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2016 (4) TMI 993 - AT - Income TaxAddition u/s 40A - Held that - The issue arising before us is identical to the issue before the Tribunal in Tata Johnson Controls Automotive Ltd. Vs. DCIT (2016 (4) TMI 963 - ITAT PUNE) and following the same parity of reasoning, we hold that the said expenditure is to be allowed in entirety in the hands of assessee being paid in accordance with the terms of the Agreement agreed upon between the parties and for the purpose of carrying on the business of assessee more efficiently. It may be pointed out herein that the assessee had initially entered into an Agreement with TACO in 1997 and the said expenditure had been allowed in the hands of assessee from year to year. However, the assessee renewed the Agreement in 2006 and the expenditure for the first time was not allowed in the hands of assessee in assessment year 2006-07. We find no merit in the orders of authorities below in this regard and accordingly, we modify the order of CIT(A) and direct the Assessing Officer to allow the expenditure in entirety in the hands of assessee. - Decided in favour of assessee. Disallowance of expenses incurred on engineering services - Held that - Before the CIT(A), the assessee had explained the nature of expenses that the said expenses were incurred for testing of flow through heat exchangers manufactured by the assessee under computer aided simulated conditions. The said testing is called as CFD Analysis. The assessee had undertaken the said testing to find out whether the product manufactured by it complied with the parameters laid down by the customer of the assessee. The said testing was done by CSM Software Pvt. Ltd. In another reply, the assessee further explained that from the invoice itself it was clear that the said charges were purely in the nature of engineering services as testing charges and no software was acquired by the assessee. The perusal of the above said details reflects that while incurring the said expenditure of ₹ 26,50,000/-, the assessee has not acquired any software perse. However, engineering services were provided by CSM Software Pvt. Ltd. in order to carry out the CFD Analysis of hood components manufactured by the assessee. We find merit in the plea of the assessee in this regard. he Hon ble Bombay High Court in CIT Vs. Raychem RPG Ltd. (2011 (7) TMI 953 - Bombay High Court ) has laid down the ratio that where the software facilitates the assessee s trading operations or enables the management to conduct its business more efficiently or more profitably, then such package software was not in the nature of profit making apparatus, and software expenditure was allowable as revenue expenditure. Though as mentioned by us in the paras hereinabove, the assessee had not acquired any software package, but had utilized the services of another concern, who in turn, has utilized its software to carry out the job work of the assessee. Following the principle laid down by the Hon ble Bombay High Court, we hold that in the alternate, in case the expenditure is said to be on acquisition of software package by the assessee, then the same is allowable as expenditure in the hands of assessee.- Decided in favour of assessee. Disallowance of expenses on repairs to building - Held that - The perusal of the details of the appellate order reflects that the total of ₹ 4,59,804/- is including VAT. As referred to by us in the paras hereinabove, the assessee has booked the expenditure under the respective heads and any other levies or taxes have been booked by the assessee under separate heads. During the course of hearing also, the learned Authorized Representative for the assessee was asked to explain in this regard. Where expenditure is being disallowed in the hands of assessee, then even the said levies i.e. including VAT, Education Cess, etc. is to be disall owed in the hands of assessee. Accordingly, we find no merit in the claim of the assessee in this regard and the same is dismissed - Decided against assessee. Disallowance of rent expenses - Held that - The case of the assessee before the authorities below was that the said expenditure was crystallized during the year though relates to prior year, hence was booked as expenditure during the year. Both the authorities below have disallowed the claim of assessee since the expenditure did not relate to the year under consideration. The assessee before us has failed to furnish any evidence to establish that the said expenditure did crystallize during the year, which in turn, relates to prior year. Since the assessee is following mercantile system of accounting, we find no merit in the claim of assessee and the said expenditure on rent relating to prior years, is not allowable as expenditure during the year. Accordingly, we confirm the addition - Decided against assessee. Disallowance of sales tax expenses - Held that - Admittedly, the demand was raised against the assessee for the year 2001-02 and the said demand was disputed. However, under protest, the assessee deposited sum of ₹ 7,01,572/- during the year under consideration. Once the amount has been deposited by the assessee during the year and no deduction on this account has been taken by the assessee in any of the earlier years, then under the provisions of section 43B of the Act, such Sales Tax payment is duly allowable as deduction in the hands of assessee. However, the assessee had furnished a challan of Sales Tax payment of only ₹ 1 lakh before the CIT(A) and no challan of payment of ₹ 6,01,572/- was filed. Even before us, the assessee has failed to furnish the said challan. Accordingly, we remit this issue back to the file of Assessing Officer to allow the claim of assessee on satisfaction that both the amounts have been paid by the assessee during the year under consideration, though the demand relates to the year 2001-02. - Decided in favour of assessee for statistical purposes. Disallowance of performance incentive - Held that - It is provided under the said section 43B of the Act that notwithstanding anything contained in any other provisions of the Act, the deduction on account of the sums referred to thereunder, in various clauses is to be allowed as deduction in the hands of person claiming the same, only on payment of the same during the year. However, in the proviso, it is further provided that in case the said amount is paid on or before due date of filing the return of income, then the same may be allowed as deduction in the hands of assessee. Under section 36(1)(ii) of the Act, it is provided that deduction on account of sum paid to an employee as bonus or commission for services rendered is to be allowed as deduction while computing the income under section 28 of the Act. In the facts of the present case before us, the assessee claims to have paid performance incentive to the employees which is covered by the term commission for services rendered and hence, we find no merit in the claim of the assessee in this regard.- Decided against assessee. Disallowance of equated rent - Held that - The assessee had accounted for lease equalization charges in accordance with Accounting Standards-19 issued by the Institute of Chartered Accountants of India. The details i.e. computation of equalized rent along with lease agreement between the assessee and the Lessor were filed before the CIT(A). The learned Authorized Representative for the assessee pointed out that though admittedly, the said issue is covered against the assessee by the Special Bench decision which was the case of Lessor, wherein it was held that the provisions of section 5 overrides the provisions of section 145 of the Act. Coming to the second aspect of the application of provisions of section 43B of the Act, we find that the CIT(A) has already directed the Assessing Officer to allow the claim of assessee after verification, in case the amount due to the employees has been paid by the assessee before due date of filing the return of income. The CIT(A) has directed the Assessing Officer to verify the said claim by seeing bank entries in the hands of assessee. We find no error in the said directions given by the CIT(A) and confirm the same.
