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TMI Blog1991 (3) TMI 208X X X X Extracts X X X X X X X X Extracts X X X X ..... see had spent a sum of Rs. 16,37,284 as capital expenditure in acquiring Digester Tanks in respect of which it claimed 100% deduction as expenditure relating to scientific research under section 35(2). The claim was in two assessment years 1983-84 Rs. 3,63,962 and 1984-85 Rs. 12,73,322. In addition, the assessee claimed investment allowance. This was disallowed because of the embargo under section 32A(1)(d) according to which no investment allowance is to be given in respect of any machinery or plant, the whole of the actual cost of which is allowed as a deduction in computing the income chargeable under the head 'profits and gains of business or profession' of any one previous year. The case of the assessee was that because the cost has been allowed not in one previous year but in two previous years this embargo cannot apply. We have rejected the same contention in respect of another asset for the assessment year 1983-84 by our order dated 29-6-1990 in ITA No. 1786/Hyd/86 in the view that the expression, 'one previous year' cannot be equated to 'the same previous year' and the words in the singular includes the plural. We have concluded that the object of the section is to deny th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carrying out 'in-house research' and the activity of the R D unit as such was not in dispute and yet upheld the disallowance only on the basis of his decision in respect of the Digester Tank. It was contended that since the facts were similar to the Digester Tank, which was accepted as an asset used for scientific research this unit was eligible for deduction. On the other hand, it was contended on behalf of the revenue that the recognition obtained by the assessee was not specifically for income-tax purposes and, therefore, the assessee was not eligible for the deduction. 5.2 On a consideration of the rival submissions, we are of the opinion that the assessee is entitled to the deduction claimed. Section 35(3) states that if any question arises as to whether, and if so, to what extent, an activity constitutes, or any asset is being used for scientific research, it shall be referred to the prescribed authority whose decision shall be final. Under Rule 6 of the Income-tax Rules the prescribed authority is the Secretary, Department of Scientific Industrial Research, Government of India. We find that it is to this authority that the assessee had applied for recognition of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the claim was not required to be considered in this year. On appeal, the Commissioner (Appeals) has remitted the matter to the Income-tax Officer for giving a finding. However, it is stated that this deduction has been allowed in the subsequent assessment year and, therefore, the assessee has not pressed this claim for this assessment year. Energy Saving Devices - Rs. 33,30,261 8.1 The assessee claimed 100% depreciation on a 'Jyothi Generator for 2000 KW Turbo Alternator' costing Rs. 10,10,880. The Income-tax Officer was of the view that a generator is not covered by the entry energy saving device and hence disallowed this claim. Similarly, the assessee's claim for 100% depreciation in respect of written down values of certain machinery was disallowed. The assessee appealed and contended that the Jyothi Generator was a single unit with an integrated Back Pressure Turbine and was eligible for the deduction. The Commissioner (Appeals), therefore, remitted the matter to find out whether it was a single unit. With regard to the other items, he was of the view that since they were not acquired during the previous year, the assessee was not entitled to the additional depreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We are of the view that the assessee is entitled to the deduction in respect of the written down value of the other items of energy saving devices which are already in use. We direct the Income-tax Officer to grant the deductions accordingly. Coal Subsidy in Cement Unit - Rs. 2,37,982 9.1 The assessee had claimed in the cement regulation account a sum of Rs. 7,30,305 as coal subsidy from the Cement Controller for the period September 1980 to February 1982. Subsequently, the Cement Controller wrote to the assessee on 4-4-1983 stating that there was an excess claim of Rs. 2,37,981 and requiring the amount to be credited. The assessee, therefore, claimed that there was a liability accruing on that date. The Income-tax Officer was of the view that the communication from the Cement Controller was only a request for verifying the excess claim and did not amount to a demand. He, therefore, disallowed this deduction. On appeal, the Commissioner (Appeals) also agreed with the Income-tax Officer that a letter was not a demand notice and, therefore, there was no liability. In the further appeal before us it was contended on behalf of the assessee that since a running account was being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 30-6-1983. Rs. 23,27,706 ----------------- Rs. 31,03,608 ------------------ The assessee claimed deduction of these amounts in computing the income. The Income-tax Officer was of the opinion that since the award itself was made only after the end of the previous year, the assessee could not have worked out the provision for increase in wages. He also observed that the award became final only on publication and since the publication was beyond the previous year, the liability did not arise during the previous year. He thus disallowed the claim. On appeal, the CIT(Appeals) agreed with the Income-tax Officer that the liability accrued only after the close of the relevant accounting period and, therefore, could not be allowed as a deduction. 