan Chemicals 267 ITR 770 and on Hon’ble Bombay High Court’s judgment in the case of Mahindra and Mahindra Ltd v CIT, 261 ITR 501. The AO rejected the submission of the assessee and proceeded to add the said sum to the income returned by the assessee. In an appeal, the CIT(A) upheld the contentions of the assessee, except to the extent of Rs 25 lakhs represented by lease rental written off, and deleted the rest of the addition. Being aggrieved, the revenue has filed the present appeal.

The issue is whether to invoke the provisions of s 41(1), the first requirement is as to whether in the assessment of the assessee, an allowance or deduction has been made in respect of loss, expenditure or the trading liability incurred by the assessee.

Whether the CIT(A) erred in directing the AO to delete the addition made on account of remission of loan liabilities by ignoring the fact that the addition was made after gathering the relevant information from the bank, and also the Explanation 1 of s 41 which explained the fact that the remission or cessation of any liability will be profit chargeable to tax in the hands of the recipient.

The main thrust of revenues’ submissions is that in view of the case of Solid Containers Ltd v DCIT, 308 ITR 417, the amount of loan written off is to be treated as income as the said write off has taken place in the course of assessee’s business activity and the law laid down by in the case of Mahindra and Mahindra Ltd v CIT, 261 ITR 501, to that extent, ceases to be good law. This court is unable to see merits in this stand for more reasons than one. In the case of Sulzer India Ltd v DCIT, 42 SOT 457, a special bench of this Tribunal, after considering a number of decisions of Hon’ble Bombay High Court as also other Hon’ble High Courts and Hon’ble Supreme Court, has held that, “Having regard to the aforesaid law laid down by the Hon’ble Supreme Court and High Courts, that to invoke the provisions of s 41(1), the first requirement is as to whether in the assessment of the assessee, an allowance or deduction has been made in respect of loss, expenditure or the trading liability incurred by the assessee”. Solid Containers’ case decision does not negate the law laid down by Hon’ble Bombay High Court but only holds that the law so laid down in Mahindra and Mahindra does not apply to the particular fact situation that Solid Containers’ case was dealing with. Having regard to the fact that it is an uncontroverted finding of the CIT(A) that the amount representing impugned relief was never claimed as deduction by the assessee, the finding of CIT(A) is upheld.