2013 (11) TMI 1577 - HC - Income Tax

Liability to tax interest does not arise unless it accrues to the assessee - Not when the refund is actually granted in the relevant assessment year in MODVAT Credit - In interest u/s- 244A of the Act - HELD THAT - If an amount is due on a particular date and if that amount is unpaid on that date but paid on a subsequent date the recipient of that amount is deprived of legal due payment till actual payment. To compensate the denial of the benefit of the due payment interest is levied. It is not dependent on the claim in any legal proceedings when the assessee has received the money by interest on refund and the said amount required to be shown in the returns as an income making liable to pay tax. The amount offered for tax is not dependent on said interest became irrevocable or refundable. Therefore, the said finding is contrary to law and cannot be sustained. Thus, set aside. As the matter is already remitted to the assessing authority, firstly interest refunded should be calculated and the amount of refund on the subsequent orders by which the said benefit is sought to be withdrawn and thereafter calculate the interest taxable. Allowance of provision for advances as a revenue expenditure by furnishing details without actual examination of those details - HELD THAT - the direction given to Assessing Authority to allow the deduction for provision for advances. Further, observed that corresponding adjustment to the income exempted under Section 10A would also be warranted. Deduction allowed for amount of expenditure incurred by the corporate office to 10A units despite non-involvement in any activity other than earning income mainly interest and dividend - HELD THAT - the assessee is entitled to the benefit of deduction and thus answered in favour of the assessee and against the Revenue. - Decision in the case of Wipro Limited 2010 (8) TMI 1053 - KARNATAKA HIGH COURT followed Expenditure allowance for Provision for warranty expenses despite not being written off treated as the contingent liability - HELD THAT - provision for warranty is rightly made by the appellant because it has incurred a present obligation as a result of past events. There is also an outflow of resources. Therefore, the appellant has incurred a liability during the relevant assessment year which was entitled to deduction u/s. 37 of the 1961 Act. Therefore, all the three conditions for recognizing a liability for the purposes of provisioning stands satisfied in this case. There are provisioning which relates to- present obligation, it arises out of obligating events, it involves outflow of resources and it involves reliable estimation of obligation. Keeping in mind all the four aspects, we are of the view that the High Court should not to have interfered with the decision of the Tribunal in this case. The decision in the case of Rotork Controls India (P.) Ltd. v. CIT 2009 CHENNAI 2009 (5) TMI 16 - SUPREME COURT followed. Total turnover of software business taken into account for obtaining deduction u/s- 80HHE - HELD THAT - the sales tax and excise duty has to be excluded from the turnover for computing deduction under Section 80HHE of the Act, accordingly answered in favour of the assessee and against the Revenue. The decision in this case of CIT v. Laxmi Machine Works 2007 (4) TMI 202 - SUPREME COURT followed. Raising additional substantial question of law - Non-consideration of the claim for capital loss as a colourable devise - Allowing the capital loss based upon the statements made in the affidavits of the Revenue in the matter relating to interim relief for stay of refunds - Allowance of the capital loss suffering from perversity - Subterfuge or contrivance - obligation of every citizen to pay the taxes without resorting to subterfuges - Colourable devices - Tax Evasion vs. Tax Planning - HELD THAT - tax planning may be legitimate provided it is within the frame work of law . Colourable devices cannot be a part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid payment of tax by resorting to dubious methods . It is an obligation of every citizen to pay the taxes without resorting to subterfuges. Decision in the case of VODAFONE INTERNATIONAL HOLDINGS BV. VERSUS UNION OF INDIA ANR. 2012 (1) TMI 52 - SUPREME COURT and MCDOWELL AND CO. LIMITED VERSUS COMMERCIAL TAX OFFICER 1985 (4) TMI 64 - SUPREME COURT - followed

Issues Involved:
1. Validity of notice under Section 148 of the I.T. Act.
2. Eligibility of miscellaneous income for deduction under Section 10A.
3. Tax liability on interest accrual.
4. Allowability of provision for advances as revenue expenditure.
5. Claim of bad debts and write-off of debts.
6. Business loss due to liquidated damages.
7. Carry forward of loss from 10A units.
8. Fluctuation gain in exchange rate.
9. Deductibility of expenditure incurred by corporate office.
10. Deductibility of expenditure for importing software without TDS.
11. Allowability of provision for warranty expenses.
12. Exclusion of sales tax and excise duty from turnover for Section 80HHE computation.
13. Total turnover consideration for Section 80HHE deduction.
14. Allowability of foreign tax credit.
15. Controversy regarding un-availed MODVAT credit.

