2011 (2) TMI 1351 - AT - Income Tax

Deduction u/s 080 HHC - inclusion of sales-tax and excise duty - HELD THAT - section 145A as such will not affect the working of profits of business and, therefore, sales-tax, excise duty if not included by the assessee in its accounting method cannot be forced to be included for computing deduction under section 080 HHC. Therefore, the decision of Hon. Supreme Court in Laxmi Machine Works 2007 (4) TMI 202 - SUPREME COURT would be applicable even in Asst. Years subsequent to Asst. Year 1999-2000 onwards. As a result, this ground of assessee is allowed. Deduction u/s 080 HHC - inclusion of service charges in the total turnover - HELD THAT - services charges would be excluded from the total turnover. following the judgment in the case of CIT vs. Nahar Export Ltd. 2008 (3) TMI 697 - PUNJAB AND HARYANA HIGH COURT . we decide the issue in favour of the assessee. As a result, this ground of assessee is allowed. Deduction u/s 080 HHC - on sale of scrap - HELD THAT - Relying on the decision in CIT vs. Ashok Leyland Ltd. 2007 (2) TMI 151 - HIGH COURT, MADRAS held that if scrap has formed part of gross receipts of the assessee and it is coming out of manufacturing process and profit therefrom is included in the trading cum manufacturing account then scrap would form part of turnover. Accordingly, this issue is decided against the assessee. This ground of assessee is rejected. Exclusion of 90% of sale and scrap - deduction u/s 080 HHC - HELD THAT - Here in the present case the scrap is business income generated from manufacturing activities and is, therefore, part of business profit but as it is not akin to commission, brokerage, interest, rent etc. any part thereof cannot be excluded from the business profit. Therefore, this ground of assessee is rejected. HELD THAT - Once interest income is treated as income from other sources, therefore, excluded 90% thereof as per explanation (baa) to section 80 HHC would not arise. Accordingly, this ground of assessee is also rejected. challenged the computation of assessed income as a whole - HELD THAT - The only argument of the ld. AR which requires consideration is that wherever additions are sustained then they should be taken into account while computing business profit for the purpose of deduction u/s 80 HHC. We agree with the above submission and direct the AO to recomputed the deduction u/s 80 HHC by considering the additions sustained in appeal while computing business profits. This ground is disposed of accordingly. charging of interest u/s 234D - HELD THAT - It laid down the proposition that if the amount refunded u/s143 exceeds the amount refundable on regular assessment then assessee would pay simple interest at the prescribed rate on the whole or excess amount so refunded. This provision of charging of interest will apply to all cases of refund granted but interest could be levied only w.e.f. 1.6.2003.As a result this ground is allowed in favour of the assessee. claim of bad debts - HELD THAT - In our considered view there is no case for interference in the order of ld. CIT(A). It is admitted position that assessee has actually written off the amounts. Once it is so then matter is squarely covered by the decision of Hon. Supreme Court in the case of TRF Ltd. vs. CIT 2010 (2) TMI 211 - SUPREME COURT wherein it is held that w.e.f. 1.4.1989 in order to obtain a deduction in relation to bad debts it is not necessary for the assessee to establish that the debt in fact has become irrecoverable. It is enough if the bad debt is written off and the bad debt is irrecoverable in the account of assessee. Following the decision, we confirm the order of ld. CIT(A) and dismiss this ground of Revenue. acquisition of computer software - intangible asset - claim of depreciation - disallowance of software expenses - claimed as revenue expenditure - HELD THAT - Once it is found that the system software are integral part to the computer hardware system then they will also be entitled for same rate of depreciation as computer hardware. Since no specific rate is prescribed in the rule for computer software they have to be held as part of computer system and hence they are eligible for same rate of depreciation. We accordingly allow depreciation @ 60% on system software also as claimed by the assessee. So far as claim of ₹ 5,08,728/- is concerned the AO has not shown that they are system software but in fact they are only application software. The assessee does not get any right over them. They are to be modified from time to time, what assessee gets is licence to use them and they are not integral to computer system. Accordingly they are revenue expenditure and has to be allowed. Similar view has been taken in CIT vs. Varinder Agro Chemicals Ltd. 2008 (10) TMI 100 - PUNJAB AND HARYANA HIGH COURT . Therefore,we allow the claim of the assessee that application software is Revenue in nature and expenditure thereon is deductible. disallowance proportionate interest - HELD THAT - In the present case we notice that loan funds have decreased this year as compared to earlier years. Even though investments have increased from ₹ 940.32 lacs to ₹ 1008.51 lacs but such increase in investment cannot be linked to any borrowed funds this year as assessee has in fact not borrowed any additional fund this year. Since assessee had sufficient profits generated this year and it had mixed funds and no nexus is established by the AO as to whether investment was made out of interest bearing funds, disallowance of interest cannot be made. Similarly no disallowance out of administrative expenditure can be made as there is no direct nexus. As a result, this ground is allowed. disallowance of claim of accrued interest - HELD THAT - the AO's action is legally correct in disallowing the claim of the assessee in this regard. In the case of CIT vs. Ashwin Vanaspati Industrial 2005 (3) TMI 48 - GUJARAT HIGH COURT , held that Disputed liability towards damages claimed by customer from assessee for the latter's failure to supply part of the contracted goods which was pending for adjudication before the sole arbitrator and was not discharged during the relevant year was not allowable as deduction. Since the facts of the case under consideration are identical and both the lower authorities have followed their earlier orders. In view of that we find that the ITAT has decided the issue in favour of the revenue. In view of that, we also set aside the order of the CIT(A) and restore that of the AO. we decide the issue in favour of the Revenue.