Issues Involved:
1. Disallowance of administrative service charges paid to Tata Autocomp Systems Ltd. (TACO). 2. Disallowance of expenses incurred on engineering services. 3. Disallowance of expenses incurred on repairs to buildings. 4. Disallowance of rent expenses. 5. Disallowance of sales tax expenses. 6. Disallowance of performance incentive. 7. Disallowance of equated rent. 8. Provision made on account of repairs to buildings. 9. Admission of additional evidence without following Rule 46A. Analysis: 1. Disallowance of Administrative Service Charges Paid to TACO: The primary issue was the allowability of administrative service charges paid to TACO. The assessee claimed ?3.72 crores, which was disallowed by the Assessing Officer (AO) as excessive and unreasonable under Section 40(A)(2)(b) of the Income Tax Act. The CIT(A) allowed only 25% of the expenditure, disallowing ?2.79 crores. The Tribunal referred to a similar case, Tata Johnson Controls Automotive Ltd., where the expenditure was allowed in totality, emphasizing that the commercial agreement and business exigency justified the payment. Consequently, the Tribunal directed the AO to allow the entire expenditure in the hands of the assessee. 2. Disallowance of Expenses Incurred on Engineering Services: The assessee incurred ?26,50,000 on engineering services for CFD Analysis. The AO treated it as capital expenditure, but the Tribunal, following the Bombay High Court's decision in CIT Vs. Raychem RPG Ltd., held that the expenditure was revenue in nature as it facilitated the assessee's business operations. The Tribunal directed the AO to allow the expenditure as revenue expenditure. 3. Disallowance of Expenses Incurred on Repairs to Buildings: The AO disallowed ?11,85,657 as capital expenditure. The CIT(A) upheld the disallowance for constructing a new scrap yard and for lack of details on interior expenses. The Tribunal confirmed the disallowance, agreeing that the expenditure on constructing a new asset was capital in nature. 4. Disallowance of Rent Expenses: The AO disallowed ?1,51,896 as it related to prior years. The Tribunal upheld the disallowance, stating that the assessee, following the mercantile system, could not claim prior year expenses in the current year without evidence of crystallization during the year. 5. Disallowance of Sales Tax Expenses: The AO disallowed ?7,01,572 as it related to earlier years. The Tribunal noted that under Section 43B, sales tax payments are allowable on payment basis. Since the assessee paid the amount during the year, the Tribunal remitted the issue back to the AO to verify the payment and allow the deduction accordingly. 6. Disallowance of Performance Incentive: The AO disallowed ?32,69,953 for lack of proof of payment before filing the return. The CIT(A) directed verification of payment before the due date. The Tribunal upheld the CIT(A)'s direction, confirming that performance incentives paid before the due date should be allowed under Section 43B. 7. Disallowance of Equated Rent: The AO disallowed ?14,62,772 for lack of details. The Tribunal, following the Special Bench decision, held that lease equalization charges are not allowable under Section 5, confirming the disallowance. 8. Provision Made on Account of Repairs to Buildings: The AO disallowed ?29 lakhs as a provision. The Tribunal upheld the disallowance, noting that provisions for repairs are not allowable as expenditure. 9. Admission of Additional Evidence Without Following Rule 46A: The Revenue contended that the CIT(A) admitted additional evidence without following Rule 46A. The Tribunal found merit in the Revenue's claim and remitted the issue back to the AO for verification of the evidence regarding repairs to machinery and selling and distribution expenses. Conclusion: The Tribunal allowed the assessee's appeals for administrative service charges and engineering services while confirming or remitting other disallowances for verification. The Revenue's appeals were mostly dismissed, except for the issue of additional evidence, which was remitted for verification.
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