2017 (11) TMI 1842 - AT - Income Tax

Addition u/s 14A - Disallowance of expenditure attributable to earning of tax free income - HELD THAT - We thus find that the Co-ordinate Bench of the Tribunal had upheld the disallowance u/s 14A of the Act @ 2.5% of gross tax free income. In view of the Ld. AR s submission that the issue in the year under consideration is similar to A.Y. 2000-01 and 2001-02 2016 (8) TMI 1449 - ITAT PUNE and since in those years the issue was decided against the assessee by the Coordinate Bench of the Tribunal, we find no reason to interfere with the order of Ld.CIT(A) and thus the assessee s ground is dismissed. Denial of deduction of loss of subsidiary company - HELD THAT - We find that CIT(A) while upholding the order of AO has noted that during the appellate proceedings the assessee was asked to substantiate the loss by furnishing the copy of contract with any of the subsidiary but the same was not furnished. He has further noted that the presence of any commercial expediency was neither been highlighted nor was proved by the assessee and that merely because of relationship between the two, the payment cannot be allowed as deduction either u/s.37(1) or u/s.28 of the Act. Before us, assessee has not placed any material on record to controvert the findings of CIT(A). In view of the aforesaid facts, we find no reason to interfere with the order of Ld.CIT(A) and thus the ground of the assessee is dismissed. Disallowance of premium in respect of leasehold land - HELD THAT - Co-ordinate Bench, relying on the decision of Hon ble Apex Court in the case of Govind Sugar Mills Limited 1997 (7) TMI 16 - SC ORDER decided the issue against the assessee. Further, in view of the Ld. AR s submission that the issue in the year under consideration is similar to A.Y. 2000-01 and 2001-02 2016 (8) TMI 1449 - ITAT PUNE and since in those years the issue was decided against the assessee, we find no reason to interfere with the order of Ld.CIT(A) and thus the assessee s ground is dismissed. Addition made to the contract income - HELD THAT - Since both the parties have admitted that the facts of the case in the present ground are identical to that of earlier years and since in earlier years, the issue has been decided by Co-ordinate Bench of the Tribunal in assessee s favour, we therefore following the decision of the coordinate Bench of the Tribunal in assessee s own case for earlier years and for similar reasons, allow the ground of assessee and thus the assessee s ground No.4 is allowed and Revenue s ground No.2 is dismissed. Disallowing computer software expenses - HELD THAT - Both the parties have admitted that the facts of the case in the present ground are identical to that of earlier years 2016 (8) TMI 1449 - ITAT PUNE . In earlier years, the Co-ordinate Bench of the Tribunal has decided the issue against the assessee. We therefore following the decision of the coordinate Bench of the Tribunal in assessee s own case for earlier years and for similar reasons, find no reason to interfere with the order of Ld.CIT(A) Disallowance of higher depreciation on plant Nos.4, 8 and 11 wherein it was manufacturing shell type boilers and absorption cooling division - AO was of the view that due to the type of equipments that were manufactured by the assessee with the aforesaid machines, the aforesaid machines per se did not qualify for higher depreciation - HELD THAT - Since both the parties have admitted that the facts of the case in the present ground are identical to that of earlier years, we therefore following the decision of the coordinate Bench of the Tribunal in assessee s own case 2016 (8) TMI 1449 - ITAT PUNE of earlier years and for similar reasons hold that assessee is eligible to claim depreciation @ 100% with respect to plant and machinery used in the manufacture of air / gas / fluid systems but is not eligible for 100% depreciation in respect of plant and machinery used in the manufacture of heat pumps. Thus the ground of assessee is partly allowed. Addition of prior period expenses - HELD THAT - CIT(A) while granting partial relief has noted that some of the expenses got crystallized during the year and therefore he directed the AO to allow the same. He also noted that for some of the expenses the relevant invoices, bills, statements etc., were received prior to the relevant previous years and for some of the expenses assessee did not furnish any details or evidence to substantiate the crystallization of the liability during the year under consideration. He further directed the AO to consider the evidence and thereby granted partial relief to the assessee. Before us, assessee has not placed any material on record to controvert the findings of Ld. CIT(A) nor has placed the details of expenditure to substantiate its stand that the liability got crystallised during the year under consideration. Before us, assessee has also not placed the details of expenses. Before us, Revenue has also not placed any material to point out any fallacy in the findings of Ld.CIT(A). In such a situation, we find no reason to interfere with the order of CIT(A) and thus the ground No.7 of the assessee is dismissed Loss of amount on embezzlement - HELD THAT - It is an undisputed fact that the loss has arisen on account of embezzlement and the Assessee has also filed a police complaint. We find that the H ble Apex Court in the case of Associated Banking Corporation Of India Ltd. v. CIT 1964 (10) TMI 7 - SUPREME COURT has observed that the loss by embezzlement must be deemed to have occurred when the assessee came to know about the embezzlement and realised that the amounts embezzled could not be recovered. In the present case, it is not the case of the Revenue that the loss has not arisen during the course of business or is not incidental to business or the view