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2017 (7) TMI 997 - AT - Income TaxDisallowance of loss without rejecting books of accounts of the assessee under provision of section 145(3) - AO disallowed the losses from the two projects merely on the ground that there was a fall in overall gross profit rate of the company as compared to the last year - Held that - We find that the assessee has duly explained the reason for the losses. When the project is spread over more than one year and the assessee has followed percentage completion method for recognizing profit from such project, the amount of profit or loss from the project, may vary from year to year. In our opinion, when the assessee has explained the reasons for losses, the action of the AO in rejecting the losses without pointing out any defect in the explanation of the assessee, is not justified. The Assessing Officer has nowhere held that either the assessee inflated it purchases or suppressed it sales and merely the low gross profit rate cannot be basis for disallowing the losses. When the Assessing Officer failed to find any fault in the explanation of the assessee justifying the losses claimed following the percentage completion method, the action of the Assessing Officer in disallowing such losses is arbitrary and not in accordance with law. Addition on account of payment to M/s. Lurgi Life Science (LLS), Germany for drawing charges - CIT-S deleted addition - Held that - We find that the payment for getting technical know-how in the form of drawing etc. in the year under consideration has also been made in continuation of the agreement dated 03/09/2003 between the assessee and LLS, Germany. Thus, respectfully following the decision of the Tribunal in assessee;s own case there was no independent control of the assessee over the rights. It could only used them for the purpose of business. Article 3.5 also contemplates that the rights are non-exclusive non-transferable basis and for a single use only. If all these clauses are being considered then it would reveal that assessee has not acquired the rights of technical knowhow. Independently, rather it has acquired used of such technical knowhow. There is no enduring benefit to the assessee. Learned First Appellate Authority has appreciated these clause in right perspective and we do not see any reason to interfere in the order of the learned CIT(A) on this issue. This ground of appeal is rejected Addition towards expenditure on organizing seminars for updating its engineers, held as capital expenditure - Held that - The expenditure was for keeping its engineers updated with the latest knowledge relating to set up and install of services in the field of biodiesel and discussions held in the conference helped the technical staff in solving day-to-day problems. As submitted that in assessment year 2008-09 also the assessee made payment for membership fee and registration fee to Biodiesel Association but the Tribunal upheld the finding of the Ld. CIT-A, holding the expenditure as revenue in nature. Thus we uphold the finding of the Ld. CIT-A in holding the expenditure as revenue in nature. Addition on account of provision for warranty - Held that - we are of the opinion that the liability accrued and existed and there was no uncertainty as to incurring of liability as it was under contractual legal obligation. The assessee has incurred expenses in subsequent year before finalization of the financial statement. The expenses are related to the project completed in the year under consideration and the corresponding revenue has already been recognized. The assessee debited said expenses as provision of warranty in the year under consideration. In such circumstances, it is evident that while finalizing the financial statement the amount, the expenditure was ascertained. We find that the Ld. CIT-A has allowed the claim of the assessee following the judgment in the case of Rotork Controls India Private Limited (2009 (5) TMI 16 - SUPREME COURT OF INDIA ) as held provision for warranty is an ascertained liability as long as it is based on actuarial valuation. This is done on historical cost and on experience of the assessee. Thus, there can be no scope for any disallowance. Addition on account of bad debts - Held that - Assessee has already shown above debts as income in earlier years and the Revenue has not disputed the fact of debt shown as income in earlier years. The assessee has demonstrated written off of the bad debts in the year under consideration and thus both the conditions in respect of the above bad debts are fulfilled. The Ld. CIT-A has also following the decision of the Hon ble Supreme Court in the case of TRF Ltd Vs. CIT, (2010 (2) TMI 211 - SUPREME COURT ) accepted the claim of the assessee and allowed the ground raised by the assessee in this respect. Addition on account of disallowance of interest expenses - CIT-A allowed the claim - Held that - In our opinion, it is well known business practice that the manufacturer ask for advance for executing orders, and thus the advance made by the assessee is part of normal business practice and in the nature of commercial expediency. Thus, the disallowance deserve to be deleted both on the account of the sufficient own capital in the hand of assessee company as well as on the ground of advance made on account of business expediency. In view of above, we are of the opinion that finding of the Ld. Commissioner of Income-tax (Appeals) on the issue in dispute is well reasoned and no interference on our part is required. Accordingly, we uphold the same Disallowance of extra depreciation on computer peripherals/accessories - Held that - CIT-A has followed the decision of the Hon ble Delhi High Court in the case of CIT Vs. BSES Rajdhani Powers Ltd. (2010 (8) TMI 58 - DELHI HIGH COURT ), wherein the Hon ble High Court has agreed with the Tribunal that computer accessories and peripherals such as printers, scanners and servers etc. form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer, hence they are part of computer system and entitled at the higher rate of 60% depreciation. Thus, respectfully following the above decision of the Hon ble Delhi High Court, we uphold the finding of the Ld. CIT-A on the issue. Appeal of the Revenue dismissed.
