2014 (12) TMI 680 - AT - Income Tax

Allowability of deduction u/s 35AB - Held that - The AO as well as the CIT(A) denied the assessee s claim for deduction u/s 37(1) of the Act and instead deduction has been allowed in terms of section 35AB of the Act as the expenditure was for acquiring the use of Process know-how - the CIT(A) has noticed that assessee is following the mercantile system of accounting and the word paid has been defined in section 43(2) of the Act to include the incurrence of liability also CIT(A) rightly relied upon Padamjee Pulp And Paper Mills Limited Versus Commissioner Of Income-Tax 1993 (10) TMI 16 - BOMBAY High Court - wherein the applicability of the definition of expression paid contained in section 43(2) of the Act has been approved even while determining the deduction allowable u/s 35AB of the Act on accrual basis the order of the CIT(A) is upheld Decided against revenue. Entitlement of deduction u/s 37(1) - Entire amount of process know-how fees Held that - It was a common point between the parties that the AO has been allowing deduction to the assessee to the extent of 1/6th since assessee itself was debiting only 1/6th of process know-how fee in the Profit & Loss Account and what the AO was rejecting was the claim of the assessee made in the computation of income that the full amount should be allowed in the first year itself - In-fact, it was a common point between the parties that so far as the claim of deduction of 1/6th cost is concerned, the same was allowed by the AO thus, the order of the CIT(A) is set aside Decided in favour of revenue. Disallowance of provision of warranty Difference between closing and opening provision Held that - The assessee made a provision on account of provision for warranty with respect to the products sold - Considering the opening balance of provision, the differential amount of provision was debited to the Profit & Loss Account of the year - The provision was made by the assessee on account of the fact that it is under an obligation to provide warranty for a period of one to two years on the products sold by it on account of any manufacturing defect found later - assessee was obliged to replace the product or repair the product free of cost during the period of warranty - thus, the AO is directed to allow the relief Decided in favour of assessee. Allowability of provision for profit equalization Held that - As decided in assessee s own case for the earlier assessment year, it has been held that the allowability of provision for profit equalization while recognizing incomes on application of percentage of completion method in the case of long term contracts in the light of the AS-7 issued by the ICAI Decided in favour of assessee. Cost of computer software disallowed Held that - Following the decision in CIT vs. Raychem Rpg. Ltd. 2011 (7) TMI 953 - Bombay High Court - the expenditure incurred on acquisition of software which did not form part of the profit making apparatus of the assessee was treated as a revenue expenditure - the CIT(A) has given a finding that expenditure was incurred on acquisition of software connected with the manufacturing operations of the assessee - Such softwares have been identified as Autocad, project management software, designing software, etc. - The assessee is in the business of manufacturing of boilers and heat transfer equipment and therefore the aforesaid softwares form part of its profits making apparatus and thus it is liable to be considered as capital expenditure - assessee s business is of manufacturing of boilers and other heat transfer equipment and the aforesaid softwares merely facilitate assessee s trading operations and/or enable conduct of its business more efficiently and the same are not in the nature of the profit-making apparatus of the assessee company - the CIT(A) made no mistake in treating the expenditure incurred on acquisition of routine standard software as a revenue expenditure Decided against revenue. Claim for depreciation @ 100% in respect of the items of plant and machinery installed in Plant No.11 of the company Held that - Having regard to the entry 3(xiii)(r) read with 3(xiii)(e) of the Depreciation Table annexed to the Rules, plant & machinery used for the manufacture of air/gas/fluid heating systems is eligible for depreciation @ 100% - the claim of the assessee has been rightly allowed by the CIT(A) - with regard to assessee s claim for allowance of depreciation @ 100% in respect of plant & machinery used in the manufacture of heat pumps is concerned, the same has been appropriately denied by the lower authorities - CIT(A) has rightly pointed out that machinery & plant used in the manufacture of heat pumps is not eligible for depreciation @ 100% as it does not find a place in any of the items in the Depreciation Table which is entitled for depreciation @ 100% - thus, the order of the CIT(A) is upheld Decided against assessee. Deduction u/s 80HHC Inclusion of export turnover Exclusion of 90% of items from profits Held that - The stand of the assessee is quite reasonable and justified - The definition of expression total turnover in section 80HHC of the Act does not any prescription regarding the element of export turnover comprised in it. The profits eligible for deduction u/s 80HHC are computed as a proportion of the ratio of export turnover divided by the total turnover of the business - Therefore, if export turnover forming part of numerator is calculated as per the definition contained in section 80HHC of the Act then it would be appropriate that a similar figure is taken as an element of the total turnover of the business which is the denominator - Thus, on this aspect assessee succeeds and the AO is directed to re- compute the eligible deduction u/s 80HHC the matter is remitted back to the AO to allow the claim of assessee Decided in favour of assessee. Disallowance of commission to Thermax Culligan Water Technologies Ltd. Deleted Held that - The assessee have transferred its ongoing business of water treatment product division vide a business transfer agreement dated 29.03.1997 - Clause (3) of agreement, clearly provides that ongoing business has been transferred consisting of assets, products goodwill, etc. as described in the Schedule annexed thereto to excluding any liabilities relating thereto - Clause (3) also suggests that pending customer orders and any other information/material relevant for the conduct of the business also stood transferred to the transferee company - the CIT(A) has referred to a remand report submitted before her by the AO in terms of which there is no dispute on such factual aspects thus, the order of the CIT(A) is upheld Decided against revenue.

