2019 (7) TMI 949 - AT - Income Tax

Disallowance u/s.14A - HELD THAT - As already analyzed that the assessee was having sufficient own funds and therefore, whatever investment was made, the legal presumption is they were from the said own funds of the assessee. Therefore, no disallowance u/s.14A is called for. With regard to the disallowance on administrative expenses, considering the entirety of facts and circumstances in the case of the assessee, we direct the AO to sustain % of the disallowance on administrative expenses attributable to exempt income. In view of our above findings on this issue, we set aside the order of the CIT(Appeals) and partly allow this ground. Hence, ground No.1 raised in appeal by the assessee is partly allowed. Disallowance of warranty provision by the assessee in its books of account - HELD THAT - In case, it is a case of reversal of some provision, then it needs to be seen if any deduction was allowed at the time of creation of such a provision. If yes, then such reversal should be added now at the time of its reversal. There is another sum of ₹ 27,95,163/- in the Table, which has been shown as Claims recovered . AR stated that the assessee recovered claims from some parties. This amount is directed to be credited to Provision for warranty, thereby reducing the amount of expenses incurred during the year. There is another sum of ₹ 55,03,000/-, which is Reversal during the year . As the assessee is getting deduction on creation of provision, such reversal, being excessive provision created in the past, needs to be recognized as income for the year. In so far as CP division is concerned, the assessee made provision during the year at ₹ 3,10,33,820/-. As against that, the amount of actual expenditure is ₹ 3,11,63,197/-. In view of the fact that actual expenditure incurred by the assessee in CP division is more than the amount of provision, we hold that deduction should be allowed for the amount of provision created. In the absence of such a position, we would have directed to follow the same rule of allowing provision at the rate of 0.40% of the sales of CP division. Once deduction is allowed on creation of provision, there can be no question of allowing deduction for actual expenses incurred in this division. AO is directed to give effect to our above directions/observations after allowing opportunity of hearing to the assessee. Thus, ground No.2 of the assessee s appeal is allowed for statistical purposes. Disallowance out of Voluntary Retirement Scheme expenses (VRS expenses) - AO allowed 1/5 th of actual payment - HELD THAT - We have to read Section 35DDA along with Section 43(2) and in view of the binding judicial pronouncements hereinabove referred, we hold that within the system of accounting followed by the assessee, they may have paid certain amount but the assessee has kept the provision as the expenses were also incurred. Therefore, as per the style of accounting, the term paid shall include actually paid or incurred. In the instant case, the Revenue Authorities have only tried to interprete the provision of section 35DDA without considering the entire spirit and intent of the Act. We therefore, set aside the order of the CIT(Appeals) on this issue and the amount of VRS expenditure claimed by the assessee i.e. 1/5th of VRS expenses incurred of ₹ 6,47,90,700/- is therefore allowed. However, it is made clear that once the assessee is allowed deduction on incurring expenses towards VRS, no deduction u/s.35DDA should be allowed at the time of actual payment thereof. AO is directed to verify if any deduction on this score is not claimed/allowed in the subsequent years at the time of actual payment. In case he finds that the assessee was allowed deduction at the time of payment, then such an amount should be added back. It goes without saying that once deduction has been allowed on the basis of incurring of liability, there cannot be any deduction on the basis of payment. Thus, ground No.3 raised in appeal by the assessee is allowed for statistical purposes. Disallowance of amalgamation expenses - CIT(A) allowed stamp duty on immovable property and but disallowed fees paid for increase in authorized share capital for deduction u/s 35DD - HELD THAT - We are also inclined to agree with the submission of the Ld. AR after perusing facts of the case in HINDUSTAN INSECTICIDES LIMITED 2001 (2) TMI 75 - DELHI HIGH COURT that it relates to fees for registration of company and essentially dealing with provision of section 35D(2)(c)(iii). There is substantial difference between registration of a company and action taken for increase in authorized share capital. In the case of the assessee because of amalgamation proceedings, there was need to increase in authorized share capital and therefore, such expenses cannot be segregated from the main amalgamation proceedings and therefore, these expenses are part of amalgamation expenses. We set aside the order of the Ld. CIT(Appeals) on this issue and direct the AO to delete the addition from the hands of the assessee. Thus, ground No.4 raised in appeal by the assessee is allowed and ground No.3 of the Revenue s appeal is dismissed. Disallowance of provision on stock obsolescence - HELD THAT - Respectfully, following the decision of the Hon ble Jurisdictional High Court in assessee own case 2013 (2) TMI 883 - BOMBAY HIGH COURT , we direct the AO to provide provision for stock obsolescence to the assessee and delete the addition therein. Thus, ground No.5 raised in appeal by the assessee is allowed. Addition being income from scrap sale - the assessee stated that the amount was already offered to tax in assessment year 2001-02 - HELD THAT - In order to meet the ends of justice, we find it deem and appropriate to restore this issue to the file of the AO to verify the contentions of the assessee whether the amount reflected in the scrap sales account was actual income from sale of some cars in the financial year 2000-01 relevant to assessment year 2001-02 i.e. just preceding assessment year and whether same was offered to tax in that year. If the amount was offered to tax in that year then in this relevant year same amount again cannot be brought to tax and should be deleted. Disallowance of provision for miscellaneous expenses treated as excess claim - HELD THAT - This issue requires detailed factual verification and it is to be verified whether such provision made consistently followed