2015 (1) TMI 654 - AT - Income Tax

Part disallowance of depreciation on cars - allowing it at 20% of the written down value (WDV) of the relevant block of assets, as against the appellant s claim for the same at 40% - luxury cars v/s commercial vehicles - Held that - We have perused the said decision, to find that the said reasoning to have also found favour with the hon ble high court. When a commercial vehicle has been defined under the Act as well as the Rules, which definition is satisfied by the vehicle/s under reference, we are unable to see as to how the claim could be denied by importing a presumed meaning or condition with regard to the user thereof. In view of the same, subject to the verification and consequent finding with regard to the date of purchase and put to use of the car/s under reference, qua which we observe no finding by the authorities below, we allow the assessee s claim. We decide accordingly. - Decided in favour of assessee. Disallowance of club membership fees and club expenses - Held that - Club facilities could also, and may well be used for availing the different services, including for entertainment or as a platform for social interaction, by the directors or officers of the company, so that the expenses attributed to such user would be, or could contended to be, a non-business purpose of the assessee-company. The expenditure on such user would qualify as a perquisite in the hands of the individual directors/employees, being only in pursuance of a benefit extended to them, in whole or in part, by it. No disallowance in the hands of the assessee-company would thus ensue even on a user of the club membership by the concerned person/s for their personal purposes. The same is accordingly deleted.- Decided in favour of assessee. Part disallowance of the remuneration paid to the Managing Director of the assessee-company - Held that - Revenue has not impugned the commercial expediency or the assessee s obligation under the terms and conditions of the payment. So, however, to the extent the same was required by law to be approved by the competent authority (Central Government), and which has subsequently been not, the payment to that extent cannot be said to in pursuance to a valid contract in-as-much as the law would prevail, being even otherwise against public policy. The excess claim would have, therefore, to be allowed in the year of its claim/payment, on the basis of the provision, while the amount found in excess liable for inclusion as a part of the income on being so found. The same though thus does not fall strictly within the purview of section 41(1) inas- much as, as it appears, there has been no remission or cessation of liability, with we not observing any finding by the authorities below, would stand to be considered as income on general principles, i.e., as a provision for an expenditure written back on being found to have been made in excess. We are though, we may add, not in agreement with the assessee that not so doing would result in double taxation. Each assessment year is an independent unit of assessment, so that the taxing of an income in a year other than for which it is liable to be taxed, would not result in it being not taxed in the right year. - Decided in favour of assessee. Computation of the profit on export of the trading goods - computing the deduction u/s.80- HHC - Held that - In-as-much as the export incentives and other incomes, required to be excluded under Explanation (baa) to the provision, is at 90% of such income, 10% thereof stands imputed as their cost, so that the said cost, attributed to the export incentives and other income (i.e., at 10% thereof) would stand to be excluded in arriving at the indirect costs attributable to the assessee s exports, whether of trading or manufactured goods, for computing the deduction u/s.80- HHC. The same would also therefore require being given effect to. As, however, we have directed for the exclusion of the interest cost, which would also stand to be included in the statutorily imputed cost of 10%, the same would have to be proportionately reduced, i.e., in the ratio of the finance cost to the total indirect cost, which we observe at 4.4%, so as to eschew allowance of double benefit to the assessee. - Decided partly in favour of assessee. Treatment of scrap sales in computing the deduction u/s.80-HHC - Held that - The receipt by way of sale of scrap is certainly not an income of such nature. On the contrary, it, generated in and through the manufacturing operations, arises directly out of the assessee s principal operations of production, giving rise to turnover of manufactured goods. The same, goes as it does to abate the cost of raw material out of which the same is generated, can, therefore, be conceptually considered as toward a reduction in the raw material or production cost. The same, therefore, would not warrant being excluded in computing the profits of the business under Explanation (baa) to section 80-HHC. - Decided partly in favour of assessee and the Revenue. Computation of profit of business u/s.80-HHC. - commission, interest, duty draw back and sales-tax set off - Held that - Only the interest paid is to be excluded and no further limitation, in-as-much as the statute provides for exclusion @ 90%, deeming 10% as implied cost, would be made, even as observed by the Bench during hearing. The matter is accordingly restored back to the file of the A.O. for the purpose. No infirmity in the direction by the ld. CIT(A) to exclude 90% of the said receipts commission and duty draw back in computing the profits of the business under Explanation (baa) to section 80-HHC. Sales tax refund forms part of the operational income and, therefore, liable to be assessed as part of the assessee s business income u/s.28 and not as income from other sources u/s.56. Admittedly, however, no income has been offered by the assessee for the year of lodging the claim for sales tax refund, being clarified during hearing by the ld. AR himself. The same, therefore, relates to the transactions of the purchase and sale (by way of exports) during earlier years. The same is thus for the current year only a prior period income and, accordingly, though assessable as business income, cannot be considered as relatable to the export income for the current year. The same, therefore, is liable for exclusion. - Decided partly in favour of assessee for statistical purposes. Modvat element added to the closing stock - CIT(A) deleted addition - Held that - The inclusion of the taxes, levies, etc. incident on the purchase and sale of goods would not only be on the closing stock, but on the opening stock, purchases and sales as well. The assessee s claim is unexceptional, so that we observe no dispute in principle, which could thus only be with regard to its application. No prima facie case, disputing the same, has however been made before us. We, nevertheless, in the interest of justicerestore the matter back to the file of the A.O. The onus to exhibit that the profit, on a proper application of section 145A, works to the same amount as disclosed by the assessee s accounts, prepared on exclusive basis, is strictly on the assessee, who so contends. Decided in favour of assessee for statistical purposes. Disallowance of the provision for warranty - Held that - When the assessee s own accounts disclose the relevant provision to be far in excess to what needs to be provided toward the actual cost. Even if the assessee adopts the same basis for making the provision, i.e., that it did for the earlier years, if on account of technical or other factors, the warranty claims have declined considerably, it would be a sufficient ground to restrict or lower its charge to the operating statement by way of provision. The same, it is to be appreciated, only a provision, toward costs, in respect of sales for the year, which are likely to be incurred in future in complying with the terms and conditions of the sale and, therefore, provided for on an estimated basis. The same, therefore, would have to be determined on empirical basis. Restore this matter as well as with regard to the disallowance of provision for after sales cost on sales, which forms the subject matter of the assessee s appeal for A.Y. 2005-06, back to the file of the A.O. for enabling the assessee to present its case in the matter. Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Disallowance of depreciation on cars.
2. Disallowance of club membership fees and expenses.
3. Disallowance of excess remuneration paid to the Managing Director.
4. Computation of profit on export of trading goods.
5. Treatment of scrap sales in computing deduction under section 80-HHC.
6. Computation of 'profit of business' under section 80-HHC.
7. Levy of interest under sections 234B, 234C, and 234D.
8. Addition of Modvat element to the closing stock.
9. Disallowance of provision for warranty.

