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TMI Blog2018 (2) TMI 1909X X X X Extracts X X X X X X X X Extracts X X X X ..... e matter before Ld.CIT(A), who vide order dt.24.02.2014 (in appeal No.Nsk/CIT(A)-2/733/2013-14) granted substantial relief to the assessee. Aggrieved by the order of Ld.CIT(A), assessee and Revenue are now in appeal before us. 3. The grounds raised by the assessee in appeal No.616/PUN/2014 reads as under : "1.0 Bad debts and irrecoverable balances written off-- Rs. 21,11,554/- The learned CIT(A) erred on facts and in law in disallowing irrecoverable debit balances as written off under section 36(1)(vii) of the Act when the assessee has claimed amount of Rs. 21,11,554/- under section 28 of the Act. The learned CIT(A) further erred in allowing him to be misguided with nature of claim u/s. 28 and bad debts u/s. 36. He failed to appreciate the written and oral arguments put before him. 2.0 Disallowance of Late Delivery fees- Rs. 21,57,815/- The learned CIT(A) erred on facts and in law in disallowing Late Delivery Fees of Rs. 21,57,815/- on the ground that the provision is made on ad-hoc basis. He failed to appreciate that the company follows mercantile system of accounting and expenses relating the previous year have been properly provided for to arrive at the correct pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. Whether on the facts and circumstances of the case and in law, the CIT(A) is justified in deleting the addition of Rs. 12,46,100/- made u/s 40A(2) out of commission paid to Directors without justifying the reasonableness of the payment to Directors? 7. Whether on the facts and circumstances of the case and in law, the CIT(A) is justified in deleting the addition made on the issue of provision for warranty, without appreciating that the provision has not been made on a scientific basis. 8a. Whether on the facts and circumstances of the case and in law, the CIT(A) was justified in not appreciating that the investment by the assessee company in preference shares of a loss suffering company was only a guise of providing funds to the loss suffering company so as to restructure its debts. 8b. Whether on the facts and circumstances of the case and in law, the CIT(A) was justified in not appreciating that KFIL was a company which had huge accumulated losses and promoted by the assessee company, and preference shares were purchased and redeemed by the company as a convenient arrangement for tax avoidance through claim of capital loss." 5. We first take up assessee's appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce will be Rs. 21,57,815/- (Rs. 6,00,000/- + Rs. 15,57,815/-). Considering the facts of this assessment year, the balance amount of Rs. 15,60,823/- (Rs. 37,18,638/- less Rs. 6,00,000/- less Rs. 15,57,815/-) is allowed. The Assessing Officer is directed to allow Rs. 15,60,823/-. Accordingly, this ground is partly allowed." Aggrieved by the order of Ld.CIT(A), assessee is now in appeal before us. Revenue is also aggrieved to the extent of relief granted by Ld.CIT(A) and has therefore raised ground No.3 in its appeal. Since the grounds are inter-connected, the grounds raised by the assessee and Revenue are considered together. 8. Before us, Ld.A.R. submitted that identical issue arose in assessee's own case in earlier years. He further submitted that the Pune Bench of the Tribunal while deciding the issue in A.Y. 2005- 06 relying on the order of Tribunal in assessee's own case in ITA Nos.857 and 854/PUN/2006 for A.Y. 2001-02, had in principal allowed the ground in favour of the assessee but restored the matter to the file of AO for verification of the factual position. He pointed to the relevant findings at page 5 of the Tribunal order. He submitted that since the facts of the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l India Ltd., wherein damages of Rs. 1.56 crores had been worked out and demanded. The assessee also furnished the copies of vouchers, statements, correspondence with the concerned parties in respect of balance liquidated damages paid by the assessee. The CIT(A) in view of the letter received from M/s. Oil India Ltd., wherein the actual liquidated damages were of the order of Rs. 1,49,97,482/-, held the same as admissible and the disallowance to that extent was deleted. The remaining amount of Rs. 6,64,552/- represented interest on mobilization advance. The CIT(A) noted that as per purchase order, mobilization advanced was interest free and it had to be seen as to why M/s Oil India Ltd. Demanded interest on the said mobilization advance. In the absence of complete details being filed by the assessee, the matter was restored to the file of Assessing Officer to call for relevant particulars and decide the same. 41. In respect of balance liquidated damages, the assessee filed evidences in respect of certain items and the CIT(A) held that in view of the evidences filed for Rs. 3,41,724/-, Rs. 5,44,987/-, 1,45,072/- and Rs. 5,25,067/-, allowability towards the payment of liquid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er hand, relied on the ratio laid down by the Hon'ble Supreme Court in Haji Aziz and Abdul Shakoor Bros. Vs. CIT (1961) 41 ITR 350 (SC), wherein liquidated damages paid were not allowed. He also placed reliance on the ratio laid down by the Hon'ble High Court of Delhi in Rohtak Textiles Mills Vs. CIT (supra), which was relied on by the Assessing Officer. 