2019 (11) TMI 270 - AT - Income Tax

Disallowance of depreciation on the value of the machinery part treated as capital asset by the assessee - whether capitalising of machinery spares for the purpose of Income Tax Act in view of accounting standards is justified? - assessee has contested the disallowance whereas in ground No. 1(c), the assessee has sought alternative deduction on the basis of the actual consumption of machinery spares as revenue expenditure - HELD THAT - Before us, the assessee has failed to demonstrate whether the spare parts which are used when a machine malfunctions, has brought into existence a new asset or given enduring benefit to the assessee. In absence of satisfying the requirement for constituting a machinery spare as capital expenditure as laid down in LAKSHMI JI SUGAR MILLS CO. PVT. LIMITED 1971 (8) TMI 13 - SUPREME COURT AND M/S. SRI MANGAYARKARASI MILLS (P) LTD. 2009 (7) TMI 17 - SUPREME COURT , expenditure incurred on machinery repairs can not be allowed as capital expenditure and consequent depreciation claimed also cannot be allowed. Thus the ground number 1(a) of the appeal is dismissed. Asset ready for use or actually used - In the present case machinery spares does not constitute capital expenditures and thus the issue of whether the same were ready for use or actually used is not relevant in the facts of the case. This ground of the appeal no 1(b), is accordingly dismissed. In the event deduction towards depreciation on machinery spare is not allowed, deduction may be allowed on the basis of the actual consumption of the Spares - As mentioned by the assessee that in assessment year 2002-03 also the assessee has been allowed deduction on the basis of the actual consumption of the machinery spares. In our opinion, this prayer of the assessee is justified as the machinery spares which have been consumed in repair of fixed asset, satisfies the requirement of section 37(1) of the Act and accordingly, ground No.1(c) of the appeal of the assessee is allowed. Disallowance of deduction under section 80IA(4) - HELD THAT - According to the assessment order, copies of all the agreements were before Assessing Officer yet Assessing Officer chose to make sweeping observation that the assessee is not developer. Such sweeping and bald assertion cannot be approved by us. Therefore, taking into the facts of the present case, we are or the considered view that appellant is entitled to claim deduction u/s 80IA, which was wrongly denied. Deduction u/s 80HHC in respect of supply of signalling equipment - claim denied assessee company was obliged to supply services and was also responsible for training commissioning and the said services are not eligible for deduction under section 80HHC - HELD THAT - As in own case Tribunal has held that services are identical to the supply of material and dominant objective of the contract is purchase of equipment by the government of Iran. Further, it is held that direct shipment of the goods cannot disentitle assessee in claiming the deduction under section 80HHC in respect of the goods exported from one country to the other country outside India. Disallowance on account of miscellaneous donations - HELD THAT - The expenses have evidently incurred on donation to Railway Board Association and Welfare Societies of Railway employees and not on festivals or community celebration in the area of projects executed by the assessee.In absence of any such evidences of incurring expenses on account of festival or community celebration in the vicinity of project executed, the reliance placed by the assessee on the decision in the case of CIT Vs Bata India Ltd 2016 (7) TMI 517 - CALCUTTA HIGH COURT is misplaced. We do not find any infirmity in the order of the Ld. CIT(A) on the issue in dispute and accordingly, we uphold the same. The ground of the appeal of the assessee is dismissed. Disallowance of prior period expenses - AO made disallowance stating that those did not pertain to the previous year relevant to the current assessment year and there is no provision in the Income-Tax Act to allow deduction of prior period expenses - HELD THAT - The clients of the assessee have rejected the claim of reimbursement of the expenses in previous year relevant to subsequent assessment year, thus, it cannot be said that expenditure crystallized during the year under consideration. The assessee has failed to substantiate before us that the said expenditure was crystallised during the year under consideration. Thus, we do not find any error in the finding of the Ld. CIT(A) on the issue in dispute and accordingly , uphold the same. Prior period expenses in respect of NTPC Korba project - CIT(A) held that no proof was provided by the assessee that the liability arose during the year under consideration, and hence he sustained the disallowance. Before us the Ld. counsel submitted that the expenditure represents the amount of expenditure not accepted by the client for reimbursement in a cost-plus contract and it is a regular expenditure in relation to various years. In our opinion, merely making a claim without substantiating that liability crystallised during the year under consideration, the claim cannot be allowed to the assessee. We do not find any error in the finding of the of the Ld. CIT(A) in sustaining the disallowance, and