9911796707
TMI Blog2017 (11) TMI 1842X X X X Extracts X X X X X X X X Extracts X X X X ..... e of relationship between the two, the payment cannot be allowed as deduction either u/s.37(1) or u/s.28 of the Act. Before us, assessee has not placed any material on record to controvert the findings of CIT(A). In view of the aforesaid facts, we find no reason to interfere with the order of Ld.CIT(A) and thus the ground of the assessee is dismissed. Disallowance of premium in respect of leasehold land - HELD THAT:- Co-ordinate Bench, relying on the decision of Hon ble Apex Court in the case of Govind Sugar Mills Limited [ 1997 (7) TMI 16 - SC ORDER] decided the issue against the assessee. Further, in view of the Ld. AR s submission that the issue in the year under consideration is similar to A.Y. 2000-01 and 2001-02 [ 2016 (8) TMI 1449 - ITAT PUNE] and since in those years the issue was decided against the assessee, we find no reason to interfere with the order of Ld.CIT(A) and thus the assessee s ground is dismissed. Addition made to the contract income - HELD THAT:- Since both the parties have admitted that the facts of the case in the present ground are identical to that of earlier years and since in earlier years, the issue has been decided by Co-ordinate Bench of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e us, assessee has not placed any material on record to controvert the findings of Ld. CIT(A) nor has placed the details of expenditure to substantiate its stand that the liability got crystallised during the year under consideration. Before us, assessee has also not placed the details of expenses. Before us, Revenue has also not placed any material to point out any fallacy in the findings of Ld.CIT(A). In such a situation, we find no reason to interfere with the order of CIT(A) and thus the ground No.7 of the assessee is dismissed Loss of amount on embezzlement - HELD THAT:- It is an undisputed fact that the loss has arisen on account of embezzlement and the Assessee has also filed a police complaint. We find that the H ble Apex Court in the case of Associated Banking Corporation Of India Ltd. v. CIT [ 1964 (10) TMI 7 - SUPREME COURT] has observed that the loss by embezzlement must be deemed to have occurred when the assessee came to know about the embezzlement and realised that the amounts embezzled could not be recovered. In the present case, it is not the case of the Revenue that the loss has not arisen during the course of business or is not incidental to business or the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is not controverted by the Revenue. In such a situation, we find that the ratio of the decision of Hon ble Apex Court in the case of CIT Vs. Punjab Steel Industries India [ 2014 (5) TMI 238 - SUPREME COURT] would be applicable to the present facts and therefore the sale of scrap cannot be considered as part of total turnover for the purpose of calculation of deduction u/s 80HHC of the Act. Exchange Difference assessee fairly admitted that the said difference to the extent of sales would form part of the total turnover and the balance needs to be excluded. We find merit in the plea of the assessee that exchange difference to the extent of sales would be included as part of the total turnover. Thus, ground of appeal No.10(a) raised by the assessee is partly allowed and ground of appeal No.6 raised by the Revenue is dismissed. Disputed adjustments to the export turnover - Business claims and refunds - HELD THAT:- In this regard the amount relates to insurance refund of ₹ 1,15,82,359/-. The issue was remitted back to the AO with direction. We also remit this issue back to the AO to apply the said directions. Balances written off now recovered - The assessee p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction u/s 80HHC of the Act should be increased and we direct so. Thus, ground of appeal No.10(d) is allowed. Proportionate deduction with reference to its export and on account of (DEPB) - The said issue now stands decided as per the amendment to Section and the AO in this regard is directed to apply the amendment and decide the issue. Claim of unabsorbed losses u/s 72A - the same may be reduced from the profits of business. The Ld. CIT(A) has decided the said issue relying on the ratio laid down by the Hon ble Bombay High Court at para 27 page 77, which has not been reversed. Applying the said principle, we dismiss the ground of appeal No.10(f). Assumption of exchange difference as business income or under the head income from other sources - CIT(A) relied and has considered the plea of the assessee and in the absence of details of deductions, has directed the AO to call for the details and examine the same and decide the issue as per his direction and decide the same. We find no merit in the ground of appeal No.11 raised by the assessee in this regard, where the issue has been set aside to the AO for verification. Thus, this ground is dismissed. Directio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome and upheld the addition in respect of Modi Alkalies Ltd. and Inertia Industries Ltd. whereas, all the four companies are similarly placed. Accordingly, we deem it appropriate to remit this issue back to the file of Commissioner of Income Tax (Appeals) for deciding the issue afresh, in the light of decision rendered in the case of THERMAX LTD., PUNE [ 2016 (8) TMI 1449 - ITAT PUNE] and M/S EXCEL INDUSTRIES LTD. AND MAFATLAL INDUSTRIES P. LTD. [ 2013 (10) TMI 324 - SUPREME COURT] . The findings of Commissioner of Income Tax (Appeals) on this issue are set aside and the ground No. 7 in the appeal of the assessee and ground No. 4.1 to 4.5 in the appeal of the Revenue for assessment year 2000-01 are allowed for statistical purpose. We thus find that the Co-ordinate Bench, while deciding the issue in assessee s own case in earlier year had set aside the issue to the file of Ld.CIT(A). It is also a fact that both the parties have admitted that the issue in the year under consideration is identical to that of earlier years. We therefore following the same reasoning as given by the coordinate Bench of Tribunal while deciding the issue in A.Y.s 2000- 01 and 2001-02 and for simi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. The grounds raised by the Assessee in ITA No.259/PUN/2006 reads as under : Being aggrieved by the order passed by the CIT(A) III PUNE, your appellant submits the following grounds of appeal for your sympathetic consideration. 