Maintainability of Assesses claim for deduction U/s. 80IA if he sets up windmills at different places in different years

M/s. Pidilite Industries Limited

Vs.

The Dy. Commissioner of Income Tax

Decided by – ITAT Mumbai

ITA No. 3355/Mum/2009 

Asst.Year- 2006- 2007

Date of Decision – 10.06.2011

O R D E R

Per R.S.Syal, AM :

This appeal by the assessee arises out of the order passed by the learned Commissioner of Income-tax on 17.03.2009 in relation to the assessment year 2006-2007.

2. First ground is against the denial of deduction u/s.80-IA in respect of profits of windmills. Briefly stated the facts of this ground are that the assessee claimed deduction in respect of windmills set up at Upleta, Gujarat and Sangli & Satara, Maharashtra. The Gujarat unit was set up in 1995-96 and Maharashtra unit was set up in 2000-2001. In the covering letter filed along with the return of income the assessee claimed that the above referred undertakings had brought forward losses but in view of the decision of the Mumbai Bench of the Tribunal in M.Pallonji & Co. Pvt. Ltd. Vs. JCIT SR-5 (6 SOT 287) the assessee was entitled to deduction. Audit report in Form No.10CCB in support of claim of deduction u/s.80-IA was also filed. During the course of assessment proceedings the Assessing Officer observed that the claim of the assessee for deduction u/s. 80-IA was not maintainable in view of the provisions of section 80-IA(5). In reaching this conclusion, the A.O. relied on Special Bench order in the case of ACIT Vs. Goldmine Shares and Finance (P) Ltd. [(2008) 113 ITD 209 (Ahd) (SB)]. It was noticed that in the afore-noted order of the Special Bench the Tribunal has concluded that in view of the provisions of section 80-IA(5) the profits from eligible business for the purpose of determination of quantum of deduction u/s. 80- IA were to be computed after deduction of notional brought forward losses and depreciation of eligible business even though this had been set off against other income in the earlier years. In view of this position the A.O. did not allow deduction u/s.80-IA(5). The learned CIT(A) echoed the assessment order on this issue.

3. We have heard the rival submissions and perused the relevant material on record. The learned Counsel for the assessee placed on record two sheets detailing the position in respect of profit /  loss of both the units from the year of set up till the close of the previous year relevant to the assessment year under consideration. First is Gujarat Unit, whose commercial production started in the financial year 1996-97. There was a loss in that year to the tune of Rs. 3.56 crores. In the Remarks column, it has been mentioned that the said loss was set off from the business income of other non-eligible units. From assessment year 1998-99 onwards up to assessment year 2005-2006 there was profit ranging between Rs. 11,48,000 to Rs. 23.84 lakhs. In the assessment year under consideration there was profit of Rs. 18.34 lakhs for which the assessee is claiming deduction u/s.80- IA. It is an admitted position that the assessee had not claimed any deduction in the earlier years due to the sub-section (5) of section 80-IA. It is noticed that even after reducing the amount of profits for the intervening years the amount of loss of Rs.3.56 crores which resulted in assessment year 1997-98 when commercial production was started, still there is a cumulative loss of Rs.2.14 crores. Coming to the second Unit at Sangli & Satara, whose commercial production started in financial year 2000-200 1 and there was a loss of Rs.16,73,40,000 in that year. This loss was set off from business income of other non-eligible units as has been mentioned in the Remarks column of the chart produced by the ld. AR before us. Starting from the second year of the year of commencement of commercial production, there was a profit up to assessment year 2005-2006. In assessment year 2006-2007, there was profit of Rs. 13.34 lakhs, for which the assessee is claiming deduction. After adjusting the profits over the period still there is a cumulative loss from the eligible unit amounting to Rs. 12.99 crores. Thus it is seen that in both the units there was a loss in the year in which the commercial production started. Even though there was profit in subsequent years, but in the assessment year under consideration the assessee claimed deduction for the profit resulted in this year from these eligible units despite the fact that there was a cumulative brought forward loss from these units.

