2012 (4) TMI 416 - AT - Income Tax

Depreciation on intangible assets - AO disallowed the depreciation - various assets including integrated software - During the survey, it was found by the survey team that these assets were not there in the premises and if the appellant had any objection regarding the list of the assets in the survey report, the same has to be objected there itself and ought to have corrected - AO denied claim of the assessee because no fixed assets register was maintained by the assessee but same was produced before the AO subsequently - held that - Merely because the parties who had supplied assets to the assessee have not responded to the notice of the AO may not be a ground for denying claim of the assessee on tangible assets - the material supplied by the assessee is not examined in detail and complete details of the assets are recorded in the report of valuation prepared prior to the survey at the instance of IDBI, therefore, we are of the view the matter as regards depreciation on tangible assets requires reconsideration at the level of the AO Regarding deduction u/s 80HHC and 80 IA - Held that assessee made a claim of deduction under these provisions when income is computed at profit. The learned CIT(A), therefore, rightly directed the AO to consider this issue particularly when the assessee fulfilled conditions under these provisions. The learned CIT(A) merely directed the AO to allow the claim of the assessee as per law Regarding bad debts u/s 36 (1) (vii) - Held that debts having been written off in the books of accounts in the year under consideration, the claim of bad debts is allowable to the assessee - Appeal is allowed Disallowance of insurance expense - AO rejected the claim of the assessee because the insurance cover was taken for loss of production and expected profit whereas insurance expenses were debited on estimate basis relating to destruction of machinery, building, raw material and finished goods. - held that - Once assessee has shown income on account of insurance receipts out of the same incident and claimed expenses out of the same incident relating thereto, the claim of the assessee should have been appreciated and considered for both i.e. income and the expenditure on account of insurance. Similarly, assessee shall have to satisfy the AO as to how expenses have been claimed and should have filed the supporting evidences. - matter remanded back. Regarding disallowance to the extent of 25% on disallowance of Rs.3,08,17,231/- made by the AO on account of nongenuine purchases - arned Counsel for the assessee reiterated the submissions made before the authorities below and submitted that search was carried out by central excise department on 15-02-2002 which is prior to the start of the financial year relevant to the assessment year under appeal 2003-04 - It is not in dispute that search was carried out by central excise department prior to start of the financial year in appeal. The financial year starts from 01-04-2002 and would end on 31-03-2003 for assessment year 2003-04 under appeal - In the absence of any material on record against the assessee, we do not find any justification to sustain even part addition against the assessee - Decided in favor of the assessee Disallowance of various expenses - assessee Company filed return of income in response to notice u/s 148 of the IT Act and has made additional claims on these expenses. Such claims were not made in the original return of income. - held that - the proceedings u/s 147 are meant for the benefit of revenue and not for assessee, the assessee cannot be permitted to convert the re-assessment proceedings into an appeal or revision in disguise and sick leave in respect of items earlier rejected or claim relief in respect of items not claimed in the original assessment proceedings, unless relatable to escaped income. Regarding addition of Rs.10,55,53,967/- u/s 36(1) (iii) - It was submitted before the learned CIT(A) that the AO did not issue any show cause notice on this issue and that all the advances were made for business purposes either for purchase of materials or plant and machinery - The learned Counsel for the assessee submitted that the entire disallowance has been made by the AO purely on estimate basis without establishing any nexus between the funds borrowed and advances granted - It was submitted that recently the Hon ble Supreme Court has held that in case of loans to associate concerns and/or outside parties, commercial expediency from the businessman s point of view has to be taken into consideration and while doing so, revenue cannot sit in the arm-chair of the assessee - Held that the assessee is having sufficient own funds, therefore, there is no question of diversion of interest-bearing funds for giving loans and advances - Decided in favor of the assessee Regarding addition on account of loss on sale of raw materials of Rs.2,69,86,470 - After verification of the evidences produced by the assessee the AO had come to the conclusion that the loss claimed in respect of such sales of raw material is fictitious and therefore, the same has been disallowed and as per the clear finding in the assessment order, the AO stated that the addition made be confirmed - learned Counsel for the assessee also submitted that huge volumes of additional evidences are in order and the AO did not find any mistake in the same and hence, he has not commented on any of them - Held that CIT(A) considering the details furnished found that the assessee has suffered loss and such findings of the learned CIT(A) have not been rebutted through any evidence or material on record - Appeal is dismissed

Issues Involved:

1. Depreciation on intangible and tangible assets.
2. Deduction under sections 80HHC and 80IA.
3. Claim of bad debts under section 36(1)(vii).
4. Levy of interest under sections 234B, 234C, and 234D.
5. Initiation of penalty under section 271(1)(c).
6. Reopening of assessment under section 147.
7. Disallowance of insurance expenses.
8. Disallowance of various other expenses (interest, legal, professional, and depreciation).
9. Disallowance of bad debt provisions.
10. Deduction under section 80IA on other income.
11. Reduction of business profits by gross interest receipts.
12. Bogus purchases and differences in balances.
13. Share and debenture issue expenses.
14. Machinery repair expenses.
15. Service charges and employee contributions to PF and ESI.
16. Unexplained share application money under section 68.

