2019 (3) TMI 1608 - AT - Income Tax

Expenditure towards liquidated damages - HELD THAT - It is an undisputed fact that the assessee has accepted the claim for liquidated damages/compensation. We find that CIT(A) has in principle accepted the allowability of claim for liquidated damages as a business expenditure. It is a settled law that the expenditure is allowable as a business expenditure if it is incurred on the grounds of commercial expediency. Commercial expediency is a term of wide import and has been held to include such expenditure as a prudent businessman incurs for the purpose of business. The expenditure incurred though not under any legal obligation but still it is allowable as a business expenditure if incurred on the grounds of commercial expediency and the method of recognition is followed from year to year. The assessee is following the said method in earlier years and no disallowance has been made. Before us, no material has been placed by the Revenue that the expenditure is not a genuine expenditure or has been incurred to benefit any group concerns. Considering the totality of the facts we are of the view that the expenditure is allowable. Thus, the ground of Assessee is allowed Disallowance of higher depreciation - HELD THAT - since both the parties have admitted that the facts of the case in the present ground are identical to that of earlier years, we therefore following the decision of the Co-ordinate Bench of the Tribunal in assessee s own case for A.Y 2002-03 and for similar reasons hold that assessee is eligible to claim depreciation @ 80% with respect to plant and machinery used Plant Nos.4 and 8 in the manufacture of air / gas / fluid systems but is not eligible for 100% depreciation in respect of plant and machinery used in the manufacture of heat pumps. Thus, the ground of assessee is partly allowed. Disallowance of Short Term Incentive Plan (STIP) - HELD THAT - It is Assessee s submission that it has been consistently paying performance based incentives in the past and which has been allowed. However, during the year, the assessee has booked the expenditure on wholesome basis. We further find that pre-declared scheme is dated 22.12.2002 recommended by the VP HR and it was by the committee only on 28.05.2003 i.e., after the close of year. The AO has given a finding that the amounts were not credited to respective employees account in the instant year. Hence, we find no merit in claim of assessee. But the assessee is entitled to deduction of amounts, if any paid under the proposed scheme. In the result, the ground No.7 of the Assessee is partly allowed. Depreciation on knowhow - HELD THAT - The issue in the present ground is with respect to depreciation on knowhow. Before us it is assessee s contention that that technical know-how has been acquired in the first half of the year. However before us no external evidence has been furnished by the Assessee to demonstrate that the asset has been put to use. The evidence from Division head of the Assessee itself could not be the only basis for demonstrating the evidence to demonstrate the asset being put to use. In such a situation we find no reason to interfere with the order of CIT(A) and thus, the ground No.8 of Assessee is dismissed. Disallowance of club expenses - HELD THAT - The expenses have been disallowed by the Revenue authorities by holding it to be not for the purpose of business. On the other hand it is Assessee s contention that the expenses have been incurred by the employees for the purpose of business. Before us. Revenue has not placed any material to demonstrate that the expenses were not incurred by the employees of the Assessee. We find that the issue of allowability of club membership fees incurred for employees u/s 37(1) of the Act arose before for Hon ble Apex Court in the case of United Glass Manufacturing Ltd 2012 (9) TMI 914 - SUPREME COURT held the expenses to be a pure business expenses. Before us. Revenue has not placed on record any contrary binding decision nor could point out as to how the ratio of the aforesaid decision of the Apex Court is not applicable to the present facts. We therefore relying on the aforesaid decision of Hon ble Apex Court hold the club expenses to be an allowable expenditure u/s 37(1) Adhoc disallowance of expenses - HELD THAT - no distinguishing feature in the facts of the case under consideration and that of earlier years has been pointed out by the revenue. Before us, the submission of Ld AR that in subsequent years CIT(A) has deleted the adhoc deletions made by AO has not been controverted by Revenue. In such circumstances and following the reasoning as given while deciding the Assessee s appeal for AY 2002-03 and for similar reasons, hold that no disallowance of expenses on adhoc basis is called for in the present case. We therefore direct its deletion Deduction u/s 80HHC - items to be considered in total turnover and the items to be considered in export turnover - HELD THAT - While applying the deduction u/s 80HHC of the Act, the AO had excluded certain items and included certain items against which the Ld. CIT(A) has given relief in respect of certain items and upheld the other