2015 (7) TMI 685 - AT - Income Tax

Disallowance of Provision for warranty obligation - Held that - As relying on assessee s own case for assessment years 1998-99 and 1999-2000 2014 (12) TMI 680 - ITAT PUNE we find that this issue has been decided in favour of the assessee wherein held that the assessee made a provision on account of provision for warranty with respect to the products sold - Considering the opening balance of provision, the differential amount of provision was debited to the Profit & Loss Account of the year - The provision was made by the assessee on account of the fact that it is under an obligation to provide warranty for a period of one to two years on the products sold by it on account of any manufacturing defect found later - assessee was obliged to replace the product or repair the product free of cost during the period of warranty - thus, the AO is directed to allow the relief Decided in favour of assessee Amortization of premium paid on leasehold land - Held that - This issue has been decided against the assessee in assessment years 1998-99 and 1999-2000 by the Tribunal wherein held an accepted position that the issue regarding assessee s claim for deduction of proportionate premium of leasehold land amortized and charged to the Profit & Loss Account for the year under consideration is liable to be decided in terms of the judgement of the Hon ble Supreme Court in the case of Govind Sugar Mills Ltd. vs. CIT, (1997 (7) TMI 16 - SUPREME Court ) against the assessee - Decided against assessee. Disallowance of Provision for profit equalizations in terms of AS-7 - Held that - There has been no change in the facts and circumstances in the present year, nor there is any change in the accounting treatment given by the assessee. We do not find any reason to deviate from the view taken by the Co-ordinate Bench in assessment years 1998-99 and 1999-2000 wherein the Tribunal upheld the allowability of provision for profit equalization while recognizing incomes on application of percentage of completion method in the case of long term contracts in the light of the AS-7 issued by the ICAI. Accordingly, this ground in the appeal of the assessee is accepted.- Decided against revenue. Disallowance of expenditure on computer software - Held that - A perusal of the order of the Co-ordinate Bench in assessee s own case for assessment years 1998-99 and 1999-2000 shows that the Tribunal followed the judgement of the Hon ble Bombay High Court in the case of CIT vs. Raychem Rpg. Ltd. reported as(2011 (7) TMI 953 - Bombay High Court )upheld the order of the Tribunal whereby the expenditure incurred on acquisition of software which did not form part of the profit making apparatus of the assessee was treated as a revenue expenditure. In the said context, it is to be noted that the CIT(A) has given a finding that expenditure of ₹ 22,16,107/- was incurred on acquisition of software connected with the manufacturing operations of the assessee. Such softwares have been identified as Autocad, project management software, designing software, etc.. The assessee is in the business of manufacturing of boilers and heat transfer equipment and therefore the aforesaid softwares form part of its profits making apparatus and thus it is liable to be considered as capital expenditure in view of the judgement of the Hon ble Bombay High Court in the case of Raychem Rpg. Ltd. (supra). - Decided against assessee. Disallowance of claim of depreciation @ 100% on plant and machinery installed in Plant No.11. - Held that - The issue was decided by the Tribunal in assessee s own case for assessment years 1998-99 and 1999-2000 for assessee s claim for depreciation 100% with respect to the plant & machinery used in the manufacture of air/gas/fluid heating systems having regard to the item (r) read with item (e) of Entry 3(xiii) of the Depreciation Table, the claim of the assessee has been rightly allowed by the CIT(A) and we find no force in the Ground of Appeal raised by the Revenue. With regard to assessee s claim for allowance of depreciation @ 100% in respect of plant & machinery used in the manufacture of heat pumps is concerned, the same has been appropriately denied by the lower authorities. The CIT(A) has rightly pointed out that machinery & plant used in the manufacture of heat pumps is not eligible for depreciation @ 100% as it does not find a place in any of the items in the Depreciation Table which is entitled for depreciation @ 100%. - Decided against assessee and revenue. Disallowance of expenditure in earning tax free income - Held that - The issue has been decided against the assessee in earlier assessment years disallowance as confirmed by the CIT(A) has been a subject matter of consideration by the Tribunal in assessment year 1997-98. In view of the aforesaid precedent, the action of the CIT(A) in restricting the disallowance to 2.5% of the gross income is hereby affirmed.