2019 (7) TMI 882 - AT - Income Tax

Disallowance of proportionate premium in respect of leasehold land amortized - HELD THAT - Similar issue has been decided against the assessee by the Tribunal in the past years and in this context referred to the recent order of the Tribunal dated 03.09.2014 2014 (9) TMI 1006 - ITAT PUNE pertaining to assessment year 1997- 98. It was also an accepted position that the issue regarding assessee s claim for deduction of proportionate premium of leasehold land amortized and charged to the Profit Loss Account for the year under consideration is liable to be decided in terms of the judgement of the Hon ble Supreme Court in the case of Govind Sugar Mills Ltd. vs. CIT, 1997 (7) TMI 16 - SC ORDER against the assessee. Income recognition from contract activity - method of accounting - recognition income on reimbursement - HELD THAT - We find the AS-7 which existed prior to letter dated 01st April, 2003 continues to remain the same; but for minor changes. There are minor changes in relation to the computational issues. However, there is no change so far as cost based percentage completion method in concerned. Therefore, the computation of recognition income is concerned, the order of the CIT(A) is fair and reasonable and the same does not call for any interference. Accordingly, relevant grounds stand allowed in favour of the assessee. Adjustments to the estimated cost is concerned, the CIT(A) already granted part relief to the assessee. With reference to the freight outward to be included in the estimated total cost, we find it is a case of reimbursement of the actual cost incurred by the assessee. The inclusion in the total estimated cost when the same is returned has no effect on the income aspect. Therefore, being the case of reimbursement, there is no profit element. Consequently, recognition income of such reimbursement is not appropriate. Therefore, the order of the CIT(A) on this issue requires to be reversed. Accordingly, assessee is entitled to get relief on this issue also. Thus, ground no.2 of the assessee is allowed and the ground no.1(a) and 1(b) of the Revenue is dismissed. Disallowance of prior period expenses - HELD THAT - This issue is perennially being adjudicated by the Tribunal 2019 (3) TMI 1608 - ITAT PUNE and the same is decided in favour of the Revenue. Considering the commonness of the facts as well as the settled legal proposition, we are of the opinion that the issue should be decided in favour of the Revenue for the year under consideration also. Thus, ground No.3, raised in appeal by the assessee is dismissed. Addition of liquidated damages - allowable as business expenditure - HELD THAT - Pune Bench of the Tribunal 2019 (3) TMI 1608 - ITAT PUNE has decided this issue in favour of the assessee. Now, it is a settled law that such expenditure is allowable as business expenditure if it is incurred on the grounds of commercial expediency . Commercial expediency is a term of wide import and has been held to include such expenditure as a prudent businessman incurs for the purpose of business. The expenditure incurred though not under any legal obligation but still it is allowable as a business expenditure if incurred on the grounds of commercial expediency and the method of recognition is followed from year to year. Before us, no material has been placed by the Revenue that the expenditure is not a genuine expenditure or has been incurred to benefit any group concerns. Considering the totality of the facts we are of the view that the expenditure is allowable. Disallowance of claim for depreciation @100% on Plant Machinery - HELD THAT - Claim of depreciation with respect to impugned Plant Machinery is allowable protonto. Considering the commonness of the facts as well as the settled legal proposition, we are of the opinion that the Assessing Officer needs to be directed to follow the said order of the Tribunal 2019 (3) TMI 1608 - ITAT PUNE Short Term Incentive Plan (STIP) on account of provision for performance incentive payable to employees - HELD THAT - Considering the totality of facts and circumstances of the case, the direction of Tribunal s order in assessee s own case 2019 (3) TMI 1608 - ITAT PUNE and observation of the Ld. CIT(A) to the effect that the STIP scheme has been approved by the Company Board on 28.05.2003, we are of the considered view that the assessee is eligible for claiming deduction. Accordingly, we direct the Assessing Officer to allow the deduction as claimed by the assessee Deduction u/s.80HHC - HELD THAT - CIT(Appeals), while dealing with this issue, has not considered the submissions of the assessee that loss of foreign representative offices should go to increase the profits of the business eligible for deduction u/s.80HHC instead of ignoring the same. On perusal of the records, it reveals that there needs certain clarification while exclusion of 90% of the claims and refunds, balances written off now recovered, premium