Summary

Issues Involved:
1. Deduction of process know-how fees under Section 37(1) vs. Section 35AB.
2. Provision for warranty obligations.
3. Deduction of amortized premium on leasehold land.
4. Recognition of income from contract activities.
5. Disallowance under Section 35D.
6. Taxability of retention money.
7. Capital vs. revenue expenditure for computer software.
8. Depreciation on plant and machinery.
9. Computation of deduction under Section 80HHC.
10. Exclusion of certain incomes under Explanation (baa) of Section 80HHC.
11. Deduction under Section 80-I/80-IA for specific industrial undertakings.
12. Disallowance of club fees.
13. Disallowance of bad debts.
14. Commission paid to a group company.

Detailed Analysis:

1. Deduction of Process Know-How Fees:
The assessee claimed a deduction of Rs. 7,16,58,292/- under Section 37(1) for process know-how fees. The Assessing Officer (AO) and CIT(A) allowed the deduction under Section 35AB, not Section 37(1). The Tribunal upheld the Revenue's stand, following the Supreme Court's judgment in M/s Drilcos (India) Pvt. Ltd. vs. CIT, allowing amortization under Section 35AB.

2. Provision for Warranty Obligations:
The assessee's provision for warranty obligations amounting to Rs. 49,62,303/- was disallowed by the AO and CIT(A) as contingent liability. The Tribunal allowed the provision, following past decisions in the assessee's favor.

3. Deduction of Amortized Premium on Leasehold Land:
The assessee's claim for Rs. 2,25,020/- as amortized premium on leasehold land was disallowed by the AO and upheld by CIT(A), following the Supreme Court's decision in Govind Sugar Mills Ltd. vs. CIT.

4. Recognition of Income from Contract Activities:
The AO added Rs. 14,95,43,003/- to the income, disallowing the provision for profit equalization. The CIT(A) allowed the provision but disallowed Rs. 4,00,71,000/- for scaling down revenue and non-recognition of revenue for contracts under Rs. 20,00,000/-. The Tribunal directed the AO to follow its previous order and allow the provision.

5. Disallowance under Section 35D:
The assessee's grounds on this issue were not pressed and dismissed as 'Not Pressed'.

6. Taxability of Retention Money:
The assessee's contention that retention money did not accrue and was not taxable was not pressed and dismissed as 'Not Pressed'.

7. Capital vs. Revenue Expenditure for Computer Software:
The AO treated Rs. 40,13,159/- for computer software as capital expenditure. CIT(A) allowed Rs. 17,97,051/- as revenue expenditure and retained Rs. 22,16,107/- as capital. The Tribunal upheld CIT(A)'s decision, following the Bombay High Court's judgment in CIT vs. Raychem Rpg. Ltd.

8. Depreciation on Plant and Machinery:
The AO disallowed 100% depreciation on plant & machinery used in manufacturing heat pumps and air/gas/fluid heating systems. CIT(A) allowed 100% depreciation for air/gas/fluid heating systems but not for heat pumps. The Tribunal upheld CIT(A)'s decision.

9. Computation of Deduction under Section 80HHC:
The AO used export turnover as per books instead of Section 80HHC definition. The Tribunal directed the AO to use the definition in Section 80HHC.

10. Exclusion of Certain Incomes under Explanation (baa) of Section 80HHC:
The AO excluded 90% of certain incomes. The Tribunal restored the issue to the AO, following the Bombay High Court's judgment in Pilzer Ltd. vs. CIT.

11. Deduction under Section 80-I/80-IA for Specific Industrial Undertakings:
The AO denied deductions for Woodpac and Process Integrated Boilers. CIT(A) allowed the deductions, and the Tribunal upheld CIT(A)'s decision, following past Tribunal and High Court decisions.

12. Disallowance of Club Fees:
The AO disallowed Rs. 2,50,000/- as capital expenditure. CIT(A) allowed it as business expense, following Gujarat High Court's decision in Gujarat State Export Corporation Ltd. vs. CIT. The Tribunal upheld CIT(A)'s decision.

13. Disallowance of Bad Debts:
The AO disallowed Rs. 14,82,798/- for bad debts. CIT(A) allowed the claim, and the Tribunal upheld CIT(A)'s decision, following the Supreme Court's judgment in TRF Ltd. vs. CIT.

14. Commission Paid to a Group Company:
The AO disallowed Rs. 90,00,000/- paid as commission to Thermax Culligan Water Technologies Ltd. CIT(A) allowed the deduction, and the Tribunal upheld CIT(A)'s decision, noting the business transfer agreement and procedural delays.

Conclusion:
The Tribunal partly allowed the cross-appeals for both assessment years 1998-99 and 1999-2000, directing the AO to follow its previous orders and applicable legal precedents.