1. EXPENDITURE IN RELATION TO DIVIDEND ETC. The learned CIT(A) erred in confirming the action of the AO of notionally attributing expenditure to dividend and interest-free income rejecting the contention of the Appellant that no such expenditure was, in fact, incurred for earning such income and accordingly none was so attributable. The learned CIT(A) also erred in observing that the appellant had failed to furnish the relevant information in this connection. In any event, the estimate made by the learned CIT(A) @ 2.5% of such income is excessive and unrealistic. 2. LOSS FUNDING OF SUBSIDIARY On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the action of the AO of rejecting the claim of the appellant for deduction of loss of ₹ 160.14 lacs suffered by a subsidiary of the appellant but funded by the appellant as per contractual obli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt that it was entitled to claim depreciation @ 100% in respect of certain items of plant and machinery which were so entitled in accordance with Appendix to Income-tax Rules, 1962 and instead allowing depreciation @ 25%. Without prejudice to the above the learned CIT(A) erred in wrongly concluding that machinery used in the manufacture of renewable energy devices referred to in entry 3(xiii)(r) of the Appendix has itself to be in the nature of renewable energy devices and in consequently observing that the appellant had failed to adduce evidence in support of such eligibility. The learned CIT(A) failed to notice that the claim in respect of renewable energy devices and plant and machinery used in the manufacture there of was allowed in the earlier years. The claim of the appellant be directed to be allowed. 7. PRIOR YEAR EXPENSES: On the facts and in the circumstances of the case and in law the learned CIT(A) erred in remitting back to the AO to decide afresh the issue of allowability of Prior Year's expenses ₹ 92.37 lacs on the basis of certain restrictive criteria indicated by him instead of allowing the same in their entirety as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... settlement of claim on cancellation of contract (₹ 2,50,00,000); and miscellaneous income (₹ 1,60,55,992 plus some further amount to be determined on re-verification). d) Confirming exclusion from eligible profits of business, loss 1 expenses on foreign representative offices ₹ 3,44,90,526/- instead of accepting the contention of the appellant that loss of foreign representative offices should go to increase the profits of the business eligible for deduction u/s 80 HHC instead of ignoring the same. e) Confirming reducing the profits of the business by ₹ 72.71 lacs by not allowing deduction with reference to the proportionate export incentive (DEPB ). f) Confirming the action of the AO in reducing the profits of the business by the amount of unabsorbed losses and depreciation u/s 72A and in also observing that the appellant had not pursued this ground in appeal proceedings. 11. On the facts and in the circumstances of the case and in law and without giving the appellant an opportunity of being heard in the matter the learned CIT(A) erred in directing the AO to determined and bring to tax certain portion of Exchange Di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d dividend income of ₹ 8,52,00,888/- and interest on tax free bonds of ₹ 61,64,383/- as being not liable to tax. The assessee was asked to furnish details of expenditure incurred to earn the aforesaid income and also show cause as to why part of administrative, overhead and managerial expenses for earning the tax free income not be disallowed to which assessee inter alia submitted that it has not incurred any expenditure towards the exempt income and therefore no disallowance of expenditure is called for. The submission of the assessee was not found acceptable to the AO as he was of the view that company had an investment of ₹ 189.43 crores as at the end of the year and to manage such huge investment some expenses would have been incurred. In the absence of any details submitted by assessee, AO estimated an expenditure of ₹ 25 lakhs to have been incurred for earning the exempt income and accordingly disallowed ₹ 25 lakhs u/s.14A of the Act. Aggrieved by the order of AO, assessee carried the matter before Ld.CIT(A) who decided the issue by observing as under : 6.2. I have carefully considered the appellant's submissions. During the course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions and perused the material on record. The issue in the present ground is with respect to disallowance u/s 14A of the Act. It is an undisputed fact that during the year assessee has earned aggregate tax free income to the tune of ₹ 9.14 crores (rounded off) and had not disallowed any expenditure for earning the exempt income. AO estimated the disallowance of expenses for earning exempt income at ₹ 25 lacs. When the matter was carried before Ld.CIT(A), he relying on the decision of his predecessors in assessee s own case for earlier years, restricted the disallowance @ 2.5% of exempt income. We find that identical issue arose before the Co-ordinate Bench of the Tribunal in assessee s own case in A.Yrs. 2000-01 and 2001-02 (in ITA Nos.1247 1248/PUN/2005 order dated 30-06-2015) and the issue was decided against the assessee by holding as under : 12. The sixth ground raised by the assessee in its appeal is with respect to the amount of expenditure attributable to dividend and taxfree interest. We find that identical ground was raised by assessee in appeal for assessment year 1998-99 before the Tribunal. The Tribunal dismissed the contentions of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of AO, assessee carried the matter before Ld. CIT(A), who upheld the order of AO by holding as under : 7.2 I have considered the ground thus raised. It is admittedly a very general one. During the course of the appeal proceedings, the appellant was asked to substantiate the contentions raised in the ground by filing a copy of the contract, if any, with the subsidiary. Neither a copy of the said contract nor any other details pertaining to the issue have been furnished. In the circumstances, the ground on this score deserves to be treated as not having been established in any manner. Even otherwise, the arguments raised by the Assessing Officer are prima facie tenable. The appellant and its subsidiary are two different and independent taxable entities. Therefore, the payment made by