2021 (8) TMI 928 - AT - Income Tax

Disallowance of payment of liquidated damages and interest on delayed payment of Value Added Tax (VAT) as deduction - HELD THAT - It is payment made for breach of contractual obligation by the assessee. These facts are not disputed by the revenue. Hence we hold that any payment made for breach of contractual obligation in the form of liquidated damages, cannot be construed as penal in nature. Hence the provisions of Explanation 1 to section 37(1) of the Act cannot be brought into operation at all in the facts of the instant case. Accordingly, we direct the ld AO to grant deduction towards liquidated damages. Assessee had remitted the VAT dues to the Government with some delay for which it had duly suffered interest upto the date of payment. This interest payment is purely compensatory in nature and becomes an allowable deduction. The same cannot be construed as penal in nature and does not fall within the provisions of Explanation 1 to section 37(1) - Reliance in this regard has been rightly placed by the ld AR on Lachmandas Mathuradas 1997 (12) TMI 16 - SUPREME COURT wherein it was held that the interest on sales tax is compensatory in nature and would be allowable as deduction in computing profits of the business. Accordingly, we direct the ld AO to grant deduction towards interest on delayed payment of VAT. Disallowance of bad debts written off - HELD THAT - We find that under invoicing of sale amounts got triggered pursuant to the Central Excise Audit conducted in earlier years and Audit Report dated 16.12.2005 was submitted wherein the under invoicing of sales to the extent of ₹ 39 lacs was pointed out to the assessee, which fastened an excise duty liability of ₹ 6,36,480/- on the assessee.This payment towards excise duty does not include any penalty for any violation of any law in force. Since the additional excise duty liability fastened on the assessee company could not be recovered from the customers, but still the assessee had to pay the same to the Government, the said excise duty was duly paid by the assessee and claimed as deduction during the year on the ground of bad debts written off. This is in our considered opinion, is squarely allowable as deduction both u/s 43B as well as u/s 36(1)(vii) of the Act. Hence we direct the ld AO to allow the same as deduction. Deposits written off - We find that these are regular business deposits paid by the assessee in its ordinary course and since the said deposits were not recoverable by the assessee company, the same were sought to be written off by the assessee in its books of accounts and claim the said business loss as deduction. The fact of those deposits becoming irrecoverable is not disputed by the revenue before us. Hence the regular business deposits which became irrecoverable, when written off, would be squarely allowable as deduction u/s 28 of the Act as a business loss. Disallowance of advances written off - HELD THAT - As the deposits / advances written off were sought to be disallowed by the ld AO on the ground that no evidences were furnished by the assessee. But we find that from the bare perusal of the aforesaid chart, all the advances / deposits were given only in the ordinary course of its business by the assessee company - since the same were not properly examined by the ld AO in the original assessment proceedings, in the interest of justice and fairplay, we deem it fit and appropriate, to restore this issue to the file of ld AO for denovo adjudication in accordance with law. Needless to mention that the assessee be given reasonable opportunity of being heard. The assessee is also at liberty to furnish fresh evidences, if any, in support of its contentions. Accordingly, the Ground No. 8 raised by the assessee is allowed for statistical purposes. Reduced claim of deduction u/s 10A - whether deduction u/s 10A of the Act is to be granted qua the eligible unit before setting off losses of other non-10A units? - AO restricted the claim of deduction u/s 10A of the Act by setting off the loss incurred by the non-eligible unit of the assessee with the profits made by the STPI unit which is eligible for deduction u/s 10A of the Act, which action was upheld by the ld CITA also - HELD THAT - We find that this issue is no longer res integra in view of the decision of the Hon‟ble Supreme Court in the case of CIT vs Yokogawa India Ltd 2016 (12) TMI 881 - SUPREME COURT holding that though Section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter VI. - Decided in favour of assessee. Computation of deduction u/s 10A - HELD THAT - As AR stated that the ld AO had denied deduction u/s 10A of the Act in respect of export proceeds in the sum of ₹ 17.33 lacs which was realised beyond the prescribed period . In this regard, the ld AR submitted that the ld AO verify the Foreign Inward Remittance Certificate (FIRC) and decided the issue of allowability of deduction u/s 10A of the Act for the same in accordance with law. This was fairly agreed by the ld DR before us. Accordingly, we restore this issue to the file of ld AO to verify the FIRC and decide the issue of allowability of deduction u/s 10A of the Act for the same in accordance with law. Disallowance of interest u/s 36(1)(iii) - Sufficiency of own funds - HELD THAT - We find from the perusal of the balance sheet of the assessee for the year under consideration, that the assessee is having sufficient own funds of ₹ 77.04 crores which is several times more than the Capital Work in Progress figure of ₹ 1.13 crores. Hence it could be safely presumed that the Capital Work in Progress had been invested only out of own funds and not out of borrowed funds, by following the ratio laid down in the case of HDFC Bank 2014 (8) TMI 119 - BOMBAY HIGH COURT . Respectfully following the same, we direct the ld AO to delete the disallowance of interest u/s 36(1)(iii). Deduction for share issue expenses - HELD THAT - We find that there is no dispute that the amounts spent on account of share issue expenses were incurred only for increasing the authorised share capital of the assessee company. We find that the Hon‟ble Supreme Court in the case of Brooke Bond India Ltd 1997 (2) TMI 11 - SUPREME COURT had held that expenditure incurred on issuing share to increase share capital by a company would not be allowable as revenue expenditure and it would only be capital in nature. Respectfully following the said decision, the Ground No. 8 raised by the assessee is hereby dismissed. Disallowance made on account of provision for warranties - HELD THAT -We find that the assessee had furnished detailed explanation with regard to the provision for warranties before the ld CITA together with the basis of making the provision, its allowability as deduction in the earlier assessment years and with various decisions of Hon‟ble Supreme Court and Hon‟ble High Courts. We find that the ld CITA had simply brushed aside all the arguments of the assessee and made general observations which are not at all germane to the issue in dispute before him and upheld the action of the ld AO. We find that since sufficient opportunity was not given to the assessee by the ld AO in the assessment proceedings itself, we deem it fit and appropriate, in the interest of justice and fairplay, to restore this issue to the file of ld AO for denovo adjudication in accordance with law by duly considering all the submissions of the assessee in this regard. Needless to mention that the assessee be given reasonable opportunity of being heard.

