Income Tax Appellate Tribunal - Chennai
Rane Brake Linings Ltd. vs Joint Commissioner Of Income Tax on 17 November, 2006
Equivalent citations: (2007)107TTJ(CHENNAI)475
ORDER
T.R. Sood, A.M.
1. In this appeal, the assessee has raised the following grounds:
(1) that the CIT(A) erred in disallowing the claim for depreciation in respect of assets transferred to the Clutch Unit.
(2) that the CIT(A) erred in disallowing the royalty payment of Rs. 2,29,500 and royalty on trademark of Rs. 20,000.
(3) that the CIT(A) erred in restricting the claim of deduction under Section 80HH by excluding a sum of Rs. 4,86,000.
(4) that the CIT(A) erred in including excise duty, sales-tax and scrap sales as part of the total turnover for computing the relief under Section 80HHC.
(5) that the CIT(A) erred in excluding 90 per cent of interest, rent, interest on APSEB deposit and other income aggregating to Rs. 94,49,312 for the purpose of computing relief under Section 80HHC.
Ground No. (1)
2. After hearing both the parties, we find that the assessee was owner of the Clutch Unit at Hosur in Tamil Nadu which was transferred through an agreement dt. 20th Jan., 1997 to its subsidiary company and all assets and liabilities were also transferred to the subsidiary company against which the assessee received a total consideration of Rs. 8,40,26,000. As per the agreement, the transfer of the unit took place w.e.f. 1st Feb., 1997. It seems the sale consideration was not credited to block of assets and thus depreciation was claimed on such assets also. In response to the query, it was submitted that the assessee had sold all the assets on lump sum basis and therefore, sale consideration in the sense of any sale value was not credited to any block of assets. In this respect, reliance was placed on the decision of Hon'ble Supreme Court in the case of CTT v. Electric Control Gear Mfg. Co. (1997) 141 CTR (SC) 302 : (1997) 227 TTR 278 (SC) and the decision of Karnataka High Court in the case of Syndicate Bank Ltd. v. Addl. CTT (1985) 45 CTR (Kar) 68 : (1985) 155 LTR 681 (Kar). The AO observed that the decision of the Hon'ble Supreme Court in the case of Electric Control Gear Mfg. Co. (supra) was in respect of chargeability of tax in respect of items mentioned in Section 41(2) of the IT Act, and the decision of Karnataka High Court in the case of Syndicate Bank Ltd. (supra) was in respect of charging of capital gains under Section 2(14) r/w Section 45 and therefore, had no applicability. He also noted that the provisions of Section 32(1) r/w Section 43(6)(c)(i) were applicable. He also noted that the assessee had made adjustments in its published accounts, but in the depreciation statement filed along with return of income, no adjustment has been made on account of assets transferred to the subsidiary company and in this background, depreciation was not allowed.
3. Before the learned CIT(A), similar contentions were reiterated and it was further submitted that Section 50B which deals with slump sale was introduced subsequently and thus such transaction cannot be subjected to tax in the relevant year. The disallowance was confirmed by the learned CIT(A).
4. We find that the learned CIT(A) has correctly confirmed the disallowance of depreciation. Section 32 of the IT Act, 1961 which deals with allowance of depreciation reads as under:
32. (1) In respect of depreciation of-
(i) buildings, machinery, plant or furniture, being tangible assets;
(ii) know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998;
owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed-
(i) ...
(ii) in the case of any block of assets, such percentage on the WDV thereof as maybe prescribed.
