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TMI Blog2013 (3) TMI 532X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of our co-ordinate Bench and the judgments of the Hon’ble Bombay High Court in the case of Pfizer Ltd. [2010 (6) TMI 433 - Bombay High Court] and Dresser Rand India P Ltd. [2010 (4) TMI 153 - BOMBAY HIGH COURT]. - Decided in favor of assessee. Deleting the addition of commission - Held that:- the practice of paying commission to dealers/agents, stand established - the appellants have been able to substantiate their claim of commission payment. The appellants had submitted detailed justification for the payments. A majority of the payees selected randomly by the AO had confirmed the receipt of commission payment. The AO has not raised any serious questions regarding the veracity of the information received from these parties. - Decided against the revenue. Depreciation on software expenses U/s 32(1)(ii) or deduction u/s 37 as revenue expenditure - Held that:- We do not find any infirmity in the findings of the Commissioner of Income-tax (Appeals) on this aspect. The instant issue stands squarely covered in favour of the assessee and against the Revenue by the judgements in (i) CIT v Varinder Agro Chemicals Ltd. [2008 (10) TMI 100 - PUNJAB AND HARYANA HIGH COURT]; (ii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - - Dated:- 31-1-2012 - SHRI I.C. SUDHIR AND SHRI G.S. PANNU, JJ. Assessee by: Shri Percy Pardiwala Department by: Shri Hareshwar Sharma ORDER PER G S PANNU, AM: These cross-appeals by the assessee and the Revenue arise out of the order of the Commissioner of Income-tax (Appeals)-V, Pune dated 31.12.2009, which in turn, have arisen from the order dated 31.3.2004 passed by the Assessing Officer under section 143(3) of the Income-tax Act, 1961 (in short the Act ), pertaining to the assessment year 2001-02. Both the cross appeals are disposed of by a common order for the sake of convenience and brevity. 2. We shall first take up assessee s appeal, vide ITA No 448/PN/10. In its appeal, assessee has raised following Grounds of appeal: 1.(a) The ld CIT(A) erred in confirming the disallowance u/s 14A of the Income-tax Act, 1961 to the extent of Rs 275,850/-. (b) He erred in observing that the AO cannot be faulted for estimating the expenditure incurred in relation to the exempt income. 2. (a) The ld CIT(A) erred in confirming the disallowance of advances written off of Rs 100,000/-. (b) He erred in observing that the appellant did not contest the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the Revenue, has not controverted the aforesaid factual matrix brought out by the learned Counsel for the assessee, but has relied upon the orders of the authorities below in support of the case of the Revenue. 7. We have carefully considered the rival submissions and have perused the relevant record. In assessment year 2000-01, the Tribunal in its order dated 19.11.2010 (supra) has considered the allowability of the write-off of advance given to M/s Vitara Chemicals Ltd. in the following words: We have considered the rival submissions. We have seen the Memorandum of Association of the assessee and in clause 17 of the other objects clause permits the assessee to engage in the business of lending money of the company not immediately required. It is further seen that the assessee has been systematically and periodically making ICDs. At page 201 of the assessee s paper book we find that assessee has during the period from April, 1999 to October 1999 made Inter Corporate Deposits totaling Rs 4,08,23,117/-. The ICDs were made in about 15 companies. The interest earned on ICDs has been regularly offered to tax as business income. In this regard we have seen the assessment order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee contended that no enduring benefit was derived from the expenditure as the same was incurred on repair work carried out to strengthen an existing shed in the factory premises and additional set of gas cylinder for better protection from rains as well as increasing security. The Commissioner of Income-tax (Appeals) did not agree with the assessee as according to him, the invoice did not indicate that the nature of work carried out was merely in the nature of repairs and maintenance. He accordingly upheld the disallowance made by the Assessing Officer, against which assessee is in further appeal before us. 10. Before us, the learned Counsel for the assessee has referred to page 24 of the Paper Book, inter alia, containing written submissions before the lower authorities and on that basis, it is sought to be pointed out that the impugned expenditure has not resulted in any enduring benefit to the assessee so as to constitute a capital expenditure. It was pointed out that the expenditure has not resulted in creation of any new asset and is, therefore, allowable as a revenue expenditure. In support of his arguments, reliance has been placed on the following judgments: (i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 173 (Del). 14. Before us, the learned Counsel for the assessee has referred to the Paper Book at pages 27 to 32 to explain the nature of the incomes in question and it is contended that the same formed an integral part of the business profits and, therefore, the same cannot be excluded from the expression profits of the business as appearing in Explanation (baa) to section 80HHC of the Act. Apart from aforesaid, it is pointed out, a somewhat similar issue in the assessment year 1996-97 has been restored by the Tribunal vide its order in ITA No 1424/PN/07 dated 30.11.2010 to the file of the Commissioner of Income-tax (Appeals) to decide the issue afresh in the light of the judgment of the Hon ble Bombay High Court in the case of CIT v. Pfizer Ltd. 42 DTR 32 (Bom). 