2007 (2) TMI 699 - AT - Income Tax

Issues Involved:
1. Disallowance of expenditure on land lease charges.
2. Disallowance of entertainment expenses.
3. Disallowance under Rule 6B of the Income Tax Rules, 1962.
4. Disallowance of contractual warranty obligations as contingent liability.
5. Addition of leave encashment provision.
6. Disallowance of provision for liquidated damages.
7. Restriction of deduction under Section 80HHC.
8. Exclusion of interest income from profit of the undertaking under Section 80-IA.
9. Exclusion of commission income from business profit under Section 80HHC.
10. Inclusion of cash discount and warehousing charges in business profit under Section 80-IA.
11. Exclusion of benefits received in respect of deemed export under Section 80-IA.
12. Allowance of deduction under Section 80-O.

Detailed Analysis:

1. Disallowance of Expenditure on Land Lease Charges
The Tribunal confirmed the disallowance of Rs. 46,163 on account of land lease charges, as it was previously decided against the assessee in earlier assessment years. The expenditure was deemed not of a revenue nature.

2. Disallowance of Entertainment Expenses
The Tribunal decided to exclude 20% of the entertainment expenses attributable to employees, following its earlier decision for the assessment year 1994-95. The ground was partly allowed.

3. Disallowance under Rule 6B of the Income Tax Rules, 1962
The Tribunal, following its earlier decision, upheld the disallowance of Rs. 30,000 under Rule 6B, rejecting the contention that the provisions of the said Rule were not applicable.

4. Disallowance of Contractual Warranty Obligations as Contingent Liability
The Tribunal remitted the matter back to the assessing officer for fresh adjudication, following its earlier decision. It was noted that no new facts were presented compared to the earlier year.

5. Addition of Leave Encashment Provision
The Tribunal remitted the matter back to the assessing officer to ascertain the incremental liability by making actuarial valuation for the previous year ended on 31-3-1997, following its earlier decision.

6. Disallowance of Provision for Liquidated Damages
The Tribunal held that the provision for liquidated damages was not a contingent liability but an accrued liability, citing various judgments including Calcutta Co. Ltd. v. CIT and Bharat Earth Movers v. CIT. The matter was remitted back to the assessing officer to determine the accrued liability for the year in question based on the terms of the contract agreements.

7. Restriction of Deduction under Section 80HHC
The Tribunal decided several sub-issues under this ground:
- Excise Duty Refund: Following its earlier decision, the Tribunal held that excise duty refund is not to be excluded under Clause (baa) of Explanation to Section 80HHC.
- Inclusion in Total Turnover: Sales-tax and excise duty were excluded from the total turnover, following the jurisdictional High Court's decision. Client balances written back, compensation for cancellation of orders, increase in contract-in-progress, packing recoveries, and freight recovery were included in the total turnover.
- Profit Element Exclusion: The Tribunal upheld the exclusion of 90% of the profit element in cash discount, write back suspense account, and service charges received.
- Warehouse Charges: The issue was remitted back to the assessing officer to ascertain the nature of warehouse charges.

8. Exclusion of Interest Income from Profit of the Undertaking under Section 80-IA
The Tribunal, following its earlier decision, excluded interest income of Rs. 44,97,004 from the profit of the undertaking, holding that it was not derived from the industrial undertaking.

9. Exclusion of Commission Income from Business Profit under Section 80HHC
The Tribunal upheld the exclusion of commission income from business profit for computing deduction under Section 80HHC, following its earlier decision.

10. Inclusion of Cash Discount and Warehousing Charges in Business Profit under Section 80-IA
- Cash Discount: The Tribunal held that cash discount is not directly related to the business activity of the assessee and thus not includible under Section 80-IA.
- Warehouse Charges: The issue was remitted back to the assessing officer to ascertain the true nature of the warehouse charges.

11. Exclusion of Benefits Received in Respect of Deemed Export under Section 80-IA
- REP Licence: The Tribunal decided against the assessee, following the Supreme Court's decision in CIT v. Sterling Foods.
- DGFT Claim: The Tribunal held that DGFT claims are not derived from the industrial undertaking and thus not eligible for deduction under Section 80-IA.
- Excise Duty Claim: Similarly, the Tribunal held that excise duty claim is not eligible for deduction under Section 80-IA.

12. Allowance of Deduction under Section 80-O
The Tribunal dismissed the ground as it was not pressed by the assessee.

Conclusion:
The appeal was partly allowed, with several issues remitted back to the assessing officer for fresh adjudication. The Tribunal followed its earlier decisions and various legal precedents in deciding the issues.

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