of the assessee that the loss is not recoverable is incorrect. In view of the aforesaid facts, we are of the view that the loss on account of embezzlement is allowable. Since the Ld CIT(A) has already allowed the loss to the extent of ₹ 64,82,136/-, we direct the AO to allow the balance loss - ground of the assessee is allowed. Disallowance of expenses - HELD THAT - In the absence of any contrary binding decision in favour of Revenue, we relying on the aforesaid decision of Hon ble High Court of Gujarat in the case of Sayaji Iron Engg. Co. 2001 (7) TMI 70 - GUJARAT HIGH COURT hold that no disallowance of vehicle expenses on account of being personal in nature is called for in the present case. As far as the disallowance of other expenses on adhoc basis is concerned, we find that AO has not pointed out any expenses which are not for the purpose of business. Further it is not in dispute that the assessee s books of accounts are regularly maintained, audited and no discrepancies have been pointed out by the Auditor or the Revenue. The disallowance has been made on adhoc basis. Before us, assessee has submitted that no such adhoc disallowance has been made in subsequent years in scrutiny proceedings and this fact has not been controverted by Revenue. Considering the totality of the aforesaid facts, we are of the view that no disallowance of expenses on adhoc basis is called for in the present case and thus the ground of the assessee is allowed. Deduction u/s 80HHC - determination of total turnover - assessee is aggrieved by the inclusion of trading turnover in total turnover - Revenue is also in appeal against the order of Ld. CIT(A) as exclusion of sales tax and excise duty from total turnover - HELD THAT - Hon ble Apex Court in the case of CIT Vs. Catapharma (India) Pvt. Ltd., 2007 (7) TMI 203 - SUPREME COURT has held that while calculating the deduction under section 80HHC(3)(b) of the Income Tax Act, 1961, for computing the total turnover of exports out of India of trading goods, excise duty and sales tax are not to be included. Accordingly, we hold that trading turnover is to be excluded from total turnover also. Sales tax and excise duty is to be excluded from total turnover. Scrap sales - plea of the assessee is that the scrap is generated during the course of manufacturing. The aforesaid contention of the assessee is not controverted by the Revenue. In such a situation, we find that the ratio of the decision of Hon ble Apex Court in the case of CIT Vs. Punjab Steel Industries India 2014 (5) TMI 238 - SUPREME COURT would be applicable to the present facts and therefore the sale of scrap cannot be considered as part of total turnover for the purpose of calculation of deduction u/s 80HHC of the Act. Exchange Difference assessee fairly admitted that the said difference to the extent of sales would form part of the total turnover and the balance needs to be excluded. We find merit in the plea of the assessee that exchange difference to the extent of sales would be included as part of the total turnover. Thus, ground of appeal No.10(a) raised by the assessee is partly allowed and ground of appeal No.6 raised by the Revenue is dismissed. Disputed adjustments to the export turnover - Business claims and refunds - HELD THAT - In this regard the amount relates to insurance refund of ₹ 1,15,82,359/-. The issue was remitted back to the AO with direction. We also remit this issue back to the AO to apply the said directions. Balances written off now recovered - The assessee pointed out that it was part of operational income recovered. Since the expenses when booked were allowed as expenditure, hence, the same is to be considered at cost of export turnover. We find merit in the plea of the assessee in this regard. However once the same is excluded as part of turnover, hence, the same cannot be excluded under Explanation (baa) to Sec.80HHC of the Act. Settlement of claim of order cancelled - The Explanation (baa) under Sec.80HHC defines the profit of business to mean the profits as computed under the head profits and gains of business to as reduced by 90% of the same referred to in clauses (iii)(a) to (iii)(e) of Sec.28 of the Act beyond any receipts by way of brokerage, claim, interest, rent, charges or any other receipt of similar nature included in such profits. The receipts on account of settlement of claim of order cancellation is in the nature of operational income and cannot be excluded under Explanation (baa) to Sec.80HHC of the Act. Miscellaneous income - assessee claimed the said income at ₹ 4.39 crore to be part of export turnover. CIT(A) allowed the claim of the assessee to the extent of ₹ 2.29 crores referring the Ld. CIT(A) vide para 24.3 discussed the issue and we find merit in his observations and upheld the order of Ld. CIT(A) regarding miscellaneous income to be excluded. Hence, the ground of appeal No.10(c) is partly allowed. Exclusion from eligible profits of business, loss / expenses on oversea losses - HELD THAT - The assessee is aggrieved by the non-exclusion of business losses. In this regard, it was pointed out that profits if any of the representatives of the assessee ought to be excluded u/s 80HHC of the Act, so consequently the losses have to be excluded under Explanation baa (2) of Sec.80HHC of the Act and consequently the profits eligible for claiming the deduction u/s 80HHC of the Act should be increased. We find merit in the plea of the assessee as Explanation (baa) to Sec.80HHC of the Act provides that the profits of any branch office, warehouse or any other establishment of the assessee situated outside India ought to be revised from the profits of business computed under the head of profits and gains of business and profession. Consequently in cases from the any loss of over-seas, branch or office then the same also