2010 (1) TMI 869 - AT - Income Tax

Written off of capital advance - claim of deduction u/s 37(1) - held that - said amounts were advanced in earlier years on capital accounts and not in the trading operations. - held that - Neither the amount can be allowed as deduction u/s.36(1)(vii) nor u/s.37(1). In the same manner it cannot be considered as a revenue loss u/s.28. Deduction in respect of payment/reversal of items disallowed u/s.43B - Assessing Officer did not consider the claim Held that - CIT(A) has directed the Assessing Officer to verify the assessee s claim in this regard and then allow the permissible deduction as per law there is no infirmity in directing the Assessing Officer to conduct verification of the assessee s claim in this regard ground is not allowed. Disallowance of provision for leave encashment - A.O. held that the provision for leave encashment was in the nature of contingency and hence not deductible. Bharat Earth Movers Ltd(2000 - TMI - 5816 - SUPREME Court) - CIT(A) allowed the deduction - judgment of the Hon ble Supreme Court has been nullified by the legislature by insertion of clause (f) to section 43B with effect from assessment year 2002- 2003. - For the assessment year 1998-99 the ratio of the Hon ble Supreme Court judgment will apply with full force.

Issues Involved:

1. Amortization of premium on leasehold land.
2. Capital advances written off.
3. Technical service fees.
4. Expenditure on software implementation.
5. Disallowance under Section 40A(9).
6. Development expenses paid to M/s. AVL, Austria.
7. Interest chargeable under Section 244A.
8. Deduction of prior period expenses.
9. Payment to clubs under Section 40A(9).
10. Provision for warranties.
11. Provision for pending labor demands.
12. Special pension liability.
13. Exclusion of sales tax from total turnover for Section 80HHC deduction.
14. Payment/reversal of items disallowed under Section 43B.
15. Old balances written off.
16. Provision for leave encashment.
17. Voluntary Retirement Scheme (VRS) payment.
18. Capital gain on sale of land and building.

Detailed Analysis:

1. Amortization of Premium on Leasehold Land:
The first part of ground no. 1 regarding the addition of Rs. 1,77,470 towards amortization of premium on leasehold land was dismissed as it was not pressed by the assessee.

2. Capital Advances Written Off:
The assessee's claim of Rs. 22,99,076 as a business expenditure was disallowed. The Tribunal upheld that these were capital losses and not deductible under sections 36(1)(vii), 37(1), or 28, citing the Supreme Court's decision in Hasimara Industries Ltd. vs. CIT.

3. Technical Service Fees:
The addition of Rs. 8,93,56,131 towards technical service fees was allowed by following the precedent set in the previous assessment year 1997-98, where the Tribunal had accepted the assessee's claim.

4. Expenditure on Software Implementation:
The issue of Rs. 6,65,28,676 towards software system implementation was restored to the Assessing Officer (A.O.) for fresh consideration, following the precedent from the previous assessment year 1997-98.

5. Disallowance under Section 40A(9):
The addition of Rs. 12,08,973 under Section 40A(9) was also restored to the A.O. for fresh consideration, similar to the previous assessment year.

6. Development Expenses Paid to M/s. AVL, Austria:
The addition of Rs. 10,69,09,754 for development expenses was restored to the A.O. for fresh consideration, following the precedent from the previous assessment year.

7. Interest Chargeable under Section 244A:
The Tribunal upheld the addition of Rs. 4,28,34,836 as interest on income-tax refund under Section 244A, following the Special Bench decision in Avada Trading Co.(P) Ltd. vs. ACIT.

8. Deduction of Prior Period Expenses:
The issue of Rs. 26,32,268 for prior period expenses was remanded to the A.O. for fresh consideration, as it was not adjudicated by the CIT(A).

9. Payment to Clubs under Section 40A(9):
The deletion of Rs. 23,05,076 made by the A.O. for payments to clubs was upheld, following the precedent from the previous assessment year.

10. Provision for Warranties:
The deletion of Rs. 4.38 crores for provision for warranties was upheld, following the precedent from the previous assessment year.

11. Provision for Pending Labor Demands:
The deletion of Rs. 5.26 crores for pending labor demands was upheld, following the precedent from the previous assessment year.

12. Special Pension Liability:
The deletion of Rs. 2.18 crores for special pension liability was upheld, following the precedent from the previous assessment year.

13. Exclusion of Sales Tax from Total Turnover for Section 80HHC Deduction:
The direction to exclude sales tax from total turnover for Section 80HHC deduction was upheld, following the precedent from the previous assessment year.

14. Payment/Reversal of Items Disallowed under Section 43B:
The direction to verify and allow deduction for Rs. 19,02,866 under Section 43B was upheld, as the CIT(A) had directed the A.O. to verify the details.

15. Old Balances Written Off:
The issue of Rs. 8,89,323 for old balances written off was remanded to the A.O. to determine if they were capital or revenue in nature.

16. Provision for Leave Encashment:
The deletion of Rs. 2.26 crores for leave encashment was upheld, following the Supreme Court's judgment in Bharat Earth Movers Ltd. vs. CIT.

17. Voluntary Retirement Scheme (VRS) Payment:
The deletion of Rs. 65.19 lakhs for VRS payments was upheld, following judicial precedents including Indian Cable Co. Ltd. vs. Their Workmen and CIT vs. Ashok Leyland Ltd.

18. Capital Gain on Sale of Land and Building:
The exclusion of capital gain of Rs. 96,55,695 and the impact on the block of "Building" was upheld, as the sale did not materialize.

Conclusion:
The assessee's appeal was partly allowed, and the Revenue's appeal was partly allowed for statistical purposes. The order was pronounced on 13.1.2010.

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