45. We have heard the rival contentions and perused the record. The issue which arises in the present appeal is in respect of liquidated damages provided by the assessee in its books of account. The case of assessee before us is that in view of it taking up turnkey projects and as per the conditions of purchase order placed, the project has to be completed within stipulated period and in case the same is not so completed, then the assessee is liable to pay liquidated damages. Further, in case other conditions of the purchase order are not complied with by the assessee, then also as part of purchase order itself, there is a clause that the purchaser may at his discretion withhold any payments until the whole of stores has been supplied and he may also deduct recovery from the supplier liquidated damages. The major i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities below in allowing the liquidated damages only to the extent where the amount has been paid and in not allowing the balance. In any case, the said liquidated damages are relatable to the business undertaken by the assessee and are not for infraction of law. Hence, there is no merit in disallowing any part of expenditure. Reliance placed upon by the learned Departmental Representative for the Revenue on the decisions of Hon'ble Supreme Court are misplaced as in both the cases, damages were paid on account of infraction of law and hence, were held to be not allowable as expenditure in the hands of said assessee. However, in the present case, liquidated damages are paid by the assessee on account of violation of terms of contract entered into with the parties to whom the goods have been supplied by the assessee. There is no infraction of law in such cases and accordingly, we find no merit in the orders of authorities below in this regard. Reversing the order of CIT(A), we direct the Assessing Officer to allow the claim of assessee also on account of provision made of Rs. 20,82,139/-. The ground of appeal No.12 raised by the assessee is thus, allowed and the ground of ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n civil construction, earth work and foundation etc., is 10% as in the case of block of assets of buildings and not 40% as claimed by the assessee. He therefore restricted the depreciation on construction activity to 10% and on erection and commissioning expenditure to 15%, being the rate applicable to the plant and machinery, and accordingly worked out the excess depreciation to the tune of Rs. 56,69,031/- and disallowed the same. Aggrieved by the order of AO, assessee carried the matter before Ld.CIT(A), who decided the issue by holding as under : "4.2 I have gone through the submissions of appellant and reasons given by the AO for disallowance of depreciation on windmill. I have also gone through the decision on which the AO & the appellant have placed reliance. 4.3 The main contention of the assessee is that civil work related to foundation done to install windmill and commission charges are part of the plant & machinery Le. Windmill and the assessee is entitled for depreciation of at 80%. The assessee has also stated the Pune ITAT case (Poonawala Finwest & Agro P Ltd) on which AO had placed reliance deals with civil cost incurred on roads, control room, etc adjacent to w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13. Before us, Ld.D.R. supported the order of AO. Ld.A.R. on the other hand, reiterated the submissions made before AO and Ld.CIT(A) and further submitted that the issue is also covered in favour of the assessee by the decision of Pune Bench of the Tribunal in the case of DCIT Vs. Aminity Developers and Builders in ITA No.1505/PN/2011 order dt.12.12.2012. He thus supported the order of Ld.CIT(A). 14. We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to depreciation on windmills. AO denied the claim of depreciation at 40% which is applicable to the windmills, on cost of foundation, erection and commissioning expenditure. He denied the higher rate of depreciation for the reason that he was of the view that the rate of depreciation applicable on such costs is the normal rate of depreciation which is applicable to building and plant and machinery. We find that Ld.CIT(A) while deciding the issue has given a finding that by applying functional test that without civil foundation the windmills will not generate power and that civil foundation cannot be separated from windmills and cannot be treated as a separat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e