the appellant to its subsidiary by way of funding the latter's loss cannot be allowed as a deduction either u/s.37(1) or u/s.28 merely because of the relationship between the two, and without there being anything to show that the payment had been necessitated by commercial expediency. The presence of any such commercial expediency has not even been highlighted, let alone proved. I w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 2,41,534/- being amortization of premium paid on leasehold land. AO noted that similar expenditure claimed by the assessee in earlier years was disallowed by the AO and the action of AO was also upheld by Ld.CIT(A). He therefore, by following the reasoning of AO and CIT(A) s decision of earlier years, disallowed the claim. Aggrieved by the order of AO, assessee carried the matter before CIT(A), who upheld the order of AO, by holding as under : 8. The next ground pertains to the disallowance of the appellant's claim of deduction of ₹ 2,41,534/-, being amortization of the premium paid on lease-hold land. The appellant had made this claim as revenue expenditure by relying on the decision of the Hon'ble Karnataka High Court in the case of Commissioner of Income-tax Vs. HMT Ltd., 203 ITR 820. The Assessing Officer, however, rejected the claim by following, among other things, the decision of the Hon'ble Supreme Court in the case of Commissioner of Income- tax Vs. Govind Sugar Mills Ltd. 232 ITR 319. It was also observed by him that identical disallowances made for some of the earlier assessment years had been confirmed by the Commissioners of Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Ltd. vs. CIT, (1998) 232 ITR 319 (SC) against the assessee. Accordingly, the orders of the authorities below on this aspect are upheld and assessee fails. Accordingly, ground No. 2 in the appeal of assessee is dismissed. 15. We thus find that the Co-ordinate Bench, relying on the decision of Hon ble Apex Court in the case of Govind Sugar Mills Limited (supra) decided the issue against the assessee. Further, in view of the Ld. AR s submission that the issue in the year under consideration is similar to A.Y. 2000-01 and 2001-02 and since in those years the issue was decided against the assessee, we find no reason to interfere with the order of Ld.CIT(A) and thus the assessee s ground is dismissed. 16. Ground No.4 is with respect to addition made to the contract income. AO noticed that assessee is a manufacturer of boilers and heat transfer equipments and undertakes the projects on contract basis and the contract normally runs over a period of more than one year. The assessee was accounting for income on such projects by following the Projection Completion method and was raising invoices as per the scheduled payments agreed with the client ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal cost / expenses upto this date amounted to ₹ 32.28 lakhs thus giving an actual revenue of a ₹ 9 .61 lakhs. As per the ratio between the actual cost and the total estimated cost, the project had been completed upto 56%. Hence as per the bench-mark being followed by the appellant, only 85% of the contributions / revenue was recognisable. This worked out to ₹ 4.82 lakhs as against the actual contributions / profit of ₹ 9 .61 lakhs. The excess of the actuals vis-a-vis the revenue recognition at the prescribed percentage worked out to ₹ 4.79 lakhs. This was taken to the provision account. The actual profits were reduced to the above extent so as to equilise the profits with the proportionate revenue contribution as had been estimated. Yet another example may be taken. In the case of the Moser Baer-III Project, the total order value was ₹ 755.14 lakhs. The budgeted expenses were ₹ 493.89 lakhs leading to an estimated contribution/profit of ₹ 261.25 lakhs. Year ending 31.3 .2002 was the first year of exclusion of this work. By the year end, the appellant had invoiced the contractee for an amount of ₹ 100.61 lakhs. Against the net ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed the Accounting Standard 7 in the matter of revenue recognition and, as a corollary, in making provisions for equilisation. 20.2.3 However, even where an assessee is found to be justified in following Accounting Standard 7, its actual working is not above scrutiny. Such scrutiny can also extend to examine if any part of the revenue otherwise chargeable to tax as per sections 4 / 5 of the Income-tax Act, 1961, has not been so charged on account of adherence to the Accounting Standard 7. For, where there is a conflict between law and accounting, the former must prevail. Carrying such scrutiny into the appellant's case, it has been already noted that the appellant is omitting to recognise revenue wherever completion is less than 33% of the total project. It also appears that the appellant is not considering / recognising any profit on percentage completion method in respect of contracts which are less than ₹ 25 lakhs. This is certainly not correct; particularly as the appellant is billing the contractee irrespective of the percentages upto which contract execution has progressed and irrespective of the total value of the contract. It would have been a different ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same by the latter. Same applies to actual contributions which are in the negative. In some such cases, no adjustments have been carried out. Instead, the appellant has given the narration 'hold'. The above deficiencies need to be made good. It also needs to be ensured that the appellant has worked out the revised provision without applying scaling-down . If not, the same has to be done. It is, therefore, necessary that the Assessing Officer verifies the workings made by the appellant thoroughly, and works out the excess provision in the light of the remarks given hereinabove. The excess provision as may thus be worked out shall be taken in the place of the addition made in the assessment. The Assessing Officer shall also make suitable adjustment with reference to the addition deleted by the Commissioner of Income-tax (Appeals) in the appellate order for the assessment year 2001-02. The Assessing Officer is directed accordingly. The appellant is also directed to submit before the Assessing Officer all the details / workings as have been furnished before this forum as also such other details as the Assessing Officer may require to arrive at the admissible provision. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision Contribution Equalization Provision . The Assessing Officer rejected this method of making adjustment by the assessee. In the first appeal, the Commissioner of Income Tax (Appeals) partly accepted the claim of the assessee. Against the finding of the Commissioner of Income Tax (Appeals), both, the assessee and the Revenue have come in appeal. 9.1 We observe that similar issue had come up in the appeal of the assessee and the Revenue for assessment years 1998-99 and 1999- 2000. The Co-ordinate Bench decided the issue in favour of the assessee. The relevant extract of the order of the Tribunal reads as under :- 22. On this aspect, it was a common ground between the parties that in assessment year 1997-98, the Tribunal vide its order dated 03.09.2014 (supra) in the amssessee s own case has upheld the stand of the assessee by following the decision of the Pune Bench of the Tribunal on a similar issue in the case of Thermax Babcock Wilcox Ltd. vs. DCIT vide ITA Nos.157 158/PN/1995 dated 11.05.2001 for assessment years 1990- 91 1991-92. The Tribunal in its order dated 03.09.2014 (supra) noted that in the case of Thermax Babcock Wilcox Ltd. (supra) w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software gives enduring benefit and it has to be treated as capital expenditure. He also noticed that the similar software expenses incurred by the assessee in A.Y. 2000-01 were held to be capital in nature. He therefore, following the same reasoning as of his predecessor for AY 2000-01, disallowed the claim of expenses as revenue expenditure but however granted depreciation and accordingly made net disallowance of ₹ 44,96,008/-. Aggrieved by the order of AO, assessee carried the matter before CIT(A), who upheld the order of AO, by holding as under : 17.4 I have carefully considered the submissions made by the appellant. Whether software expenses should be regarded as revenue or capital is not a matter of generalization. The issue has to be decided by examining the relevant facts, viz. nature of the software acquired, the purposes for which it is acquired and the uses to which it is put. If by its nature, a software is intended to activate the hardware in the sense of making it functional, but for which the computer cannot be made use of vis-a-vis a specific function, the software will be as much in the nature of an apparatus as the hardware is. Further, if a soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01-02. The coordinate Bench of the Tribunal while deciding the appeal for those years decided the issue against the assessee by holding as under : 10. The fourth ground raised by the assessee in appeal is expenditure on computer software. The assessee during the relevant assessment period had purchased license to use computer softwares like, Windows 95, AutoCAD, MS Office, FoxPro, etc.. The assessee treated the expenditure towards purchase of computer software as revenue in nature. The Assessing Officer held the same to be capital expenditure. In the first appeal, the Commissioner of Income Tax (Appeals) confirmed the findings of the Assessing Officer. 10.1 The Ld. AR of the assessee pointed out that an identical issue was raised in the appeals for assessment years 1998-99 and 1999- 2000 by the assessee, as well as, the Revenue. The Co-ordinate Bench dismissed this ground raised in the appeals of both the parties. 10.2 A perusal of the order of the Co-ordinate Bench in assessee s own case for assessment years 1998-99 and 1999-2000 shows that the Tribunal followed the judgement of the Hon ble Bombay High Court in the case of CIT vs. Raychem Rpg. Ltd. r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reover, the said decision of the CIT(A) is in line with the ratio of the judgement of the Hon ble Bombay High Court in the case of Raychem Rpg. Ltd. (supra). In the result, the Ground of Appeal No.7 of the assessee as well as the Grounds of Appeal No.7.1 7.2 of the Revenue are dismissed. Respectfully following the order of Tribunal in earlier assessment years in assessee s own case, we dismiss this ground in the appeal of assessee. 23. Before us, both the parties have admitted that the facts of the case in the present ground are identical to that of earlier years. In earlier years, the Co-ordinate Bench of the Tribunal has decided the issue against the assessee. We therefore following the decision of the coordinate Bench of the Tribunal in assessee s own case for earlier years and for similar reasons, find no reason to interfere with the order of Ld.CIT(A) and thus the assessee s ground No.5 is dismissed. 24. Ground No.6 is with respect to disallowance of higher depreciation. On perusing the depreciation chart, AO noticed that assessee had claimed 100% depreciation on plant Nos.4, 8 and 11 wherein it was manufacturing shell type boilers a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal in ITA Nos.1247 1248/PN/2005 order dated 30-06-2015 has decided the issue with respect to Plant Nos.4 and 5 in favour of the assessee and Plant No.11 against the assessee. He therefore submitted that since there are no changes in the facts for the year under consideration, therefore by following the order of the Tribunal, the issue be decided accordingly. Ld. DR did not controvert the submissions made by the Ld. AR but however supported the order of AO. 26. We have heard the rival submissions and perused the material on record. The issue in the present case is with respect to allowing higher rate of depreciation on certain machineries. We find that identical issue of disallowance of high depreciation arose in assessee s own case in A.Yrs. 2000-01 and 2001-02. The coordinate Bench of the Tribunal while deciding the appeal in ITA Nos. 1247 1248/PN/2005 decided the issue partly in favour of assessee by holding as under: 11. The fifth ground in appeal of the assessee is with respect to claim of 100% depreciation on plant and machinery. The Revenue has also impugned the findings of the Commissioner of Income Tax (Appeals) on this issue as ground No.2 in its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for depreciation @ 100%. On this aspect, the order of the CIT(A) is hereby affirmed. Thus, Ground of Appeal No.8 of the assessee as well as the Grounds of Appeal Nos.8.1 8.2 of the Revenue are dismissed. The issue raised by both the sides are identical to the one already adjudicated by the Tribunal. Both the sides have not been able to controvert the findings of the Tribunal in earlier assessment years. We find no reason to take a contrary view. Accordingly, the ground with respect to claim of depreciation in assessee s appeal and the appeal of Revenue is dismissed. 