needs to be excluded and the profits eligible to claim deduction u/s 80HHC of the Act should be increased and we direct so. Thus, ground of appeal No.10(d) is allowed. Proportionate deduction with reference to its export and on account of (DEPB) - The said issue now stands decided as per the amendment to Section and the AO in this regard is directed to apply the amendment and decide the issue. Claim of unabsorbed losses u/s 72A - the same may be reduced from the profits of business. The Ld. CIT(A) has decided the said issue relying on the ratio laid down by the Hon ble Bombay High Court at para 27 page 77, which has not been reversed. Applying the said principle, we dismiss the ground of appeal No.10(f). Assumption of exchange difference as business income or under the head income from other sources - CIT(A) relied and has considered the plea of the assessee and in the absence of details of deductions, has directed the AO to call for the details and examine the same and decide the issue as per his direction and decide the same. We find no merit in the ground of appeal No.11 raised by the assessee in this regard, where the issue has been set aside to the AO for verification. Thus, this ground is dismissed. Direction to AO to consider the following items of income u/s 80HHC (a) bad debts written off recovered and (b) doubtful debts written off recovered - HELD THAT - The said issue has been decided against the Revenue by the ratio laid down by the Hon ble Bombay High Court 2000 (8) TMI 73 - BOMBAY HIGH COURT Applying the said principle, we direct the AO to allow the claim of the assessee in accordance with the law. AO thus has directed to recompute the deductions available during the assessment u/s 80HHC of the Act after applying the directions of the Tribunal on various aspects of the said deduction i.e., the computation of total turnover and export turnover as directed in the paragraphs hereinabove, while deciding the ground of appeal Nos.10 and 11 raised by the assessee and ground of appeal Nos.5 and 6 raised by the Revenue. We thus adjudicated the said issues in ground of appeal No.10 raised by the assessee. Charging of interest u/s 234D - A.R. submitted that this ground needs to be decided against assessee as the provisions of Sec.234D were applicable as assessment was completed after 01.06.2003. In view of the submission of Ld.A.R., the ground of assessee is dismissed. Addition of lease rent on account of accrual basis - accrual of income - HELD THAT - Applying the three tests laid down by various decisions of this Court, namely, whether the income accrued to the assessee is real or hypothetical; whether there is a corresponding liability of the other party to pass on the benefits of duty free import to the assessee even without any imports having been made; and the probability or improbability of realisation of the benefits by the assessee considered from a realistic and practical point of view (the assessee may not have made imports), it is quite clear that in fact no real income but only hypothetical income had accrued to the assessee and Section 28(iv) of the Act would be inapplicable to the facts and circumstances of the case. Essentially, the AO is required to be pragmatic and not pedantic. We are of the considered view that this issue needs a revisit to the file of Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) while dealing with the issue in assessment year 2000-01 partly deleted the addition in respect of Parasrampuria Industries Ltd. and Parasrampuria International Ltd. by following the concept of real income and upheld the addition in respect of Modi Alkalies Ltd. and Inertia Industries Ltd. whereas, all the four companies are similarly placed. Accordingly, we deem it appropriate to remit this issue back to the file of Commissioner of Income Tax (Appeals) for deciding the issue afresh, in the light of decision rendered in the case of THERMAX LTD., PUNE 2016 (8) TMI 1449 - ITAT PUNE and M/S EXCEL INDUSTRIES LTD. AND MAFATLAL INDUSTRIES P. LTD. 2013 (10) TMI 324 - SUPREME COURT . The findings of Commissioner of Income Tax (Appeals) on this issue are set aside and the ground No. 7 in the appeal of the assessee and ground No. 4.1 to 4.5 in the appeal of the Revenue for assessment year 2000-01 are allowed for statistical purpose. We thus find that the Co-ordinate Bench, while deciding the issue in assessee s own case in earlier year had set aside the issue to the file of Ld.CIT(A). It is also a fact that both the parties have admitted that the issue in the year under consideration is identical to that of earlier years. We therefore following the same reasoning as given by the coordinate Bench of Tribunal while deciding the issue in A.Y.s 2000- 01 and 2001-02 and for similar reasons, restore the issue to the file of Ld.CIT(A). Needless to state that the Ld.CIT(A) shall grant reasonable opportunity of hearing to both the parties. Thus this ground of Revenue is allowed for statistical purpose. Claim for deduction u/s 80IA - HELD THAT - In the present case, CIT(A) while deciding the issue has noted that as far as deduction u/s 80IA is concerned, only the losses and unabsorbed depreciation of the eligible business undertaking has to be considered. He therefore after upholding the reliance placed on the decisions referred by assessee held that AO was not justified in setting off of the entire unabsorbed loss of Thermax Water Technologies Company Limited against the profit from eligible business undertaking and in the process computing nil profit u/s 80IA of the Act. Before us, Revenue has not pointed out any fallacy in the findings of Ld.CIT(A) nor has pointed to any contrary binding decision in its support. In such a situation, we find no reason to interfere with order of Ld.CIT(A) and thus, the ground of the Revenue is dismissed.

