2007 (7) TMI 658 - AT - Income Tax

Issues Involved:
1. Disallowance of customs duty paid by the assessee.
2. Deductibility of the balance in RG23A (Part II) and PLA.
3. Disallowance of interest accrued but not payable to IDBI Ltd.
4. Depreciation on the written-down value (WDV) of technical know-how fees.
5. Enhancement of income due to customs duty paid on imported raw material lying in closing stock.
6. Non-exclusion of certain sums from income taxed in the previous year.
7. Deductibility of provision for leave encashment.
8. Disallowance of club expenses.
9. Deductibility of depreciation on capital expenditure on technical know-how.
10. Enhancement of the value of foreign exchange denominated assets for depreciation.
11. Treatment of expenses on food and lodging in hotels as entertainment expenditure.
12. Deductibility of the cost of stores and spares written off.
13. Treatment of cash credits and interest thereon.
14. Treatment of interest income for the purpose of deduction u/s 80HHC.

Detailed Analysis:

1. Disallowance of Customs Duty Paid by the Assessee:
The Tribunal held that the provisions of section 145A were not applicable to the year under consideration. The customs duty liability had been incurred and paid in the relevant year, making it deductible under section 43B. The removal of the amount from the closing stock by the assessee was an effective way of granting the deduction under section 43B without disturbing the closing stock figure. Thus, the CIT(A) erred in including the customs duty in the closing stock, and the ground was allowed.

2. Deductibility of Balance in RG23A (Part II) and PLA:
The Tribunal noted that the advance deposit had been made, but the goods had not been removed. The liability was incurred on 'manufacture,' and the duty payable on finished goods exceeded the amount deposited. The credits in PLA and RG23A (Part II) did not amount to actual payment under section 43B, as they were advances to meet future liabilities. The ground was dismissed.

3. Disallowance of Interest Accrued but Not Payable to IDBI Ltd.:
The Tribunal held that clause (d) of section 43B applied only if the interest was payable within the previous year. Since the interest was payable after the close of the previous year, the provision of clause (d) was not applicable, and the disallowance was not justified. The ground was allowed, subject to verification by the Assessing Officer.

4. Depreciation on WDV of Technical Know-How Fees:
The Tribunal followed the decision of a co-ordinate Bench and directed the Assessing Officer to grant depreciation on the WDV determined as per the order of the Tribunal for the earlier assessment year. The ground was allowed.

5. Enhancement of Income Due to Customs Duty Paid on Imported Raw Material Lying in Closing Stock:
Since the Tribunal had already allowed the ground regarding customs duty paid in respect of goods in transit, this ground was also allowed.

6. Non-Exclusion of Certain Sums from Income Taxed in the Previous Year:
The Tribunal held that the amount of Rs. 66,85,647/- was deductible in the current year, while the other sum of Rs. 83,15,315/- was not deductible. The ground was partly allowed.

7. Deductibility of Provision for Leave Encashment:
The Tribunal held that only the incremental liability of the current year could be allowed as a deduction, following the orders of the Pune Benches. The Assessing Officer was directed to work out the incremental liabilities and allow the same. The ground was partly allowed.

8. Disallowance of Club Expenses:
The Tribunal held that the expenditure incurred for corporate membership of clubs was for business purposes and did not confer any enduring benefit on the assessee. The entire expenditure was allowed as deductible. The ground was allowed.

9. Deductibility of Depreciation on Capital Expenditure on Technical Know-How:
Following the decision for the earlier assessment year, the Tribunal directed the Assessing Officer to allow depreciation on the WDV of the capitalized amount of technical know-how. The ground was partly allowed.

10. Enhancement of Value of Foreign Exchange Denominated Assets for Depreciation:
The Tribunal followed its earlier order and dismissed the ground, holding that the amendment in section 43A was prospective and applicable from A.Y. 2003-04 onwards.

11. Treatment of Expenses on Food and Lodging in Hotels as Entertainment Expenditure:
The Tribunal held that 35% of the expenditure was attributable to employees and was not entertainment expenditure. The balance was to be treated as entertainment expenditure under section 37(2). The ground was partly allowed.

12. Deductibility of Cost of Stores and Spares Written Off:
The Tribunal allowed the write-off of chemicals as they were used in the manufacturing process and had expired. However, the write-off of stores and spares from capital work in progress was remanded to the Assessing Officer for fresh examination. The ground was partly allowed.

13. Treatment of Cash Credits and Interest Thereon:
The Tribunal held that the assessee had not provided sufficient evidence for some of the credits. It was decided that eight credits aggregating to Rs. 5.20 lakh were unexplained, and the interest on these credits was disallowed. The ground was partly allowed.

14. Treatment of Interest Income for Deduction u/s 80HHC:
The Tribunal directed the Assessing Officer to compute the deduction based on the finally assessed income, following the decision of the Hon'ble Delhi High Court in the case of Shri Ram Honda Power Equipment. The ground was partly allowed.

Conclusion:
All the appeals were partly allowed, with specific directions given for each ground based on the merits of the case and existing legal precedents.

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