27. Before us, since both the parties have admitted that the facts of the case in the present ground are identical to that of earlier years, we therefore following the decision of the coordinate Bench of the Tribunal in assessee s own case of earlier years and for similar reasons hold that assessee is eligible to claim depreciation @ 100% with respect to plant and machinery used in the manufacture of air / gas / fluid systems but is not eligible for 100% depreciation in respect of plant and machinery used in the manufacture of heat pumps. Thus the ground of assessee is partly allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Only then the appellant's liability in respect of the expenses covered by such bills as were received during the year could be said to have been incurred during the relevant previous year. 16.3.1 It has been mentioned by the Assessing Officer that at the time of the assessment supporting evidences and vouchers had not been filed. Even the details filed before this forum are not complete. No doubt, on the basis of some of the details and supporting evidences filed, liability in respect of some of the expenses appear to have got crystallised during the relevant previous year only. Examples are - commission on sales: ₹ 6,15,576/-; domestic sales-spares : ₹ 2,84,673/-; legal and professional charges : ₹ 9,97,500/-; accessories purchases and non modvat projects: ₹ 50,670/-; site expenses: ₹ 9,636/-; site expenses: ₹ 20,000/-; legal and professional charges: ₹ 30,000/-; premium on forward contract and reversal: ₹ 76,640/- etc. But some other expenses also appear to be prima facie inadmissible as the credit notes, bills etc. relating thereto seem to have been received prior to the relevant previous year. Examples are - domestic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses was allowed by the coordinate Bench of the Tribunal. He further submitted that considering the nature of expenses, the entire expenses should have been allowed, more so, when assessee was following consistent accounting policy. He further submitted that identical issue arose in assessee s group concern and the issue was decided in assessee s favour. He placed on record the copy of Tribunal order in the case of Thermax Surface Coatings Ltd., in ITA No.1211/PN/1997 dt.26.08.2005. Ld. DR on the other hand supported the order of AO and submitted that since assessee was following mercantile system of accounting it should have debited the expenses in the respective years. He also placed reliance on the decision of Hon ble Madras High Court in the case of Fertilizers Vs. CIT reported in (2009) 8 ITR 174. 30. We have heard the rival submissions and perused the material on record. We find that CIT(A) while granting partial relief has noted that some of the expenses got crystallized during the year and therefore he directed the AO to allow the same. He also noted that for some of the expenses the relevant invoices, bills, statements etc., were received prior to the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO has not questioned the deductibility of the loss per se. He has also not questioned the appellant s claim that the embezzlement was detected only during the relevant previous year. Therefore, admissibility of the loss arising to the appellant as a result of the embezzlement will have to be upheld in principle. 10.3.1 As already noted, the Assessing Officer has restricted the deduction only to such loss as related to the previous year relevant to this assessment year. In this connection, he has relied upon the decision in the case of Bombay Forgings Pvt. Ltd. Vs. Commissioner of Income-tax, 206 ITR 562. I am afraid, there is nothing in this decision as would support the Assessing Officer's stand. In the above case, the Hon'ble court held that as embezzlement had taken place during the relevant previous year, and the loss arising thereon had also been duly reflected in the books of account by omitting the value of the embezzled goods from sales as well as from losing stock (of the assessee) while preparing the final accounts, the fact that the loss was detected during the subsequent previous year would not be relevant. The facts in the present case are not simila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bank, Jogeshwari Branch, casts doubts on the correctness of the loss claimed by the appellant. Out of the total withdrawal of ₹ 94,33,619/-, there is no information as regards payees to the extent of ₹ 11,31,200/-. While the deficiencies in the various statements illustrated hereinabove will have a bearing on the quantum of the loss claimed by the appellant, for the purpose of allowing deduction even the recoveries will have to be taken into account. It has been submitted by the appellant (during the course of the appeal proceedings) that recoveries to the extent of₹ 27.5 lakhs had been already made and recovery of a further amount of ₹ 20 lakhs was expected shortly. It is also seen that the police had recovered from the accused property to the tune of ₹ 50,83,000/-. It is not known if any part of the recovered property has since been permitted by the Court to be appropriated by the appellant. In these circumstances, I have to hold that even while the appellant's claim of deduction is admissible in principle, the quantum of the admissible deduction needs to be worked out on a thorough examination of the facts available on records as also such othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course of business or is not incidental to business or the view of the assessee that the loss is not recoverable is incorrect. In view of the aforesaid facts, we are of the view that the loss on account of embezzlement is allowable. Since the Ld CIT(A) has already allowed the loss to the extent of ₹ 64,82,136/-, we direct the AO to allow the balance loss of ₹ 9,57,853/-. Thus the ground No.8 of the assessee is allowed. 