By TIOL News Service

CHENNAI, JAN 06, 2016: THE issue is - Whether when a Circular allowing inward remittances came into effect after the receipt of such amount, such circular can have only prospective effect. YES is the answer.

Facts of the case

The assessee company is manufacturer of electronic components and filed audit report u/s 44AB and also claimed exemption u/s.10B in respect of EHTP Division (Electronic Hardware Technology Park Division) engaged in manufacture of UPS and power condition system. Out of the total turnover of Rs.3,91,72,095/-, net profit on export turnover has worked out to Rs.15,09,803/- after considering the overheads. The assessee had filed all statutory forms for claiming deduction u/s.10B and also copies of foreign inward remittances undertaken by the EOU division. Against the total turnover of Rs.3,91,72,095/-, the foreign exchange received within stipulated time of six months from the end of financial year into country is Rs.3,42,66,477/- and the balance sum of Rs.48,23,426/- was received from subsidiary company after the due date. AO had restricted the deduction u/s 10B to the extent of Rs.42,64,057/- as against claimed by the assessee Rs.52,16,537/-. On appeal, CIT(A) had has confirmed the AO's disallowance.

Disallowance u/s.40(a) (ia)

The assessee company was in the business of manufacturing and export of the UPS and electronic parts used for global networking and has entered into contracts with various communication channels which provides internet services including M/s.SAP India Pvt. Ltd for providing software services. The assessee company based on the nature of transaction and working conditions deducted TDS under provisions u/s.194C @2% on such contract payments. AO objected to TDS deduction at 2% and treated such expenditure was covered u/s.194J for technical services and made proportionate disallowance. The assessee has further submitted that provisions of Sec.40(a) (ia) are not applicable and payments are contract payments and not for any professional or technical services. After hearing the submissions, the AO neither considered provisions of 194C or 194J but invoked disallowance under provisions u/s.40a(ia) for contract payments.

Disallowance of interior decoration works

The assessee in the financial year 2007-08 has incurred an expenditure of Rs.17,83,467/- on the interior works in the nature of Aluminum glass partitions, toilet refurbishing, granite tiles and strips doors etc. The assessee company has treated such expenses as Revenue expenditure. In the assessment proceedings, it was explained that temporary partitions, fixation of glass, granite tiles etc on rented premises are considered as current repairs and 100% deduction claimed but the Assessing Officer allowed depreciation at the rate of 10% and disallowed expenditure of Rs.16,05,120/-. On appeal, CIT(A) after hearing the submissions overlooked the information and confirmed the addition of AO.

Having heard the matter, the Tribunal held that,

Exemption claimed u/s.10B

++ at the outset, RBI is the competent authority to give special permission in writing to the assessee to receive sale proceeds after the said date. In the present case Rs.48,23,426/- was received in October, 2008 and February 2009, after a period of six months from the end of the previous year and the circular of the RBI is effective from 2011 onwards in respect of inward remittances and not retrospectively. Considering the above facts, we are inclined to uphold the order of the CIT(A). The AO also excluded from the export turnover foreign exchange gain of Rs.2,98,953/- for the computation of deduction u/s.10B as assessee could not explain the source for foreign exchange gains attributed to units and the CIT(A) has confirmed the addition. Before us, the AR has not submitted any particulars but pleaded for consideration of foreign exchange gains for deduction u/s.10B and it is also apparent from the facts of the case that AR could not substantiate his ground with any material evidence. Therefore, we are inclined to uphold the order of the CIT(A) on this ground also;

Disallowance u/s.40(a) (ia)

++ we find that the addition u/s.40a(ia) can be made if both the conditions are satisfied in respect of applicability of TDS under chapter XVII B and tax was not deducted by the assessee. In the present case, the assessee had deducted TDS at a lower rate, on perusing the case laws and decisions relied by the counsel. We found that expenses are not liable to be disallowed u/s.40(a)(ia) on account of short deduction of TDS. The assessee has further complied with both the limbs of applicability of provisions by deducting TDS on payments and depositing the same with the Government, which is not disputed by the AO. We are of the opinion, that if any difference in strategy of taxability or nature of payment arises, in such circumstances alternatively, AO can treat the assessee as defaulter u/s.201 but not by invoking provisions u/s.40(a)(ia). It is also apparent from facts of the case the assessee has deducted TDS and remitted to the treasury and we direct the Assessing Officer to delete the impugned addition and allow the grounds of the assessee;

Disallowance of interior decoration works

++ the expenditure incurred by the assessee is only to upkeep the business enterprises to maintain wear and tear but not to increase the productivity or manufacturing activity. The change of flooring and other connected works will only improve the brand image which is indeed required for such global company. The legal position of such expenditure when it is dismantled cannot be rebuild or used for any other purpose as held by jurisdictional Madras High Court in the case of CIT vs. Amrutanjan Finance Ltd. 363 ITR 135 and Thiru Arooran Sugars Ltd vs. DCIT 350 ITR 324, were distinction has been made between capital and revenue expenditure and allowed as current repairs in the previous year. Applying the principles of law of Jurisdictional High Court. We are of the opinion that such expenditure has to treated as revenue expenditure and we direct the Assessing Officer to allow the deduction accordingly. The ground of the assessee is allowed. In the result, the appeal filed by the assessee in ITA No.1344/Mds/2012 is partly allowed for statistical purpose.

(See 2016-TIOL-26-ITAT-MAD)