5. The plain reading of the section makes it abundantly clear that for computing business income, every assessee is entitled to depreciation on various assets as mentioned in the section if they are owned wholly or partly by the assessee and also used for the purpose of business. Apart from twin conditions of ownership and usage, Section 43 is also relevant which gives various definitions relevant to computation of income from profits and gains of business or profession. In this connection, Sub-section (6) of Section 43 is relevant which defines "WDV". This sub-section reads as under:
(6) "Written down value" means-
(a) In the case of assets acquired in the previous year, the actual cost to the assessee;
(b) In the case of assets acquired before the previous year, the actual cost of the assessee less all depreciations actually allowed to him under this Act, or under the Indian IT Act, 1922 (11 of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian IT Act, 1886 (2 of 1886), was in force:
Provided that in determining the WDV in respect of buildings, machinery or plant for the purposes of Clause (ii) of Sub-sction (1) of Section 32, 'depreciation actually allowed' shall not include depreciation allowed under Sub-sections (a), (b) and (c) of Clause (vi) of Sub-section (2) of Section 10 of the Indian IT Act, 1922 (11 of 1922), where such depreciation was not deductible in determining the WDV for the purposes of the said Clause (vi);
(c) in the case of any block of assets,-
(i) in respect of any previous year relevant to the assessment year commencing n the 1st day of April, 1988, the aggregate of the WDVs of all the assets falling within that block of assets at the beginning of the previous year and adjusted,-
(A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year;
(B) by the reduction of moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the WDV as so increased;
6. The reading of above provision would make it clear that the legislature after providing for allowance, has also laid down the procedure and definition of various terms for computation of allowance of depreciation. We think before going to Sub-section (6) of Section 43, every assessee has to fulfil the first two conditions provided in Section 32, i.e. ownership of asset and usage for the purpose of business. If an assessee disposes a particular asset by any means, then such an assessee cannot be called owner of such asset and further obviously he cannot possibly use such an asset for the purpose of business. Therefore, at this stage itself Section 32 would come into operation and such an assessee would not be entitled to any allowance of depreciation. This is so, even if, for any reason, the WDV of the block of assets has not been reduced. Section 43(6) defines WDV and merely because such an amount is existing as WDV in the books, it does not mean that the assessee would be entitled to depreciation. Accordingly, Section 43(6) has to be read along with Section 32 for claiming allowance of depreciation and Section 43(6) cannot be read in isolation. This is because Section 43(6) only defines the WDV, i.e. the amount on which the assessee can claim depreciation. But, it does not provide for allowance of claim as such. In the case before us, the assessee is trying to claim that the assets sold were sold by way of slump sale and that is why the WDV has not been reduced. The AO has given a clear-cut finding that in the annual published accounts, such assets have been reduced from the fixed assets laid down which means the assets are not existing. In any case, the assessee has claimed depreciation allowance on these assets in the subsidiary company to which such assets were sold. By no stretch of imagination, depreciation against the same assets can be claimed at two places. That is, once by the assessee and at the same time by the subsidiary company also to which such assets have been sold. Further, Sub-clause (B) of Clause (c) of Section 43(6) also makes it clear that WDV has to be reduced by the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any. This clause makes it clear that whenever an asset is sold or discarded or demolished or destroyed, the assessee is duty-bound to reduce the WDV of such assets. Thus, the procedural part of the provision regarding depreciation allowance, i.e. Section 43(6) also makes it clear that when the assets are sold, the assessee is not entitled to depreciation. We also find that lower authorities have correctly observed that the decision of Hon'ble Supreme Court in the case of Electric Control Gear Mfg. Co. (supra) was rendered in respect of entirely different issue. There, the issue was regarding chargeability of tax in respect of items mentioned in Section 41(2) and therefore, this decision will have no bearing on the allowance of depreciation. In these circumstances, we find nothing wrong with the order of the CIT(A) and confirm the same.
Ground No. (2)
7. After hearing both the parties, we find that the AO disallowed a sum of Rs. 2,29,500 out of total claim of royalty amounting to Rs. 9,58,027, because TDS on this was paid on 18th June, 1997 which was beyond the time specified in Rule. 30 r/w Section 40(a)(i). He also disallowed a sum of Rs. 20,000 paid towards royalty on trademark as the same was of the capital nature. The disallowance was confirmed by the learned CIT(A). We find that disallowance of royalty payment has been correctly made because TDS on the same was deducted beyond the time specified under Rule 30 r/w Section 40(a)(i). Similarly, a sum of Rs. 20,000 paid towards royalty on trademark is clearly of capital nature. In these circumstances, we decline to interfere in the order of the learned CIT(A).
Ground No. (3)
8. After hearing both the parties, we find that the AO did not allow deduction under Section 80HH in respect of interest receipt amounting to Rs. 24,000, interest on APSEB deposit amounting to Rs. 19,000 and other items Rs. 4,43,000. The disallowance was confirmed by the learned CIT(A). No details have been filed before us in respect of other items. As far as interest received and interest on APSEB deposit is concerned, the same cannot be said to have been derived from industrial undertaking in view of the decision of the Supreme Court in the case of Pandian Chemicals Ltd. v. CIT no details were available in respect of other items, the same is also held not to be derived from industrial undertaking. Hence, we find nothing wrong with the order of the learned CIT(A). Therefore, the same is confirmed.
Ground No. (4)
9. After hearing both the parties, we find that as far as the issue regarding inclusion of excise duty and sales-tax is concerned, the same cannot be included in the total turnover in view of the decision of the Hon'ble jurisdictional High Court in the case of CIT v. Sundaram Fasteners Ltd. (Mad). Therefore, we set aside the order of the learned CIT(A) to this extent and direct the AO not to include excise duty and sales-tax in the total turnover for computing relief under Section 80HHC. However, as far as scrap sale is concerned, following the decision of Chennai Bench of the Tribunal in the case of Jt. CLT v. Virudhunagar Textiles Mills Ltd. (2006) 99 TTJ (Chennai) 500 : (2005) 97 TW 306 (Chennai), we hold that the same has to be included in the total turnover as well as in the business profits of the assessee. Therefore, this ground is partly allowed.