15. On the other hand, the learned Departmental Representative has defended the action of the lower authorities by pointing out that the impugned incomes do not constitute operational incomes and, therefore, the same have been rightly subjected to the exclusions prescribed in Explanation (baa) to section 80-HHC of the Act for calculating profits of the business for the purposes of computing deduction under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CIT(A). Following the said precedent, on the aspect of application of clause (1) of the Explanation (baa) of section 80-HHC to Service Charges and also other receipts in question, we set aside the order of the Commissioner of Income-tax (Appeals) and remit the matter back to his file to be adjudicated afresh in line with the directions of our co-ordinate Bench (supra) and the judgments of the Hon ble Bombay High Court in the case of Pfizer Ltd. (supra) and Dresser Rand India P Ltd. (supra). The Ground of appeal is accordingly allowed for statistical purposes. 17. In the result, appeal of the assessee is partly allowed, as above. 18. The Revenue in its appeal has taken up the following Grounds of appeal: 1. Whether on the facts and circumstances of the case and in law, the ld CIT(A) was justified in deleting the addition of Rs 2,20,84,664/- made by AO on account payment of commission by the assessee, when the assessee had failed in his duty to show that the said commission payments were commensurate with the services rendered and also in ignoring the fact that in some cases the commission was paid even where the customers were govt. agencies which is against the publ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without ascertaining the nature of liability i.e. whether the same is in the nature of penalty for infringement of any law in force at that point of time.? 8. Whether on the facts and circumstances of the case and in law, the ld CIT(A) was justified in deleting the addition of Rs 2,17,38,129/- on account of stocks written off when the same was a provision and was held to be an unascertained liability by the AO? 9. Whether on the facts and circumstances of the case and in law, the ld CIT(A) was justified in not excluding foreign exchange gain, miscellaneous receipts (sale of scrap, risk insurance recovery, sundry neutral revenue, recovery of doubtful accounts, refund from customs, income due to order cancellation others) from eligible business profits for the purpose of calculating deduction u/s 80HHC as per Explanation (baa) to sec. 80HHC of the I.T. Act 1961? 19. The brief facts relating to Ground No. 1 of appeal are that during the course of assessment proceedings, the Assessing Officer issued notices under section 133(6) to 17 randomly selected parties to whom commission was stated to have been paid by the assessee. Of these, replies from 12 parties were received. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es or that the payments were made other than on commercial consideration. Under the circumstances, in my view, it cannot be said that the appellants had failed to provide sufficient proof and justification for the commission payments. Accordingly, this Ground of appeal is allowed and the addition made is deleted. Being aggrieved by the deletion of the addition made by the Commissioner of Income-tax (Appeals), Revenue is in appeal before us. 21. Before us, the learned Departmental Representative has reiterated the reasons detailed by the Assessing Officer in support of the case of the Revenue, which have already been noted by us in para 19 above and are not being repeated for the sake of brevity. With regard to the order of the Commissioner of Income-tax (Appeals) deleting the disallowance, it has been argued that the objections raised by the Assessing Officer have not been addressed by the Commissioner of Income-tax (Appeals) and that the addition has been deleted on generalized considerations. 22. On the other hand, the learned Counsel for the assessee pointed out that the Commissioner of Income-tax (Appeals) made no mistake in deleting the addition on the basis of the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommission. It has also been explained that the dealers are mainly responsible for follow up for the quotations and to help the company in procuring the orders and also for effecting recoveries and collection of C Form etc. Even with regard to the Government customers, assessee s personnel at the Regional offices are supported by the network of dealers who are based at a closer location to the customers site. In such cases, the responsibility of the dealer is to provide necessary logistic and communication support to the assessee s staff. The warranty services of the product, which include regular service visits to ensure smooth operation of the equipment at the customer s site is also arranged through the dealer-engineer and as a part of the appointment terms of the dealers, they are required to stock sufficient parts at their end, so that timely delivery of parts and services is offered. In order to compensate the dealer for the above services, the assessee gives service commission to cover all the costs that the dealer incurs towards travelling, boarding and lodging, stocking of parts as well as training of the personnel. 24. All the aforesaid factual aspects of the matter h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee referred to page 215 of the Paper book wherein necessary confirmation has been placed, though the party had not responded to the summons issued by the Assessing Officer. In fact the factual scenario of the verification exercise would reveal that overwhelming number of parties randomly chosen by the Assessing Officer has acknowledged the commission payments and in any case, there is no denial of the payment in any of the case. Considering the entirety of the facts and circumstances of the instant year as also the precedent in the assessee s own case wherein the practice of paying commission to dealers/agents, stand established, we find no reasons to interfere with the ultimate conclusion of the Commissioner of Income-tax (Appeals) of having deleted the disallowance made by the Assessing Officer. Resultantly, Ground Nos. 1 2 are dismissed. 25. The next issue raised in the appeal of the Revenue pertains to the disallowance of software expenses. During the course of assessment proceedings, the Assessing Officer held that the amount of Rs 11,08,961/- incurred on purchase of MS Office and other software packages was not allowable as revenue expenditure and that the same amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax (Appeals) and find no merit in the Revenue s Ground of appeal. This Ground is accordingly dismissed. 