Summary

Issues Involved:
1. Disallowance of bad debts.
2. Exclusion of other income while computing deduction under section 80 HHC.
3. Adjustment regarding International transactions.
4. Depreciation on computer software.
5. Disallowance of interest and administrative expenses.
6. Accrued interest payable to APSEB.
7. Classification of interest income.
8. Inclusion of sales tax and excise duty in total turnover.
9. Inclusion of service charges and sale of scrap in total turnover.
10. Charging of interest under section 234D.
11. Provision for warranty expenses.
12. Provisions of bad debts.

Detailed Analysis:

1. Disallowance of Bad Debts:
- Revenue's Appeal (2002-03): The AO disallowed Rs. 74,16,526/- as bad debts, questioning the evidence of efforts made for recovery. The CIT(A) allowed the claim, referencing various judgments that post-1989 amendments only require the debt to be written off in the books. The Tribunal upheld the CIT(A)'s decision, citing the Supreme Court's ruling in TRF Ltd. vs. CIT.
- Assessee's Appeal (2003-04): The AO disallowed Rs. 46,84,621/- as bad debts but allowed Rs. 25.39 lacs recovered in 2004-05. The CIT(A) allowed the entire claim. The Tribunal upheld this decision following the TRF Ltd. judgment.
- Revenue's Appeal (2004-05): The AO disallowed Rs. 32,58,572/- as bad debts. The CIT(A) allowed the claim. The Tribunal restored the issue to the AO to verify actual amounts written off.

2. Exclusion of Other Income While Computing Deduction Under Section 80 HHC:
- Revenue's Appeal (2002-03): The AO excluded 90% of debt recovery, discount, and insurance claims from business income. The CIT(A) directed not to exclude these, treating them as business income. The Tribunal restored the issue to the AO for fresh adjudication.
- Revenue's Appeal (2004-05): Similar exclusions were made for insurance claims, bad debt recovered, sundry credit balances, sales tax, and excise refunds. The Tribunal restored the issue to the AO for fresh adjudication, considering the nature of these receipts.

3. Adjustment Regarding International Transactions:
- Assessee's Appeal (2002-03): The CIT(A) confirmed the addition of Rs. 1,20,930/- for transactions with Suzhou Pfaudler Glass lined Equipment Co. Ltd., China. The Tribunal noted the ground was not pressed and rejected it.

4. Depreciation on Computer Software:
- Assessee's Appeal (2002-03): The AO allowed 25% depreciation on software, treating it as an intangible asset. The CIT(A) upheld this. The Tribunal differentiated between system software (eligible for 60% depreciation) and application software (revenue expenditure), allowing the claim accordingly.

5. Disallowance of Interest and Administrative Expenses:
- Assessee's Appeal (2002-03): The AO disallowed Rs. 10,70,000/- interest and Rs. 1,20,000/- administrative expenses, invoking section 14A. The CIT(A) upheld this. The Tribunal found no nexus between borrowed funds and investments, allowing the claim.
- Assessee's Appeal (2004-05): The Tribunal followed the same reasoning and allowed the claim.

6. Accrued Interest Payable to APSEB:
- Assessee's Appeal (2002-03): The CIT(A) confirmed the non-allowance of Rs. 8,33,185/- interest payable to APSEB. The Tribunal upheld this decision, referencing earlier judgments.
- Assessee's Appeal (2003-04 & 2004-05): The Tribunal followed the same reasoning and rejected the claim.

7. Classification of Interest Income:
- Assessee's Appeal (2002-03): The AO classified Rs. 19,51,000/- as income from other sources. The CIT(A) upheld this. The Tribunal noted the ground was not pressed and rejected it.
- Assessee's Appeal (2004-05): The Tribunal followed the same reasoning and rejected the claim.

8. Inclusion of Sales Tax and Excise Duty in Total Turnover:
- Assessee's Appeal (2002-03): The CIT(A) included sales tax and excise duty in total turnover. The Tribunal excluded these, following the Supreme Court's decision in CIT vs. Laxmi Machine Works.
- Revenue's Appeal (2003-04 & 2004-05): The Tribunal followed the same reasoning and decided in favor of the assessee.

9. Inclusion of Service Charges and Sale of Scrap in Total Turnover:
- Assessee's Appeal (2002-03): The CIT(A) included service charges and sale of scrap in total turnover. The Tribunal excluded service charges, following the Punjab & Haryana High Court's decision in CIT vs. Nahar Export Ltd. However, it included the sale of scrap, following the Karnataka High Court's decision in CIT vs. Motor Industries Co. Ltd.
- Assessee's Appeal (2003-04): The Tribunal followed the same reasoning and decided in favor of the assessee regarding service charges but included the sale of scrap.

10. Charging of Interest Under Section 234D:
- Assessee's Appeal (2002-03): The Tribunal allowed the claim, noting that interest under section 234D should be charged only from 1.6.2003, following various judgments.

11. Provision for Warranty Expenses:
- Revenue's Appeal (2004-05): The AO disallowed Rs. 6,43,000/- as warranty expenses. The CIT(A) allowed the claim. The Tribunal restored the issue to the AO for verification, following the Supreme Court's decision in Rotork Controls India (P) Ltd. vs. CIT.

12. Provisions of Bad Debts:
- Assessee's Appeal (2004-05): The AO disallowed Rs. 59,71,000/- as provisions for bad debts. The CIT(A) allowed part of the claim but disallowed Rs. 16,52,778/- recovered in FY 2006-07. The Tribunal restored the issue to the AO for verification of actual amounts written off.

Conclusion:
The Tribunal's decisions were a mix of confirmations, rejections, and remands for fresh adjudication. The key issues revolved around the treatment of bad debts, exclusion of certain incomes for deduction purposes, and the inclusion of specific items in total turnover. The Tribunal consistently followed higher judicial precedents and required detailed verification by the AO in several instances.