Issue-wise Analysis:

1. Disallowance of Depreciation on Cars:
The assessee claimed depreciation at 40% on cars, categorizing them as 'commercial vehicles.' The Revenue allowed only 20%, classifying them as 'luxury cars.' The Tribunal found that the cars met the definition of 'commercial vehicles' under the Motor Vehicle Act, 1988, and the Income Tax Rules, 1962. The Tribunal directed verification of the purchase and usage dates of the cars and allowed the assessee's claim subject to this verification.

2. Disallowance of Club Membership Fees and Expenses:
The Revenue disallowed the expenses for not being incurred wholly and exclusively for business purposes. The Tribunal noted that the membership was in the name of the company and used by directors on behalf of the company. It held that such expenses could not be considered personal benefits and deleted the disallowance.

3. Disallowance of Excess Remuneration Paid to the Managing Director:
The Revenue disallowed excess remuneration not approved by the Central Government. The Tribunal noted that the excess remuneration was written back and taxed in a subsequent year under section 41(1). It held that the excess claim should be allowed in the year of payment, and the write-back should be considered as income on general principles, not specifically under section 41(1).

4. Computation of Profit on Export of Trading Goods:
The Revenue imputed indirect costs proportionately to the export turnover, reducing the deduction under section 80-HHC. The Tribunal upheld the Revenue's principle but directed verification of the assessee's claim that no interest cost was incurred due to the timing of export proceeds and purchase payments. It also directed adjustments for costs attributed to export incentives and other incomes.

5. Treatment of Scrap Sales in Computing Deduction under Section 80-HHC:
The Revenue included scrap sales in the total turnover and reduced it from the 'profits of the business.' The Tribunal, following the Supreme Court's decision, excluded scrap sales from the total turnover but held that it should not be excluded from 'profits of the business' as it arises directly from manufacturing operations.

6. Computation of 'Profit of Business' under Section 80-HHC:
The Tribunal addressed four components:
- Interest Income: Directed netting off interest paid against interest received, subject to verification of the nexus between borrowings and FDRs.
- Commission and Duty Drawback: Upheld exclusion of 90% of these receipts.
- Sales Tax Set Off: Held that it should be excluded as it represents prior period income, not operational income for the current year.

7. Levy of Interest under Sections 234B, 234C, and 234D:
The Tribunal found the levy of interest to be consequential to other grounds and dismissed the ground for interference.

8. Addition of Modvat Element to the Closing Stock:
The Tribunal restored the matter to the Assessing Officer (A.O.) for recomputation in accordance with section 145A, ensuring that taxes and levies are included in opening stock, purchases, sales, and closing stock.

9. Disallowance of Provision for Warranty:
The Tribunal noted that the provision for warranty was made in excess of actual claims. It restored the matter to the A.O. for verification of the provision's reasonableness based on empirical data and directed a reassessment of the provision for after-sales costs.

Conclusion:
The assessee's appeal for A.Y. 2004-05 was partly allowed, while the Revenue's appeal for A.Y. 2004-05 and the assessee's appeal for A.Y. 2005-06 were allowed for statistical purposes. The Tribunal directed detailed verifications and recomputations on several issues to ensure compliance with legal provisions and factual accuracy.