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2007 (9) TMI 623 - HC - Income TaxDeduction u/s 80O, 80-IA and 80-HHE - gross income - disallowance u/s 37 - provision of warranty based on management estimation - deduction as it had accrued on the date of sale - Contingent Liability - Mercantile System of Accounting - concessional taxes - total turnover - HELD THAT - The important aspects notified in the Notification issued by the Central Government u/s 145(1)(2) of the I.T. Act are read along with Section 209(1) clauses (q-d) of sub-section (3) of the Companies Act and the accounting standard Notification regarding procedure to be followed for maintaining Accounts of a company issued by the Central Government in the year 1979 wherein it is stated accrual extracted in the said Notification. It mandates the assesses to maintain mercantile systems of accounting. Therefore the phrase accrual occurred in the notification has got importance to interpret the phrase laid down occurred in section 37(1) of the I.T. Act. Accordingly, we answer the said substantial questions of law Nos. 14, 9, 12 and 13 framed in these Appeals in favour of the assesses against the Revenue. The assesses who were aggrieved of the assessment orders passed by the Assessing Authorities, whose orders are confirmed by the Appellate Authority have questioned the same before the ITAT in disallowing the special benefits claimed by them u/s 80A, 80IA and 80HHE of the I.T. Act for the respective assessment years mentioned in their returns by disallowing certain mounts and giving certain benefits which were the subject matter of appeals before the appellate Tribunal. The Appellate Tribunal accepting the case of the assesses has set aside that portion of the assessment orders under the aforesaid provisions of the Act by accepting the grounds urged in the appeal and placing strong reliance upon the decision of the Calcutta High Court in M.N. Dastur s 1997 (1) TMI 118 - ITAT BANGALORE . No doubt, it has referred to in the impugned judgment the judgments of various other High Court in justification of its findings. aggrieved by the said impugned judgments of the Appellate Tribunal, the revenue filed these appeals before this Court framing certain substantial questions of law which are extracted above in this judgment and in support of the same has urged various legal grounds and requested this Court to answer the said substantial of law in favour of the revenue. In our considered view having regard to the finding of fact recorded by the Assessing Authority in its order, whose findings are referred to supra by us have been rightly concurred with by the First Appellate Authority with valid reasons. The said concurrent findings of fact recorded by the First Appellate Authority on the Claim of the assessee for deduction in respect of the various items referred to supra has been allowed by the Appellate Tribunal on erroneous assumption of facts and material produced by the assessee which is not only contrary to the relevant statutory provisions of the I.T Act referred to supra but also the law laid down by the Supreme court and various other High Courts in the decisions referred to in the First appellate Authority s order, wherein it has held that expenditures made by the assessee to do its business and therefore, that amount will be the capital receipt, but not revenue expenditure erroneously held by the Tribunal. In our view, the said finding of fact of the Tribunal recorded on contentious point is not only erroneous but also suffers from error in law and therefore the same is liable to the set aside. Therefore, the deductions allowed by the tribunal in the impugned judgment in respect of those items from the gross income turnover of the assessee is totally impermissible in law. The learned counsel appearing on behalf of M/s. K.R. Prasad for the assesssee has placed reliance upon the Circular and also the decision of the Apex court in the case of Cloth Traders Pvt. Ltd. Vs. Addl. CIT 1979 (5) TMI 2 - SUPREME COURT in support of the concessional taxes u/s 80-O of the I.T. Act, the said decision is overruled by the Apex court in its later judgment in the case of Distributors (Baroda) P.Ltd. Vs. Union of India Ors. 1985 (7) TMI 1 - SUPREME COURT upon which strong reliance is placed by the learned counsel on behalf of the Revenue in support of his submission to answer the substantial question No. 6 in its favour. Accordingly for the forgoing reasons, the appeals filed by the revenue framing the aforesaid substantial question of law Nos. 15, 16, 10, 13, 14 and 6 framed in these Appeals are answered against the assesses and in favour of the Revenue. The appeal of the revenue in so far as the payment claimed by the assessee for deduction from their income under the warranty provisions, the relief is granted in favour of the assessees. Hence, the appeal of the revenue in this regard is dismissed. Thus, we have answered all the substantial question of law regarding warranty in favour of the assessee and in respect of all other substantial questions of law regarding the benefit claimed by the assesses under the provisions of Sec. 80-O 80IA, Sec. 80HHE are answered in favour of the revenue by allowing the appeals partly as indicated above.