10.2 In the further appeal before us it was contended on behalf of the assessee that even in May 1983 when the assessee had agreed for the award having retrospective effect from 1-1-1982, the assessee was aware of the implications and could therefore make a provision. It was also argued that according to the accepted accounting standards, contingencies and events occurring after the Balance Sheet date could be taken into account and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts due to S.T.C. - Rs. 5,76,000 11.1 The assessee claimed the deduction of an amount of Rs. 5,76,000 representing interest at 12% on a sum of Rs. 48,00,000 which was due to the State Trading Corporation. Actually, the assessee was to pay the amount under a decree in respect of which the assessee obtained stay in the Supreme Court on condition that the assessee takes the liability to pay interest @ 12%. The Income-tax Officer disallowed this claim only on the ground that the interest was payable only if the assessee failed in the appeal. On appeal the Commissioner (Appeals) was also of the view that the liability was dependent upon the happening at a future point and connected with the appellant's failure in the appeal and, therefore, the liability should be considered as a contingent liability. 11.2 In the further appeal before us it was contended on behalf of the assessee that the interest was payable as long as the stay was in force and it did not depend upon the result of the appeal. It was also pointed out that for the preceding year as well as the subsequent year interest payable under the terms of the same agreement had been allowed as a deduction. This was not dispute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeals) confirmed this addition. In the further appeal before us it was contended on behalf of the assessee that this amount had been kept in a separate deposit account and, therefore, no deduction had been claimed under the Profit Loss account. According to the assessee in the sales-tax assessment order it had been accepted that these amounts had been shown as deposits in the bills and, therefore, with the knowledge of the purchaser this amount had been kept apart and not appropriated to the assessee's account. It was submitted that in these circumstances this amount could not be treated as part of the income of the assessee. On the other hand, it was contended on behalf of the revenue that sales-tax collection should be treated as part of the turnover of the assessee as held by the Supreme Court in the cases of Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 as well as Sinclair Murray Co. (P.) Ltd. v. CIT [1974] 97 ITR 615. 13.3 On a consideration of the rival submissions, we are of the opinion that this matter requires further investigation of facts. The same question came up for consideration for the immediately preceding assessment year when it was viewed fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pport this claim, the assessee produced a letter dated 23-6-1983 from M/s. Larsen Toubro Limited stating that the machine was loaded on the trailer and left their premises on 22-6-1983 and that a Service Engineer had been deputed to commission the machine on or before 30th June subject to availability of 3.3 KV power supply, an Inter Office Correspondence note to the Plant Manager by the Assistant Engineer (Transport) dated 28-6-1983 stating: "We have received one Electric Polcain 300 CK Excavator Sr. No. E. 001 I on 26-6-1983 and commissioned it on 27-6-1983 and it is working satisfactorily", and a Relieving Certificate dated 30-7-1983 certifying that the Service Representative Mr. K. Narayanaswamy and Mr. C.M. Satish arrived on 27-6-1983 and were relieved on 30-7-1983 after completing the following jobs: "1. Unloaded the machine from Trailer and commissioned. 2. Trained the operators and Maintenance Staff in safe operation and maintenance. 3. Advised use of particular grease for lubrication system. 4. Replaced new filter and tract after seal and that the machine is now in perfect working order". The assessee also stated that no day-to-day record was maintained for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve been commissioned before 30-6-1983. That certificate is a printed form in which the last sentences, are "Our machine is now in perfect working order and we are satisfied with the job carried out. You may submit your bill for the services rendered and parts supplied". The word "now" in that sentence only refers to the satisfaction of the customer with regard to the repair job carried out. It cannot mean that the machine was not in working order before the date of that certificate. We must read with certificate in full and when we do so we find that this certificate also confirms that the representatives of Larsen Toubro Ltd. arrived on 27-3-1983, unloaded the machine from the trailer and commissioned it. This fact was not disputed by the Revenue. The other jobs done by them were to train the operators and maintenance staff, advise them on proper maintenance and they have replaced one filter element. The fact that they remained for one month indicates that they were supervising the working of the machinery and not that the machine was not working during that period. It must be remembered that after all the machine was ready to be operated just like a car on delivery being ready ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncidental expenses for obtaining this contract. (d) The commission shall be paid to Messrs. Globe Commercial Agencies or their nominees in Sri Lanka. (e) Consideration referred to above arises only on K.C.P. securing the order. Till then each party will bear their respective expenses," Reading these clauses, the Income-tax Officer came to the conclusion that they provided for a formula for quantification of the commission according to which the commission was payable only in respect of supplies made during the year. He computed the commission payable during the year at Rs. 14,211 on supplies of machinery supplied at Rs. 2,84,234 and disallowed the balance of Rs. 99,03,062. This was confirmed on appeal. 