of forward contracts, other receipts and Export Incentives under Explanation (baa). It is also clear that the Assessing Officer as well as the Ld. CIT(Appeals) did not clarify the matter corresponding with the decisions of the Hon'ble Supreme Court of India as mentioned above as Explanation (baa). We are of the view that this issue needs certain clarification in response to the Explanation (baa) as well as the decisions of M/S AVANI EXPORTS ANR. 2015 (4) TMI 193 - SUPREME COURT - remit this issue back to the file of Assessing Officer for fresh adjudication Addition made on account of lease rentals - HELD THAT - When the assets were not leased out like in the assessment year 2002-03 2019 (3) TMI 1608 - ITAT PUNE the lease income cannot be taxed as directed by the Tribunal the issue in favour of the assessee. Ad-hoc disallowance on account of public relation expenses, miscellaneous expenses, Vehicle expenses, Foreign Travel expenses and Telephone expenses - HELD THAT - No distinguishing feature in the facts of the case under consideration and that of earlier years has been pointed out by the revenue. Before us, the submission of Ld AR that in subsequent years CIT(A) has deleted the adhoc deletions made by AO has not been controverted by Revenue. In such circumstances and following the reasoning as given while deciding the Assessee s appeal for AY 2002-03 and for similar reasons, hold that no disallowance of expenses on adhoc basis is called for in the present case. We therefore direct its deletion. Addition of provision for Medical Expenses - HELD THAT - We find that CIT(A) while deciding the issue in assessee s favour had relied upon the order of his predecessor for AY 2002-03. Before us, Ld AR submitted that in AY 2002-03 CIT(A) on identical facts had decided the issue in assessee s favour and the issue was not agitated by the Revenue. The aforesaid contention of the Ld AR has not been controverted by the Revenue. We further find that identical issue in AY 2002-03 was decided in Assessee s favour. Deduction u/s.80HHC can be reduced by the amount of deduction allowed u/s.80IB - HELD THAT - Assessing Officer has primarily reduced the entire amount of profits allowed as deduction u/s.80-IA from the profits eligible for deduction u/s.80HHC and computed deduction u/s.80HHC on such reduced profits and this issue is now settled by the decision ASSOCIATED CAPSULES P. LTD. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX 2011 (1) TMI 787 - BOMBAY HIGH COURT wherein it has been held that deductions u/s.80-IA and 80HHC are to be computed in the manner prescribed in those sections; only it should be ensured that in relation to the profits derived by the 80IA undertaking the two deduction taken together should not exceed the profit of the undertaking. In view of the above, we are of the view that the order of the Ld. CIT(A) is fair and reasonable and it does not call for any interference. Accordingly, ground No.9 raised in appeal by the Revenue is dismissed. Disallowance u/s.14A in respect of interest in the past - HELD THAT - Only interest incurred was by way of post shipment credit which is always levied on credit utilized for specific purpose for which it is granted no proportion thereof can be disallowed under section 14A as attributable to exempt income. In the present year Rule 8D is not applicable. Therefore, expenses related to earning of exempt income are required to be estimated. CIT(A) while restricting the disallowance to 2.5% of the exempt income, has placed reliance on the earlier appellate order. It is a well settled law that the rule of consistency should be followed. Considering the above facts and circumstances, we are of the considered view that the order of the Ld. CIT(A) is well reasoned and it does not call for any interference. Hence, ground No.10 raised in appeal by the Revenue is dismissed. Addition on account of commission paid on sales when the same were not justifiable and also when no proof of services rendered were furnished - HELD THAT - during assessment proceedings, as required by the Assessing Officer, parties failed to submit proof of rendering of services while they are in constant touch with the respective parties in subsequent years. Despite sufficient and reasonable opportunities, the said five parties have not been in a position to furnish requisite documentary evidences to demonstrate that the services were actually rendered by them to the assessee. It is also apparent from the order of the Ld. CIT(A) during First Appellate proceedings that the parties were not able to provide any proof of rendering of services. Therefore, it is evident from the assessment order as well as appellate order that the said five parties have not rendered any services to the assessee. Regarding rendering of services by the said five parties, the order of the CIT(A) is very silent and does not deal with the issue in proper perspective. - Decided in favour of revenue.