Issues Involved:
1. Warranty provision as an allowable deduction. 2. Classification of certain payments as revenue or capital expenditure. 3. Deduction under Section 80-O, 80IA, and 80HHE. 4. Deduction of Provident Fund contributions. Detailed Analysis: 1. Warranty Provision as an Allowable Deduction: The Revenue questioned whether the provision for warranty made by the assessee based on management estimates was an allowable deduction. The Tribunal had held that such provisions were allowable as they accrued on the date of sale. The Revenue argued that these were contingent liabilities and should not be deductible under Section 37 of the Income Tax Act. They relied on various judgments to support this contention. The Court, however, upheld the Tribunal's decision, emphasizing that under the mercantile system of accounting, liabilities that are reasonably estimated and accrued during the accounting year should be allowed as deductions. The Court referred to several precedents, including the Supreme Court's rulings in Metal Box Company of India Ltd. and Calcutta Co. Ltd., which supported the accrual basis of accounting for such liabilities. Consequently, the Court answered the substantial questions of law regarding warranty in favor of the assessee and against the Revenue. 2. Classification of Certain Payments as Revenue or Capital Expenditure: The Revenue contested the Tribunal's decision to classify payments made by the assessee for acquiring a medical division and other related expenses as revenue expenditure. The Tribunal had allowed these as revenue expenditures, contrary to the Assessing Officer's classification as capital expenditures. The Court examined the nature of these payments, including sums paid for access to information, voluntary retirement of employees, and non-compete agreements. It referred to the Supreme Court's decisions in Alembic Chemical Works Co. Ltd. and other relevant cases, which distinguished between capital and revenue expenditures based on the enduring nature of the benefits derived. The Court concluded that these payments provided enduring benefits to the assessee and should be classified as capital expenditures. Therefore, the substantial questions of law regarding these expenditures were answered in favor of the Revenue. 3. Deduction under Section 80-O, 80IA, and 80HHE: The Revenue challenged the Tribunal's decision to allow deductions under Sections 80-O, 80IA, and 80HHE based on gross income rather than net income. The Tribunal had relied on the Calcutta High Court's decision in M.N. Dastur & Co. (P) Ltd. and other similar cases. The Court referred to the Supreme Court's rulings in Motilal Pesticides (I) Pvt. Ltd. and Distributors (Baroda) Pvt. Ltd., which clarified that deductions under Chapter VI-A of the Income Tax Act should be computed based on net income as per Section 80AB. The Court noted that the Tribunal's decision was contrary to these precedents and the statutory provisions. Therefore, the substantial questions of law regarding deductions under Sections 80-O, 80IA, and 80HHE were answered in favor of the Revenue. 4. Deduction of Provident Fund Contributions: In ITA No. 3047/2005, the Revenue questioned the Tribunal's decision to allow deductions for Provident Fund contributions made beyond the stipulated period. The Tribunal had allowed these deductions, considering payments made before the due date for filing the return of income under Section 139(1). The Court upheld the Tribunal's decision, referring to its earlier judgment in ITA Nos. 1088/2006, which had examined the provisions of Section 36(1)(va), 2(24)(x), and 43B of the Income Tax Act. The Court concluded that contributions made before the due date for filing the return should be allowed as deductions. Therefore, the substantial question of law regarding Provident Fund contributions was answered in favor of the assessee. Conclusion: The Court partially allowed the appeals, ruling in favor of the assessee on the issue of warranty provisions and Provident Fund contributions. However, it ruled in favor of the Revenue regarding the classification of certain payments as capital expenditures and the computation of deductions under Sections 80-O, 80IA, and 80HHE.
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