items. Both the assessee and the Revenue are in appeal against the respective portions of the order of the Ld. CIT(A). Both the Authorised Representatives have made extensive arguments in support of their respective claims. However, the issue of various aspects of claim of High Court and the Apex Court in various decisions and we proceed deduction u/s 80HHC of the Act has been adjudicated by the Hon ble to adjudicate the issues raised by making reference to the said decisions relied upon by the Ld.A.R. for the assessee and Ld.D.R. for the Revenue. Determination of total turnover - HELD THAT - The plea of the assessee is that the scrap is generated during the course of manufacturing. The aforesaid contention of the assessee is not controverted by the Revenue. In such a situation, we find that the ratio of the decision of Hon ble Apex Court in the case of CIT Vs. Punjab Steel Industries India 2014 (5) TMI 238 - SUPREME COURT would be applicable to the present facts and therefore the sale of scrap cannot be considered as part of total turnover for the purpose of calculation of deduction u/s 80HHC of the Act. Further, identical issue arose in Assessee s own case in AY 2002-03 wherein the issue was decided in favour of the Assessee by the co-ordinate Bench of Tribunal. Exchange Difference - Assessee fairly admitted that the said difference to the extent of sales would form part of the total turnover and the balance needs to be excluded. We find merit in the plea of the assessee that exchange difference to the extent of sales would be included as part of the total turnover. Non-exclusion of business losses - HELD THAT - Profits if any of the representatives of the assessee ought to be excluded u/s 80HHC of the Act, so consequently the losses have to be excluded under Explanation baa (2) of Sec.80HHC of the Act and consequently the profits eligible for claiming the deduction u/s 80HHC of the Act should be increased. We find merit in the plea of the assessee as Explanation (baa) to Sec.80HHC of the Act provides that the profits of any branch office, warehouse or any other establishment of the assessee situated outside India ought to be revised from the profits of business computed under the head of profits and gains of business and profession. Consequently in cases from the any loss of over-seas, branch or office then the same also needs to be excluded and the profits eligible to claim deduction u/s 80HHC of the Act should be increased and we direct so. Claim of u/s deduction u/s 80HHC by the amount of deduction allowed u/s 80IB - HELD THAT - AR fairly admitted that the method adopted by the AO has been upheld by the Hon ble Delhi High Court in the case of Great Eastern Exports 2010 (11) TMI 91 - DELHI HIGH COURT wherein it had approved the decision of the Special Bench of ITAT in the case of Hindustan Mint and Agro Products P Ltd 2009 (6) TMI 124 - ITAT DELHI-C and therefore the ground of the Assessee will have to be dismissed. Addition on account of adjustment made to closing stock - HELD THAT - The issue in the present ground is with respect to adjustment made to closing stock in terms to Sec.145A of the Act. We find that CIT(A) after considering the decision of Mumbai tribunal in the case of Gandhar Oil Refinery decided the issue in favour of the Assessee. Before us, Revenue has not pointed out any fallacy in the findings of CIT(A). We therefore find no reason to interfere with the order of CIT(A) and thus, the ground No.1 of Revenue is dismissed. Addition on account of lease rent - HELD THAT - The issue in the present ground is with respect to addition made on account of lease rentals. Before us it is submitted that in no fallacy has been pointed out by the revenue in the order of CIT(A). earlier year the addition has been deleted by the tribunal. Before us, We therefore find no reason to interfere with the order of CIT(A) and thus the ground of Revenue is dismissed. Addition on account of medical expenses - HELD THAT - We have heard the rival submissions and perused the material disallowance of additional medical expenses. We find that CIT(A) while deciding the issue in assessee s favour had relied upon the order of his predecessor for AY 2002-03. Before us, Ld AR submitted that in AY 2002-03 CIT(A) on identical facts had decided the issue in assessee s favour and the issue was not agitated by the Revenue. The aforesaid contention of the Ld AR has not been controverted by the Revenue. We further find that identical issue in AY 2002-03 was decided in Assessee s favour. In view of the aforesaid fact, we find no reason to interfere with the order of CIT(A) and thus the ground of Revenue is dismissed. Computation of deduction u/s 80IA - HELD THAT - We find that CIT(A) while deciding the issue in favour of the assessee has noted that if losses of erstwhile Thermax Water Technologies Ltd has been completely setoff and no loss is available to be carried forward then the question of setting of losses during the year does not arise. Before us Revenue has not pointed to any fallacy in the finding of CIT(A) and therefore we find no reason to interfere with the order of CIT(A) and thus the ground of Revenue is dismissed.

