1. Industrial Development Bank of India v. DCIT (85 TTJ 1006) (Mumbai)

ISSUES:

Ø Whether expenditure in accordance with statutory guidelines is allowable as business expenses?

Ø Whether subscription to its own bonds i.e. transfer from one account to other is eligible for exemption u/s 54E of the Act?

HELD:

Ø Assessee has set up a Technical Assistance Fund (TAF) as per the guidelines laid down in Section 9 of the Industrial Development Bank of India Act, 1964 and making annual contribution to TAF from the profit and loss Appropriation account. Expenses were incurred from the TAF on items as statutorily prescribed. ITAT held that expenses incurred from TAF were allowable as business revenue expenses being wholly and exclusively incurred for business by reason of overriding enablement of statute.

Ø Exemption u/s 54E was available to the assessee where it invested in its own bonds notified for the purposes of exemption u/s 54E of the Income Tax Act, though the same is transfer of funds from one bank account to the other, as assessee had no control over the fund constituting the bond.

2. DCIT v. Indian Hotels Co. Limited (85 TTJ 1016) (Mumbai) (TM)

When loan advanced to sister concerns at the concessional rate on business consideration disallowance can be made u/s 36(1)(iii) of the Act?

HELD:

Assessee company having made advances to its subsidiary company at concessional rate of interest as a matter of business prudence in order to enable it to buy shares of other public companies from which assessee was receiving substantial operating fees and there being nothing to shoe that the agreement to advance loan was not bonafide or that it was intended to divert income of the assessee. ITAT held that disallowance made u/s 36(1)(iii) for the interest expenses is not justified.

3. S.S.I. Limited v. DCIT (85 TTJ 1049) (Chennai)

Ø Whether powers of CIT u/s 263 is confined to the notice issued by him only or the same can be expanded?

Ø Whether surplus arising on exchange fluctuation on GDR receipts kept out side India and later on brought in India is a revenue receipt liable to tax?

Ø When pursuant to an agreement assessee incurred expenses on furniture in the Govt. Schools in which they are imparting training is allowable as revenue expenses?

Ø Whether expenses incurred on acquisition of IPR through acquisition of the American firm is allowable as deduction u/s 35D of the Act?

Ø Whether expenses on ESOP is allowable as deduction?

HELD:

Ø Proceedings u/s 263 has to be strictly confined to the notice issued invoking the jurisdiction under that section for the reasons stated therein. Law does not permit expanding proceedings under section 263 after initiation beyond what is stated in the notice itself.

Ø Surplus arising as a result of exchange fluctuation on account of retention of GDR proceeds outside India which was later on brought into India is not a revenue receipt and, therefore, the direction of CIT in revision proceedings u/s 263 to treat the surplus as revenue receipt was not warranted.

Ø Assessee having made provision for installation of wooden partitions, furniture and other structures in Government Schools under an agreement to impart computer education whereby these structures were to remain the property of the schools, the expenditure incurred was wholly and exclusively for the purpose of business allowable as deduction in the year it was incurred, and, therefore, allowance of said expenditure in its entirety was not erroneous in law not prejudicial to the interest of revenue, and the direction of CIT to allow 1/5th of the depreciation for a period of five years was not justified.

Ø Assessee engaged in computer education and development of computer software having acquired intellectual property rights through acquisition of an American Firm, it was an expansion of an existing undertaking and therefore, acceptance of claim for deduction u/s 35D by the AO could not be considered as erroneous in law.

Ø Assessee company´s claim of deduction of ESOP expenses being in accordance with the guidelines of SEBI, order assessment granting the deduction was neither erroneous not prejudicial to the interest of the revenue.

4. DCIT v. Metallizing Equipment Co. (P.) Limited (92 TTJ 95) (Jodhpur)

Ø Whether intended use of plant and machinery is sufficient for claiming deduction u/s 35(1)(iv) of the Act?

Ø Whether bank guarantee commission paid to directors and their relatives are allowable as deduction?

Ø Expenses on late delivery of goods are allowable as deduction?

HELD:

Ø Assessee having fulfilled all the conditions required for claiming deduction under section 35(1)(iv) of the Act, capital expenditure on items intended to be used for research and development unit was allowable as deduction. It is not mandatory that the plant and machinery purchased must be put to use, intended use of plant and machinery is sufficient compliance for claiming deduction.

Ø Payment of guarantee commission to directors and relatives is an allowable deduction.

Ø Expenditure incurred by the assessee on account of late delivery of goods to purchaser was wholly and exclusively for the purpose of business and therefore, deduction was allowable.

5. Samtex Fashions Ltd. v. ACIT (85 TTJ 59) (Delhi)

Ø Whether interest received on deposit placed with bank as margin money is eligible for exemption u/s 10A of the Income Tax Act, 1961?

Ø Whether deduction u/s 80HHC is admissible once exemption u/s 10A is claimed by the assessee?

HELD:

Ø Interest on fixed deposit with the bank kept as margin money as a precondition of the bank for providing funds to the assessee for running the industrial undertaking was eligible for deduction u/s 10A of the Income Tax Act, 1961.

Ø Assessee can not claim deduction under section 80HHC on the item of income on which exemption under section 10A was claimed in the return of income but was not allowed. In order to avail benefit under the general provisions, assessee has to opt out of Section 10A before filing return as provided by Sub S. (7) of Section 10A. Non mention of Section 80HHC in prohibitory clause (iii) of Sub s. (4) of Section 10A is immaterial as what is obvious and need not be provided for.