Summary

Issues Involved:
1. Deduction of amortized premium on leasehold land.
2. Revenue recognition from contract activity.
3. Disallowance of prior period expenses.
4. Deduction of liquidated damages.
5. Depreciation claim on plant and machinery.
6. Short Term Incentive Plan (STIP) deduction.
7. Deduction under Section 80HHC of the Income Tax Act.
8. Lease rental income.
9. Ad-hoc disallowance of various expenses.
10. Provision for medical expenses.
11. Disallowance under Section 14A of the Income Tax Act.
12. Commission paid on sales.

Issue-wise Detailed Analysis:

1. Deduction of Amortized Premium on Leasehold Land:
The assessee's claim for deduction of amortized premium on leasehold land was disallowed by the Assessing Officer (AO) and confirmed by the CIT(A). This issue was covered by a series of decisions of the Tribunal against the assessee. The Tribunal upheld the disallowance, citing the Supreme Court's decision in Govind Sugar Mills Ltd. v. CIT, which ruled against the assessee on similar grounds.

2. Revenue Recognition from Contract Activity:
The AO added ?26.55 lakhs to the assessee's income by including freight outward in the revenue recognition method. The CIT(A) granted partial relief but upheld the addition related to freight outward. The Tribunal, following its earlier decisions, ruled in favor of the assessee, stating that the inclusion of freight outward was inappropriate as it was merely a reimbursement and did not impact the ultimate profits.

3. Disallowance of Prior Period Expenses:
The AO disallowed prior period expenses of ?3,23,912, which was upheld by the CIT(A). The Tribunal confirmed this disallowance, noting that the issue had been consistently decided against the assessee in previous years.

4. Deduction of Liquidated Damages:
The AO disallowed ?200.26 lakhs claimed as liquidated damages, treating them as bad debts. The CIT(A) directed the AO to verify and allow the claim if supported by contractual clauses. The Tribunal ruled in favor of the assessee, recognizing the expenditure as allowable on grounds of commercial expediency.

5. Depreciation Claim on Plant and Machinery:
The AO restricted the depreciation claim to 25% instead of 100% for certain plant and machinery. The CIT(A) upheld this decision. The Tribunal, following its earlier rulings, allowed 100% depreciation for plant and machinery used in the manufacture of air/gas/fluid heating systems but not for those used in the manufacture of heat pumps.

6. Short Term Incentive Plan (STIP) Deduction:
The AO disallowed ?4,86,48,820 claimed under the STIP, stating that the liability did not crystallize during the year. The CIT(A) allowed only ?23.21 lakhs. The Tribunal directed the AO to allow the full deduction of ?4,86,48,820, noting that the scheme was approved during the relevant year.

7. Deduction under Section 80HHC:
The AO made several adjustments under Section 80HHC, which were partially upheld by the CIT(A). The Tribunal remitted the issue back to the AO for fresh adjudication, directing consideration of the Supreme Court decisions in Avani Exports and Topman Exports.

8. Lease Rental Income:
The AO added ?1,53,21,302 as lease rental income on an accrual basis. The CIT(A) deleted this addition, and the Tribunal upheld the deletion, noting that no assets were leased out during the year.

9. Ad-hoc Disallowance of Various Expenses:
The AO made ad-hoc disallowances for public relation expenses, miscellaneous expenses, vehicle expenses, foreign travel expenses, and telephone expenses. The CIT(A) upheld these disallowances. The Tribunal, following its earlier decision, deleted the ad-hoc disallowances, noting that the assessee's books were regularly maintained and audited without discrepancies.

10. Provision for Medical Expenses:
The AO disallowed a provision of ?48,22,069 for medical expenses, treating it as contingent. The CIT(A) deleted the disallowance, and the Tribunal upheld this decision, following its earlier ruling in favor of the assessee.

11. Disallowance under Section 14A:
The AO made a disallowance of ?27.71 lakhs under Section 14A, which the CIT(A) restricted to ?47,00,000. The Tribunal upheld the CIT(A)'s decision, noting that the rule of consistency should be followed.

12. Commission Paid on Sales:
The AO disallowed commissions paid to five agents due to lack of documentary evidence of services rendered. The CIT(A) deleted the disallowance. The Tribunal, however, found that the agents did not provide proof of services rendered and set aside the CIT(A)'s order, allowing the AO's disallowance.

Conclusion:
The Tribunal's judgment provided a detailed analysis of each issue, granting relief to the assessee on several grounds while upholding the Revenue's stance on others. The decision emphasized the importance of consistency, documentary evidence, and adherence to legal precedents in tax assessments.