Summary

Issues Involved:
1. Disallowance of payment of liquidated damages and interest on delayed payment of VAT.
2. Disallowance of bad debts written off.
3. Disallowance of advances written off.
4. Deduction u/s 10A of the Income Tax Act.
5. Disallowance of interest u/s 36(1)(iii) of the Act.
6. Disallowance of share issue expenses.
7. Disallowance of provision for warranties.
8. Quantification of carry forward of losses.
9. Granting of interest u/s 244A of the Act.
10. Export proceeds brought into India within the prescribed time.

Detailed Analysis:

1. Disallowance of Payment of Liquidated Damages and Interest on Delayed Payment of VAT:
The tribunal found that the payment of ?25,983 towards liquidated damages was made for breach of contractual obligation and not penal in nature, thus allowable as deduction. Similarly, the interest of ?76,620 on delayed VAT payment was deemed compensatory and allowable as deduction, supported by the Supreme Court decision in Lachmandas Mathuradas (254 ITR 799).

2. Disallowance of Bad Debts Written Off:
The tribunal allowed the deduction of ?6,36,480 towards excise duty and ?67,350 towards deposits written off. The excise duty was paid due to under-invoicing and could not be recovered from customers, thus allowable under sections 43B and 36(1)(vii). The deposits written off were regular business deposits, deemed allowable as business loss under section 28.

3. Disallowance of Advances Written Off:
The tribunal restored the issue to the Assessing Officer (AO) for re-examination, as the advances written off were given in the ordinary course of business but were not properly examined. The assessee is allowed to furnish fresh evidence.

4. Deduction u/s 10A of the Income Tax Act:
The tribunal ruled that the deduction u/s 10A should be granted before setting off losses of other non-10A units, following the Supreme Court decision in CIT vs Yokogawa India Ltd (391 ITR 274).

5. Disallowance of Interest u/s 36(1)(iii) of the Act:
For A.Y. 2011-12, the tribunal found that the assessee had sufficient own funds to cover the capital work in progress, thus the disallowance of ?4,15,922 was deleted, following the Bombay High Court decision in HDFC Bank (366 ITR 505).

6. Disallowance of Share Issue Expenses:
The tribunal upheld the disallowance of ?32,00,020 towards share issue expenses as capital expenditure, following the Supreme Court decision in Brooke Bond India Ltd vs CIT (1997) 12 SCL 83.

7. Disallowance of Provision for Warranties:
The tribunal restored the issue to the AO for re-examination, as the assessee was not given sufficient opportunity to justify the provision for warranties of ?20,54,889.

8. Quantification of Carry Forward of Losses:
The tribunal directed the AO to dispose of the rectification application u/s 154 and determine the carry forward of losses in accordance with law.

9. Granting of Interest u/s 244A of the Act:
The tribunal directed the AO to dispose of the rectification application u/s 154 and grant interest u/s 244A in accordance with law.

10. Export Proceeds Brought into India Within the Prescribed Time:
The tribunal restored the issue to the AO to verify the Foreign Inward Remittance Certificate (FIRC) and decide the allowability of deduction u/s 10A for the export proceeds realized beyond the prescribed period.

Conclusion:
The appeals were partly allowed for statistical purposes, with several issues remanded for re-examination by the AO. The tribunal provided clear directions on the treatment of various disallowances and deductions, ensuring compliance with legal precedents and proper verification of facts.