2001 (4) TMI 870 - AT - Income Tax

Issues Involved:
1. Addition of Rs. 60,30,000 on account of provisioning for revenue recognition.
2. Addition of Rs. 11,64,000 on account of warranty provision.
3. Disallowance under section 37(2A) for business lunch expenses.
4. Interest income of Rs. 11,07,085 treated as business income.
5. Deduction of pro rata lease premium of Rs. 46,163.
6. Disallowance of Rs. 24,41,000 towards royalty and technical know-how fees.
7. Addition of Rs. 4,70,000 for foreign travel expenses.

Detailed Analysis:

1. Addition of Rs. 60,30,000 on account of provisioning for revenue recognition:
The assessee, a public limited company, followed the percentage of completion method for recognizing revenue from long-term contracts. The Assessing Officer (AO) disallowed the provisioning of Rs. 60,30,000, considering it imaginary and aimed at increasing costs without actual expenditure, thus reducing profits. The Commissioner of Income-tax (Appeals) (CIT(A)) upheld this view, stating that the provision was for an unknown liability and not an actual material cost. The ITAT, however, allowed the appeal, recognizing the percentage of completion method as an accepted accounting practice, aligned with AS-7, and concluded that the provisioning was a rational and acceptable method for determining profit from long-term contracts.

2. Addition of Rs. 11,64,000 on account of warranty provision:
The AO disallowed the warranty provision of Rs. 11,64,000, considering it an unascertained liability. The CIT(A) upheld this view, stating that the provision was based on estimates and not actual liabilities. The ITAT, however, allowed the appeal, recognizing that the warranty provision was based on industry experience and collaborators' data, and was a rational and bona fide estimate. The provision was deemed allowable under AS-7, which mandates provisioning for foreseeable warranty costs.

3. Disallowance under section 37(2A) for business lunch expenses:
The AO treated the entire business lunch expense of Rs. 1,47,523 as entertainment and disallowed it. The CIT(A) allowed 20% of the expense as attributable to employees. The ITAT, referencing the Karnataka High Court's judgment in Mysore Minerals Ltd., directed the AO to allow 50% of the business lunch expenses as attributable to employees.

4. Interest income of Rs. 11,07,085 treated as business income:
This ground was not pressed during the hearing and was subsequently dismissed.

5. Deduction of pro rata lease premium of Rs. 46,163:
The ITAT dismissed this ground, agreeing with the CIT(A) that the issue was covered against the assessee by the decision in Maharashtra Scooters Ltd.

6. Disallowance of Rs. 24,41,000 towards royalty and technical know-how fees:
This ground was not pressed during the hearing and was subsequently dismissed.

7. Addition of Rs. 4,70,000 for foreign travel expenses:
This ground was not pressed during the hearing and was subsequently dismissed.

Separate Judgments by Judges:

On Warranty Provision:
The learned Accountant Member allowed the warranty provision, considering it a rational and bona fide estimate based on industry experience and AS-7 guidelines. However, the learned Judicial Member disagreed, stating that the liability was contingent and not allowable under section 28 or 37. The Third Member, agreeing with the Judicial Member, concluded that the provision for warranty liability was not allowable as it was contingent and had not accrued during the relevant accounting years.

On Investment Allowance:
The ITAT upheld the disallowance of investment allowance of Rs. 3,60,096, agreeing with the CIT(A) that the machinery was not installed in the relevant previous year and referencing the Supreme Court judgment in Shri Shubhlaxmi Mills Ltd. v. Addl. CIT, which mandates the creation of a reserve fund in the relevant previous year for claiming development rebate.

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