entry tax was actually paid amounting to Rs. 62,62,297/- and liability for the same was Rs. 24,12,202/-. Thus the appellant had paid Rs. 38,50,095/- excess on account of entry tax. The appellant also explained that this amount was shown as receivable & considering the decision of authorities under Karnataka Entry Tax to levy penalty u/s 3B of the Karnataka Entry Tax Act proposing the penalty of Rs. 52,99,970/- as unjust enrichment, it was decided to write off the amount paid on account of Entry Tax. The appellant filed appeal with the Karnataka Appellate Tribunal and the dispute was decided in favour of the appellant. The entry tax paid was also refunded after the decision of Karnataka Appellate Tribunal and the appellant had offered the same for Income Tax. Considering the facts and circumstances of the case, I hold the amount is allowable as deduction under Income Tax Act. The Assessing officer is directed to delete the addition Rs. 38,50,000/-. 5.4 The other amounts claimed by the appellant are on account of advance paid to suppliers which was neither refunded nor was material not supplied. After going through the reply, it is seen that identical issue came up in AY 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar reasons stated herein while deciding the ground No.2 of the assessee in assessee's favour and for similar reasons, dismiss the grounds Nos.3 and 4 of Revenue. Thus, these grounds of the Revenue are dismissed. 19. Ground No.5 is with respect to disallowances u/s 14A of the Act. 20. During the course of assessment proceedings, AO noticed that assessee had made investments in shares and mutual funds for an amount of Rs. 517.38 crores and had claimed interest expenditure of Rs. 8.93 crores. The assessee was asked to explain as to why the expenditure incurred for any exempt income not be disallowed by applying the formula prescribed in Rule 8D of the Income Tax Rules. Assessee inter-alia submitted that it has already disallowed of Rs. 5,00,000/- suo motu and that the investment activities are ancillary to assessee's principal business. The submission of the assessee was not found acceptable to the AO. AO noted that assessee had not kept separate pool of funds for managing the activities of earning exempt income. He was therefore of the view that expenditure incurred for earning of exempt income needs to be disallowed. He thereafter, following the method prescribed under Rule 8D o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellate orders passed by me for AY 2005-06 & 2006- 07, the disallowance was restricted to Rs. 2,00,000/-. After consideration of the facts of this assessment year, the total disallowance will be Rs. 1,20,90,752/-. (Rs. 1,10,90,752/- + Rs. 5,00,000 + Rs. 5,00,000). The AO is directed to delete disallowance of Rs. 6,80,97,131/-. Accordingly, the ground is partly allowed." Aggrieved by the order of Ld.CIT(A), Revenue is now in appeal before us. 21. Before us, Ld.D.R. supported the order of AO. Ld.A.R. on the other hand, reiterated the submissions made before AO and Ld.CIT(A) and further submitted that for the year under consideration, method prescribed by Rule 8D of the Income Tax Rules are not applicable and for which he relied on the decision of Bombay High Court in the case of Godrej and Boyce Mfg., Co., Ltd., Vs. DCIT reported in (2010) 328 ITR 81 (Bom). He further submitted that aforesaid decision of Godrej and Boyce Mfg., Co., Ltd (supra) has been upheld by the Hon'ble Supreme Court reported in (2017) 394 ITR 449 (SC). He therefore submitted that the ground of Revenue needs to be dismissed. He thus supported the order of Ld.CIT(A). 22. We have heard the rival submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of Rs. 12,46,100/-. Aggrieved by the order of AO, assessee carried the matter before Ld.CIT(A), who decided the issue by holding as under : "9.2 Similar issue of disallowance of director commission was decided in favour of the appellant in A.Y. 2002-03, 2004-05, 2005- 06 & 2006-07. The facts of the assessment year are similar to the facts of the earlier years in which the expenditure is allowed. Accordingly, this ground is allowed and AO is directed to delete the disallowance." Aggrieved by the order of Ld.CIT(A), Revenue is now in appeal before us. 24. Before us, Ld.D.R. supported the order of AO. Ld.A.R. on the other hand, reiterated the submissions made before AO and Ld.CIT(A) and further submitted that the issue is covered in favour of the assessee by the decision of Pune Bench of Tribunal in the case of its sister concern, Kirloskar Feerous India Limited in ITA No.911/PN/2013 order dt.27.11.2014. He thus supported the order of Ld.CIT(A). 