34. Ground No.9 is with respect to disallowance of expenses. AO noticed that assessee had claimed ₹ 9,84,462/- as Public Relation Expenses. AO was of the view that since the assessee failed to establish its reasonableness with supporting evidence therefore the reasonableness and genuineness of the entire transactions were not fully verifiable and therefore he disallowed a sum of ₹ 50,000/- on adhoc basis. AO also noticed that assessee had claimed ₹ 23,08,917/- being expenses of Membership and Subscription. In the absence of documentary evidence, AO held that the expenses were not fully verifiable and that they were for the purpose of business. He accordingly disallowed the disallowance of ₹ 1,15,446/- (being 5% percent o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng business connections with the appellant. In the circumstances, and also considering the total amount incurred on the guests, I am of the opinion that a small part of such expenses can be validly subjected to disallowance. It would also be relevant to mention here that some of the guest charges included in this account related to February, 2001, and, therefore, cannot even be considered for this assessment year. On a reasonable basis, the disallowable sum is hereby estimated at ₹ 25,000/-. The addition made on this score is reduced accordingly. 12.2 I have carefully considered the submissions thus made. I have also perused the relevant accounts, copies of which were filed during the course of the appeal proceedings. The garden expenses account does not show any capital expenditure. The expenses were mostly in the nature of garden maintenance expenses. I also find merit in the appellant's submission that these expenses had to be necessarily incurred for adding to the decorum and ambience of the factory and office set-up and, therefore, should be considered as revenue. I would accordingly hold that the Assessing Officer was not justified in making any disallowan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10,271/-; 1.08.2011 ₹ 7,080/-; 3.09.3011 ₹ 4,994/- + ₹ 3,325/-; 30.09.2001 ₹ 9,080/-; 5.11.2001 ₹ 8,180/-; 13.11.2001 ₹ 3,200/-; 4.12.2001 ₹ 8,905/-; 1.1.2002 ₹ 11,805; 7.2.2002 ₹ 10,422/-; 01.03.2002 ₹ 10,466/-; 31.03.2002 ₹ 7,691/-; 13.12.2001 ₹ 5,500/-; 16.08.2001 ₹ 7,035/-; 25.02.2002 ₹ 3,500/-; 23.05.2001 ₹ 10,916/-; 22.05.2001 ₹ 2,813/-; 23.08.2001 ₹ 5,929/-; 02.11.2001 ₹ 4,215/-; 11.02.2002 ₹ 3,500/-; 16.02.2002 ₹ 2,717/-; etc. Here, amounts less than ₹ 2,000 have not been mentioned. In the absence of any narration, the above amounts would certainly be liable for disallowance. I also find that the account contains certain provisions which have not been reversed / adjusted, e.g. provision of ₹ 50,000/- for the assessment year 2001-02, a few other provisions made on 31.03.2002 etc. The above provision amounts to the extent not supported by bills or not being expenses actually incurred would qualify for disallowance. Having observed as above, I would all the same mention that the Assessing Officer was not justified in routinely making a percentage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the entire charges attributable to personal or non-business calls had been recovered from the directors / employees. The appellant has also not furnished details of the total recoveries made. For these reasons and also allowing due margin for the factum of recovery, the expenses attributable to non-business / personal use of residential telephone is hereby estimated at ₹ 1 lakh. The disallowance of ₹ 3,97,383/- made in the assessment is reduced accordingly. Aggrieved by the order of Ld.CIT(A) assessee is now in appeal before us. 35. Before us, Ld. AR reiterated the submissions made before AO and Ld.CIT(A) and further submitted that from A.Y. 2004-05 onwards Ld.CIT(A) has allowed full expenditure and no disallowance has been made. He further submitted that the AO has not pointed out any expenses which were not allowable and has proceeded to disallow the expenses on ad-hoc basis. As far as the disallowance of vehicle expenses are concerned, he submitted that since the assessee was a listed company, there was no element of personal expenses involved and for the aforesaid proposition, he relied on the decision of Gujarat Hon ble High Court in case of Sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was of the view that the sales tax and the excise duty was part of turnover and should have been considered as part of total turnover in view of Hon ble Apex Court s decision in the case of Chowringhee Sales Bureau Pvt. Limited (87 ITR 542). He also noticed that while calculating deduction u/s 80HHC the trading export of ₹ 1,43,74,000/- was not included in the total turnover while computing deduction u/s 80HHC of the Act. He also noticed that the assessee had earned income from sale of scrap, settlement of claim on order cancellation, exchange difference, miscellaneous income, balances written off earlier recovered in the year etc., aggregating to ₹ 16,65,72,358/- (details of which are placed at Page 17 of the assessment order). AO was of the view that the aforesaid income should have been excluded while calculating deduction u/s 80HHC. AO therefore re-worked the deduction u/s 80HHC and computed the deduction at ₹ 88,71,692/- as against the claim of ₹ 4,97,36,000/- made by assessee. Aggrieved by the order of AO, assessee carried the matter before Ld.CIT(A) who granted partial relief to assessee by holding as under : 23.2 First coming to the excise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 1,43,74,000/- was found reflected, rather cryptically. In the circumstances, it would be appropriate that the Assessing Officer verifies the relevant account and the other details having a bearing on this issue once again. Should much verification conclusively show omission of any trading exports from 'total turnover', inclusion to the extent of such omission shall stand automatically confirmed. Directed accordingly. 