2010 (11) TMI 991 - AT - Income Tax

Issues Involved:

1. Disallowance of bad debt.
2. Re-computation of deduction under section 80-IA.
3. Disallowance of ad hoc expenses on repairs and maintenance.
4. Computation of deduction under section 80HHC.
5. Addition on account of MODVAT credit.
6. Disallowance of capital expenditure for scientific research.
7. Disallowance under section 14A.
8. Disallowance of non-compete amount paid to ex-managing director.
9. Exclusion of sales tax and excise duty from total turnover for section 80HHC deduction.
10. Disallowance of interest on borrowed capital for machinery purchase.

Detailed Analysis:

1. Disallowance of Bad Debt:
The assessee's appeal contested the disallowance of Rs. 10,064 as bad debt. The Revenue's appeal challenged the deletion of Rs. 29,39,891 by the CIT(A). The Tribunal upheld the CIT(A)'s decision, noting that the bad debt was written off in the books and satisfied section 36(2). However, the Rs. 10,064 was not considered bad debt due to procedural lapses in claiming duty drawback benefits. The matter was remanded to the Assessing Officer (A.O.) for verification.

2. Re-computation of Deduction under Section 80-IA:
The A.O. included indirect labor costs and other expenses in the cost computation for the LABSA plant, reducing the deduction. The CIT(A) upheld this, refusing additional evidence. The Tribunal remanded the matter to the A.O. to verify the inclusion of indirect labor costs and the relevance of R&D and sales commission expenses.

3. Disallowance of Ad Hoc Expenses on Repairs and Maintenance:
The A.O. disallowed Rs. 28.22 lakhs as capital expenditure due to lack of details, based on the previous year's ratio. The Tribunal found this approach inappropriate and remanded the matter to the A.O. to verify the nature of expenses and make specific additions.

4. Computation of Deduction under Section 80HHC:
- Commission Income: The A.O. added Rs. 64.55 lakhs due to an auditor's error, which was corrected to Rs. 4.43 lakhs. The Tribunal allowed this correction.
- Interest Income: The A.O. reduced 90% of gross interest income, which the CIT(A) upheld. The Tribunal agreed, noting section 80HHC's formulaic nature.
- Miscellaneous Income: The A.O. reduced 90% of various items, including scrap sales and insurance claims. The Tribunal upheld the reductions except for insurance claims, following High Court precedent.
- Sales Tax Liability Write-back: The Tribunal remanded the issue to the A.O. to verify if Rs. 20 lakhs was excluded from profits before further reduction.
- Other Write-backs: The Tribunal upheld the reduction of 90% for write-backs of liabilities and exchange differences.

5. Addition on Account of MODVAT Credit:
The A.O. added Rs. 1.17 crores for closing MODVAT credit. The Tribunal remanded the matter to the A.O. to adjust purchases, sales, and opening stock as per section 145A, following High Court judgments.

6. Disallowance of Capital Expenditure for Scientific Research:
The A.O. disallowed Rs. 22.34 lakhs, doubting the use of assets for scientific research. The Tribunal found sufficient evidence of R&D activities and allowed the deduction under section 35(1)(iv).

7. Disallowance under Section 14A:
The Tribunal remanded the matter to the A.O. to determine the disallowance on a reasonable basis, following the High Court judgment in Godrej & Boyce Ltd.

8. Disallowance of Non-compete Amount Paid to Ex-managing Director:
The A.O. disallowed Rs. 20 lakhs paid to the ex-MD as non-compete fees. The Tribunal allowed the deduction as revenue expenditure, following the High Court judgment in Eicher Ltd.

9. Exclusion of Sales Tax and Excise Duty from Total Turnover for Section 80HHC Deduction:
The Tribunal upheld the exclusion of sales tax and excise duty from total turnover, following the Supreme Court judgment in Lakshmi Machine Works.

10. Disallowance of Interest on Borrowed Capital for Machinery Purchase:
The A.O. disallowed Rs. 14.05 lakhs as interest on borrowed funds for asset acquisition. The Tribunal upheld the CIT(A)'s deletion, noting that such interest is deductible under section 36(1)(iii), following the Supreme Court judgment in Core Health Care Ltd.

Conclusion:
The Revenue's appeal was dismissed, and the assessee's appeal was partly allowed for statistical purposes. The Tribunal provided detailed directions for remand and verification on several issues, ensuring compliance with relevant legal precedents and statutory provisions.

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