by the assessee and out of balance provision of ₹ 5,16,957/-, whether the sum of ₹ 501,463/- have been actually incurred out in subsequent financial year i.e. 2002-03. In view of the matter, we set aside the order of the Ld. CIT(Appeals) and restore the issue to the file of Assessing Officer for verification in compliance with the principles of natural justice. Thus, ground No.7 raised in appeal by the assessee is allowed for statistical purposes. Disallowance of amount written off out of advance to Customs - HELD THAT - Revenue Authorities have made addition since the assessee was unable to explain the modus of working of such provision in its books of account and was also not able to justify with supporting evidences that why this amount should be allowed as deduction. However, prayer of the Ld. AR is that they are ready with entire working of the said amount and relevant supporting documents and they want one opportunity to present this issue on merits once again before the Assessing Officer. In view of the matter and in the spirit of welfare legislation which is within the ambit of the taxing statutes, we set aside the order of the Ld. CIT(Appeals) on this issue and restore it to the file of the AO for necessary verification as per law following principles of natural justice. Disallowance of expenses on the basis that the assessee had not produced the vouchers/ supporting documents - HELD THAT - Assessee claims due to incorrect voucher numbers mentioned in the SAR they were unable to provide evidences/ explanations with regard to the remaining disallowed amount of ₹ 9,22,696/-. The assessee further claims that they are ready with relevant supporting documents and evidences pertaining to this amount and has prayed that an opportunity be provided so that on merits before the First Appellate Authority, the assessee can demonstrate its case. In the case before us, most of the issues relating to factual verification are being restored to the file of Assessing Officer and this issue also qualifies in that category. In view of the matter, we set aside the order of the Ld. CIT(Appeals) on this issue and restore the issue to the file of the AO for adjudication after following the principles of natural justice. Thus, ground No.9 raised in appeal by the assessee is allowed for statistical purposes. Disallowance of excess provisions - HELD THAT - We have perused the case records and given thoughtful consideration to the findings of the First Appellate Authority. There is a clear cut verification on facts which is on record that the assessee has given no basis whatsoever for making such ad-hoc provisions and actually there were no expenses incurred at all from this provisions during the year. Therefore, we do not find any infirmity with the findings of the Ld. CIT(Appeals) and the same is thereby upheld. Thus, ground No.10 raised in appeal by the assessee is dismissed. Disallowance of bad debts written off - HELD THAT - AO noted that condition u/s.36(2) was not satisfied for the bad debt claimed of CP division. The Ld. CIT(Appeals) has observed that for the amount of ₹ 64,70,030/- claimed as bad debt in the Atlas Copco Pune Division, for which details regarding the same having been included as sales in the earlier period was given that was considered to have satisfied the condition given u/s 36(2)(i). For the remaining amount of ₹ 9,86,019/- of the ACP division and the entire amount of ₹ 64,38,102/- of the CP division, the assessee cannot be considered to have satisfied the condition u/s 36(2)(i). Therefore, we do not find any infirmity with the findings of the Ld. CIT(Appeals) and the same is thereby upheld. Disallowance of Inter-Corporate Deposit (ICD) written off - HELD THAT - Issue decided in favour of assessee in own case 2013 (3) TMI 532 - ITAT PUNE , therefore, the claim of the assessee should be allowed. Addition to the total income being sundry liability considering the same as income from sale of scrap - HELD THAT - The company has credited the said sale of scrap to the sundry liability account as the same amount was payable to the Atlas Copco Secocrac/Interock. As per details provided to us the said amount was written back as income in the subsequent financial year ended 31st March, 2003.The entry for the write back of the amount has been passed on 28.11.2002. Being the said amount is not be refunded, then income on account of sale of scrap should have been booked in the financial year ended 31.03.2002 and not in subsequent year. CIT(Appeals) on the issue observed that the income of ₹ 20,10,925/- was generated by way of sale of scrap during the year and only because it was thought to be refundable to the party from whom imports were made, it was kept as outstanding liability in this year and transferred to miscellaneous income and offered to tax in A.Y. 2003-04. This method of accounting was not accepted by the Ld. CIT(Appeals) since income has arisen in this year on account of sale of scrap and he had therefore, upheld the findings of the Assessing Officer. We do not find any infirmity with the findings of the Ld. CIT(Appeals) and the same is thereby upheld. Thus, ground No.13 raised in appeal by the assessee is dismissed. Exclusion of 90% of following receipts from profit of business for the purpose of deduction u/s.80HHC - HELD THAT - As appreciate that this issue has been restored to the file of the Ld. CIT(Appeals) in assessee s own case. However, in the present scenario where most of the issues, we have restored to the file of AO for verification, this issue, therefore is restored to the file of Assessing Officer for re-examination and adjudicating the matter after providing reasonable opportunity of hearing to the assessee. TPA - royalty payment at arm s length price - royalty payments - HELD THAT - We find that even in assessment yea₹ 2004-05 and 2005-06 on this issue, relief was provided to the assessee. Following the decision for assessment year 2004-05 and 2005-06, the Ld. CIT(Appeals) has deleted the addition made on account of disallowance of royalty payments on export to AEs. For this year also, factual matrix being same, it was perfect decision rendered by the CIT(Appeals). Moreover, we observe that payment of royalty to AEs is not disputed which has been done as per RBI norms and as per relevant agreement entered into. The entire transactions have also been accepted by the Revenue. The ld. DR could not controvert these facts.