29. The next grievance of the Revenue in Ground No. 4 5 is that the Commissioner of Income-tax (Appeals) was not justified in deleting the disallowance of Rs 21,91,994/- made by the Assessing Officer under section 36(1)(va) of the Act on account of late payment of employee s and employer s contribution to Provident Fund. The Assessing Officer made the disallowance on the ground that there was delay by the assessee in making payments of both employees as well as employer s contribution to Provident Fund. Accordingly, for the last payment of employee s contribution towards Provident Fund, disallowance under section 36(1)(va) and under section 43B of the Act was made. In appeal, the Commissioner of Income-tax (Appeals) deleted the impugned addition for the following reasons: 22. I have given careful consideration to the matter. The weight of judicial opinion as it presently stands, which has also been referred by the appellant in his written submissions, is in favour of the view that payments made within grace period of 5 days (i.e. upto 20th of following month shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of Rs 86,14,839/- to the total income of the assessee. 33. In appeal, the Commissioner of Income-tax (Appeals) after considering the submissions of the assessee and applying the ratio laid down by the Hon ble Supreme Court in the case of Rotork Controls India (P) Ltd 314 ITR 62 (SC) to the facts of the assessee s case, held that the assessee was justified in making the necessary provision on account of warranty in accordance with the practice consistently followed by it. The Commissioner of Income-tax (Appeals) accordingly deleted the addition made by the Assessing Officer on this count, against which Revenue is in appeal before us. 34. Before us, the learned Departmental Representative appearing for the Revenue, has primarily argued that the provision for warranty has been allowed by the Commissioner of Income-tax (Appeals) without taking note of Assessing Officer s objection that there was no scientific basis for such provision. 35. On the other hand, the learned Counsel for the assessee pointed out that the reasonableness of the provision can be understood in the light of the order of the Tribunal in the assessee s own case for the assessment year 1998-99 dated 30.11. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ince the expenses pertained to earlier years and the assessee followed mercantile system of accounting, the Assessing Officer rejected the claim of the assessee. He accordingly disallowed the said amount of Rs 10,50,000/- and added back it to the total income of the assessee. 38. In appeal before the Commissioner of Income-tax (Appeals), the assessee submitted that the assessee claimed the amount of Rs 10,50,000/- on account of CST dues paid for the financial year 1992-93 as the same was crystallized during the assessment year 2000-01. The Commissioner of Income-tax (Appeals) deleted the addition made by the Assessing Officer by holding as follows: 26. I have considered the matter. The assessment order does not indicate the AO had called for any explanation regarding the expenditure before coming to the conclusion that the same was not allowable. In view of the circumstances explained by the appellant, I am in agreement with the appellant that the liability on account of CST even though it pertained to earlier previous year was allowable as deduction for the assessment year in question as it crystallized during the relevant previous year. Further, sales tax payment falls in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scertained liability, which was not allowable. The Assessing Officer, therefore, held that as neither proper reasons nor evidences in support of the assessee s claim of the stock written off were made, the claim of the assessee was liable to be rejected. 42. Before the Commissioner of Income-tax (Appeals), assessee assailed the order of the Assessing Officer by contending that it had in fact submitted a detailed note on stock written off, process of identification and its disposal as scrap. However, the Assessing Officer was wrong in observing that the assessee had not submitted any evidence with regard to write off of obsolete stock. A copy of such Note was submitted before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) after considering the submissions of the assessee as also extracting the detailed Note on the issue, deleted the impugned addition of Rs 2,17,38,129/- made on account of stock written off, by holding as under: 38. I have considered the submission made by the appellant and also the judicial precedent cited by them. Having given careful consideration to the matter, I am of the view that write off of stock in accordance with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lete and old non moving items of stock. The assessee pointed out that it was introducing new products in the market and in terms thereof, the stocks of old products and its spares and components do not get sold and therefore, on the basis of a consistent policy the value of such obsolete and slow moving stock is identified and provision made for its diminution. It was explained by the assessee that at the end of each year, age-analysis of the inventory is carried out and any material which does not move for a period of 12 to 24 months is written off at 50% of the book value of such stock and 100% if it has not moved for more than 24 months. The assessee further explained that after the stock is written off, the same is sold as scrap and the income thereof is offered to tax in respective years. The details of such write off, which are placed at pages 235 to 291of the Paper Book, bear out the policy adopted by the assessee for identifying the stock to be written off and its disposal as scrap. In our considered opinion, the claim of the assessee cannot be faulted inasmuch as it is well established theory that the closing stock is liable to be valued at cost or market price whichever i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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