Issue-wise Detailed Analysis:

1. Depreciation on Intangible and Tangible Assets:
The revenue challenged the allowance of depreciation on intangible assets (software), while the assessee contested the denial of depreciation on tangible assets. The Tribunal upheld the CIT(A)'s decision to allow depreciation on software, recognizing it as an intangible asset loaded into the system of the machinery. However, the disallowance of depreciation on tangible assets was remanded to the AO for reconsideration, with instructions to provide a reasoned order after examining the valuation report and evidence.

2. Deduction under Sections 80HHC and 80IA:
The revenue's appeal against the CIT(A)'s direction to allow deductions under sections 80HHC and 80IA was dismissed. The Tribunal agreed that the assessee was entitled to these deductions as it fulfilled all conditions, and the deductions were claimed when the income was computed at a profit due to various additions.

3. Claim of Bad Debts under Section 36(1)(vii):
The Tribunal allowed the assessee's claim for bad debts, citing the Supreme Court's decision in T.R.F. Ltd., which states that after April 1, 1989, it is not necessary for the assessee to establish that the debt has become irrecoverable; it is sufficient if the bad debt is written off in the accounts. The matter was remanded to the AO for verification of the write-off in the accounts.

4. Levy of Interest under Sections 234B, 234C, and 234D:
The Tribunal noted that interest under sections 234B and 234C is mandatory and consequential. However, interest under section 234D, applicable from assessment year 2004-05, could not be charged for the assessment year 2002-03. The orders charging interest under section 234D were set aside.

5. Initiation of Penalty under Section 271(1)(c):
The Tribunal dismissed the grounds related to the initiation of penalty under section 271(1)(c), noting that it is a separate proceeding.

6. Reopening of Assessment under Section 147:
The grounds challenging the reopening of the assessment under section 147 were dismissed as they were not pressed by the assessee.

7. Disallowance of Insurance Expenses:
The Tribunal remanded the issue of disallowance of insurance expenses to the AO for reconsideration, directing the AO to consider the insurance receipts and expenses together and to verify the supporting evidence.

8. Disallowance of Various Other Expenses:
The Tribunal upheld the disallowance of additional claims for various expenses (interest, legal, professional, and depreciation) made during reassessment proceedings, citing the Supreme Court's decision in Sun Engineering Works Ltd., which restricts such claims in reassessment proceedings.

9. Disallowance of Bad Debt Provisions:
The Tribunal dismissed the grounds related to the disallowance of bad debt provisions, as the assessee conceded that provisions for bad debts are not allowable.

10. Deduction under Section 80IA on Other Income:
The Tribunal allowed the deduction under section 80IA on insurance claims, following the Delhi High Court's decision in Sportking India Ltd. However, it dismissed the claim for netting other income against business profits, citing the Bombay High Court's decision in Asian Star Co. Ltd.

11. Reduction of Business Profits by Gross Interest Receipts:
The Tribunal dismissed the grounds related to the reduction of business profits by gross interest receipts, following the Bombay High Court's decision in Asian Star Co. Ltd.

12. Bogus Purchases and Differences in Balances:
The Tribunal remanded the issue of bogus purchases and differences in balances to the AO for reconsideration, directing the AO to provide specific findings and to consider the evidence submitted by the assessee.

13. Share and Debenture Issue Expenses:
The Tribunal upheld the deletion of the addition related to share and debenture issue expenses, noting that the CIT(A) correctly followed the order of the Tribunal for earlier years.

14. Machinery Repair Expenses:
The Tribunal upheld the deletion of the addition related to machinery repair expenses, noting that the CIT(A) correctly allowed the expenses as annual maintenance.

15. Service Charges and Employee Contributions to PF and ESI:
The Tribunal dismissed the grounds related to service charges and employee contributions to PF and ESI, following the Supreme Court's decisions in Vinay Cement Ltd. and Alom Extrusion Ltd.

16. Unexplained Share Application Money under Section 68:
The Tribunal upheld the deletion of the addition related to unexplained share application money, following the Supreme Court's decision in Lovely Exports, which states that no addition can be made if the shareholders are identified and their creditworthiness is established.

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