Summary

Issues Involved:
1. Disallowance of interest income and administrative expenses under Section 14A of the Income Tax Act.
2. Disallowance of warranty provision.
3. Disallowance of Voluntary Retirement Scheme (VRS) expenses.
4. Disallowance of amalgamation expenses.
5. Disallowance of provision for stock obsolescence.
6. Addition of income from scrap sale.
7. Disallowance of provision for miscellaneous expenses.
8. Disallowance of amount written off out of "advance to Customs".
9. Disallowance of expenses due to lack of vouchers/supporting documents.
10. Disallowance of excess provisions.
11. Disallowance of bad debts written off.
12. Disallowance of Inter-Corporate Deposit (ICD) written off.
13. Addition of sundry liability as income from scrap sale.
14. Exclusion of certain receipts from profit for deduction under Section 80HHC.
15. Allowing the claim of dealer commission.
16. Deletion of disallowance of prior period royalty.
17. Deletion of addition on account of adjustment of Arm’s Length Price on royalty payment.

Detailed Analysis:

1. Disallowance of Interest Income and Administrative Expenses (Section 14A)
The assessee's appeal contested the disallowance of ?14,39,550/- made by the Assessing Officer (AO) for interest and administrative expenses related to exempt income. The CIT(A) provided partial relief, reducing the disallowance to ?12,34,436/-. The Tribunal, referencing the Bombay High Court's decision in CIT Vs. Reliance Utilities and Power Ltd., concluded that the assessee had sufficient own funds, thus no disallowance under Section 14A was warranted. The Tribunal directed the AO to sustain only ½% of the disallowance on administrative expenses attributable to exempt income.

2. Disallowance of Warranty Provision
The AO disallowed the warranty provision, deeming it excessive compared to actual expenditure. The CIT(A) allowed the provision at 0.4% of net sales, following a precedent. The Tribunal upheld this, directing the AO to allow the provision for the CP division as the actual expenditure exceeded the provision.

