1997 (1) TMI 118 - AT - Income Tax

Assessing Officer, Assessment Year, Business Expenditure, Cash Credits, Foreign Currency, Foreign Enterprise, Foreign Exchange, Mercantile System, Revenue Expenditure, Work In Progress

Issues Involved:
1. Computation of engineering fees.
2. Deduction under section 80-O.
3. Unexplained credit.
4. Classification of certain expenses as capital or revenue.
5. Levy of interest under section 234B.

Detailed Analysis:

1. Computation of Engineering Fees:
The primary issue was the method used for computing engineering fees. The assessee followed the percentage of completion method, which had been consistently used for over three decades and was approved by the Institute of Chartered Accountants of India (ICAI). The Assessing Officer challenged this method, arguing that the entire amount receivable or received during the year should be treated as income. The CIT (Appeals) supported this view, stating that the assessee's method did not depict the true picture of profits due to various distortions, including not considering work-in-progress and deviating from the straight-line method prescribed by ICAI. However, the ITAT upheld the assessee's method, citing its long-standing use, scientific basis, and alignment with ICAI guidelines. The ITAT rejected the CIT (Appeals)' method, finding it vague and subjective, and restored the assessee's computation method.

2. Deduction under Section 80-O:
The assessee claimed a deduction under section 80-O for engineering fees earned from services rendered abroad. The Assessing Officer allowed the deduction but reduced it by attributing a proportionate share of expenses incurred in India. The CIT (Appeals) upheld this view, interpreting section 80-O in conjunction with section 80AB. However, the ITAT referenced its earlier decisions, which held that only expenses incurred abroad should be deducted from the gross foreign earnings for the purpose of section 80-O. The ITAT reversed the lower authorities' decisions and directed that the deduction be allowed on the entire eligible amount of foreign receipts without deducting expenses incurred in India.

3. Unexplained Credit:
The CIT (Appeals) identified a discrepancy of Rs. 34,68,59,746 between the closing balance of advances received for jobs as per the statement and the printed accounts, suggesting it might represent unexplained credit. The assessee argued that this amount included advances for jobs where work had not commenced during the year, which were not included in the statement provided to the Assessing Officer. The ITAT found the assessee's reconciliation satisfactory and held that the amount was well explained, thus knocking down the CIT (Appeals)' observation and ruling out the need for further examination.

4. Classification of Certain Expenses as Capital or Revenue:
The assessee claimed expenses for premises taken on lease as revenue expenses. The Assessing Officer and CIT (Appeals) treated these as capital expenses under Explanation 1 to section 32. The ITAT differentiated between expenses for replacing existing assets, which were allowed as revenue expenses, and expenses for new constructions, which were treated as capital expenses. Consequently, the ITAT allowed the expenses incurred at the Madras office but upheld the disallowance for the new toilet and pantry works at the Calcutta office.

5. Levy of Interest under Section 234B:
The grounds relating to the levy of interest under section 234B were stated to be for consequential reliefs. The ITAT noted that such reliefs are automatically required and dismissed these grounds without a specific order.

Conclusion:
The ITAT partially allowed the appeal, upholding the assessee's method for computing engineering fees, allowing the full deduction under section 80-O without attributing Indian expenses, and differentiating between capital and revenue expenses based on the nature of the work. The unexplained credit issue was resolved in favor of the assessee, and the grounds for interest under section 234B were dismissed as they pertained to consequential reliefs.

← Previous Next →