23.4 The next ground which also relates to deduction u/s.80HHC is over the exclusion by the Assessing Officer of 90% of the following receipts from the profits of the business by applying clause (baa) of the Explanation to section 80HHC: Claims and refunds, ₹ 1,32,37,677/- Balance written off now recovered, ₹ 5,12,54,000/- Sale of scrap, ₹ 1,37,16,681/- Settlement of claim on order cancellation, ₹ 2,50,00,000/- Exchange difference, and, ₹ 1,93,98,000/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n applies only to an amount of ₹ 1,15,82,359/-, i.e., the net claims and refunds. (ii) Balances written off now recovered. To the extent the balances recovered pertained to debts which in turn related to sales, such balances would be part of the 'total turnover' of the business and cannot be considered under clause (baa) of the Explanation to section 80HHC. I find from the details furnished by the appellant that the gross recovery of ₹ 5,12,54,071/- included ₹ 85,39,666/- being Bad-debts written off - recovered and, ₹ 3,71,57,161/- being Doubtful debts written off - recovered. Exclusion of these two amounts under clause (baa) is hereby negatived. The same, however, can not be said of the remaining sum of ₹ 55,57,243/- which represented Liquidated damages written off'. Liquidated damages are not in the nature of operational income. On the contrary, the same are in the nature of compensatory charges. Hence recovery of the damages paid would also partake the nature of charges. Therefore, such recoveries would qualify to be considered under clause (baa). I would, therefore, hold that exclusion of 90% of the sum of ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om Other Sources' (such as accretion to a deposit made from out of surplus fund on account of exchange rate fluctuations) the same would qualify to be considered I excluded from 'profits' under clause (baa). As the relevant details have not been made available, the Assessing Officer shall call for and examine the same in the manner suggested hereinabove; and, decide to the extent the gains are (i) includible in total turnover, (ii) excludible under clause (baa), and, (iii) assessable under the head 'income from other sources'. The exchange gains shall be accordingly considered I assessed. (vi) Miscellaneous income The appellant has not furnished full details in respect of the total miscellaneous income of ₹ 4,39,66,000/-. From the limited details available on records, it is seen that these included (i) excess provision (expenses) written back : ₹ 1,15,04,678/-, credit balances appropriated : ₹ 1,64,05,330/-, and, miscellaneous income I receipts ₹ 1,02,90,430/-. Nature of the balance miscellaneous income of ₹ 57,65,562/- is not ascertainable from the details available / filed. In so far as provision for expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer. During the course of the appeal proceedings, the appellant explained the various activities undertaken by the representative offices abroad and the circumstances under which losses had been incurred in such offices. It was also submitted that a similar claim had been allowed, by the Commissioner of Income-tax (Appeals), for an earlier assessment year. 25.2 I have carefully considered the appellant's submissions. There is nothing in section 80HHC authorising or permitting the addition of a loss or expenditure to profit. I would, therefore, hold that the Assessing Officer was justified in rejecting the appellant's claim in this matter. Accordingly, the ground raised by the appellant is hereby dismissed. 26. The next ground, which also deals with deduction u/s.80HHC, is over the action of the Assessing Officer in not considering the proportionate export incentive (DEPB) of ₹ 72.21 lakhs for the purpose of computing the deduction admissible to the appellant u/s.80HHC; and, instead, in reducing the profits of the business by the above incentive amount. The Assessing Officer held that DEPB is not entitled for deduction u/s.80HHC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ims. However, the issue of various aspects of claim of deduction u/s 80HHC of the Act has been adjudicated by the Hon ble High Court and the Apex Court in various decisions and we proceed to adjudicate the issues raised by making reference to the said decisions relied upon by the Ld.A.R. for the assessee and Ld.D.R. for the Revenue. 39. First we take up the ground of appeal No.10(a) and (b) raised by the assessee in this regard. i.e., determination of total turnover. The assessee is aggrieved by the inclusion of trading turnover in total turnover . The Revenue is also in appeal against the order of Ld. CIT(A). The exclusion of sales tax and excise duty from total turnover vide ground of appeal No.6. 40. We find that the Hon ble Apex Court in the case of CIT Vs. Catapharma (India) Pvt. Ltd., (2007) 292 ITR 641(SC) has held that while calculating the deduction under section 80HHC(3)(b) of the Income Tax Act, 1961, for computing the total turnover of exports out of India of trading goods, excise duty and sales tax are not to be included. Accordingly, we hold that trading turnover is to be excluded from total turnover also. Sales tax and excise duty is to be ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i)(a) to (iii)(e) of Sec.28 of the Act beyond any receipts by way of brokerage, claim, interest, rent, charges or any other receipt of similar nature included in such profits. The receipts on account of settlement of claim of order cancellation is in the nature of operational income and cannot be excluded under Explanation (baa) to Sec.80HHC of the Act. (iv) Miscellaneous income : The next item is Miscellaneous Income, wherein the assessee claimed the said income at ₹ 4.39 crore to be part of export turnover. The Ld. CIT(A) allowed the claim of the assessee to the extent of ₹ 2.29 crores referring the Ld. CIT(A) vide para 24.3 discussed the issue and we find merit in his observations and upheld the order of Ld. CIT(A) regarding miscellaneous income to be excluded. Hence, the ground of appeal No.10(c) is partly allowed. 44. Now coming to ground of appeal No.10(d) i.e., confirming exclusion from eligible profits of business, loss / expenses on oversea losses to the extent of ₹ 3,44,90,526/-. The assessee is aggrieved by the non-exclusion of business losses. In this regard, it was pointed out that profits if any of the represen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act. (a) bad debts written off recovered and (b) doubtful debts written off recovered. The said issue has been decided against the Revenue by the ratio laid down by the Hon ble Bombay High Court 245 ITR 769 (Bom). Applying the said principle, we direct the AO to allow the claim of the assessee in accordance with the law. AO thus has directed to recompute the deductions available during the assessment u/s 80HHC of the Act after applying the directions of the Tribunal on various aspects of the said deduction i.e., the computation of total turnover and export turnover as directed in the paragraphs hereinabove, while deciding the ground of appeal Nos.10 and 11 raised by the assessee and ground of appeal Nos.5 and 6 raised by the Revenue. We thus adjudicated the said issues in ground of appeal No.10 raised by the assessee. 