Issue-wise Detailed Analysis:

1. Validity of Notice under Section 148:
The Tribunal held that the present appeal pertains to regular assessment under Section 143(3) and not reassessment under Section 147. Therefore, the validity of the notice under Section 148 does not arise for consideration in this appeal.

2. Eligibility of Miscellaneous Income for Deduction under Section 10A:
The Tribunal reversed the findings of the Assessing Officer, holding that the miscellaneous income from exchange rate fluctuation, sale of scrap, etc., is eligible for deduction under Section 10A. This was based on the facts being similar to those of earlier assessment years (1998-99 and 1999-2000), where such income was considered eligible.

3. Tax Liability on Interest Accrual:
The Tribunal remitted the matter back to the Assessing Officer to follow directions given for the assessment year 1999-2000. This Court held that interest received as a refund should be taxed in the year it is granted, not when it becomes irrevocable.

4. Allowability of Provision for Advances as Revenue Expenditure:
The Tribunal found that the details for the provision of advances were furnished by the assessee and directed the Assessing Officer to allow the deduction. This Court affirmed the Tribunal's order, referencing earlier judgments.

5. Claim of Bad Debts and Write-off of Debts:
The Tribunal remitted the matter back to the Assessing Officer to verify the reconciliation furnished by the assessee. This Court declined to answer the question, as it was a matter of reconciliation.

6. Business Loss due to Liquidated Damages:
The Tribunal held that liquidated damages are a business loss allowable under Section 37. The Tribunal's finding was upheld by this Court, affirming that the write-off of bad debts, including liquidated damages, is allowable.

7. Carry Forward of Loss from 10A Units:
The Tribunal directed the Assessing Officer to allow the set-off of loss from 10A units, following decisions of the Apex Court and the Tribunal at Mumbai. This Court declined to answer the question, as it was already settled by the Apex Court.

8. Fluctuation Gain in Exchange Rate:
The Tribunal held that the fluctuation gain in exchange rate is not liable to tax, following earlier assessment years' decisions. This Court upheld the Tribunal's finding.

9. Deductibility of Expenditure Incurred by Corporate Office:
The Tribunal allowed the deduction of expenditure incurred by the corporate office to 10A units, following earlier years' decisions. This Court affirmed the Tribunal's order.

10. Deductibility of Expenditure for Importing Software without TDS:
The Tribunal allowed the expenditure for importing software without deducting TDS, following earlier years' decisions. This Court upheld the Tribunal's finding.

11. Allowability of Provision for Warranty Expenses:
The Tribunal allowed the provision for warranty expenses, following the Apex Court's decision in Rotork Controls India (P.) Ltd. v. CIT. This Court affirmed the Tribunal's order.

12. Exclusion of Sales Tax and Excise Duty from Turnover for Section 80HHE Computation:
The Tribunal excluded sales tax and excise duty from the turnover for Section 80HHE computation, following the Apex Court's decision in CIT v. Laxmi Machine Works. This Court affirmed the Tribunal's order.

13. Total Turnover Consideration for Section 80HHE Deduction:
The Tribunal included the total turnover of the software business for Section 80HHE deduction, following earlier decisions. This Court upheld the Tribunal's finding.

14. Allowability of Foreign Tax Credit:
The Tribunal remitted the matter back to the Assessing Officer for proper determination, following directions given for earlier years. This Court declined to answer the question as it was a matter of remand.

15. Controversy Regarding Un-availed MODVAT Credit:
The Tribunal remitted the matter back to the Assessing Officer for consideration, following the First Appellate Authority's order. This Court declined to answer the question as it was a matter of remand.

Conclusion:
The High Court of Karnataka addressed multiple issues in this judgment, affirming the Tribunal's findings on most counts, remanding some issues for further consideration, and declining to answer questions already settled by higher courts or pending reassessment. The judgment underscores the importance of adhering to statutory provisions and the legitimacy of tax planning within the framework of law.

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