accordingly we uphold the same. Prior period expenses of Malaysia project - no evidence in support of the claim that oil was lifted in the year under consideration, has been brought on record by the assessee. In absence of any documentary evidence in support of the claim, we uphold the finding of the Ld. CIT(A) in sustaining the disallowance Prior period expenses pertaining to GAIL , L T , and OFC Ambala - Assessee submitted that at the time of raising bill in 1997- 98 and again on receipt of retention money in the year 1999 and this error was detected in the previous year relevant to the assessment year 2001-02 and therefore same was charged to expenses under the head prior period expenses. However, in support of the above explanation, no documentary evidences have been filed either before the Ld. CIT(A) or before us, accordingly the contention of the assessee are not accepted and disallowance sustained by the Ld. CIT(A) is therefore confirmed. Provision for demobilisation expenses and mobilisation expenses - HELD THAT - CIT(A) has sustained the disallowance only in the event where the assessee failed to substantiate its claim with documentary evidences. As the assessee failed to discharge its onus of substantiating whether the respective liabilities were ascertained or arose during the year under consideration, the ld. CIT(A) is justified in sustaining the respective disallowances. As far as the decisions relied upon the learned counsel of the assessee are concerned, same cannot be applied without ascertaining the facts with documentary evidences. No such documentary evidences, as pointed out by the Ld. CIT(A), have been produced before us also No error in the order of the Learned CIT(A) in deleting the part of disallowance of provision of mobilisation expenses Disallowance of provision for other expenses - HELD THAT - CIT(A) has sustained the disallowance due to failure on the part of assessee in substantiating whether the liability arose during the year under consideration and also failure to submit necessary documentary evidence in support of the claim. Before us also, no evidences have been furnished by the assessee to substantiate the claim whether the expenses crystallised during the year. In our opinion, the order of the Ld. CIT(A) on the issue in dispute is well reasoned and we do not find any infirmity in the same Accrual of income - interest received vide intimation under section 143(1) which was not shown by the assessee as income in the year under consideration - HELD THAT - We restore the issue in dispute to the file of the Ld. Assessing Officer for verifying that the interest granted under section 143 (1) in relation to assessment year 2000-01 in the previous year corresponding to assessment year under consideration, but same has been subsequently withdrawn under section 143(3) of the Act passed in financial year 2003-04 and decide the issue in accordance with law after providing adequate opportunity of being heard to the assessee. In the result, the ground No. 8 of the appeal is allowed for statistical purposes. Interest income from M/S National Building Construction Company (NBCC) - HELD THAT - CIT(A) has brought on record facts in detail that the NBCC had agreed to liquidate the principal and interest due during the financial year relevant to the assessment itself and therefore under no circumstances the interest due could be said to be unrecoverable during the year under consideration. Before us the ld. counsel did not rebut any of the observation of the Ld. CIT(A) or submitted any documentary evidence in support of its claim except the claim that loan was sticky and disputed. In the case, the appellate authority against the award by the arbitrator, directed to refund entire amount of ₹ 15.93 crores within 2 months and beyond which interest would be levied at the rate of 15%. The NBCC complied and partly refunded the amount also. By merely filing appeal by the assessee before the Hon ble Delhi High Court, it cannot be said that interest was not accrued to the assessee. The onus was on the assessee to establish that loan was unrecoverable during the year under consideration and no such evidences having been filed either before the Ld. CIT(A) or before us. In view of the facts and circumstances, we do not find any error in the order of the Ld. CIT(A) Disallowance of deduction of provision for doubtful debts and doubtful advances for computing book profit under section 115JB - HELD THAT - It is not clear whether the total debts of ₹ 23,366.55 lakhs is after deducting the provision of ₹ 1,063.70 lakhs. The amount of ₹ 624.70 lakhs considered by the Assessing Officer for addition is obviously difference between opening provision of ₹ 439 lakhs and closing provision of ₹ 1063.70 lakhs, mentioned in the above schedule. If the provision debited by assessee is indeed deducted from the total debts and only the net balance shown in the balance-sheet then by virtue of decision of Yokogawa India Ltd. 2011 (8) TMI 766 - KARNATAKA HIGH COURT there cannot be any addition of such amount under section 115JB of the Act. However, as mentioned by us, this aspect is not clear. Hence we are of the opinion that the issue regarding provision for doubtful debts requires a fresh look by the Assessing Officer. Exclusion of income earned from permanent establishment in