15.2 In the further appeal before us it was contended on behalf of the assessee that the entire clauses of the agreement should be read as a whole which indicated that the liability arose as soon as the contract was secured because of sub-clause (a) whereas the payment was staggered according to the mutual arrangement. It was submitted that the percentage specified for quantifying the amount will not affect the date of accrual of the liability and, therefore, the assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , also had the same effect. In that clause also sub-clause (e) provides that the consideration arises only on K.C.P. securing the order which fixes the accrual of the liability. Sub-clause (a) provides for the manner of computing the commission. Sub-clause (b) states that the payment will be made in proportion of the payment received by K.C.P. Reading sub-clauses (b) and (e) together, while the liability accrues on the securing of the contract, the payment is staggered according to the payments received by K.C.P. Such a postponement of the payment does not affect the accrual of the liability. Since the assessee is following mercantile system of accounting it had to provide for the entire liability in the year in which it was accrued even though the payment might be made subsequently according to the mutual arrangement. In the circumstances, we have to accept the claim of the assessee that the entire provision made in respect of these two agencies for payment of commission has to be allowed as a proper deduction. Weighted Deduction under section 35B - Rs. 33,05,758 16.1 The assessee had claimed weighted deduction under section 35B in respect of the above payment of commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. The agreements provided that the agents will actively work for the interest of K.C.P. and for securing the order for the Sevanagala Sugar Development Project. The agent was to generally follow up the tender with the customer/consultants and provide all technical and commercial data, keep K.C.P. advised of any amendments to the tender and arrange for continuous discussions and clarifications until the project is completed and generally to do whatever is required with various agencies in Sri Lanka associated with the project. The agreement with Globe Commercial Agency provides for assistance regarding the project, transport feasibility, local infrastructure also. The Tribunal has held in the case of Kothari Carriers v. ITO [1984] 19 TTJ (All.) 572 that the maintenance of an agency means an act of continuing the relationship of principal and agent. From this point of view, it is clear that by these agreements the assessee had maintained an agency in Sri Lanka for the above purpose of representing the assessee in developing the export market for its services. We are, therefore, satisfied that the assessee's expenditure fell within the scope of item (iv). We find that the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amounts had also been paid only in the next year, the disallowance should be maintained. 17.3 On a consideration of the rival submissions, we are of the opinion that the assessee is entitled to succeed on this point. One of the specific services to be made by the assessee as a contractor was to take au insurance policy on the works and the Sri Lankan Government had undertaken to reimburse the assessee for the premium incurred. The assessee, therefore, arranged for an insurance policy to cover the risk from the date of commencement of the work which was 14th March, 1983. The policy was, however, issued on 16-6-1983 by the Insurance Corporation of Sri Lanka. The period of insurance was stated as 14-3-1983 to 13-3-1985 and 14-3-1985 to 13-3-1986. The total premium was stated as "As agreed" and it was payable in four instalments, viz., at inception, 14-9-1983, 14-3-1984 and 14-9-1984. On 28-6-1983 the assessee enquired as to the amount of first instalment and the manner of remitting the amount. On 30-6-1983 the Insurance Corporation of Sri Lanka replied to this enquiry stating that a remittance of US $ 32,106 may be made by a bank draft. A reading of the terms of the insurance policy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion - Rs. 14,24,170 18.1 The assessee had claimed a deduction of Rs. 19,66,934 and after setting off reimbursement from Sri Lanka Sugar Corporation an amount of Rs. 10,00,120 charged the balance of Rs. 9,66,814 to the profit and loss account. The Income-tax Officer was of the view that since the contract was spread over three years and the nature of the guarantee was performance of the contract, only the expenditure relatable to the relevant accounting period could be allowed as a deduction. He noted that in another unit of the assessee, viz., Central Workshop unit, bank guarantee commission had been treated on pro rata basis treating the balance as pre-paid expenses. He accordingly disallowed a proportionate amount of Rs. 14,24,117 while adjusting the receipt of Rs. 10,00,120. On appeal, the CIT (Appeals) confirmed this disallowance. 