Summary

Issues Involved:
1. Disallowance of expenditure attributable to earning tax-free income.
2. Denial of deduction of loss of a subsidiary company.
3. Disallowance of amortized premium on leasehold land.
4. Addition made to contract income.
5. Disallowance of computer software expenses.
6. Disallowance of higher depreciation on certain machinery.
7. Disallowance of prior period expenses.
8. Disallowance of loss on embezzlement.
9. Adhoc disallowances of various expenses.
10. Computation and eligibility of deduction under Section 80HHC.
11. Accrual and taxation of lease rent income.
12. Accrual of income and adherence to Accounting Standard 7.
13. Deduction under Section 80IA.
14. Charging of interest under Section 234D.

Detailed Analysis:

1. Disallowance of Expenditure Attributable to Earning Tax-Free Income:
The Assessee claimed dividend income and interest on tax-free bonds without attributing any expenditure to earn such income. The AO disallowed ?25 lakhs, estimating it as the expenditure incurred. The CIT(A) restricted the disallowance to 2.5% of the exempt income, following previous years’ decisions. The Tribunal upheld the CIT(A)'s decision, citing consistency with earlier years where the Tribunal had upheld a similar disallowance rate.

2. Denial of Deduction of Loss of Subsidiary Company:
The Assessee claimed a deduction for the loss of ?160.14 lakhs suffered by its subsidiary. The AO and CIT(A) rejected the claim, stating no commercial expediency was demonstrated. The Tribunal upheld the CIT(A)'s decision, noting the absence of evidence of commercial expediency or contractual obligation.