49. Ground No.12 is with respect to charging of interest u/s 234D. Before us, at the outset, Ld.A.R. submitted that this ground needs to be decided against assessee as the provisions of Sec.234D were applicable as assessment was completed after 01.06.2003. In view of the submission of Ld.A.R., the ground of assessee is dismissed. 50. In the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prudence which was one of the prescribed policies as per the mandatory Accounting Standard-I recognised u/s.145. The Assessing Officer, however, held that the only course open to the appellant was to offer the income to tax and claim it as bad debt in the event of the debt becoming bad. Before the first appellate authority, the appellant submitted that even though it was following the mercantile method of accounting, generally and even as regards lease rentals, where, however, existed any significant uncertainty about ultimate collection, revenue was being recognised only as and when received. In the cases of the concerned lessees, it was impossible to reasonably expect ultimate collection in view of their fragile financial positions. In fact, some of these parties subsequently approached the Board for Industrial and Financial Reconstruction (BIFR). In these circumstances, there was no possibility of accrual of income even under the mercantile method of accounting. Accounting Standard-I also requires that provisions should be made for known liabilities and losses even if the amounts cannot be ascertained with precision. This Accounting Standard overrides section 5 which is 's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leases (3 in number) with M/s. Arvind Mills Ltd., it was submitted before the Commissioner of Income-tax (Appeals) that the lessee came out with a debt restructuring plan in March, 2001, with three options. Vide its letter dated 28.3.2001 addressed to the lessee, the appellant communicated its acceptance of participation in this debt restructuring plan and informed that it was opting for scheme B, being one of the three options proposed by the lessee. As per this option, the appellant was entitled to get only 45% of the principal amounts due as on 3l.3.2000 and was to forego the balance. The appellant was also obliged to transfer the leased assets to M/s. Arvind Mills Ltd. after getting 45% of the principal amounts. No further dues for the period after 1.4.2000 were to accrue to the appellant. Pursuant to this plan, Mis. Arvind Mills Ltd. paid to the appellant ₹ 117.65 lakhs in April, 2000. As a result, the appellant wrote off, in March 2001, the unpaid debts due to the extent of ₹ 6,18,344/-, ₹ 18,12,692/- and ₹ 3,02,157/- under the three contracts pertaining to the period-ended 31.3.2000. The Commissioner of Income-tax (Appeals) accepted the submissions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al by observing as under : 9. We have heard the submissions made by the representatives of rival sides and have perused the orders of the authorities below. The only issue before us for adjudication is, whether the lease rental income not received by the assessee is liable to be taxed in the assessment year 2000-01 or the same should be excluded from total income of the assessee on the basis of real income theory. The ld. AR of the assessee has contended that the lease rental income which have not been received are not liable to be taxed in assessment year 2000- 01 as the income has not accrued to the assessee. Undisputedly, the assessee is following mercantile system of accounting. It is a well settled law that Accounting Standards do not override provisions of the Act. However, the ld. AR of the assessee has asserted that the income has been recognized by the assessee on the basis of real income theory. Reliance has been placed on the decision of Hon'ble Supreme Court of India in the case of Commissioner of Income Tax Vs. M/s. Excel Industries Ltd. (supra). The relevant extract of the findings of Hon'ble Supreme Court of India are reproduced here-in-under : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easonable opportunity of hearing to both the parties. Thus this ground of Revenue is allowed for statistical purpose. 55. Second ground is with respect of accrual of income. Before us it was submitted that the present ground is interconnected to the ground No 4 of Assessee s appeal. Ground No 4 of Assessee s appeal was decided herein above by us in para no 16 to 19 wherein the ground of Assessee was allowed and ground of Revenue was dismissed. In view of the aforesaid reasons, the grounds of Revenue is dismissed. 56. Third ground is with respect to prior period expenses. Before us it was submitted that the present ground is interconnected to the ground No 7 of Assessee s appeal. Ground No 7 of Assessee s appeal was decided herein above by us in para no 28 to 30 wherein the ground of Assessee was allowed and ground of Revenue was dismissed. In view of the aforesaid reasons, the ground of Revenue is dismissed. 57. Fourth ground is with respect to claim for deduction u/s 80IA of the Act. AO noticed that assessee has claimed deduction of ₹ 3,37,27,000/- under Sec.80IA of the Act with respect to Resins / PPD Allied Products and Water Manag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s extent. The Assessing Officer shall verify if there were any losses or unabsorbed depreciation of the eligible business undertaking itself. If there were such losses or unabsorbed depreciation, he will be justified in setting off the same against the profits of the business undertaking and in computing the deduction admissible u/s.80IA accordingly. Directed as above. Aggrieved by the order of Ld.CIT(A), Revenue is now in appeal before us. 58. Before us, ld. D.R. supported the order of AO. Ld. A.R. on the other hand supported the order of Ld.CIT(A). 59. We have heard rival submissions and perused the material on record. In the present case, Ld.CIT(A) while deciding the issue has noted that as far as deduction u/s 80IA is concerned, only the losses and unabsorbed depreciation of the eligible business undertaking has to be considered. He therefore after upholding the reliance placed on the decisions referred by assessee held that AO was not justified in setting off of the entire unabsorbed loss of Thermax Water Technologies Company Limited against the profit from eligible business undertaking and in the process computing nil profit u/s 80IA of the Act. Before us ..... X X X X Extracts X X X X X X X X Extracts X X X X
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