- Decided against assessee Addition on account of Lease Rental income - Held that - The assessee admittedly maintains books of account according to the mercantile system of accounting. However, the assessee in its books of account have not recognized the lease rental income due from (i) Modi Alkalies; (ii) Inertia; (iii) Parasrampuria Industries Ltd.; and, (iv) Parasrampuria International Ltd. on the ground that these companies are in financial distress, therefore, no rental income is recoverable. In our opinion, the correct course of action which the assessee should have followed is to recognize lease rental income from the aforesaid companies in its books and thereafter should have claimed the same as bad debts. The CIT(A) has upheld the findings of the Assessing Officer in principle which in our opinion is the correct proposition. Accordingly, the same is upheld - Decided against assessee Allowability of deduction under section 80-IA - Held that - This issue was raised by the Revenue in its appeal for assessment year 1998-99 wherein the Co-ordinate Bench affirmed the findings of the Commissioner of Income Tax (Appeals allowing the claim of the assessee for deduction u/s 80-I/80-IA of the Act with respect to the industrial undertakings manufacturing products called Woodpac and Process Integrated Boilers. - Decided against revenue. Computation of deduction under section 80HHC - AO while recomputing the deduction added excise duty and sales-tax collected in total turnover - Held that - It is a well-settled law that what has been included in export turnover that it has to be included in total turnover as well. In other words, what has been excluded in export turnover cannot be included in total turnover. As far as miscellaneous receipts are concerned, the contention of the assessee is that the same is covered by the order of the Hon ble Bombay High Court in the case of Pfizer Ltd. (2010 (6) TMI 433 - Bombay High Court ). We, therefore, remit these issues to the file of the Assessing Officer to re-compute the deduction u/s. 80HHC, accordingly. - Decided in favour of assessee for statistical purposes. Deduction under section 35AB allowed in respect of lump-sum fee for technical know-how paid in earlier years - CIT(A) has directed the Assessing Officer to allow deduction u/s 35AB of the Act in respect of know-how fee whose innings u/s 35AB of the Act have began in the past and where the balance eligible period u/s 35AB of the Act was not over - Held that - The plea of the assessee for deduction of expenditure incurred by way of process know-how fee u/s 37(1) of the Act is liable to be decided against the assessee following the judgement of the Hon ble Supreme Court in the case of M/s Drilcos (India) Pvt. Ltd. vs. CIT, (2012 (9) TMI 299 - SUPREME COURT ). CIT(A) s decision to allow determination of deduction u/s 35AB of the Act not only with reference to the amounts actually paid but also with reference to the amounts payable for process know-how is concerned, the same in our view has been appropriately decided by the CIT(A). Notably, the CIT(A) has noticed that assessee is following the mercantile system of accounting and the word paid has been defined in section 43(2) of the Act to include the incurrence of liability also. In coming to such conclusion, the CIT(A) has followed the judgement of the Hon ble Bombay High Court in the case Padamjee Pulp and Paper Mills Ltd. (1993 (10) TMI 16 - BOMBAY High Court ). It was a common point between the parties that the Assessing Officer has been allowing deduction to the assessee to the extent of 1/6th since assessee itself was debiting only 1/6th of process know-how fee in the Profit & Loss Account and what the Assessing Officer was rejecting was the claim of the assessee made in the computation of income that the full amount should be allowed in the first year itself. Infact, it was a common point between the parties that so far as the claim of deduction of 1/6th cost is concerned, the same was allowed by the Assessing Officer in the respective years. In view of the aforesaid factual matrix, the direction of the CIT(A) is quite infructuous and in-fact was not called for. As a consequence, the decision of the CIT(A) on this aspect is set-aside as being infructuous. - Decided in favour of revenue for statistical purposes. Provisions for reimbursement of medical expenses - CIT(A) allowed claim - Held that - The amount of medical reimbursement are in the nature of incentives given by the assessee to its employees. It is the discretion of the employee either to claim the amount as medical reimbursement or to accumulate and withdraw the amount at the end of particular service. We do not find any infirmity in the findings of the Commissioner of Income Tax (Appeals) on this issue - Decided in favour of assessee. Non-receipt of TDS certificates - assessee write off the value of TDS certificates, not recovered - Held that - In the instance case, the assessee under similar circumstances has written off the amount of TDS certificates not received. Therefore, in our considered view it has to be allowed as bad debts. We find no infirmity in the order of CIT(A). - Decided in favour of assessee. CIT(A) has rightly directed the Assessing Officer to exclude 90% of the amount of lease rental for computing deduction under section 80HHC. - Decided against revenue.

