2019 (4) TMI 2133 - AT - Income Tax

Re-opening of assessment u/s. 147/148 - overlooking of Leave Travel Assistance (LTA) by the DCIT in the past years - HELD THAT - From the Schedule 18 of the Balance Sheet, we note that, the information about LTA Provision, was there in the audited books of accounts. Hence, it is not a new tangible material to re-open assessment u/s. 147/148 of the Act. Therefore, reopening of assessment u/s. 147/148 is not valid and hence we allow the grounds raised by assessee. Write off of technical know how expenses - allowance u/s. 37(1) or not? - HELD THAT - This amount was required to be paid to operationalize the contract. After initialization of contract HEC could fetch order for supply of seven numbers of CNC Under Floor Wheel Lathe Machine type U2000-400 and not the CNC Surface Wheel Lathe Machine, type SWL 2000. Therefore the balance amount of Technology transfer fee towards CNC Surface Wheel Lathe Machine, type SWL 2000 was not paid and as a result, complete Technology transfer for this machine was not accomplished. As the complete technology was not acquired for Surface Wheel Lathe Machine, type SWL 2000 and its technology transfer lost its usefulness due to non-availability of orders in the market, the appellant company had to write off the balance amount of the technology transfer fee so paid. This was an admissible business expenditure u/s. 37(1) - Hence we allow the appeal of the assessee. Provision for warranty expenses - obligation of providing after sale service - HELD THAT - The appellant company manufactures and sells capital goods/heavy equipment for customers. In compliance with its contractual obligation . Warranty' for replacement of spare parts and maintenance for certain specified period at free of cost are provided. Based on its past experience and technical estimate for warranty, expenses are provided in accounts. This is done while crediting Profit Loss Account for it Sales Revenue and along with this manufacturing other expenses and Warranty Expenses are charged in the accounts as expenses. We note that providing after sale service is an obligation under any contract of sale for the appellant company. Incurring of the liability therefore is certain. Therefore, the appellant company provides for its' After Sale Service/Warranty' obligation on accrual basis in its Profit Loss Account. The Company provides for 0.5% on Sale for liabilities under contractual obligations/warranties. This was stated at Clause 6 of the Statement of Accounting Policies of the Company forming part of the Balance Sheet and Profit Loss Account. The company has worked out the percentage on Sale on the basis of past factor of actual expenses incurred by it towards warranty liability. This provision of 'After Sale Service' is then reversed back by the Company on the expiration of the Guarantee/Warranty Period and the amount of such expiration is then offered for taxation as income. As relying on Haden International Group India (P) Ltd 2007 (12) TMI 305 - ITAT MUMBAI , SIEMENS PUBLIC COMMUNICATION NETWORKS LIMITED. 2009 (1) TMI 359 - ITAT BANGALORE and LG ELECTRONICS (I) LTD. 2009 (1) TMI 525 - ITAT DELHI - we dismiss the appeals of Revenue relating to warranty expenses. Disallowance u/s 40(a) - non deduction of TDS on sales promotion expenses Liquidated damages, Misc. Provision and Provision for LTA - HELD THAT - We note that the appellant during the course of appellate proceedings has argued that the company has deducted TDS wherever applicable. The company has also added back the entire expenses in cases where non deduction of TDS was reported. Therefore, disallowance under this head resulted in addition of the same amount twice. Assessee company incurred expenditure under the head sales promotion .Assessee company deducted TDS and wherever TDS was not deducted the company has added back the entire expenses which is evident from Tax Audit report in Form 3CD (clause 27(a)). The details were available in the schedules to the Audit Report. It is also not correct to say that any and every expense for sales promotion would be of such nature as to require deduction of tax at source. No such enquiry has been conducted by the Ld. Assessing Officer. Sales promotion expenses include 'freight and incidental charges' and 'warranty period expenses'. Exhibition and publicity expenses were Rs. 1.47 lakhs and Rs. 0.67 lakhs respectively. The disallowance is completely against the pronouncement in the case of Dhakeshawari Cotton Mills Ltd. V CIT 1954 (10) TMI 12 - SUPREME COURT wherein it has ruled that although ITO is not fettered by technical rules of evidence and pleadings, and that he is entitled to act on material which may not be accepted as evidence in a court of law, but there the agreement ends; because it is equally clear that in making the assessment under section 23 (3) he is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all and there must be something more than bare suspicion to support the assessment under section 23 (3). The order has also ignored the fact that the sales promotion expenses so purported to be added back already includes Rs.127.60 lakh on account of warranty period expenses which has also been added back in the order. Therefore, it tantamounts to addition of the same amount twice and hence, addition made by the Ld. AO cannot sustained in appeal. Liquidated damages, misc. Provisions and Provisions for LTA are made as per basis of accounting practice followed by company, hence addition on these heads should not sustain. Therefore, we dismiss the appeals of Revenue. Expenditure on horticulture - Whether not related to business expenditure? - HELD THAT - The word 'wholly' refers to the quantum of expenditure, while the word 'exclusively' refers to the motive, objective and purpose of the expenditure. An expenditure to which one cannot apply an empirical or subjective standard is to be judged from the point of view of a businessman and it is relevant to consider how the businessman himself treats a particular item of expenditure. It means everything that serves, to promote commerce and includes every means suitable to that end. In applying the test of commercial expediency, for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business; reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the revenue. We note that in CIT V Malayam Plantations Ltd 1964 (4) TMI 9 - SUPREME COURT has held that The expression for the purpose of the business is wider in scope than the expression for the purpose of earning profits . Its range is wide; it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business. In Madhav Prasad Jatia 1979 (4) TMI 2 - SUPREME COURT as held that the expression for the purpose of business occurring under the provision of section 36(1)(iii) is wider in scope than the expression for the purpose of earning income, profits or gains , and this has been the consistent view of the Supreme Court. - Decided against revenue.