18.2 In the appeal before us it was contended on behalf of the assessee that as in the case of insurance, the production of the guarantee bond was a condition precedent to the contract and reimbursement. It was submitted that being a one time service provided against one time payment, there was no question of apportioning it on time basis. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be made pro rata to the payments received by the assessee. Since the total order procured was Rs. 4,54,72,289, the commission payable at 5% came to Rs. 22,73,614. The assessee had received payments only to the extent of Rs. 95,47,220 on which the commission payable was Rs. 4,77,361. The balance of commission to the extent of Rs. 17,96,253 was debited to the account by making a provision. According to the Income-tax Officer, the liability to pay commission arose only on receipt of the payments and, therefore, this provision was to be added back. On appeal, the CIT(Appeals) confirmed this disallowance by relying on clause 5 of the agreement. 19.2 In the further appeal before us it was contended on behalf of the assessee that the entire liability had accrued on procuring the order and only the payment had been postponed and, therefore, the provision for the balance was properly made in the account. On the other hand, it was contended on behalf of the assessee that the entire liability had accrued on procuring the order and only the payment had been postponed and, therefore, the provision for the balance was properly made in the account. On the other hand, it was contended on behalf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure could not be treated as capital expenditure. On the other hand, it was pointed out on behalf of the revenue that being the cost of machinery, the authorities below were right in regarding it as capital expenditure. 20.3 On a consideration of the rival submissions, we are of the opinion that the assessee's claim has to be allowed inasmuch as it is not in dispute that the special attachments made for a particular purpose had to be discarded after the purpose was done with. The other aspect as to whether the cost of these machines has been already included as an input in the bill for the jobs done has still to be verified by the Income-tax Officer as directed by the Commissioner (Appeals). In the circumstances, we hold that in case the ITO finds that there is no double addition, this expenditure should be allowed as a revenue expenditure. Escalation - Rs. 8,30,624 21.1 The Income-tax Officer noted that in the agreements of the assessee for works contracts, there were escalation clauses giving a formula for increasing the price due to variations in cost. He was of the view that such escalation computed at Rs. 8,30,624 should be added to the income of the assessee eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thod of making provision for such damages attributable to the delay falling within the previous year and, therefore, such a provision must be allowed as a proper deduction in computing the total income. Conformably with that decision, we set aside the orders of the authorities below on this point and direct the Income-tax Officer to quantify the amount of liquidated damages without taking into account anticipated escalation in prices as held in the earlier year and allow the same as an admissible deduction. If any waiver or rebate is allowed by the purchaser subsequently, the corresponding amount has to be brought to tax under section 41(1) in the assessment year concerned. Valuation of Work-in-progress - Rs. 1,62,93,832 23.1 On an examination of the accounts of the assessee relating to the industrial unit at Madras engaged in the manufacture of heavy plant and machinery for various industries, the Income-tax Officer came to the conclusion that the finished goods had not been valued properly and that the 'on cost method' adopted by the assessee without including the overheads was arbitrary and did not lead to the true profits. He inferred that the method adopted by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ery on orders given with particular specifications such that the machinery was earmarked for a particular customer and not available for sale over the counter. In this background the assessee had to value the work-in-progress as on the valuation date in respect of machinery which had been manufactured but not delivered. The method adopted by the assessee for valuing such machinery was to take the cost of the materials and the labour directly employed in the manufacture of such machinery. This is a regular method employed by the assessee over more than two decades. Such a method is a well-recognised method. In fact, the Supreme Court has referred to the decision of the House of Lords in the case of Duple Motor Bodies Ltd. v. IRC [1961] 1 WLR 739 where an assessee engaged in the business of building bodies for motor-coaches for its customers, adopted the direct cost method, as in the present case, and the revenue sought to value the work-in-progress on the 'on-cost' basis and the House of Lords held that particularly in view of the direct cost method had been applied consistently in the past and being more accurate as a method of computation, the assessing authority was not justified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the expected profit of this year giving a figure of Rs. 287.32 lakhs. Out of that he allowed a deduction of Rs. 117.32 lakhs and made an addition of the balance of Rs. 170 lakhs. On appeal, the Commissioner (Appeals) was of the view that the Income-tax Officer had the jurisdiction to reject the accounts under section 145(2) if it was not verifiable. But he set aside the assessment in that regard for verification inasmuch as the assessee had given point to point reply for the various defects pointed out by the Income-tax Officer. 