2004 (10) TMI 278 - AT - Income Tax

Summary

Issues Involved:

1. Disallowances u/s 43B and Section 145A.
2. Deduction on account of excise duty and custom duty.
3. Deduction of Modvat credit.
4. Disallowance of depreciation on additional liability for capital goods.
5. Disallowance of interest u/s 14A.
6. Disallowance of warranty expenditure.
7. Disallowance of software expenses.
8. Disallowance of litigation expenses.
9. Classification of income from other sources vs. business income.
10. Addition on account of excess consumption of raw materials and inputs.
11. Levy of interest u/s 234B.
12. Additional ground regarding recomputation of deduction u/s 80HHC.

Summary:

1. Disallowances u/s 43B and Section 145A:
The Tribunal held that advance payment of taxes or duties without incurring liability cannot be allowed as deduction u/s 43B. The CIT(A)'s disallowance of Rs. 3,19,41,668 representing PLA balance of excise duty on vehicles was sustained. However, the Tribunal allowed the alternate claim of deduction in the year the advance payment was adjusted against the liability.

2. Deduction on account of excise duty and custom duty:
The Tribunal upheld the disallowance of Rs. 69,30,00,248 under section 43B representing unutilized Modvat credit. However, it allowed the alternate claim of deduction for unutilized Modvat credit of the previous year adjusted in the current year.

3. Deduction of Modvat credit:
The Tribunal rejected the claim of deduction for unutilized Modvat credit but allowed the alternate claim for the previous year's unutilized Modvat credit adjusted in the current year.

4. Disallowance of depreciation on additional liability for capital goods:
The Tribunal held that the liability to pay custom duty was incurred in the year under consideration and allowed the claim of depreciation on the additional liability of Rs. 2,99,12,931.

5. Disallowance of interest u/s 14A:
The Tribunal set aside the CIT(A)'s order and deleted the addition of Rs. 4,59,08,287, holding that the revenue failed to discharge the onus of proving that borrowed funds were used for earning tax-free income.

6. Disallowance of warranty expenditure:
The Tribunal set aside the CIT(A)'s order and directed the Assessing Officer to examine whether the claim was based on a scientific basis. If so, the claim should be allowed on an accrual basis; otherwise, on an actual basis.

7. Disallowance of software expenses:
The Tribunal upheld the disallowance of Rs. 1,39,91,022 as capital expenditure, rejecting the claim that it was revenue expenditure.

8. Disallowance of litigation expenses:
The Tribunal set aside the CIT(A)'s order and allowed the litigation expenses of Rs. 32,41,870 as revenue expenditure, holding that the expenditure was incurred to protect the goodwill and image of the company.

9. Classification of income from other sources vs. business income:
The Tribunal directed the Assessing Officer to treat interest on tooling advance to vendors, interest received from dealers for late payment, interest on advances to employees, and interest on investment in joint ventures as business income. The matter regarding interest on inter-corporate deposits, interest on securities, and interest on bank deposits was remitted for fresh adjudication.

10. Addition on account of excess consumption of raw materials and inputs:
The Tribunal set aside the CIT(A)'s order and directed the Assessing Officer to determine the consumption of raw materials on an actual basis, considering the quantity of components required to manufacture a car and the number of cars manufactured.

11. Levy of interest u/s 234B:
The issue was treated as consequential, with the Tribunal allowing the assessee to challenge its legality in the second inning.

12. Additional ground regarding recomputation of deduction u/s 80HHC:
The Tribunal dismissed the additional ground, stating that deduction u/s 80HHC is allowable only in respect of income assessed under the head 'Profit & gains of business' and not on business income declared.