Summary

Issues Involved:
1. Re-opening of assessment u/s 147/148 of the Income Tax Act.
2. Expenditure on account of technical know-how written off and allowed u/s 37(1) of the Act.
3. Deletion of provision for warranty expenses.
4. Tax deduction at source (TDS) on sales promotion expenses, liquidated damages, miscellaneous provisions, and provision for LTA.
5. Expenditure on horticulture not related to business expenditure.

Issue-wise Detailed Analysis:

1. Re-opening of assessment u/s 147/148 of the Income Tax Act:
The appellant challenged the reopening of the assessment completed u/s 143(3) by issuance of notice u/s 148. The appellant argued that the reopening was done without any fresh material on record, as all records and audited Balance Sheets were already provided during the initial scrutiny assessment. The Assessing Officer reopened the case citing that the provision for Leave Travel Assistance (LTA) was determined on an estimated basis and was not an allowable expense. The Tribunal noted that the information about LTA provision was already available in the audited books of accounts and was not a new tangible material to reopen the assessment. Therefore, the reopening of the assessment u/s 147/148 was deemed invalid, and the grounds raised by the assessee were allowed.

2. Expenditure on account of technical know-how written off and allowed u/s 37(1) of the Act:
The issue pertained to the write-off of technical know-how expenses. The appellant company paid an amount for technology transfer but could not complete the technology transfer due to non-availability of orders. Consequently, the balance amount of the technology transfer fee was written off. The Tribunal concluded that this was an admissible business expenditure u/s 37(1) of the Income Tax Act, 1961, and allowed the appeal of the assessee.

3. Deletion of provision for warranty expenses:
The revenue appealed against the deletion of provision for warranty expenses. The Tribunal noted that the appellant company, a government undertaking, provided for warranty expenses based on past experience and technical estimates. This provision was made uniformly and consistently every year and reversed back upon the expiration of the warranty period, with the expired amount offered for taxation as income. The Tribunal relied on judgments from Co-ordinate Benches of ITAT, which supported the appellant's practice. Therefore, the appeals of the Revenue relating to warranty expenses were dismissed.

4. Tax deduction at source (TDS) on sales promotion expenses, liquidated damages, miscellaneous provisions, and provision for LTA:
The Assessing Officer disallowed Rs. 220.29 lakhs on account of sales promotion expenses due to non-deduction of TDS. The appellant argued that TDS was deducted where applicable, and the entire expenses were added back where TDS was not deducted. The Tribunal found that the disallowance was against the pronouncement of the Apex Court in Dhakeshawari Cotton Mills Ltd. v CIT, which ruled that assessments must be based on evidence or material and not on pure guesswork. The addition of sales promotion expenses was deemed to have been made twice, and therefore, the addition by the Assessing Officer could not be sustained. Liquidated damages, miscellaneous provisions, and provisions for LTA were made as per accounting practices, and hence, the appeals of Revenue were dismissed.

5. Expenditure on horticulture not related to business expenditure:
The revenue challenged the deduction of expenses booked under horticulture. The appellant argued that these expenses were essential for maintaining the environment in its plant, township, administrative block, laboratory, and other utilities, and were necessary for the company's business operations. The Tribunal noted that such expenditures, incurred for promoting business and earning profits, are deductible under section 37(1) of the Income Tax Act, 1961. The Tribunal relied on the Supreme Court judgment in CIT v Malayam Plantations Ltd, which stated that business expenses could include measures for the preservation of the business and protection of its assets. Therefore, the appeal of Revenue was dismissed.

Conclusion:
In conclusion, all appeals filed by the Revenue were dismissed, and all appeals filed by the Assessee were allowed. The Tribunal pronounced the order in the Open Court on 05-04-2019.