4. Section 80-IA(5) provides that notwithstanding anything contained in provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply, shall for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made. It is noticed that by virtue of sub-section (5), section 80-IA has become a stand alone provision. The effect of sub-section (5) is that for the purpose of granting deduction in the initial year or a subsequent year it shall be considered as if the assessee is having eligible business as the only source of its income. In other words if there is a loss in the initial year and in the subsequent year there is a profit, deduction shall be allowed by considering the brought forward loss in the year of profit. Firstly such brought forward loss shall be set off against the profit of the eligible unit for such succeeding year and the deduction shall be allowed only if there is net profit of the eligible unit, that is, the profit of the year is sufficient enough to absorb the brought forward loss of the unit and also thereby leaving some positive profit for the current year. This position remains notwithstanding the fact that the assessee may have set off such loss from the eligible unit against the income of non-eligible unit in the year of incurring of such loss. By means of sub-section (5), the loss incurred in the eligible unit is notionally carried forward to the subsequent years and considered as such in the subsequent years until it is wiped out with the profits of the eligible unit for the succeeding years. This position stands despite the fact that such loss may have been actually set off against the income of non-eligible units in an earlier year or even the very year in which commercial production started. The Special Bench of the Tribunal in Goldmine Shares and Finance (P) Ltd. (supra) has held to this extent by laying down that : “in view of the specific provisions of section 80-IA(5), the profit from the eligible business for the purpose of determination of the quantum of deduction u/s.80-IA has to be computed after deduction of the notional brought forward losses and depreciation of eligible business even though they have been allowed set off against other income in earlier years”.

5. The learned Counsel for the assessee has relied on the judgment of the Hon’ble Madras High Court in the case of Velayudhaswamy Spinning Mills (P) Ltd. Vs. ACIT [(2010) 38 DTR (Mad.) 57] in support of the contention that : “the initial assessment year should not be considered as the year in which the unit is set up but the year in which the deduction is claimed for the first time”. Accentuating on this judgment, the ld. AR stated that the special bench order in Goldmine Shares and Finance (P) Ltd. (supra) is no more a good law. We are not convinced with the reasoning advanced on behalf of the assessee. In para 18 (Page 75 of the DTR) of the judgement, their Lordships of the Hon’ble High Court have observed that the initial assessment year in this case starts from 2004-2005 since the assessee opted to claim the deduction for the first time. This claim was allowed because of the amendment to section 80-IA by the Finance Act, 1999. Before the amendment, the `initial assessment year’ was defined in the Act, but after the amendment no definition for the initial assessment year has been given and thus there is option to the assessee in selecting the year of claiming relief u/s.80-IA. Adverting to the facts of the instant case it is found that the unit at Gujarat was set up in the financial year 1996-97 as is apparent from the detail provided to us by the learned Counsel for the assessee which shows that there was a loss in assessment year 1997- 98 to the tune of Rs. 3.56 crores. It, therefore, indicates that the ratio of the judgement of the Honourable Madras High Court shall not apply to the present factual scenario for the reason that the Gujarat unit was set up after the amendment to section by the Finance Act, 1999. In the pre-amendment period “initial assessment year” was defined u/s.80-IA(12). Since the amendment took place by the Finance Act, 1999 taking away the definition of `initial assessment year’ given in the pre-amendment period, it is the ante amendment provision which would apply to the assessee because the assessee started commercial production in the financial year 1996-97. In that view of the matter it becomes apparent that the Special Bench order in the case of Goldmine Shares and Finance (P) Ltd. (supra) would squarely apply as per which deduction is not permissible.

6. The second unit at Sangli & Satara started commercial production in the financial year 2000-2001. The learned A.R. contended that the benefit of the judgement in the case of Velayudhaswamy spinning Mills (P) Ltd. (supra) should be granted at least to the extent of profit from this eligible unit in preference to the Special Bench order. Again we are not convinced with the argument advanced on behalf of the assessee for the reason that the Honourable High court was considering a case in which the eligible business was the only source of income. It can be noticed from page 70 of the report. The discussion starts from para 13, whereby the Honourable High Court has reproduced the provision of section 80-IA. Thereafter certain important factors have been noted on page 69 and then at page 70 it has been observed that : “From reading of the above, it is clear that the eligible business were the only source of income, during the previous year relevant to initial assessment year and every subsequent assessment years”. From here it transpires that this judgement has been rendered in the context of a business which had income only from the eligible business and there was no income from any non-eligible unit. It is in this backdrop of the fact that the Honourable High Court held that if the brought forward loss of the eligible unit has been set off against the income then for the purpose of sub-section (5), it should be construed that there is no brought forward loss for the purposes of reducing the profit earned in the year of claim of deduction u/s.80-IA. It can be explained in a simple manner. Suppose there is only eligible business and in the year of setting up there is loss from business at Rs.100. Simultaneously the assessee earns income from `other sources’ in the same eligible business to the tune of Rs. 150. Even though there was a business loss of Rs. 100 in the year of setting up, but such loss was set off against income from other sources of the eligible business thereby bringing the business loss to Rs. Nil. It is in this scenario that there would be no brought forward loss from the eligible business in the subsequent years so as to enable the assessee to claim the benefit of deduction u/s.80-IA in subsequent years when there is profit. The facts of Sangli & Satara units are entirely different. In this case there was loss of Rs.16.73 crores from the eligible unit which was set off against the business income of other non-eligible unit. This fact has been mentioned in the detail sheet supplied by the learned A.R. at the time of hearing. It, therefore, becomes evident that the loss from the eligible unit was set off against the business income of other non-eligible unit and not the income of the eligible unit. The judgement of the Hon’ble Madras High Court would be applicable when there is profit from the eligible unit and the only source of income is that from the eligible business. As the present assessee had earned income from non-eligible business in the year of loss in the year of commencement of commercial production in the eligible unit, which was set off, the ratio decidendi of the judgement of the Honourable Madras High Court would not apply. But for the judgment in Velayudhaswamy spinning Mills (P) Ltd. (supra), the ld. AR has nothing to distinguish the special bench order. In that view of the matter it is seen that the judgement rendered in Velayudhaswamy spinning Mills (P) Ltd. (supra) is not applicable to the facts of the present case. Rather the authorities below were justified in jettisoning the claim of the assessee on deduction u/s 80-IA by relying on the Special Bench order in the case of Goldmine Shares and Finance (P) Ltd. (supra). We, therefore, uphold the impugned order on this issue. This ground is not allowed.