Ø ITAT has also discussed the allowability of deduction u/s 80HHC on sale of quota when there is a no profit u/s 80HHC(3) notwithstanding applicability of Sub S. (7) of Section 10A. ITAT held that the proviso to Section 80HHC (3) under which the deduction is claimed, can come into play only when deduction is claimed under the main provision of Sub Section (3) of Section 80HHC. The proviso contemplates that first there have to be profits under cl.(a) or cl.(b) or cl.(c) of Section 80HHC (3) and then only such profits have to be “further increased” by the amount of proportionate incentive scheme. Unless there are profits under cl.(a) or cl.(b) or cl.(c) there is no question of any “further increase”.

6. Addl. CIT v. Vetas RRB India Limited (92 ITD 1) (Delhi)

Whether payment made of PF and ESI after the due date but before the filing of return of income is allowable as deduction?

HELD:

ITAT held that deletion of second proviso and amendment to first proviso to section 43B by the Finance Act, 2003 so as to make payments made by employer towards contribution to PF, ESI, Gratuity etc. allowable, if the same are made before filing return of income and necessary evidence of such payment is enclosed with the return of income are curative in nature and therefore, has to be applied retrospectively. Therefore, no disallowance is required to be made in respect of payments made by an employer towards said contributions even if the same are made beyond due dates prescribed in section 36(1)(va).

7. ACIT v. Maxcare Laboratories Ltd. (92 ITD 11) (Cuttack)

Ø Whether interest received is eligible for deduction u/s 80IA of the Act?

Ø Whether sale of empty drums and other useless materials are eligible for deduction u/s 80IA of the Act?

HELD:

Ø Since the assessee was under business obligation to have security deposit with the other company as such deposits were given in consideration of providing bank guarantee for organizing finance and providing franchise to set up industry by assessee company, there was a direct and proximate nexus between interest earned on such deposits and interest paid on fund borrowed for running of business of industrial undertaking and therefore, assessee was eligible to claim deduction u/s 80IA on the same.

(Note: ITAT has not considered decision of SC in the case of Pandian Chemiclas reported at 262 ITR 278 )

Ø Sale of empty drums / containers and sale of useless materials could not be ignored as it was closely and directly connected with outcome of manufacturing process itself and there was a nexus between sale of those items and carrying on of business of industrial undertaking.

8. Maruti Udyog Limited v. DCIT (92 ITD 119) (Delhi)

Ø Whether advance payment of duty without incurring liability to pay such taxes can be allowed as deduction u/s 43B?

Ø Whether following expenses are allowable as deduction u/s 37(1)?

o Claim of Warranty expenses

o Purchase of software

o Exp. in respect of criminal litigation

Ø Disallowance u/s 14A when there was a nexus between borrowed funds and investments in shares?

HELD:

Ø ITAT held that advance payment of taxes or duties without incurring liability to pay such taxes or duties can not be allowed as deduction under section 43B of the Income Tax Act, 1961.

Ø Deduction u/s 37(1) of the Act:

o ITAT held that if the claim of warranty is on the basis of scientific method than the same is allowable as deduction on accrual basis.

o Software is a capital asset and expenditure on acquisition of software is a capital expenditure. ITAT held that assessee was not in the business of software and hence, software is the capital asset. Further, it was held that The Income Tax Rules, as amended w.e.f. 1-4-2003 rather helped the revenue and not the assessee in as much as it provides for depreciation on software at the rate of 60%. By providing higher depreciation, it can not be said that prior to 1-4-2003, it was revenue expenses. It was always a capital expenditure.

o Expenditure in respect of criminal litigation is allowable as deduction u/s 37(1) if it can be shown that transactions in respect of which criminal proceedings were initiated arose out of assessee´s business or was incidental to such business and that such expenses was incurred bonafide for the purpose of business. ITAT further held that where company incurs expenses to safeguard its goodwill and image by defending its employees, such expenses are allowable as business revenue expenses.

Ø Assessee had paid interest on advances, deposits etc. and had also invested in shares of various companies and dividends earned thereon was claimed exempt u/s 10(33). AO disallowed the claim of interest by applying provisions of Section 14A. CIT(A) confirmed the disallowance and held that there was a direct nexus between funds borrowed and investment in shares. ITAT held that CIT(A) merely picked up the sources on which the interest is paid by assessee and had completely ignored the other sources of income which is erroneous. It was a case of mixed account wherein all kinds of receipts were deposited. The fact stated by the assessee that interest free funds were available with the assessee for making investments which far exceeded investment is shares remained uncontroverted. The nexus between borrowed funds and investments can be said to be established only where it is shown that interest free funds are not available with the assessee. It is revenue´s obligation to discharge this onus which was not done by the revenue and considering this ITAT has deleted the addition made.

9. Padra Taluka Co-op. Cotton Ginning & Pressing Society Limited v. ACIT (142 Taxman – ITAT 22) (Ahmedabad)

Assessee had claimed set off of carried forward depreciation against the capital gain. While passing order u/s 143(3) of the Act assessing officer has allowed such set off. After that AO has initiated proceedings u/s 154 of the Act and disallowed such set off.

ISSUE:

Whether unabsorbed depreciation can be set off against the profit chargeable to tax u/s 50 of the Act?

HELD:

ITAT held that the depreciation is a business charge and the income from the sale of commercial asset has to be treated as business income, though the same is assessed under section 50 of the Income Tax Act. Therefore, assessing officer had not committed any mistake in allowing such set off.