Income Tax Appellate Tribunal - Ahmedabad
Gmm Pfaulder Ltd.,, Ahmedabad vs Department Of Income Tax
-1-
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "A" AHMEDABAD
Before S/Shri Mukul Kr. Shrawat, JM and D.C.Agrawal, AM
ITA No.1241/Ahd/2006
Asst. Year 2002-03
Asstt. CIT, Circle-4, Vs. G M M Pfaulder Ltd, B.
Ahmedabad. Jadav Chambers, 3 r d Floor,
Ashram Road, Ahmedabad.
(Appellant) (Respondent)
..
ITA No.1476/Ahd/2006
Asst. Year 2002-03
G M M Pfaulder Ltd, B. Vs. Asstt. CIT, Circle-4,
Jadav Chambers, 3 r d Floor, Ahmedabad.
Ashram Road, Ahmedabad
(Appellant) (Respondent)
..
ITA No.1926/Ahd/2007
Asst. Year 2003-04
Dy. CIT, Circle-4, Vs. G M M Pfaulder Ltd, B.
Ahmedabad. Jadav Chambers, 3 r d Floor,
Ashram Road, Ahmedabad
(Appellant) (Respondent)
..
ITA No.2002/Ahd/2007
Asst. Year 2003-04
G M M Pfaulder Ltd, B. Vs. Dy. CIT, Circle-4,
Jadav Chambers, 3 r d Floor, Ahmedabad.
ITA Nos.1241 & 1476/Ahd/2006 & four others
Asst. Year 2002-03 & others
Ashram Road, Ahmedabad
(Appellant) (Respondent)
..
ITA No.12/Ahd/2008
Asst. Year 2004-05
Asstt. CIT, Circle-4, Vs. G M M Pfaulder Ltd, B.
Ahmedabad. Jadav Chambers, 3 r d Floor,
Ashram Road, Ahmedabad.
(Appellant) (Respondent)
..
AND
ITA No.4402/Ahd/2007
Asst. Year 2004-05
G M M Pfaulder Ltd, B. Vs. Asstt. CIT, Circle-4,
Jadav Chambers, 3 r d Floor, Ahmedabad.
Ashram Road, Ahmedabad
(Appellant) (Respondent)
..
Revenue by :- Shri M. Mathivanan, DR
Assessee by:- Shri S. N. Soparkar & Shri D.
K. Parikh, ARs
ORDER
Per D.C. Agrawal, Accountant Member.
These are group appeals involving common issues and hence they are taken up together for the sake of convenience.
ITA No.1241/Ahd/2006 Asst. Year 2002-03 (Revenue's appeal)2. In this appeal following grounds are raised :-
2ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others (1) The ld. CIT(A) erred in law and on the facts of the case in deleting the disallowance of Rs.74,16,526/- being the claim of bad debts relying upon the Hon'ble ITAT Delhi Bench's decision in the case of DCIT vs. Vatvision Products Ltd. 84 TTJ Delhi, without taking into consideration the decision of Hon'ble Gujarat High Court in the case of Ahmedabad Electricity Co.
Ltd.
(2) The ld. CIT(A) erred in law and on the facts of the case in directing the AO not to exclude 90% of other income by way of debt recovery, discount and insurance claim etc. while computing the deduction u/s 80 HHC.
(3) On the facts and in the circumstances of the case, the ld. CIT(A) ought to have upheld the order of the AO.
(4) It is, therefore, prayed that the order of the ld. CIT(A) may be cancelled and that of the AO may be restored to the above effect.
ITA No.1476/Ahd/2006 Asst. Year 2002-03 (Assessee's appeal)3. In its appeal for Asst. Year 2002-03 the assessee has raised following grounds :-
(1) The ld. CIT(A) failed to understand the facts and circumstances of the case.
(2) The ld. CIT(A) erred in confirming the addition of Rs.1,20,930/- being adjustment with regard to International transactions with Suzhou Pfaudler Glass lined Equipment Co.
Ltd. China for sale of Firt 1912. He has considered the submission of the vouchers clarifying the actual facts as additional evidene though the same was submitted before the AO at the assessment stage.
(3) (a) The ld. CIT(A) erred in holding that the acquisition of computer software of Rs.508728/- is the intangible asset and the rate of depreciation is 25% against claim of depreciation @ 60% under the head computers.
3ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others
(b) The ld. CIT(A) erred in confirming the disallowance of software expenses Rs.4,32,248/- claimed as revenue expenditure after allowing depreciation @ 25%.
