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TMI Blog2012 (1) TMI 370X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 ₹ 100,000/-. (b) He erred in observing that the appellant did not contest the fact that the amount was capital in nature and was not allowable as a bad debt. 3. The ld CIT(A) erred in confirming the disallowance of ₹ 272,628/- being repairs to factory building. 4. The ld CIT(A) erred in confirming the exclusion of 90% of following receipts from profit of business for the purpose of deduction u/s 80HHC of the I.T. Act, 1961: Nature of receipt Amount in Rs. Service charges 40,025,643 Sale of Manuals 615 Technical fees received from Revathi CP 1,500,000 Training charges 75,900 Professional fees received from Bhagwati Foundries 1,771,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee 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 ₹ 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 he assessment orders in assessee s case for AY 1999-2000 and 1998-99, wherein the interest income has been offered as business income and tax accordingly. In view of the above, we are of the view that the findings of the CIT(A) that assessee was engaged in the business of making ICDs has to be upheld. It is further seen that the company M/s Vitara Chemicals Ltd. became a sick company. The assessee filed a criminal complaint u/s 138 of the Negotiable Instrument Act against M/s Vitara Chemicals Ltd., but the same did not bare any result. M/s Vitara Chemicals was declared as sick company under the Sick Industries Spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) Standard Mills Co. Ltd. v. CIT 181 233(Bom); (ii) Addl. CIT v India United Mills Ltd 141 ITR 399(Bom). 11. On the other hand, the learned Departmental Representative, appearing for the Revenue, has pointed out that the expenditure in question was for erection of additional shed for LPG gas bank and therefore, the same has been rightly considered as a capital expenditure. 12. We have carefully perused the orders of the authorities below and also the submissions put-forth by the assessee, copies of which have been pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 section 80HHC of the Act. 16. We have carefully considered the rival stands. In so far as exclusion of Service Charges from profits of the business as per Explanation (baa) to section 80HHC is concerned, the same has been considered by our coordinate Bench in the assessee s case vide its order dated 30.11.2010 (supra) in the following words: 10. As per the Revenue, these receipts did not form part of the main activities of the assessee and therefore they is not to be incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ser 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 ₹ 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 public policy? 2. Whether on the facts and circumstances of the case and in law, the ld CIT(A) was justified in allowing additional evidence on the issue of commission paid without allowing the AO to present his point of view, more so when ample opportunity was provided to the assessee company during assessment proceedings for the relevant AY and the assessee company could not fully substantiate the payment of commission vis- -vis com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e carefully considered the reasons cited by the AO in the assessment order for making the said disallowance and also to the appellant s submissions. In my view, 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. Significantly, in no case payment was denied by any party (in some cases there was no response). The AO also acknowledges that the payments had been made through cheques. There is nothing to indicate that the parties to whom commission payments were made were related parties 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eting the impugned disallowance. 23. We have carefully considered the rival submissions. We have also perused the orders of the authorities below as well as the assessee s written submissions and other material placed on record, which has been referred to in the course of the hearing before us. Briefly put, as per the material on record, it emerges that the assessee company has customers spread all over India and in order to serve such customers at various locations, assessee appoints dealers for its various products, namely, compressors, construction and mining equipment, spares and accessories. It has been explained that the dealers also undertake direct sales and orders are also booked by the dealers and products are invoiced/supplied to the customers. On the latter activities of the dealer, assessee pays commission. 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 base ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l has allowed the deduction after being satisfied of the practice of commission payment. In this background of the matter, and with no adverse material on record, we do not find any merit in the objections raised by the Assessing Officer with regard to commission payment to dealers relating to the orders from the Government agencies. At this point, we may also observe that even with regard to the verification exercise carried out by the Assessing Officer, we find nothing adverse so as to infer that the impugned commission payments were ingenuine. The Assessing Officer issued summons to 17 randomly selected parties, out of which 12 replies were received and 4 summons came back unserved. In relation to one party, no response was received in-spite of service of summons. With regard to such solitary party, learned counsel for the assessee 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 pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technology has been evolving very rapidly, leading to frequent obsolescence and as such, incapable of providing any enduring benefit. In this view of the matter, Commissioner of Income-tax (Appeals) directed the Assessing Officer to allow software expenses as revenue expenditure, against which, Revenue is in appeal before us. 28. We have carefully considered the submissions of the rival sides. 