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TMI Blog2002 (4) TMI 219X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. That learned CIT(A) is not justified in confirming the disallowance to the extent of Rs. 1,000, being expenses for transfer of technology and treating the same as capital expenditure. 4. That learned CIT(A) is not justified in upholding disallowance of Rs. 1,500 on account of expenses incurred on board meeting expenses treating the same as entertainment expenses. 5(a) That learned CIT(A) is not justified in concurring with learned assessing authority that an amount of Rs. 5,94,404 incurred on account of travelling is capital in nature and for setting up of new business. (b) Alternatively to the above, taking whole of expenditure as capital expenditure, is unjustifiable. (c) That learned assessing authority is not justified in considering the said expenses as capital expenditure and also not correctly interpreting the provisions of s. 35AB, to which the expenses on technical knowhow pertain. 6. That learned CIT(A) is not justified in upholding disallowance of Rs. 27,110 under s. 40A(12) and in agreeing with the learned assessing authority that the entire amount was paid in connection with proceedings under IT Act. 7(a) That learned CIT(A) is not justified in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not justified in adjudicating upon the issue in respect of part of the amount on account of the followings: (a) guarantee or warranty (b) aftersales service (c) Incomplete contracts treated as income by learned assessing authority which claim was not decided upon by learned assessing authority. (b) That learned CIT(A), in case was to consider the issue on her own, further opportunity should have been given where all evidence of the claim could have been produced to her satisfaction. (c) That learned CIT(A) is not justified in holding that the full value of sales in respect of each sale bill forms part of the income and no part of the said sale a/c is to be reduced as actual amount of sale during course of year under appeal. The appellant has details of each bill and the amount under each category where income does not accrue or arise during the year under appeal. 12. That learned CIT(A) is not justified in upholding the disallowance of Rs. 7,890 on account of group insurance because of not attaching proof of payment with return. She is not justified in not dealing with all the arguments placed before her. 13. That learned CIT(A) is not justified in holding th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... July, 1999, where it is thought proper to estimate 25 per cent of entertainment expenses pertaining to employees of the assessee-company. Respectfully following the aforesaid order in the case of the assessee itself, we direct the AO to treat 25 per cent of Rs. 1,94,032 to be incurred on staff welfare and recompute the disallowance under s. 37(2A). The assessee is allowed relief in respect of 25 per cent of total entertainment expenses, being on staff welfare. 5. Addition of Rs. 1,000 on account of fee paid to the Secretary of Industrial Approvals, GoI, for entering into an agreement of transfer of technical knowhow, in our opinion, has been incurred in the course and for the purpose of the assessee's business. No new capital asset has come into existence. The agreement for transfer of technical knowhow has been entered into for carrying on the business of the assessee. Therefore, we allow this ground and delete the impugned disallowance of Rs. 1,000. 6. Ground No. 4 pertaining to disallowance of Rs. 1,500 on account of expenses incurred on board's meeting expenses treating the same as entertainment expenses, cannot be disallowed. Board's meetings are conducted by the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls Works Co. Ltd. vs. CIT (1989) 77 CTR (SC) 1 : (1989) 177 ITR 377 (SC); and (c) CIT vs. Suri Sons (1989) 79 CTR (P H) 173 : (1989) 177 ITR 406 (P H). 7.2 Learned authorised representative further relied on the decision of Tribunal Ahmedabad in the case of Raymon Glues Chemicals vs. CIT (1994) 75 Taxman 127 (Ahd)(Mag) in which it was held that foreign travelling expenditure is allowed and no part of such expenditure can be disallowed on the presumption that these were incurred for personal purposes without establishing that such expenses were in excess of limits prescribed under r. 16 and in excess of foreign exchange released by the Reserve Bank India (RBI). He further referred to the decision in the case of CIT vs. Wood Crafts Products Ltd. (1993) 111 CTR (Cal) 149 and also in the case of Shroff Engineering (P) Ltd. vs. ITO (1998) 96 Taxman 198 (Ahd)(Mag). He vehemently relied on the decision of Tribunal, Chandigarh Bench in the case of Dy. CIT vs. Metalman Auto (P) Ltd. (2001) 73 TTJ (Chd) 961 : (2001) 78 ITD 327 (Chd) for the proposition that where no technical knowhow were acquired, the expenditures incurred by assessee are the revenue expenditure and is allowable und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or was incurred in excess of the foreign exchange released by RBI. In the case before us, disallowance was not made by the AO on the presumption of personal expenses. The next judgment in CIT vs. Wood Crafts Ltd. is also not applicable to the facts of the case because in that case foreign expenditure was incurred in connection with expansion scheme of the assessee-company to set up a new plywood factory which was not the case of new business in the case of separate and distinct from the existing business. In the case before us, the assessee has incurred expenses for entering into agreement for procuring new technology. The judgment of (1998) 96 Taxman 198 (Ahd) in the case of Shroff Engg. Ltd. vs. ITO, is applicable to the facts of the case because in this case also, the expenses were incurred by the assessee on foreign trip of the managing director which was duly approved by the board of directors and RBI. The trip was with a view to meet various parties in foreign country to explore collaboration with them for manufacturing certain machines in India and also to visit Achema Trade Fair in Germany. In this judgment, it was held that the foreign tour was for the promotion of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ising building for its business. The municipal tax was paid for the plot of land. 7.8 No evidence is available on record to prove that the expenditure so incurred by the assessee in its running concern but for setting up new business which is not connected with the existing running business of the assessee. 