2018 (4) TMI 385 - AT - Income Tax

Adjustment u/s 145A - impact on the taxable profit while including excise duty, MODVAT credit and sales tax in the valuation of stock, purchases and sales as per the provisions of section 145A - Held that - As the provisions of section 145A have been inserted w.e.f. 01.04.1999 that section 145A is applicable for and from AY 1999-2000. As held in Cartini India Ltd. v. ACIT (2007 (2) TMI 192 - BOMBAY High Court), as per the new provisions of section 145A, the unutilized Modvat Credit had to be included in the closing stock of raw material and Work-In-Progress, whereas the excise duty paid on unsold finished goods had to be included in the inventory of finished goods. We direct the AO to allow the above claim of the assessee as per the above decisions after examining that adjustment should be made in such a manner that no double deduction is claimed for the same expenditure. Thus the 1st ground of appeal is allowed. Disallowance being the commission paid - Held that - Without knowing the exact nature of the services rendered by those parties, it is not possible for us to decide the commission payable by the assesses company was legitimate expenditure permitted by law, and therefore, to be allowed. If such details are not coming such payments made in respect of contracts awarded by Public Sector Companies we have to be held as expenses were incurred against public policy, and therefore, not entitled to be deducted in the light of the proviso to Section 37 - Decided against assessee Rejection of claim for deduction of provision made in the books of account towards liability on account of arrears wages payable to workmen under the wage settlement agreement - Held that - The assessee file a chart submitting that the said deduction has been allowed in subsequent year. Therefore, there is merit in the order of the AO disallowing which has been subsequently confirmed by the Ld. CIT(A). Upholding the said order, we dismiss the 3rd ground of appeal. Disallowance of provision made to meet expenditure in connection with Y2K compliance - Held that - In the instant case, the assessee has made a provision of ₹ 2,00,00,000/- in connection with Y2K compliance which would arise not in the financial year 1998-99 but in the financial year 1999-00. Thus following the ratio laid down in Indian Molasses Co. (Pr.) Ltd. (1959 (5) TMI 5 - SUPREME Court), we uphold the disallowance made by the AO. Thus the 6th ground of appeal is dismissed. Expenditure incurred by the assessee on computer software is revenue in nature. Addition u/s 14A - Held that - Since the total own funds in the instant case is more than investment in tax-free bonds and shares and mutual funds, thus addition to be deleted.

Issues Involved:
1. Disallowance under Section 145A of the Act.
2. Disallowance of commission paid to certain parties.
3. Rejection of claim for deduction of provision for arrears wages.
4. Additions under Section 40A(9) for contributions to welfare funds.
5. Disallowance of expenditure under Section 42 related to oil exploration.
6. Disallowance of provision for Y2K compliance.
7. Treatment of expenditure on SAP R/3 software.
8. Depreciation on SAP R/3 software.
9. Disallowance of depreciation and set-off of long-term capital loss.
10. Disallowance of interest expenditure under Section 14A.
11. Computation of deduction under Section 80HHC.
12. Additions for computing book profit under Section 115JA.
13. Additional ground regarding computation of deduction under Section 80HHC for book profit.
14. Treatment of expenses on setting up new cement plants.
15. Interest on borrowed funds for new cement plants.

Issue-wise Analysis:

1. Disallowance under Section 145A:
The AO disallowed ?3,27,93,629/- based on non-inclusion of MODVAT credit, excise duty, and sales tax in the valuation of stock, purchases, and sales. The CIT(A) upheld the disallowance, stating mandatory adoption of Section 145A. The Tribunal directed the AO to allow the claim following decisions in Mahavir Aluminium Ltd. and Mahalaxmi Glass Works (P) Ltd., ensuring no double deduction.

2. Disallowance of Commission:
The AO disallowed ?1,04,48,142/- commission paid for government contracts, upheld by CIT(A) based on lack of evidence of services rendered. The Tribunal confirmed the disallowance following its earlier orders in the assessee’s own case.

3. Deduction for Arrears Wages:
The AO disallowed ?4,34,41,997/- provision for arrears wages, considering it contingent. The CIT(A) upheld the disallowance. The Tribunal confirmed the disallowance, noting the deduction was allowed in the subsequent year.

4. Contributions to Welfare Funds:
The AO disallowed ?2,82,665/- under Section 40A(9). The CIT(A) upheld the disallowance. The Tribunal, following its earlier decisions, deleted the disallowance.

5. Expenditure under Section 42:
The AO disallowed ?7,22,722/- claimed during assessment proceedings. The CIT(A) upheld the disallowance referring to Goetze (India) Ltd. The Tribunal remanded the matter to the AO to consider the claim following Pruthvi Brokers & Shareholders (P.) Ltd.

6. Provision for Y2K Compliance:
The AO disallowed ?2,00,00,000/- provision for Y2K compliance, considering it for future liability. The CIT(A) upheld the disallowance. The Tribunal confirmed the disallowance, citing Indian Molasses Co. (Pr.) Ltd.

7. Expenditure on SAP R/3 Software:
The AO treated ?7,34,64,250/- as capital expenditure. The CIT(A) upheld the decision. The Tribunal, following decisions in Raychem RPG Ltd. and Asahi India Safety Glass Ltd., held the expenditure as revenue in nature.

8. Depreciation on SAP R/3 Software:
The Tribunal allowed depreciation at 60% applicable to computers, contrary to the AO’s allowance at 25%.

9. Depreciation and Set-off of Long-term Capital Loss:
The AO reduced depreciation by ?13,60,63,570/- and disallowed set-off of long-term capital loss. The CIT(A) upheld the disallowance. The Tribunal directed the AO to follow its earlier decision, treating the sale as a slump sale.

10. Interest Expenditure under Section 14A:
The AO disallowed ?5,64,59,000/- interest attributable to exempt income. The CIT(A) upheld the disallowance. The Tribunal deleted the disallowance, following HDFC Bank Ltd. and Reliance Utilities & Power Ltd.

11. Deduction under Section 80HHC:
The AO revised total turnover and excluded certain incomes, resulting in nil deduction. The CIT(A) upheld the AO’s decision. The Tribunal partially allowed the appeal, remanding certain issues to the AO for fresh consideration.

12. Additions for Book Profit under Section 115JA:
The Tribunal deleted disallowance under Section 14A and allowed the appeal on power generation profits. It upheld disallowance of tax on distributed income and remanded the issue of wealth-tax provision to the AO.

13. Additional Ground on Section 80HHC for Book Profit:
The Tribunal admitted the additional ground and remitted the matter to the AO for fresh consideration.

14. Expenses on Setting up New Cement Plants:
The AO disallowed ?13,10,75,536/-. The CIT(A) allowed the appeal. The Tribunal dismissed the revenue’s appeal, following its earlier decisions.

15. Interest on Borrowed Funds for New Cement Plants:
The AO disallowed ?113,81,76,864/-. The CIT(A) allowed the appeal. The Tribunal dismissed the revenue’s appeal, following its earlier decisions.

Conclusion:
The appeal filed by the assessee is partly allowed, and the appeal filed by the revenue is dismissed.

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