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2012 (5) TMI 10 - AT - Income TaxCapital or revenue expenditure - Repairs and maintenance - Enduring nature - substantial repair had undertaken for rig - AO was of the view that expenditure has been incurred before commencement of business - Held that it could not be said that the business was not set up. There was no necessity to employ Engineers because the Director was competent to render advisory services for setting up the business. Meeting and discussions, was therefore an indication of setting up of business. Following the said view and considering the entirety of the evidences placed on record, as also the totality of the circumstances, it appears that no capital asset had come into existence through which the assessee has obtained enduring benefit. - Decided in favor of assessee. Regarding head Office expenditure - Held that - the contracting States have kept in mind the provisions of the tax laws of the contracting States and to avoid any conflict in the provisions of the tax laws vis- -vis the provisions of Treaty, as also to streamline the applicable provisions of law, it was decided to incorporate that, for the purposes of determining the profits of a permanent establishment, there shall be allowed deduction of expenses incurred for the purposes of the business of the permanent establishment including general administrative expenses but in accordance with the provisions and also subject to the limitations of the tax laws of that State. Therefore by this amendment in the Article the applicability of provisions of section 44C has been enforced, nevertheless with effect from 1st day of April-2008. Regarding previous year income - AO has noticed that as per Schedule XIV - notes to the accounts, the said claim was confirmed by Cairn India Pvt. Ltd. On the other hand, as per the assessee, the claim was still under dispute and the claim was not recognized by the said party - Held that It is worth to note that the final payment was received from the said party in the F.Y. 2006-07 as per the TDS certificate given by the assessee and that fact has also been noted by the AO - once the admitted factual position is that the payment in question has actually been received in the F.Y. 2006-07, i.e. A.Y. 2007-08 and that fact has been noted by the AO himself, inter alia, further reaffirmed by ld. AR that in the next Financial Year it was duly recognized in the books of accounts - Appeal is partly allowed
Issues Involved:
1. Classification of repairs and maintenance expenses as revenue or capital expenditure. 2. Allowability of Head Office expenditure under Section 37(1) and Section 44C of the IT Act. 3. Recognition of disputed revenue as income in the current year. Detailed Analysis: 1. Classification of Repairs and Maintenance Expenses: - Issue: Whether the expenses incurred for repairs and maintenance of drilling rigs and auxiliary equipment should be classified as revenue expenditure or capital expenditure. - Facts: The assessee, a foreign company, incurred substantial expenses on repairs and maintenance of drilling rigs. The AO treated these expenses as capital expenditure, arguing that they provided an enduring benefit. - CIT(A) Decision: The CIT(A) found that the expenses were recurring in nature and necessary for the upkeep and maintenance of the drilling rigs and auxiliary equipment. Therefore, they were classified as revenue expenditure. - Tribunal's Conclusion: The Tribunal agreed with the CIT(A), noting that the expenses were incurred after the commencement of business and were purely for repairs and maintenance, not resulting in the creation of a new asset. The Tribunal dismissed the Revenue's appeal on this ground for all three years. 2. Allowability of Head Office Expenditure: - Issue: Whether the Head Office expenditure should be allowed under Section 37(1) or restricted under Section 44C of the IT Act. - Facts: The assessee claimed Head Office expenses under Section 37(1), arguing that the expenses were incurred for the business operations of the Indian Project. The AO restricted the claim under Section 44C, which limits the allowance for Head Office expenses. - CIT(A) Decision: The CIT(A) upheld the AO's decision, stating that the non-discrimination clause of the DTAA was not applicable and the expenses should be restricted under Section 44C. - Tribunal's Conclusion: The Tribunal examined the provisions of Section 44C and the DTAA. It noted that the non-discrimination clause and Article 7 of the DTAA should allow full deduction of expenses attributable to the Indian business. The Tribunal directed the AO to verify the allocation of expenses and allow them if they were at arm's length, referring to the accepted method in the previous year. The Tribunal allowed the assessee's appeal on this ground. 3. Recognition of Disputed Revenue: - Issue: Whether the disputed revenue amount should be recognized as income in the current year. - Facts: The AO added an amount receivable from Cairn India Pvt. Ltd. to the current year's income, arguing that it was confirmed and thus realizable. The assessee contended that the revenue was still under dispute and should not be recognized until actually received. - CIT(A) Decision: The CIT(A) upheld the AO's addition, stating that the realization was almost certain, and the income had arisen in the current year. - Tribunal's Conclusion: The Tribunal found that the revenue was actually received in the subsequent financial year and should be recognized then to avoid double taxation. It directed the AO to verify the correctness of the claim and not to disturb the accounts if the claim was found correct. The Tribunal allowed the assessee's appeal for statistical purposes. Final Judgment: - Revenue's Appeals: Dismissed for all years. - Assessee's Appeals: Allowed for A.Y. 2005-06 and partly allowed for A.Y. 2006-07.
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