foreign countries while computing book profit under section 115JB by applying the provisions of Double Tax Avoidance Agreement (DTAA) - HELD THAT - As relying on own case we direct the Assessing Officer to exclude the income which is subject matter of dispute under this ground of the appeal from the ambit of the computation of book profit under section 115JB of the Act. Denial of exclusion of profit on sale of fixed assets in computing book profit under section 115JB - HELD THAT - The hon ble Bombay High Court in the case of Veekaylal Investment Company Private Limited 2001 (2) TMI 117 - BOMBAY HIGH COURT held that while computing the book profit under the companies Act, the assessee has to include capital gains for computing the book profit under section 115JB Disallowance of claim of deduction u/s 80HHC while computing the book profit under section 115JB - HELD THAT - Assessee claim deduction under section 80HHB(A) of the Act as alternative claim that if the deduction under section 80IA of the Act is denied to it, then the assessee might be allowed deduction under section 80 HHB(A) of the Act. Since the assessee has already been allowed deduction under section 80IA of the Act by us while adjudicating the ground No. 2 of the appeal of the assessee, this alternative claim of deduction under section 80HHB(A) cannot be allowed in addition to the claim under section 80IA of the Act. The assessee has also not insisted for this claim before us. Accordingly, the ground of the appeal of the Revenue is allowed. Grant of deduction under section 80HHB in respect of foreign project without allocating corporate office expenses - HELD THAT - This claim of deduction under section 80HHB was made only as alternative claim before the Ld. CIT(A). Since we have already allowed the main claim of the assessee under section 80HHC of the Act while adjudicating the ground No. 3 of the appeal of the assessee, and thus this claim of deduction under section 80HHB is denied to the assessee. Before us, the assessee has also not insisted for allowing this claim. Accordingly, the ground of the appeal of the Revenue is allowed. Deduction u/s 35DDA being 1/5th paid to the employees under the Voluntary Retirement Scheme (VRS) as applicable in the assessee company - HELD THAT - All the requisite details of the voluntary retirement scheme and the expenses incurred of ₹ 62, 54, 482/- towards said scheme have already been filed by the assessee and thus the contention of the Ld. DR that no details of the employee resigned were filed, cannot be made a basis for disallowance of the claim of the assessee. In our opinion, the finding of the Ld. CIT(A) on the issue in dispute is well reasoned and we do not find any error in the same. The ground of the appeal of the Revenue is dismissed. Deduction of corporate office expenses by the AO while granting exclusion of income from foreign projects under DTAA - HELD THAT - The income of the foreign projects through their permanent establishment, is chargeable in the respective country and in such a situation, reducing of promotional corporate office expenses in working out the income of the permanent establishment in the foreign country excludable while computing income chargeable to tax in India, cannot be justified. Accordingly, the finding of the Ld. CIT(A) on the issue in dispute is upheld. The ground of the appeal of the Revenue is accordingly dismissed. Provision of gratuity allowed while computing book profit u/s 115JB - HELD THAT - CIT(A) has allowed the issue in dispute in view of the decision of the Tribunal in the case of GD Rathi Steels Ltd Vs DCIT 1995 (8) TMI 95 - ITAT DELHI-C wherein it is held that gratuity which has been actually valued is an ascertained liability. We don t find any error in the finding of the Ld. CIT(A) on the issue in dispute following a binding precedent on the issue. Accordingly, we uphold the finding of the Ld. CIT(A) on the issue Book profit for computation of MAT liability u/s 115JB - According to the AO the assessee was required to enhance the book profit of previous/ earlier years corresponding to the reduction in book profit claimed on account of written back liabilities - HELD THAT - CIT(A) has explained the clause(i) of explanation to section 115JB of the Act that it applies to any amount withdrawn from the reserves or provision which are created and/or provided in the previous year ended on or before 31/03/96 and should be allowed. In our opinion, the Ld. CIT(A) has correctly appreciated the position of the law into the facts of the instant case. We do not find any error in the order of the Ld. CIT(A) on the issue and accordingly, we uphold the same. Interest under section 234D - HELD THAT - The explanation -2 to section 234D has been inserted by way of Finance Act 2012 which provides that provisions of section 234D would be applicable for assessment year commencing before 01/06/2003 if the proceeding for such assessment year is completed on or after 1.6.2003. It is undisputed that in the present case assessment proceedings have been completed on 25/03/2004 and hence provision of section 234D are applicable. Accordingly, the finding of the ld. CIT(A) are set aside and interest charged by the learned Assessing Officer under section 234D is restored. The ground of the appeal of the Revenue is accordingly allowed.