24.2 In the further appeal before us it was pointed out on behalf of the assessee that due to a strike the workshop was closed from 9-6-1982 to 23-1-1983 and the work had to be entrusted to sub-contractors at higher cost. It was argued that there were other reasons such as increase in steel price, increase in cost of direct machinery purchased which explained the fall in the profit. It was pointed out that the accounts had been audited and the assessee had explained every allegation made by the Income-tax Officer such that there was no defect at all and, therefore, the Commissioner (Appeals) was not correct in remitting the matter for fresh equiry. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of all the records we now feel that the above machine has been effectively commissioned only during the subsequent accounting year relevant to assessment year 1985-86. Accordingly, we are drawing the following claims in respect of this machine for this assessment year: Rs. Rs. Total cost of the machine 1,99,45,835 Normal depreciation 29,91,875 Extra Shift allowance 16,70,463 Additional depreciation 14,95,937 Investment allowance 49,61,459 ------------------- 1,11,19,734 ------------------- We are filing a separate letter claiming all the above deductions in the assessment year 1985-86." The Income-tax Officer, however, rejected the claim by stating: "Since the assessee failed to produce evidence in support of its claim that the machine has been commissioned on 14-6-1983 (year ending 30-6-1983) the claim of allowance to the tune of Rs. 1,11,19,734 is hereby disallowed and added back to the returned income. (The assessee has since withdrawn the claim through its letter dated 14-12-1987 the extract of which is already reproduced in the preceding para)." 25.2 In the appeal of the assessee an additional ground was taken claiming that the machine arrived in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upervision and, therefore, he wanted the insurance to be taken up immediately. On the same day the insurance policy was taken for a period of three months. It was submitted that in these circumstances the fact that the insurance policy was taken for a period of three months from 20-6-1983 by itself did not contradict the commissioning of the machine which was supported by a commissioning report given on 14-6-1983 by the Manager (Mechanical Maintenance). In that report it was stated : "We wish to report that the above machine has now been installed and after successful trial, commissioned and put to use from June. The machine has been allotted Serial No. 02700 and located in Extra Heavy Shed. The erection and commissioning of this machine was done by us departmentally, there was no necessity to call foreign engineers." It was further pointed out that the Income-tax Officer had written a letter dated 28-11-1987 to M/s. Okura Co. Ltd., Tokyo as to whether there is any contract with K.C.P. for erection of the machine and if so to state when their engineers completed the erection and commissioned the machinery. By letter dated 17-12-1987 M/s. Okura Co. Ltd. replied as follows :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how that after rectifying the defects the machine was tried out and does not contradict the claim of the assessee that even earlier in June the machine had been run because the expression 'trial run' does not refer only to the initial trials but is also commonly understood as referring to the trying out of the machine after repair. Similarly, the fact that the assessee had taken an erection insurance for a period of 3 months from 20-6-1983 has been fully explained by the assessee. The fact that the period of cover extended beyond the date on which the assessee claimed to have erected the machine does not mean that the machine was not erected because, as explained by the assessee, the policy was taken as a requirement of the financial arrangement in acquiring the machinery. Under the provisions of the Income-tax Act, the assessee was entitled to make the claims for the statutory allowances either in the year of installation or in the year of use. The assessee has succeeded in establishing that the machine was installed in the previous year but because of certain snags it could be put to proper use only after rectifying the snags in the succeeding year. We, therefore, direct the Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payable by the assessee under any law and, therefore, disallowed the claim to be considered during the year in which the taxes were payable under the law. On appeal, the Commissioner (Appeals) was of the view that the relevant question was whether the expenditure related to the year of account and only if there was a provision for that expenditure, section 43B could be invoked. He accordingly confirmed the rejection of this claim. 26.3 Before us it was contended on behalf of the assessee that since the assessee had admittedly paid all these taxes and under section 43B taxes are to be allowed as a deduction on payment, the claim of the assessee should be accepted. On the other hand, it was contended on behalf of the revenue that since the expenditure had not been claimed as a deduction under the profit and loss account, it was not required to be considered. 26.4 On a consideration of the rival submissions, we are of the opinion that the provisions of section 43B have no relevance to the issue. That section only enables the Income-tax Officer to disallow the claim for deductions of the provision made in the profit and loss account if the expenditure relates to certain taxes and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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