1998 (2) TMI 158 - AT - Income Tax

Issues Involved:
1. Deletion of addition on account of work-in-progress (WIP) in respect of equipment supply.
2. Deletion of addition on account of WIP in respect of inland transportation.
3. Classification of expenditure on construction of bridges as revenue expenditure.
4. Allowance of head office expenses under the Double Taxation Agreement (DTA) with Japan.
5. Applicability of specific disallowance provisions under the Income Tax Act in light of the DTA with Japan.

Detailed Analysis:

1. Deletion of Addition on Account of WIP in Respect of Equipment Supply:
The Revenue challenged the deletion of Rs. 2,19,15,387 by the CIT(A) regarding the valuation of WIP for equipment supply. The AO had initially added Rs. 3,61,24,600, arguing that the assessee did not account for WIP, which is essential for determining accurate profits and losses. The CIT(A) reduced this addition based on a gross profit margin of 1.25% instead of the AO's 20%. The Tribunal found that the CIT(A) had accepted the assessee's figures without proper scrutiny and without giving the AO an opportunity to comment. The matter was remanded back to the CIT(A) for fresh consideration after providing the AO with the necessary documents and a chance to respond.

2. Deletion of Addition on Account of WIP in Respect of Inland Transportation:
The AO added Rs. 1,58,30,000 for WIP related to inland transportation, which the assessee had not accounted for. The CIT(A) partially sustained this addition to Rs. 44,98,300, considering the net surplus for the period ending March 31, 1991. The Tribunal noted that the CIT(A) did not verify whether the revenues recorded in subsequent years had a direct nexus with the expenses incurred. The Tribunal remanded the issue back to the CIT(A) for a fresh decision after allowing the AO to examine the details.

3. Classification of Expenditure on Construction of Bridges as Revenue Expenditure:
The AO had treated Rs. 1,17,21,284 spent on constructing temporary bridges as capital expenditure. The CIT(A) overturned this, citing that the expenditure was necessary for transporting machinery to the work site and did not result in any enduring benefit. The Tribunal upheld the CIT(A)'s decision, agreeing that the expenditure was a business necessity and should be treated as revenue expenditure.

4. Allowance of Head Office Expenses Under the DTA with Japan:
The AO disallowed Rs. 3,86,16,155 claimed as head office expenses, applying Section 44C of the IT Act. The CIT(A) allowed the expenses based on Article III of the DTA with Japan, which permits the deduction of all expenses reasonably allocable to the permanent establishment. The Tribunal upheld the CIT(A)'s decision, agreeing that the DTA provisions should prevail over Section 44C, allowing the expenses proportionately based on the turnover of the Indian project.

5. Applicability of Specific Disallowance Provisions Under the IT Act in Light of the DTA with Japan:
The CIT(A) had held that disallowances under Sections 40A(3), 40A(12), 37(2A), Rule 6D, and Section 43B of the IT Act were not applicable due to Article III(3) of the DTA. The Tribunal disagreed, stating that the DTA does not explicitly exclude the applicability of these provisions. The Tribunal restored the disallowances made by the AO, noting that the provisions of the IT Act would continue to govern except where the DTA specifically provides otherwise.

Conclusion:
The Tribunal remanded the issues related to the addition on account of WIP in respect of equipment supply and inland transportation back to the CIT(A) for fresh consideration. It upheld the CIT(A)'s decision on the classification of bridge construction expenditure as revenue expenditure and the allowance of head office expenses under the DTA. However, it overturned the CIT(A)'s decision regarding the non-applicability of specific disallowance provisions under the IT Act, restoring the AO's disallowances. The Revenue's appeal was treated as allowed for statistical purposes.

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