2007 (12) TMI 305 - AT - Income Tax

Issues Involved:
1. Disallowance of technical fees under section 40(a)(i) of the Act.
2. Provision for warranty.
3. Provision for doubtful debts added back to the book profits for calculation of income under section 115JA.
4. Disallowance of business promotion expenses.
5. Disallowance of travelling expenses of foreign technicians.
6. Non-grant of TDS credit.
7. Penalty under section 271(1)(c) for assessment year 1999-2000.

Detailed Analysis:

1. Disallowance of Technical Fees under Section 40(a)(i):
The first issue in the appeals for assessment years 1997-98, 1999-2000, and 2000-01 concerns the disallowance of technical fees under section 40(a)(i). The assessee paid technical services fees and deducted tax but did not deposit the same into the Government account during the relevant financial years. The Assessing Officer disallowed the technical fees paid, and the CIT(A) upheld this decision. The Tribunal found that although the tax was deducted, it was paid to the exchequer in subsequent financial years. The Tribunal ruled that the technical fees should be allowed in the subsequent assessment year when the tax was paid, and directed the Assessing Officer to allow the deduction of technical fees paid as claimed by the assessee.

2. Provision for Warranty:
This issue arises in assessment years 1996-97, 1997-98, 1999-2000, and 2000-01. The assessee provided for warranty at 2% of the turnover, claiming it on an accrual basis. The Assessing Officer and CIT(A) treated the provision as a contingent liability and disallowed it. The Tribunal, however, found that the provision for warranty was based on past experience and was necessary to reflect the true financial position of the company. Citing various case laws, the Tribunal allowed the deduction for the provision for warranty.

3. Provision for Doubtful Debts Added Back to Book Profits under Section 115JA:
For assessment year 1998-99, the Assessing Officer added back the provision for doubtful debts to the book profits under section 115JA. The CIT(A) upheld this addition. The Tribunal, however, found that the provision for bad debts was not for meeting any liability but to provide for diminution in the cost of assets. Citing various case laws, the Tribunal allowed the ground raised by the assessee.

4. Disallowance of Business Promotion Expenses:
For assessment year 1997-98, the Assessing Officer disallowed 50% of business promotion expenses, treating them as entertainment expenses. The CIT(A) upheld this disallowance. The Tribunal, following the jurisdictional High Court's decision in CIT v. Indian Plastics Ltd., dismissed the assessee's ground, treating the expenses as entertainment expenditure.

5. Disallowance of Travelling Expenses of Foreign Technicians:
For assessment year 1996-97, the Assessing Officer disallowed travel expenses of foreign technicians amounting to Rs. 1,56,06,665, which was claimed in the revised return. The CIT(A) upheld the disallowance, finding no business expediency and noting the lack of RBI approval for such expenses. The Tribunal concurred with the CIT(A), emphasizing that the expenditure was not for the purpose of the assessee's business and lacked statutory approval.

6. Non-grant of TDS Credit:
The assessee contended that full credit for tax deducted was not allowed. The departmental representative agreed to send the issue back to the Assessing Officer for fresh adjudication. The Tribunal set aside this ground to the file of the Assessing Officer.

7. Penalty under Section 271(1)(c) for Assessment Year 1999-2000:
The Assessing Officer levied a penalty of Rs. 11,50,659 under section 271(1)(c) for a wrong claim regarding the reversal of provision for doubtful debts. The CIT(A) upheld the penalty, finding deliberate concealment by the assessee. The Tribunal agreed with the CIT(A), noting that the claim was not made on a bona fide basis and was an attempt to reduce tax liability. The penalty was confirmed.

Conclusion:
The appeals for assessment years 1996-97, 1997-98, and 2000-01 were partly allowed, while the appeals for assessment years 1998-99 and 1999-2000 were allowed. The penalty appeal for assessment year 1999-2000 was dismissed.

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