Issues Involved:
1. Deletion of addition on account of contract receipts. 2. Deletion of addition on account of payment for drawing design charges. 3. Deletion of addition on account of capital expenditure for organizing seminars. 4. Deletion of addition on account of provision for warranty. 5. Deletion of addition on account of bad debts. 6. Deletion of addition on account of disallowance of interest expenses. 7. Deletion of addition on account of disallowance of extra depreciation on computer peripherals/accessories. Issue-wise Detailed Analysis: 1. Deletion of addition on account of contract receipts: The Revenue contested the deletion of ?56,14,565/- related to contract receipts, arguing that the assessee failed to justify an abnormally low gross profit (G.P.) rate of 18.16% compared to 28.9% in the previous year. The assessee attributed the decline to losses in two projects and explained that the percentage completion method, as per Accounting Standard-7 issued by ICAI, was followed. The CIT-A allowed the relief, noting that the method was judicially recognized and regularly followed by the assessee. The Tribunal upheld this, stating that the AO's disallowance without rejecting the books of accounts or finding any specific defects was unjustified. 2. Deletion of addition on account of payment for drawing design charges: The Revenue challenged the deletion of ?1,45,91,310/- paid to Lurgi Life Science (LLS), Germany for drawing and design charges, arguing it was a capital expenditure. The CIT-A, following the jurisdictional High Court's judgment in CIT Vs. JK Synthetics Ltd, held that the expenditure was revenue in nature, as the ownership of the technical know-how remained with LLS and the assessee could not create further rights. The Tribunal upheld this finding, noting that similar payments in the previous year were treated as revenue expenditure. 3. Deletion of addition on account of capital expenditure for organizing seminars: The Revenue contested the deletion of ?15,00,000/- spent on organizing seminars, arguing it was capital expenditure. The assessee argued that the expenditure was for updating engineers' knowledge, which was essential for day-to-day operations. The CIT-A and the Tribunal, referring to a similar case in the previous year, held that such expenditure was revenue in nature as it was aimed at updating technical knowledge rather than creating an enduring benefit. 4. Deletion of addition on account of provision for warranty: The Revenue argued that the provision for warranty amounting to ?60,76,476/- was a contingent liability and not an ascertained liability. The assessee contended that the liability was based on actual valuation and related to completed projects. The CIT-A, following the Supreme Court's judgment in Rotork Controls India Private Limited, held that the provision was an ascertained liability based on historical cost and experience. The Tribunal upheld this finding, noting that the provision was made following contractual obligations and actual expenses incurred. 5. Deletion of addition on account of bad debts: The Revenue challenged the deletion of ?93,32,234/- on account of bad debts, arguing that the assessee had not established that the debts had become bad. The assessee demonstrated that the debts were shown as income in earlier years and written off in the current year, fulfilling the conditions under section 36(2) of the Act. The CIT-A, following the Supreme Court's decision in TRF Ltd Vs. CIT, held that it was sufficient if the bad debt was written off in the accounts. The Tribunal upheld this finding, noting that the assessee had fulfilled the necessary conditions. 6. Deletion of addition on account of disallowance of interest expenses: The Revenue contested the deletion of ?3,38,462/- on account of interest expenses, arguing that the assessee had advanced interest-free loans to related parties without establishing business expediency. The CIT-A found that the assessee had sufficient own funds and the advances were for business purposes. The Tribunal upheld this, referring to the Supreme Court's judgment in SA Builders Vs. CIT, which held that advances made on grounds of commercial expediency are allowable as business expenditure. 7. Deletion of addition on account of disallowance of extra depreciation on computer peripherals/accessories: The Revenue challenged the deletion of ?5,647/- on account of extra depreciation on computer peripherals/accessories, arguing that only computers and software were eligible for 60% depreciation. The CIT-A, following the Delhi High Court's decision in CIT Vs. BSES Rajdhani Powers Ltd., held that computer peripherals and accessories form an integral part of the computer system and are eligible for higher depreciation. The Tribunal upheld this finding. Conclusion: The Tribunal dismissed the Revenue's appeal, upholding the CIT-A's findings on all issues. The decision was pronounced in the open court on 27th March 2017.
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