2011 (2) TMI 1437 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of commission payments to agents.
2. Disallowance of cash payments under Section 40A(3).
3. Inclusion of other income in total turnover for computing deduction under Section 80HHC.
4. Disallowance of employees' contribution to PF/ESI.
5. Disallowance of royalty payment.
6. Disallowance of foreign technicians' fee.
7. Disallowance of research and development expenses.
8. Disallowance of repairs and maintenance expenses.
9. Exclusion of excise duty in total turnover for computing deduction under Section 80HHC.
10. Disallowance of software expenses.
11. Withdrawal of DEPB benefit for computing deduction under Section 80HHC.

Detailed Analysis:

1. Disallowance of Commission Payments to Agents:
The assessee claimed commission payments to agents for services rendered in procuring orders and other related activities. The Assessing Officer (AO) disallowed these payments, arguing they were not exclusively for business purposes and possibly illegal. The CIT(A) upheld the AO's decision, stating that influencing government officials is illegal. However, the Tribunal reversed this, stating the payments were legitimate business expenses, supported by agreements and services provided. The Tribunal emphasized that the payments were made to business enterprises, not government officials, and were necessary for completing sales and realizing payments. The Tribunal directed the AO to allow the commission payments as deductions.

2. Disallowance of Cash Payments under Section 40A(3):
The AO disallowed 20% of cash payments exceeding Rs. 20,000, citing Section 40A(3). The assessee argued that these payments were made in locations without bank accounts. The CIT(A) and Tribunal upheld the disallowance, stating the reason provided by the assessee was not sufficient to bypass Section 40A(3).

3. Inclusion of Other Income in Total Turnover for Computing Deduction under Section 80HHC:
The assessee contested the inclusion of other income in total turnover for Section 80HHC deduction. The Tribunal directed the AO to exclude other income from total turnover, following the precedent set in the assessee's earlier cases and the Supreme Court's decision in CIT vs. Laxmi Machine Works.

4. Disallowance of Employees' Contribution to PF/ESI:
The AO disallowed contributions to PF/ESI paid after the due date but within the filing deadline. The Tribunal, referencing the Supreme Court's decision in CIT vs. Vinay Cement, allowed the deduction, stating the deletion of the second proviso to Section 43B is retrospective.

5. Disallowance of Royalty Payment:
The AO treated 25% of royalty payments as capital expenditure. The CIT(A) and Tribunal deleted this addition, citing earlier Tribunal decisions and the Delhi High Court's affirmation, which were upheld by the Supreme Court.

6. Disallowance of Foreign Technicians' Fee:
The AO disallowed the fee paid to foreign technicians. The CIT(A) and Tribunal deleted this disallowance, referencing earlier Tribunal and High Court decisions in the assessee's favor.

7. Disallowance of Research and Development Expenses:
The AO treated a significant portion of R&D expenses as capital expenditure. The CIT(A) and Tribunal deleted this addition, following earlier Tribunal decisions affirmed by the High Court.

8. Disallowance of Repairs and Maintenance Expenses:
The AO disallowed a portion of repairs and maintenance expenses. The CIT(A) and Tribunal deleted this disallowance, citing consistent Tribunal decisions and the High Court's rejection of the department's reference.

9. Exclusion of Excise Duty in Total Turnover for Computing Deduction under Section 80HHC:
The CIT(A) directed the AO to exclude excise duty from total turnover for Section 80HHC deduction, following the Supreme Court's decision in Laxmi Machine Works. The Tribunal upheld this decision.

10. Disallowance of Software Expenses:
The AO treated software expenses as capital expenditure. The Tribunal remanded the issue back to the AO for fresh examination in light of the Special Bench decision in Amway India Enterprises vs. DCIT.

11. Withdrawal of DEPB Benefit for Computing Deduction under Section 80HHC:
The AO withdrew the DEPB benefit for Section 80HHC deduction. The Tribunal remanded the issue back to the AO for reconsideration in light of the Bombay High Court's decision in Kalpataru Colours & Chemicals vs. CIT.

Conclusion:
The appeals filed by the assessee were partly allowed, and those filed by the revenue were dismissed. The Tribunal provided detailed directions on each issue, ensuring compliance with relevant legal precedents and statutory provisions.