7.9 In view of the aforesaid reasons, we are of the considered opinion that the expenses incurred by the assessee on the running concern in the ordinary course of business for foreign travelling is a revenue expenditure and is allowable under s. 37(1) of IT Act. 8. The 6th ground of appeal is against the disallowance of Rs. 27,110 under s. 40A(12). 8.1 We have gone through the submissions made by the rival parties and we find from p. 80 of the paper book that the assessee has incurred total expenditure amounting to Rs. 25,100 which fall within the preview of s. 40A(12) of the IT Act, and after allowing a sum of Rs. 10,000, therefrom, we direct the AO to disallow a sum of Rs. 15,100 under s. 40A(12). 9. The 7th ground of appeal is against the disallowance of Rs. 98,212 on account of subscription to superannuation fund as premium to LIC. 9.1 The assessee debited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to the extent of purchases made by the assessee for other units also. The assessee submitted that this is fully covered by the decision of Tribunal Delhi Bench, in the case of Phoenix Oversees Ltd. vs. Asstt. CIT (1996) 55 TTJ (Del) 379 : (1996) 56 ITD 274 (Del) to which learned Departmental Representative did not object but relied on the order of the CIT(A). 11.2 We have heard both the parties and perused the material on record. We also have gone through the judgment of Delhi Bench of Tribunal in the case of Pheonix Oversees Ltd. vs. CIT and we find that the case of the assessee is fully covered by the aforesaid judgment where on the similar issue, Tribunal has held as under: "On plain reading of s. 32AB it is not possible to hold that eligible business means the business of the undertaking where machinery is installed and not the business of the assessee. There is no restriction placed on the assessee as per definition of eligible business to invest only out of the income of a particular unit. The definition of eligible business given in s. 32AB(2) is an exclusionary definition. Every business other than the one excluded under cls. (a) and (b) of s. 32(AB)(2) is eligible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-compliance of conditions as per purchase order placed by the customers, such as, service in the form of instance providing infrastructural facilities and also successful operation of the equipment at buyers place, etc. and under these circumstances some of the cases only delivery of goods is made but various conditions as enumerated remain unexecuted and for that purpose the money is withheld by the customers to the extent of 5 to 10 per cent or in some cases even 100 per cent payment been received but the obligation of the company continues in the form of incomplete contract or supply for which services are to be rendered and hence the right to receive does not accrue or arise merely on the basis of invoicing or even receipt of 100 per cent amount by showing the whole of the amount as amount of turnover. The assessee submitted that the income to this extent needs to be reduced. The AO, however, did not deal with the claim. Learned CIT(A) rejected the claim holding the same to be quite vague and without any basis. She observed that even at the time of making claim, the amount had not been quantified. The warranty/guarantee did not reduce the value of sale. The sale is complete su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accepted standards for materials of the type ordered and shall perform in full conformity with the specifications and drawings. 10 per cent of the payment is to be released, as per cl. 15. Thus, he submitted that as per terms and conditions of sale of equipment by the assessee to various consignees/purchasers, the assessee does not become entitled to the amount of 5 to 10 per cent of total sale price which has been released/given against bank guarantee and hence encumbered and the assessee cannot treat the same as its income till the bank guarantee is released and satisfactory performance certificate is given of a particular order for which it has to execute a bank guarantee in favour of the purchaser. Alternatively, he submitted that the liability to the extent obligations are there in warranty period, a provision has to be made and, therefore, deduction of such liability be allowed. He relied on the following case law: (i) Corrision Control Services (Mumbai) (P) Ltd. vs. Dy. CIT (2001) 72 TTJ (Mumbai) 768 : (1999) 70 ITD 109 (Mumbai); (ii) Jay Bee Industries vs. Dy. CIT (1998) 61 TTJ (Asr) 403; (iii) Calcutta Co. Ltd. vs. CIT (1959) 37 ITR 1 (SC); (iv) Marchon Textile ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of goods, but shall expire except in respect of complaints notified prior to such date, 12 months after the stores have been taken over under cl. 5 above." Payment terms are given under cl. 11 and relevant portion of cl. 11(b) reads as under: (b) Commercial supplies after validation: (i) 95 per cent payment shall be made on proof of despatch of the equipment ex-works of the consignee if transported by