3. Disallowance of Amortized Premium on Leasehold Land:
The AO disallowed the Assessee’s claim for amortizing the premium on leasehold land, following earlier years' decisions. The CIT(A) confirmed this disallowance. The Tribunal upheld the CIT(A)’s decision, referencing the Supreme Court’s ruling in Govind Sugar Mills Ltd., which treated such expenditure as capital in nature.

4. Addition Made to Contract Income:
The AO increased the Assessee's income by ?109.90 lakhs, disputing the provision for profit equalization. The CIT(A) partially upheld the AO’s decision but directed verification of the actual excess provision. The Tribunal allowed the Assessee’s appeal, following earlier Tribunal decisions in the Assessee’s favor, which accepted the Assessee's application of Accounting Standard 7 for revenue recognition.

5. Disallowance of Computer Software Expenses:
The AO treated software expenses of ?52.31 lakhs as capital expenditure. The CIT(A) remitted the issue back to the AO for fresh consideration based on specific criteria. The Tribunal upheld the CIT(A)’s decision, referencing earlier Tribunal rulings that treated such software expenses as capital expenditure.

6. Disallowance of Higher Depreciation on Certain Machinery:
The AO disallowed higher depreciation claims on certain machinery, allowing only 25% instead of 100%. The CIT(A) upheld the AO’s decision. The Tribunal partly allowed the Assessee’s appeal, granting 100% depreciation for machinery used in manufacturing air/gas/fluid heating systems but not for machinery used in manufacturing heat pumps.

7. Disallowance of Prior Period Expenses:
The AO disallowed ?92.37 lakhs of prior period expenses, citing the Assessee's mercantile accounting system. The CIT(A) directed the AO to verify and allow expenses that crystallized during the year. The Tribunal upheld the CIT(A)’s decision, remitting the issue back to the AO for verification.

8. Disallowance of Loss on Embezzlement:
The AO allowed only the current year’s embezzlement loss of ?4.04 lakhs, disallowing ?74.40 lakhs from prior years. The CIT(A) directed the AO to determine the admissible loss after thorough examination. The Tribunal directed the AO to allow the balance loss of ?9.57 lakhs, recognizing the embezzlement loss as allowable.

9. Adhoc Disallowances of Various Expenses:
The AO made adhoc disallowances under various heads like public relations, membership & subscription, vehicle, and telephone expenses. The CIT(A) granted partial relief. The Tribunal allowed the Assessee’s appeal, deleting the adhoc disallowances, especially vehicle expenses, citing the Gujarat High Court’s decision in Sayaji Iron & Engg. Co.

10. Computation and Eligibility of Deduction Under Section 80HHC:
The AO reworked the deduction u/s 80HHC, including sales tax, excise duty, and other incomes in total turnover. The CIT(A) granted partial relief. The Tribunal adjudicated various aspects, excluding sales tax, excise duty, and scrap sales from total turnover, and remitted certain issues back to the AO for verification.

11. Accrual and Taxation of Lease Rent Income:
The AO included ?1.53 crores as lease rental income. The CIT(A) deleted the addition, citing earlier years' decisions. The Tribunal remitted the issue back to the CIT(A) for fresh consideration, following the approach in earlier years.

12. Accrual of Income and Adherence to Accounting Standard 7:
The AO disputed the Assessee’s revenue recognition method under AS-7. The CIT(A) directed verification of the actual excess provision. The Tribunal followed earlier decisions favoring the Assessee’s application of AS-7.

13. Deduction Under Section 80IA:
The AO denied the deduction, setting off brought forward losses against profits. The CIT(A) allowed the deduction, stating only the losses and unabsorbed depreciation of the eligible business unit should be considered. The Tribunal upheld the CIT(A)’s decision.

14. Charging of Interest Under Section 234D:
The CIT(A) confirmed the AO’s action of charging interest u/s 234D. The Tribunal dismissed the Assessee’s ground, acknowledging the applicability of Section 234D as the assessment was completed after 01.06.2003.