25. We have heard the rival submissions and perused the material on record. The issue in the present case is with respect to disallowance of commission u/s 40A(2) of the Act. Before us, it is assessee's submission that the paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt order. Similar issue was decided in AY 2005-06 &*2006-07. The appellant has filed letter to change the ground of appeal. The appellant has requested to change the amount from Rs. 15,16,618/- to Rs. 1,07,02,212/-.The above change in the amount was requested since in the earlier assessment years the warranty provision was disallowed and in AY 2007-08, the AO has allowed Rs. 91,85,594/- on the basis of utilisation of warranty for earlier years. 11.3 Considering the facts of the case, the decision of SC judgment in Rotork Controls India (P) Ltd vs CIT (SC) (2009) 314 ITR 62 is applicable to the issue. The provision for warranty will be always based on past trends only and as a % of turnover. The AO cannot consider subsequent reversals made by the appellant for disallowing the provision of warranty for earlier years. The reversals of provision made by the appellant are offered for the taxation in the future years. Similarly in the case of large engines, the warranty obligation starts immediately after the sales are made by the appellant. Considering the facts of the case and following the decision of the AY 2005-06 & 2006-07, I hold the provision of warranty for Large Engines amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther submitted that the shares were redeemed prior to original date for which necessary Board resolutions were passed and that the long term capital loss was only due to indexation. The submissions of the assessee was not found acceptable to AO for the reason that KFIL was a company promoted by assessee and it was a loss making company, had huge accumulated losses and was not in a position to repay the interest on loans. He also noticed that from March 1998 to September 2002, assessee had provided huge funds by converting interest over dues as preference shares as part of financial restructuring of its existing debts. He noted that assessee was providing funds to KFIL by converting debts to preference shares and helped to overcome financial crisis. He was of the view that when the preference shares are redeemed, assessee acquires huge losses so that it escapes paying capital gains tax. He also noted that no specific reasons were forthcoming for preponing the date of redemption. He therefore concluded that the argument of acquiring and redeeming the preference shares at par was a tax planning devise employed to save taxes. He accordingly disallowed the claim of loss. Aggrieved by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngines Ltd as a promoter of KFIL was required to subscribe preference shares. 13.6 The appellant had invested in preference share capital of KFIL since it was promoted by the appellant and the KFIL was promoted as a backward integration for supply of pig iron & castings. I agree with the appellant that investments made by it in preference share capital was made with a view to protect its business interest in investment already made and outstanding amounts due. The AO had not noted the fact that KFIL had come out with rights issue of equity shares and one of the objectives of rights issue to public was redemption of presence share capital. The appellant had received back the amount of preference share capital due to redemption in AY 2007-08 and had not incurred any loss on that account. The appellant had received the arrears of preference dividend on preference share capital amounting to Rs. 22.77 Crs in this assessment year before redemption of preference shares. I also agree with the statement made by the appellant that redemption was made in this AY had benefited it, since the amount was received earlier. The AO had also failed to note that the form of investment loan or prefe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithin the meaning of that expression of section 48 of the Income Tax Act, 1961." Relying on the decision of jurisdictional He, I hold that, the investments in preference shares (purchase) and sale (redemption) was made keeping its business interest and I do not agree with the view of the AO that the arrangement of purchasing and selling preference redeemable shares at par is tax planning device systematically employed by the assessee to avoid tax. 13.8 Considering the facts of the case and relying on the decision of the Bombay HC in Enam securities Limited, I do not agree with the reasons given by AO in the assessment order for rejecting the claim of long term capital loss. Relying on the decision of the Bombay HC in Enam securities Limited, I hold that Preference Shares are capital assets within the meaning of section 2(14) of the Income Tax Act, redemption of preference shares is a transfer within the meaning of section 2(47) of the Income Tax Act and indexation benefit is available to the appellant as per provisions of section 48 of the Income Tax Act. The appellant is entitled to long term capital loss incurred on redemption of preference share capital amounting to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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