3. Disallowance of VRS Expenses
The AO allowed only 1/5th of the actual VRS payment, disallowing ?2,41,32,829/-. The CIT(A) upheld this. The Tribunal, interpreting Section 35DDA with Section 43(2), allowed the full 1/5th of the incurred VRS expenses, directing the AO to ensure no double deduction in subsequent years.

4. Disallowance of Amalgamation Expenses
The AO disallowed stamp duty and fees for increased share capital. The CIT(A) allowed stamp duty expenses but not fees for share capital increase. The Tribunal directed the AO to delete the addition, recognizing the share capital increase as part of amalgamation expenses.

5. Disallowance of Provision for Stock Obsolescence
The AO allowed only the actual write-off, disallowing the provision. The CIT(A) upheld this. The Tribunal, referencing its earlier decision and the Bombay High Court's affirmation, directed the AO to allow the provision for stock obsolescence.

6. Addition of Income from Scrap Sale
The AO added ?3,40,443/- as scrap sale income, which the assessee claimed was already taxed in the previous year. The CIT(A) upheld the AO's decision. The Tribunal restored the issue to the AO for verification.

7. Disallowance of Provision for Miscellaneous Expenses
The AO disallowed ?5,16,954/- for excess provision. The CIT(A) upheld this. The Tribunal restored the issue to the AO for verification of the provision's consistency and actual expenditure in subsequent years.

8. Disallowance of Amount Written Off (Advance to Customs)
The AO disallowed ?16,44,087/- for lack of supporting documents. The CIT(A) upheld this. The Tribunal restored the issue to the AO, allowing the assessee to present necessary evidence.

9. Disallowance of Expenses Due to Lack of Vouchers
The AO disallowed ?9,22,696/- for lack of vouchers. The CIT(A) upheld this. The Tribunal restored the issue to the AO for verification, considering the assessee's claim of incorrect voucher numbers in the Special Audit Report.

10. Disallowance of Excess Provisions
The AO disallowed ?8,25,000/- for ad-hoc provisions with no actual expenses. The CIT(A) upheld this. The Tribunal found no basis for the ad-hoc provisions and upheld the CIT(A)'s decision.

11. Disallowance of Bad Debts Written Off
The AO disallowed bad debts for lack of evidence of inclusion as income in earlier years. The CIT(A) allowed ?64,70,030/- but disallowed the rest. The Tribunal upheld the CIT(A)'s decision, finding no satisfaction of Section 36(2)(i) conditions for the disallowed amount.

12. Disallowance of Inter-Corporate Deposit (ICD) Written Off
The AO disallowed ?4,400,000/- as not incurred in the normal course of business. The CIT(A) upheld this. The Tribunal, referencing its earlier decision and the Bombay High Court's affirmation, allowed the deduction as a business loss.

13. Addition of Sundry Liability as Income from Scrap Sale
The AO added ?20,10,925/- as scrap sale income. The CIT(A) upheld this. The Tribunal upheld the CIT(A)'s decision, finding the income should have been booked in the financial year it arose.

14. Exclusion of Certain Receipts from Profit for Deduction (Section 80HHC)
The Tribunal restored the issue to the AO for re-examination, following its earlier decision in the assessee's case.

15. Allowing the Claim of Dealer Commission
The AO disallowed dealer commission for lack of evidence. The CIT(A) allowed it. The Tribunal, referencing its earlier decision and the Bombay High Court's affirmation, upheld the CIT(A)'s decision.

16. Deletion of Disallowance of Prior Period Royalty
The AO disallowed ?95,77,308/- for lack of TDS evidence. The CIT(A) allowed part of it. The Tribunal upheld the CIT(A)'s decision, finding the deduction allowable as per Section 40(a)(i).

17. Deletion of Addition on Account of Adjustment of Arm’s Length Price on Royalty Payment
The AO disallowed ?80,44,106/- for lack of evidence of AE discontinuing production. The CIT(A) allowed it. The Tribunal upheld the CIT(A)'s decision, finding the royalty payment at arm's length price and as per RBI norms.

Conclusion:
The assessee's appeal was partly allowed for statistical purposes, and the Revenue's appeal was dismissed. The Tribunal provided detailed directions for each issue, ensuring compliance with legal provisions and principles of natural justice.