7. The second ground is against the treatment of software expenses of Rs.19,12,451 as capital expenditure. The assessee made payment of Rs.19,12,451 to three parties and claimed it as business expenses. The A.O. disallowed the claim of the assessee by holding it as capital expenditure. No relief was allowed in the first appeal.

8. After considering the rival submissions and perusing the relevant material on record it is noticed that the Special Bench of the Tribunal in the case of Amway India Enterprises Vs. DCIT [(2008) 111 ITD 112 (Del.) (SB)] has decided similar issue restoring the matter to the file of A.O. with the direction to decide about the deductibility or otherwise of software expenses on certain parameters laid down in that case. Both the sides are in agreement that the facts and circumstances of the present ground be also decided accordingly. We, therefore, set aside the impugned order on this issue and restore the matter to the file of A.O. for taking a fresh decision on this issue after considering the mandate of the Special Bench order in the case of Amway India Enterprises (supra) after allowing a reasonable opportunity of being heard to the assessee.

9. The last ground is against the treatment to Rs. 10,69,500 incurred for trademark related services out of legal and professional fees as capital expenditure. The facts of this ground are that the assessee claimed deduction of Rs. 10,69,500 paid to M/s. De Penning & De Penning for trademark related services under the head Legal and professional charges. The Assessing Officer noted that these expenses were incurred for obtaining the trademark. As the trademark is capital asset the A.O. held that the assessee would be granted depreciation as applicable to intangible asset. In holding so he relied on the view taken by him in the immediately preceding year i.e. 2005-2006. No relief was allowed in the first appeal.

10. We have heard the rival submissions and perused the relevant material on record. It is seen that the above referred payment was made by the assessee to M/s.DePenning & DePenning which is not a legal firm but engaged in providing services relating to patent, trademark, design and copyright. Copies of bills issued by M/s. De Penning & De Penning are available at pages 32 to 34 of the paper book from which it can be seen that the payment was made by the assessee towards filing patent application including translation fee / amendment fee in Canada, Russia and Taiwan. It is noticed that firstly there is nothing like legal charges involved in such payments. Secondly, this payment has been made for obtaining trademark. As trademark have been included u/s.32(1)(ii) in the category of `Intangible asset’ after 1.4.1998, the costs incurred by the assessee in the instant case are nothing but cost of trademarks. Such amount would be capitalised and qualify for depreciation as per law. The learned A.R. has relied on the judgement of the Honourable Supreme Court in the case of CIT Vs. Finley Mills Ltd. [(1951) 20 ITR 475] in which it was held that the expenses for registration of trademark are deductible in full. It is seen that the assessment years under consideration before the Honourable Supreme Court were 1943-44 and 1944-45. As the necessary amendment has been made to section 32(1)(ii) by specifically including trademark in the definition of intangible asset, the ratio laid down in Finlay Mills Ltd. (supra)would not apply as the case would be governed by section 32(1). It is further seen that the Assessing Officer has denied deduction by relying on his order for the immediately preceding year 2005-2006. On a pertinent query the learned A.R. admitted that the assessee accepted the addition made in assessment year 2005-2006 and did not agitate it further. In view of these facts and the legal position discussed above, we uphold the impugned order on this issue by dismissing this ground.