(4) (a) The ld. CIT(A) erred in confirming the disallowance of interest of Rs.10,70,000/- on the assumption that borrowed money has been used proportionately for acquisition of investments as on balance sheet date.
Alternatively, without prejudice to the above, the ld. CIT(A) erred in not accepting the appellant's contention that the disallowance should be in proportion to the income earned and not in proportion to the investments made.
(b)The ld. CIT(A) erred in confirming the disallowance Rs.1,20,000/- on account of administrative general expenses against dividend income or income arising from sale of investments on the assumption that certain administrative expenses would also have been incurred for making monitoring and selling of investments.
(5) The ld. CIT(A) erred in sustaining the addition of Rs.15,700/-
being fees paid for opinion on buy back of shares, considering it of capital nature.
(6) The ld. CIT(A) erred in confirming the non allowance of claim of accrued interest Rs.8,33,185/- payable to APSEB as per order of the city civil court.
(7) The ld. CIT(A) erred in confirming the assessment of the interest income of Rs.19,51,000/- as income from other sources against income from business as returned by the appellant.
(8) The ld. CIT(A) erred in upholding the action of the AO in including the sales tax and excise duty Rs.8,13,47,795/- in total turnover for the purpose of the computation of deduction u/s 80 HHC of the IT Act, 1961.
(9) The ld. CIT(A) erred in directing the AO to include the service charges Rs.18,98,485/- in total income turnover while computing deduction u/s 80 HHC of the IT Act, 1961.
4ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others (10) The ld. CIT(A) erred in directing the AO to include the sale of scrap Rs.32,20,959/- in total turnover while computing deduction u/s 80 HHC of the IT Act, 1961.
(11) The ld. CIT(A) erred in not deciding the issue regarding exclusion of 90% of sale of scrap Rs.32,20,959/- from the business income for the purpose of computation of deduction u/s 80 HHC of the IT Act, 1961.
(12) The ld. CIT(A) erred in not deciding the issue regarding not to exclude 90% of interest income Rs.19,51,000/- from the business income for the purpose of computation of deduction u/s 80 HHC of the IT Act, 1961 as the interest payment is more than the interest income.
(13) The ld. CIT(A) erred in not directing the AO for calculating business profit as per assessment order Rs.63,65,406/- instead of Rs.24,77,032/- as returned by the appellant. It is contended that the assessed business profit should have considered as business income and not the business income as returned by the appellant for the purpose of computation of deduction u/s 80 HHC of the IT Act, 1061.
(14) The ld. CIT(A) erred in confirming the charging of interest u/s 234D of the IT Act, 1961 on the excess refund granted u/s 143(1) prior to the operation of the provisions of section 234D i.e. 01/06/2003. It may be noted that the refund was granted as per intimation dated 03/01/2003 u/s 143(1).
(15) The appellant prays for appropriate relief on the above grounds of appeals.
(16) The appellant craves leave to add, alter, amend, substitute or withdraw any of the above grounds of appeal as circumstances may justify.
ITA No.1476/Ahd/2006 Asst. Year 2002-03 (Assessee's appeal)4. First we take up assessee's appeal for Asst. Year 2002-03. The first ground of this appeal is general and does not require any specific adjudication. The same is accordingly rejected.
5ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others
5. The second ground relates to addition of Rs.1,20,930/- being adjustment made by the AO in respect of price paid by the assessee in International transactions with Suzhou Pfaudler Glass lined Equipment Co. Ltd., China. This ground was not pressed by the assessee and hence it is rejected.
6. Ground No.3(a) relates to allowability of expenditure of purchases of software and in the alternative depreciation @ 60%. The AO found that assessee has claimed depreciation @ 60% on the software expenses of Rs.6,78,304/-. In addition to this assessee has further claimed expenses on purchase of software at Rs.5,76,330/-. Whereas first expenditure was claimed as capital and depreciation @ 60% was claimed, the other expenditure was claimed as Revenue expenditure. The AO treated the expenditure of Rs.5,76,330/- as capital expenditure and allowed depreciation thereon at 25% whereas he rejected the claim of depreciation @ 60% and allowed @ 25% on Rs.6,78,304/-. For arriving at his decision the AO relied on the decision of Hon. Rajasthan High Court's decision in the case of CIT vs. Arawali Construction Co. (P) Ltd. 259 ITR 30. According to the AO what the assessee had purchased was programmes for long-term use and hence treated them as capital and also treated them as ordinary plant and machinery eligible for depreciation @ 25%.
7. The ld. CIT(A) confirmed the order of the AO by holding that by incurring expenditure on soft ware the assessee gets right to use software. They are not goods which could be sold at the counter. The assessee acquired only intangible rights and hence it is entitled for depreciation @ 25%.
6ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others
8. We have heard the rival submissions. In our considered view where assessee purchases system software, which are integral part of computer hard-ware and without which computer system will not work, they would be treated as capital expenditure as such soft-ware cannot be treated differently than the computer hard-ware. Once it is found that the system software are integral part to the computer hardware system then they will also be entitled for same rate of depreciation as computer hardware. Since no specific rate is prescribed in the rule for computer software they have to be held as part of computer system and hence they are eligible for same rate of depreciation. We accordingly allow depreciation @ 60% on system software also as claimed by the assessee. So far as claim of Rs.5,08,728/- is concerned the AO has not shown that they are system software but in fact they are only application software. The assessee does not get any right over them. They are to be modified from time to time, what assessee gets is licence to use them and they are not integral to computer system. Accordingly they are revenue expenditure and has to be allowed. Similar view has been taken by Hon. Punjab & Haryana High Court in CIT vs. Varinder Agro Chemicals Ltd. (2009) 309 ITR 272 (P & H) wherein it is held as under :-
"6. It is well settled that for claiming deduction, apart from expenditure being for business, the same has to be revenue expenditure. Though, there is no rigid rule to determine when expenditure is capital or revenue, generally acceptable test is where advantage is for enduring nature, it may be capital expenditure, while if the expenditure is for running of the business, it is of revenue nature. Some of the leading judgments of the Hon'ble Supreme Court dealing with the issue are : Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34, CIT vs. Vazir Sultan and Sons (1959) 36 ITR 175, Empire Jute Co. Ltd. vs. CIT (1980) 124 ITR 1(SC); (1980) 4 SCC 25 Alembic Chemical Works Co. Ltd. vs. CIT (1989) 177 ITR 377 (SC); AIR 1989 SC 1913 and CIT vs. General Insurance Corporation (2006) ITR 232 (SC).
7. In Alembic Chemical Works Co. Ltd.'scase (supra), the issue was whether the expenditure on technical know-how under an agreement with a foreign company was revenue expenditure. Answering the question in favour of the assessee, the Hon'ble Supreme Court observed (in paragraph 13) that it would be unrealistic to ignore the rapid advances in research and to attribute a degree of endurability and permanence 7 ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others to the technical know-how at any particular stage in fast changing area of science. The state of art is constantly updated so that know-how cannot be said to be the element of requisite degree of durability to qualify as enduring capital asset. Question of technical know-how did not amount to new or fresh venture and was for enabling carrying on business in a better way. Referring to Empire Jute's case (supra), it was observed that there may be cases where expenditure, even if incurred for an advantage of enduring benefit, may be revenue unless the advantage was in the capital field.
8. There is nothing to show that the software used by the assessee was of enduring nature and will not become outdated. Since technology is fast changing and day-by-day systems are being developed in a new way, soft ware may be needed like raw material. The view taken by the Tribunal is certainly a possible view."
Respectfully following the above decision, we allow the claim of the assessee that application software is Revenue in nature and expenditure thereon is deductible. This ground no.3 is allowed.
9. Ground No.4(a) relates to disallowance of proportionate interest of Rs.10,70,000/-. The AO disallowed proportionate interest out of interest paid on borrowed funds on the assumption that borrowed money has been used for acquisition of investment as on balance sheet date. As per AO the Company had made total investment to the extent of Rs.1008.51 lacs in the equity shares and Mutual funds. During the year the investment in shares and Mutual funds were increased from 940.32 lacs to Rs.1008.51 lacs. Out of this investment, to the tune of Rs.61 lacs, is made in subsidiary Companies namely Karamsad Investment Ltd. & Karamsad Holding Ltd. Since the assessee had purchased shares in those companies being sister concerns, the nature of investment is the same as in shares and Mutual Fund of other companies. The assessee company had earned dividend income of Rs.94.47 lacs during the year and has claimed as exempt under section 10(33). Invoking section 14A AO held that expenditure for earning exempted income cannot be allowed as deduction. Similarly, the AO identified that administrative expenditure which could have been incurred for handling the investment in shares and 8 ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others Mutual Fund. A part of such expenditure was considered attributable to investment made in sister concerns, the income therefrom was exempt under section 10(33). The assessee submitted that it has enough working capital and it has not increased its borrowings this year. Therefore, it cannot be said that investment in subsidiary was done during this year out of any borrowed capital made this year. Regarding administrative expenditure sought to be disallowed assessee submitted before the AO that there is no relationship of such expenditure with the investment activities. No specific staff has been appointed for this purpose. The AO, however, did not agree and disallowed proportionate interest by holding that assessee did not produce any evidence to show that interest free funds were alone used for making such investment in sister concerns. The assessee has not maintained separate account for making investment are out of mixed funds. There is no nexus between the investment and interest free funds. Onus is on the assessee during the year and also in earlier years that investment for earning capital gains and dividend are made out of interest free capital. After long and detailed discussion the AO disallowed pro-rata interest worked out at Rs.10.70 lacs. In addition, he also disallowed, by estimate administrative, expenditure of Rs.1,20,000/-.