Summary

Issues Involved:
1. Premium on Leasehold Land
2. Revenue Recognition
3. Prior Year Expenses
4. Computer Software Expenses
5. Liquidated Damages
6. Depreciation on Plant and Machinery
7. Short Term Incentive Plan (STIP)
8. Depreciation on Technical Know-how
9. Club Expenses
10. Adhoc Disallowances
11. Deduction under Section 80HHC
12. Interest under Section 234D
13. Adjustments to Closing Stock under Section 145A
14. Accrual of Income as per Invoice
15. Lease Rent on Accrual Basis
16. Provision for Medical Expenses
17. Set-off of Brought Forward Losses/Unabsorbed Depreciation against Profit for Section 80IA Deduction

Detailed Analysis:

1. Premium on Leasehold Land:
The issue was the disallowance of amortized premium on leasehold land. The Tribunal upheld the disallowance, following its previous decisions in the assessee's own case for earlier assessment years and the Supreme Court's judgment in Govind Sugar Mills Ltd. v. CIT.

2. Revenue Recognition:
The Tribunal addressed the addition made to contract income due to the provision for profit equalization. It followed its earlier decisions in the assessee's own case, allowing the assessee's appeal and dismissing the Revenue's appeal on this issue.

3. Prior Year Expenses:
The Tribunal upheld the disallowance of prior period expenses, noting that the liability to pay commission arose in the respective years in which the sales took place, following its earlier decision in the assessee's case for AY 2002-03.

4. Computer Software Expenses:
The Tribunal upheld the disallowance of computer software expenses as capital expenditure, following its earlier decisions and the Bombay High Court's judgment in CIT v. Raychem RPG Ltd.

5. Liquidated Damages:
The Tribunal allowed the assessee's claim for liquidated damages as a business expenditure, noting that the expenditure was incurred on grounds of commercial expediency. It directed the AO to verify the claim to the extent supported by the clause of liquidated damages as per the contract.

6. Depreciation on Plant and Machinery:
The Tribunal partly allowed the assessee's claim for higher depreciation on certain plant and machinery used in the manufacture of renewable energy devices, following its earlier decisions. It upheld the disallowance of higher depreciation for plant and machinery used in the manufacture of heat pumps.

7. Short Term Incentive Plan (STIP):
The Tribunal upheld the disallowance of the provision for STIP, noting that the liability did not accrue during the year under consideration as the scheme was approved after the close of the financial year.

8. Depreciation on Technical Know-how:
The Tribunal upheld the disallowance of depreciation on technical know-how, noting that the assessee failed to provide external evidence to demonstrate that the asset was put to use during the year.

9. Club Expenses:
The Tribunal allowed the assessee's claim for club expenses, following the Supreme Court's decision in United Glass Manufacturing Co. Ltd., holding that such expenses are allowable as business expenditure under Section 37(1).

10. Adhoc Disallowances:
The Tribunal deleted the adhoc disallowances made by the AO, following its decision in the assessee's case for AY 2002-03, noting that the disallowances were made without pointing out any specific expenses not incurred for business purposes.

11. Deduction under Section 80HHC:
The Tribunal addressed various adjustments to the total turnover and export turnover for computing the deduction under Section 80HHC. It directed the AO to exclude certain items from the total turnover and eligible profits, following its earlier decisions and the Supreme Court's judgments in relevant cases.

12. Interest under Section 234D:
The Tribunal dismissed the assessee's ground on the levy of interest under Section 234D, noting that the provisions were applicable as the assessment was completed after 01.06.2003.

13. Adjustments to Closing Stock under Section 145A:
The Tribunal upheld the CIT(A)'s decision to delete the addition made to the closing stock under Section 145A, following the Delhi High Court's decision in Mahavir Aluminium Ltd. and the Bombay High Court's decision in Mahalaxmi Glass Works Pvt. Ltd.

14. Accrual of Income as per Invoice:
The Tribunal dismissed the Revenue's ground on the accrual of income as per the invoice, following its decision on the related issue of revenue recognition.

15. Lease Rent on Accrual Basis:
The Tribunal upheld the CIT(A)'s decision to delete the addition made on account of lease rent on an accrual basis, noting that there were no subsisting lease agreements during the year under consideration.

16. Provision for Medical Expenses:
The Tribunal upheld the CIT(A)'s decision to delete the disallowance of additional medical expenses, following its decision in the assessee's case for AY 2002-03.

17. Set-off of Brought Forward Losses/Unabsorbed Depreciation against Profit for Section 80IA Deduction:
The Tribunal upheld the CIT(A)'s decision, noting that if the losses of the amalgamating company were completely set off in the previous year, there would be no question of setting off losses during the current year.