Ground No. (5)
10. After hearing both the parties, we find that the AO had excluded interest amounting to Rs. 64,04,083, rent amounting to Rs. 4,05,000, interest on APSEB deposits amounting to Rs. 18,356 and other income amounting to Rs. 36,71,796 from the business profits for the purpose of deduction under Section 80HHC. The learned CIT(A) after analyzing the items in detail held that the AO should exclude only 90 per cent of net interest amount from the business profits and he gave further direction that other items should be examined and if they do not fall under the exclusionary categories under Clause (baa) of Explanation to Section 80HHC, then the same should not be excluded. The Revenue has also raised this issue in ITA No. 888/Mad/2001 that interest should have been disallowed on the gross basis and not on net basis.
11. Though the learned Counsel for the assessee pointed out that some of the interests were received from Telco who is one of the customers of the assessee and therefore, the same could not have been excluded in view of the decision of the Madras High Court in the case of CTT v. The Madras Motors Ltd. (2002) 174 CTR (Mad) 221 : (2002) 257 TTR 60 (Mad), however, we are not in agreement with this contention because interest was considered as part of the receipts derived from industrial undertaking for the purpose of Section 80HH. However, while adjudicating the issue for the purpose of Section 80HHC, Hon'ble Madras High Court has clearly held in CIT v. V. Chinnapandi (Mad) that after 1st April, 1992, i.e. after the amendment of Clause (baa) of Explanation to Section 80HHC(4C) that 90 per cent of gross interest has to be excluded for the purpose of deduction under Section 80HHC. Therefore, we set aside the order of the learned CIT(A) and hold that 90 per cent of the gross interest has to be excluded from business profits under Clause (baa) of Explanation to Section 80HHC. Similarly, rent is also clearly mentioned in Clause (baa) of Explanation to Section 80HHC and therefore, has to be excluded from business profits for the purpose of deduction under Section 80HHC. As far as other items are concerned, since the issue has been remitted back to the file of the AO by the learned CIT(A), no interference is called for. Therefore, the ground raised by the assessee in this regard is dismissed while the ground raised by the Revenue in this regard is allowed.
12. In the result, the appeal filed by the assessee is partly allowed. ITA No. 888/Mad/2001
13. The Revenue has raised the following grounds in this appeal:
(1) The CIT(A) erred in deleting the addition made to the tune of Rs. 2,01,09,534 being the expenditure incurred for consultancy, training, awareness programme, re-arrangement of machines, etc. and for structural and system changes in the manufacturing zone.
(2) The CIT(A) erred in holding that both interest payments and receipts have to be considered and the net interest receipts, if any, have to be adopted for excluding 90 per cent from the business profits while computing the deduction under Section 80HHC as per Expln. (baa) to Section 80HHC.
Ground No. (1)
14. During the assessment proceedings, the AO noticed that the assessee had claimed a sum of Rs. 2,01,09,534 as deferred revenue expenditure which was incurred for certain structural and system changes in the manufacturing zone of assessee company. The expenditure included consultancy, training, cost of conducting awareness programme, re-arrangement of machines, etc. The AO observed that in financial account, the above expenditure was rightly passed over a period of three years. However, the same was claimed in to to as allowable deduction under the IT Act. He held that this expenditure was of capital nature and therefore, not allowable. The learned CIT(A) deleted the addition by following his own order in the case of Rane Madras Ltd. for asst. yr. 1996-97 in ITA No. 39/1999-2000, dt. 23rd Dec, 1999.
15. Before us, the learned Departmental Representative strongly relied on the grounds of appeal filed and supported the order of the AO. On the other hand, the learned Counsel for the assessee pointed out that the order relied on by the CIT(A) for asst. yr. 1996-97 in the case of Rane Madras Ltd. has already been confirmed by the Tribunal in ITA Nos. 409/Mad/2000 and 631/Mad/2001 (copy of the order has been placed on record).
16. After considering rival contentions carefully, we find that in an identical circumstance in the case of Rane Madras Ltd., the Tribunal had allowed such expenditure as revenue expenditure in ITA Nos. 409/Mad/2000 and 631/Mad/2001 by order dt. 20th Jan., 2006. We are of the considered view that expenditure incurred on consultancy fee paid, training of task force and other members in UK and expenditure in connection with re-arrangement of machines, etc. cannot be called capital expenditure. They are clearly of revenue in nature and have been correctly allowed by the learned CIT(A). Therefore, we find nothing wrong with the order of the learned CIT(A) and confirm the same.
Ground No. (2)
17. This issue has been adjudicated by us while adjudicating the appeal of the assessee in para 9 above. Following the decision of the Hon'ble Madras High Court in the case of CTT v. V. Chinnapandi (supra), we are of the opinion that 90 per cent of the gross interest has to be excluded from the business profits for the purpose of deduction under Section 80HHC. Therefore, we set aside the order of the learned CIT(A) and the AO is directed to exclude 90 per cent of the gross interest from business profits under Clause (baa) of Explanation to Section 80HHC(4C) for computation of deduction under Section 80HHC. Therefore, this ground is allowed.
18. In the result, the appeal filed by the Revenue is partly allowed.