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 following judgments: (i) CIT v Varinder Agro Chemicals Ltd. 309 ITR 272 P H); (ii) CIT v Sundaram Clayton Ltd. 321 ITR 69 (Mad) Respectfully following the aforesaid judgments, and the parity of reasoning given therein, we affirm the decision of the Commissioner of 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 ₹ 21,91 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Balance sheet, that under the head Provisions, the assessee had credited balance of ₹ 2,39,30,903/- on account of warranty provision. The Assessing Officer show-caused the assessee to furnish reasons and basis of provision made on account of warranty which was claimed in the Profit Loss account. In response to this, the assessee submitted that warranty provision of ₹ 25,97,379/- pertained to Atlas Copco division, but stated that due to paucity of time, warranty provision of Consolidated Pneumatics division, which was merged with the assessee company, could not be submitted. With regard to the claim of Provision of warranty, the assessee contended that warranty is an integral part of terms and conditions governing the contract for sale of assessee s product and, therefore, in the price of the product, the assessee included an element of cost of warranty. However, the Assessing Officer rejected the contentions of the assessee and added an aggregate amount of ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arranty be allowed on an estimate basis at the rate of 0.4% of the net sales. In the instant assessment year, it emerges from the assessee s submissions before the Commissioner of Income-tax (Appeals) and which have not been controverted that the warranty provision in this year comes to 0.37% of the net sales. In this background, the claim of the assessee during the year can be accepted as reasonable in view of the precedent and the same deserves to be allowed. The Commissioner of Income-tax (Appeals), in our view, made no mistake in deleting the impugned disallowance. Resultantly, this Ground is dismissed. 37. Ground No. 7 raised by the Revenue relates to the allowance of CST liability pertaining to assessment year 1992-93 in the year under consideration. On verification of the details of rates and taxes, the Assessing Officer found that the assessee had claimed under the head expenditure pertaining to earlier years an amount of ₹ 10,50,000/- on account of CST dues for assessment year 1992-93. Since the expenses pertained to earlier years and the assessee followed mercantile system of accounting, the Assessing Officer rejected the claim of the assessee. He accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity in the decision of the Commissioner of Income-tax (Appeals). We hereby affirm his decision and this Ground of appeal of the Revenue fails. 41. Ground No. 8 of Revenue s appeal is that the Commissioner of Incometax (Appeals) was not justified in deleting the addition of ₹ 2,17,38,129/- on account of stock written off. During the course of assessment proceedings, the Assessing Officer noticed that the assessee had not submitted any evidence in support of its contention with regard to write off of obsolete stock. As per the Assessing Officer, the assessee failed to bring on record as to who had given approval and under what circumstances the stock was written off in the books of account. He also found that there was no correspondence or letters between the operating personnel of the assessee company with regard to reasons and basis of stock written off. The Assessing Officer was of the view that the fact that it was written off, if the inventory had not moved for 12-24 months established that it was a provision and since it was a provision, it was in the nature of an unascertained liability, which was not allowable. The Assessing Officer, therefore, held that as ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee submitted that the write off of stock is in line with the regularly followed policy of identifying non-moving stock sand its disposal as scrap. Reference has been made to pages 25 to 26 and pages 235 to 291 of the Paper Book to demonstrate that the relevant procedures/policy as well as the stock written off were furnished before the lower authorities. In the face of such details, it has been pointed out that the Commissioner of Income-tax (Appeals) was justified in allowing assessee s claim for diminution in the valuation of stock on account of slow moving and non moving items. In support of the order of the Commissioner of Income-tax (Appeals), reliance was placed on the decision of the Hon ble Delhi High Court in the case of CIT v HotlineTeletube Components Ltd 175 Taxman 286 (Del). 45. We have carefully considered the rival submissions. In this case, the sum and substance of the dispute revolves around a provision made by the assessee in respect of diminution in value of stock of a sum of ₹ 2,17,38,129/-. On being asked to explain before the Assessing Officer, it was submitted that the provision was made on account of the diminution in value of obsolete and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has urged that on the facts and circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred 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 under section 80HHC as per Explanation (baa) to sec. 80HHC of the Act. 47. We have carefully considered the rival submissions. In the assessee s appeal, vide ITA No.448/PN/2010, similar issue relating to assessee s claim under section 80HHC of the Act in respect of certain other items of income, has been considered by us vide para 16 above, wherein we have extracted the findings of our co-ordinate Bench in its order dated 30.11.2010 (supra) regarding exclusion of service charges from the profits of business as per Explanation (baa) to section 80HHC of the Act. Following the said precedent as the circumstances are identical in this year, we set aside the order of the Commissioner of Income-tax (Appeals) and remit the matter back to his file to be adjudicated afresh i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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