Summary

Issues Involved:
1. Provision for warranty obligation
2. Amortization of premium paid on leasehold land
3. Income recognition from contract in accordance with Accounting Standard 7
4. Expenditure on computer software
5. Claim of 100% depreciation on plant and machinery
6. Expenditure attributable to dividend and tax-free interest
7. Lease rental income
8. Deduction under section 80-IA
9. Deduction under section 80HHC
10. Deduction under section 35AB
11. Provisions for reimbursement of medical expenses
12. Deletion of TDS amount
13. Retention money
14. Addition of Rs. 5,60,000

Detailed Analysis:

1. Provision for Warranty Obligation:
The assessee created a provision for warranty to cover repair/replacement costs for products under warranty. The Assessing Officer disallowed this provision, considering it a contingent liability. However, the Tribunal, following its earlier decisions in the assessee's own cases for previous assessment years, decided in favor of the assessee, allowing the provision for warranty obligation.

2. Amortization of Premium Paid on Leasehold Land:
The assessee claimed the amortization of the premium paid on leasehold land as a revenue expenditure. Both the Assessing Officer and the Commissioner of Income Tax (Appeals) disallowed this claim. The Tribunal, following its earlier decisions, upheld the disallowance, rejecting the assessee's claim.

3. Income Recognition from Contract in Accordance with Accounting Standard 7:
The assessee recognized income on a project completion basis and adjusted excess billing through a provision for profit equalization. The Assessing Officer rejected this method. The Tribunal, following its earlier decisions, decided in favor of the assessee, allowing the income recognition method as per AS 7.

4. Expenditure on Computer Software:
The assessee treated expenditure on purchasing computer software as revenue in nature, while the Assessing Officer considered it capital expenditure. The Tribunal, following the Bombay High Court's judgment in CIT vs. Raychem Rpg. Ltd., upheld the disallowance of the expenditure as capital expenditure.

5. Claim of 100% Depreciation on Plant and Machinery:
The assessee claimed 100% depreciation on plant and machinery in several plants. The Commissioner of Income Tax (Appeals) allowed the claim except for Plant No.11. The Tribunal, following its earlier decisions, upheld the disallowance for Plant No.11 and allowed the depreciation for other plants.

6. Expenditure Attributable to Dividend and Tax-Free Interest:
The Assessing Officer estimated 5% of gross dividend and tax-free incomes as attributable expenditure, which the Commissioner of Income Tax (Appeals) reduced to 2.5%. The Tribunal, following its earlier decision, upheld the 2.5% disallowance.

7. Lease Rental Income:
The assessee did not include lease rentals from financially distressed companies in its total income. The Assessing Officer included these rentals, while the Commissioner of Income Tax (Appeals) allowed them as bad debts in the subsequent year. The Tribunal upheld the inclusion of lease rentals in the total income and allowed the deduction as bad debts in the subsequent year.

8. Deduction under Section 80-IA:
The Revenue challenged the deduction under section 80-IA for the assessee's unit 'Woodpack'. The Tribunal, following its earlier decisions, upheld the deduction in favor of the assessee.

9. Deduction under Section 80HHC:
The Assessing Officer added various items to the total turnover and excluded 90% of certain receipts from business profits for computing the deduction under section 80HHC. The Tribunal, following its earlier decisions, directed the Assessing Officer to recompute the deduction, considering the Bombay High Court's judgment in CIT vs. Pfizer Ltd.

10. Deduction under Section 35AB:
The Revenue challenged the deduction under section 35AB for the lump-sum fee for technical know-how paid in earlier years. The Tribunal upheld the deduction in favor of the assessee, following its earlier decisions.

11. Provisions for Reimbursement of Medical Expenses:
The Assessing Officer disallowed the provision for medical reimbursement, considering it unquantified. The Commissioner of Income Tax (Appeals) allowed the claim, following the Supreme Court's judgment in Bharat Earth Movers vs. CIT. The Tribunal upheld the allowance of the provision.

12. Deletion of TDS Amount:
The assessee wrote off the value of TDS certificates not recovered. The Assessing Officer disallowed the claim, but the Commissioner of Income Tax (Appeals) allowed it. The Tribunal upheld the allowance, considering it akin to non-receipt of monies from debtors.

13. Retention Money:
The assessee did not press this ground of appeal. The Tribunal dismissed it as not pressed.

14. Addition of Rs. 5,60,000:
No such addition was made by the Assessing Officer, and the assessee did not make any submission on this ground. The Tribunal dismissed it.

Separate Judgments:
The Tribunal delivered separate judgments for each issue based on the facts and circumstances of the respective assessment years, following its earlier decisions and relevant legal precedents.