2012 (10) TMI 1059 - AT - Income Tax

Summary

Issues Involved:
1. Addition of computer/software charges.
2. Disallowance of R&D expenses.
3. Adhoc disallowance of sales promotion expenses.
4. Disallowance of excess provision for leave encashment.
5. Disallowance of short provision for expenses and discount.
6. Disallowance invoking Section 40A(2)(b) regarding excessive payments to related parties.
7. Charging interest u/s 234B and initiation of penalty proceedings u/s 271(1)(c).

Summary:

1. Addition of Computer/Software Charges:
The assessee challenged the addition of Rs. 4,50,000/- as capital expenditure for computer/software charges. The Assessing Officer (A.O.) considered it as capital expenditure and allowed depreciation, resulting in a net disallowance of Rs. 3,15,000/-. The CIT(A) upheld this decision. However, the Tribunal found that no enduring benefit accrued to the assessee as the software project was not implemented and thus deleted the addition.

2. Disallowance of R&D Expenses:
The A.O. disallowed Rs. 2,35,743/- of R&D expenses, treating them as capital in nature, citing the Supreme Court's decision in Scientific Engineering House Pvt. Ltd. The CIT(A) confirmed this. The Tribunal, referencing the Himachal Pradesh High Court's decision in Engineering Innovation Ltd., remanded the matter back to the A.O. for fresh adjudication, allowing the ground for statistical purposes.

3. Adhoc Disallowance of Sales Promotion Expenses:
The A.O. disallowed 15% of sales promotion expenses amounting to Rs. 3,58,468/- due to lack of documentary evidence and personal element. The CIT(A) reduced this to 10%, amounting to Rs. 2,38,973/-. The Tribunal upheld the CIT(A)'s decision, finding no infirmity.

4. Disallowance of Excess Provision for Leave Encashment:
The A.O. disallowed Rs. 1,51,431/- as excess provision for leave encashment u/s 43B. The CIT(A) upheld this disallowance. The Tribunal, referencing the Calcutta High Court's decision in Exide Industries Ltd., found Clause-F of Section 43B arbitrary and deleted the disallowance.

5. Disallowance of Short Provision for Expenses and Discount:
The A.O. disallowed Rs. 4,39,182/- for short provision of expenses and discount, citing the mercantile system of accounting. The CIT(A) confirmed this. The Tribunal accepted the alternate plea to consider the allowability of these expenses in the respective years, allowing the ground for statistical purposes.

6. Disallowance Invoking Section 40A(2)(b):
The A.O. disallowed Rs. 8,03,556/- as excessive payment to a related party u/s 40A(2)(b). The CIT(A) upheld this. The Tribunal found no material evidence to show the payment was excessive and deleted the addition, as the onus of proof lies with the Revenue.

7. Interest u/s 234B and Penalty u/s 271(1)(c):
For the A.Y. 2005-06, the issue of research expenditure and sales promotion expenses were treated similarly to A.Y. 2004-05. The Tribunal allowed the research expenditure ground for statistical purposes, dismissed the sales promotion expenses ground, and allowed the disallowance invoking Section 40A(2)(b) ground.

Conclusion:
Both appeals were partly allowed for statistical purposes with specific directions for fresh adjudication on certain issues. The Tribunal pronounced the order in open Court on 31.10.2012.