rail; The balance of 5 per cent shall be paid on receipt of the equipment by the consignee." From the above, it is clear that the assessee has to give performance security to the purchaser for an amount of 5 per cent of contract value. This performance security shall be in the form of bank guarantee, as per cl. 4.3 and shall be discharged by the purchaser after completion of the supplier's performance obligation, including any warranty obligation under the contract. This bank guarantee has to be given within 30 days after the receipt of advance purchase order. As per cl. 10, the assessee warrants to the purchaser the quantity of stores and this warranty will remain in force for 12 months after stock have been taken over by the purchaser. As per cl. 11(b), the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itled for payment till acceptance of the bank guarantee. As per cl. 11, 90 per cent of payment shall be paid to the assessee on production of pre-receipted bills accompanied by the following documents: "(i) Invoice along with packing slip in triplicate; (ii) Evidence of proof of despatch of stores; (iii) Factory test report and certificate of inspection team to the effect that the stores conform to the specifications when offered are accepted; and (iv) Balance 10 per cent will be made after issue of the taking over certificate by consignee as defined in cl. 15." Clause 14 deals with inspection and under cl. 14.4, the assessee shall prepare the invoice for the passed quantity and submit the same with necessary certificate to the purchaser. The inspection of stores shall be carried out at the site of the firm by GM(OA) of DoT, as per cl. 14.1. As per cl. 14.2, the purchaser shall have the right to inspect the testing instruments as well as the equipment in use in the factory and evaluate the availability of production and quality assurance infrastructure in the factory to ensure consistent production with good quality and reliability; as per cl. 14.3, the assessee is r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time one can say that the expenses relating to warranty will accrue under the system of accounting followed by the assessee. In our view, the assessee will be entitled for deduction of the amount to meet the obligation which may arise under warranty clause in the year in which actually any claim is lodged by MTNL. The income which has actually accrued cannot be reduced with the probable obligations which may arise under warranty clause. Income and expenses are separately accrued. Probability of accrual of expenses cannot be set off against accrual of income, so as to postpone the accrual of income. 13.4 Now we may directs the case law relied upon by learned authorised representative. In the case of Corrosion Control Services (Bombay) (P) Ltd., the facts are that the assessee carried work of testing pipelines as a sub-contractor for two companies, as per the terms and conditions stipulated in the respective agreements. As per agreement, the assessee would have to raise monthly invoice in respect of services rendered and out of bill amounts of 5 and 10 per cent respectively would be deducted as security which would be released after successful completion of work assigned and cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income be reduced. It is not a case where sales have been made with the condition that the assessee has to incur certain obligations for the equipment sold. Therefore, the ratio of this decision is also not applicable to the facts of the case before us. In the case of Marchon Textile Ind. (P) Ltd. the assessee sold a machine on 1st March, 1983. Prior to sale on 24th Feb., 1983, it agreed to give guarantee of two years for satisfactory performance of machine and that in case of failure to fulfil guarantee obligation, it would refund entire sale price to the buyer by taking back the machine without charging any compensation for use of the machine, if it did not work to the satisfaction of the buyer. Under these facts, the Tribunal by referring to the provisions of s. 19(1)(2) of the Sale of Goods Act observed that the agreement is not a buy-back agreement but a sale on approval and on sale on approval the title of the goods is postponed from seller to buyer till the goods are approved. After referring to the provisions of s. 24 of the Sales of Goods Act, the Tribunal observed that until the period of two years was over, sale is not complete and seller remained the owner of the goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion so made to be an allowable deduction. In the present case, no such provision was made in respect of any past experience. On the facts of the case, the Tribunal came to the conclusion that the provision so made was liability which accrued during the year. In our view, the ratio of this decision will also not help the assessee because neither it has made any provisions in the books nor there is any finding that the provisions so made constitute an inbuilt liability. Therefore, we are of the view that the decisions relied upon by learned Departmental Representative will not help the assessee. The warranty given by the assessee under the agreements is a contingent liability and it cannot be held entitled for deduction of a contingent liability until and unless it is converted into an accrued liability. While holding so, the following observations made in the case of Shree Sajjan Mills Ltd. vs. CIT (1985) 49 CTR (SC) 193 : (1985) 156 ITR 585 (SC) are relevant: ".......Contingent liabilities do not constitute expenditure and cannot be the subject-matter of deduction even under the mercantile system of accounting. Expenditure which is deductible for income-tax purpose is towards a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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