Summary

Issues Involved:
1. Disallowance of depreciation on machinery spare parts.
2. Disallowance of deduction under section 80IA.
3. Disallowance of deduction under section 80HHC.
4. Disallowance of miscellaneous donations.
5. Disallowance of prior period expenses.
6. Disallowance of provision for demobilization expenses.
7. Disallowance of provision for other expenses.
8. Disallowance of interest received under section 143(1).
9. Addition of interest income on accrual basis on disputed dues.
10. Disallowance of provision for doubtful debts and advances under section 115JB.
11. Disallowance of provision for demobilization under section 115JB.
12. Disallowance of provision for other expenses under section 115JB.
13. Disallowance of income earned from foreign permanent establishments under DTAA in computing book profit under section 115JB.
14. Disallowance of profit on sale of fixed assets under section 115JB.
15. Disallowance of deduction under section 80HHC in computing book profit under section 115JB.
16. Allowance of deduction under section 80HHB.
17. Allowance of deduction under section 35DDA.
18. Allocation of corporate office expenses to foreign projects.
19. Addition of provision written back in computing book profit under section 115JB.
20. Interest under section 234D.

Detailed Analysis:

1. Disallowance of Depreciation on Machinery Spare Parts:
The Tribunal examined whether the machinery spares should be capitalized for the purpose of Income Tax in view of accounting standards. It was held that machinery spares should be integral parts of the fixed asset or of emergency nature to be capitalized. The assessee failed to demonstrate the requirements, and thus, the claim for depreciation was disallowed. However, the alternative claim for deduction based on actual consumption of machinery spares was allowed.

2. Disallowance of Deduction under Section 80IA:
The Tribunal allowed the deduction under section 80IA, following its earlier decision in the assessee's case for assessment year 2000-01. It was held that the assessee was engaged in developing infrastructure facilities and not merely acting as a contractor.

3. Disallowance of Deduction under Section 80HHC:
The Tribunal allowed the deduction under section 80HHC for the supply of signaling equipment to the Government of Iran, following its earlier decision in the assessee's case for assessment year 2000-01. It was held that services were incidental to the supply of material, and the dominant objective of the contract was the purchase of equipment.

4. Disallowance of Miscellaneous Donations:
The Tribunal upheld the disallowance of miscellaneous donations, as the assessee failed to establish that the donations were wholly and exclusively for business purposes.

5. Disallowance of Prior Period Expenses:
The Tribunal upheld the disallowance of prior period expenses, as the assessee failed to demonstrate that the expenses crystallized during the year under consideration.

6. Disallowance of Provision for Demobilization Expenses:
The Tribunal upheld the disallowance of provision for demobilization expenses where the assessee failed to substantiate the claim with documentary evidence. However, it allowed the claim where the liability was ascertained during the year.

7. Disallowance of Provision for Other Expenses:
The Tribunal upheld the disallowance of provision for other expenses where the assessee failed to substantiate the claim with documentary evidence. However, it allowed the claim where the liability was ascertained during the year.

8. Disallowance of Interest Received under Section 143(1):
The Tribunal restored the issue to the file of the Assessing Officer for verifying the interest granted under section 143(1) and subsequently withdrawn under section 143(3).

9. Addition of Interest Income on Accrual Basis on Disputed Dues:
The Tribunal upheld the addition of interest income on accrual basis on disputed dues, as the assessee failed to establish that the loan was unrecoverable during the year under consideration.

10. Disallowance of Provision for Doubtful Debts and Advances under Section 115JB:
The Tribunal restored the issue to the file of the Assessing Officer for verification, following the decision in the case of Philips Carbon Black Ltd.

11. Disallowance of Provision for Demobilization under Section 115JB:
The Tribunal upheld the disallowance of provision for demobilization under section 115JB, as the liability was not ascertained.

12. Disallowance of Provision for Other Expenses under Section 115JB:
The Tribunal upheld the disallowance of provision for other expenses under section 115JB, as the liability was not ascertained.

13. Disallowance of Income Earned from Foreign Permanent Establishments under DTAA in Computing Book Profit under Section 115JB:
The Tribunal allowed the exclusion of income earned from foreign permanent establishments under DTAA in computing book profit under section 115JB, following its earlier decision in the assessee's case for assessment year 2000-01.

14. Disallowance of Profit on Sale of Fixed Assets under Section 115JB:
The Tribunal upheld the disallowance of profit on sale of fixed assets under section 115JB, following the decision of the Hon'ble Bombay High Court in the case of Veekaylal Investment Company Private Limited.

15. Disallowance of Deduction under Section 80HHC in Computing Book Profit under Section 115JB:
The Tribunal allowed the deduction under section 80HHC in computing book profit under section 115JB, following the decision in the assessee's case for assessment year 2000-01.

16. Allowance of Deduction under Section 80HHB:
The Tribunal allowed the deduction under section 80HHB as an alternative claim, as the main claim under section 80IA was allowed.

17. Allowance of Deduction under Section 35DDA:
The Tribunal upheld the allowance of deduction under section 35DDA, as the assessee provided all requisite details.

18. Allocation of Corporate Office Expenses to Foreign Projects:
The Tribunal upheld the deletion of allocation of corporate office expenses to foreign projects, following the decision of the Tribunal in the case of Telecommunication Consultant India Ltd.

19. Addition of Provision Written Back in Computing Book Profit under Section 115JB:
The Tribunal upheld the partial allowance of the claim, directing the Assessing Officer to verify the provisions created before 1st April 1997.

20. Interest under Section 234D:
The Tribunal upheld the charging of interest under section 234D, as the assessment proceedings were completed after 1st June 2003.