10. The ld. CIT(A) confirmed the addition by holding that had the amount not invested in shares and units, the liability of Bank and Financial Institution would have reduced by that amount and amount of payment of interest would have been less. The assessee has not proved by any evidence that investment in shares was exclusively from interest free funds, as no separate account for investment in shares have been kept. Once they are mixed funds then proportionate interest has to be disallowed. For arriving at this decision the ld. CIT(A) followed the 9 ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others decision of Tribunal in H. K. Bhatt vs. ITO ITAT, Ahmedabad Bench 85 TTJ 872.
11. The ld. AR for the assessee submitted that firstly, borrowed capital has not increased this year and, therefore, investment made in the current year in subsidiaries cannot be held out of borrowed interest bearing capital. Further profit this year is Rs.11 crores. Therefore, any investment made in shares can be treated to be coming out of current profits unless AO is able to establish a nexus that investment in shares has gone out of interest bearing funds. Once there are mixed funds then presumption goes in favour of the assessee that investment in shares is out of interest free capital unless it is proved otherwise by the AO. He then referred to pages 17 & 19 of the Paper Book to point out that investment was made from the Bombay Office where there was no borrowing. It had only current account. In addition to above arguments, the ld. AR submitted that no such disallowance has been made in earlier years, therefore, following the principles of consistency no disallowance should be made this year as well.
12. In support of his arguments the ld. AR referred to the decisions of Hon'ble Punjab & Haryana High Court in the case of CIT vs. Hero Cycles Ltd. 323 ITR 518 (P & H); of ITAT Delhi Bench 'E' in the case of Minda Investments Ltd. vs. DCIT, Circle 6(1), New Delhi in ITA No.4046/Delh/2009 Asst. Year 2006-07; of ITAT, Mumbai Bench -G in the case of M/s Godrej Agrovet Ltd. vs. ACIT, Rg.10(2), Mumbai in ITA No.1629/Mum/09 Asst. Year 2005-06 & that of Hon'ble Supreme Court in the case of Munjal Sales Corpn. Vs. CIT 298 ITR 298 (SC) and Reliance Utilities & Power Ltd. 313 ITR 340 (Bom). He also referred to 10 ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others the judgments reported in 192 ITR 265 and 273 ITR 518 in support of above proposition.
13. On the other hand, the ld. DR relied on the orders of authorities below. He further referred to the decision of Punjab & Haryana High Court in CIT vs. Abhishek Industries Ltd. 286 ITR 1 (P & H) and of Hon. Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. (2010) 328 ITR 81 (Bom) and submitted that the issue regarding bifurcation of expenditure may go to the AO for determining reasonable disallowance.
14. We have considered the rival submissions and perused the material on record. In our considered view, the matter would go to the file of AO as per the decision of Hon. Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. (supra) only when it is held that some amount is required to disallowed as there is a nexus between the exempted income and investment, i.e. if Revenue is able to show that interest bearing capital has been invested in shares but where no such nexus is established the question of determining any disallowance does not arise and, therefore, matter need not be sent to the file of AO as no determination of any disallowance would be necessary. In the present case we notice that loan funds have decreased this year as compared to earlier years. Even though investments have increased from Rs.940.32 lacs to Rs.1008.51 lacs but such increase in investment cannot be linked to any borrowed funds this year as assessee has in fact not borrowed any additional fund this year. Prior to the decision of Hon. Supreme Court in the case of Hon'ble Supreme Court in S.A. Builders vs. CIT 288 ITR 1(SC) onus was considered on the assessee to show the nexus between the interest free funds and investment on which no income is earned. After S.A. Builder's case (supra) onus is considered shifted to the Revenue and AO 11 ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others has to show that interest bearing capital alone were invested in investment on which no income was earned. Hon. Supreme Court in the case of Munjal Sales Corporation vs. CIT (2008) 298 ITR 298 (SC) held where assessee had sufficient profits in the current year then interest free advances can be considered to be flowing from such profits. Hon'ble Bombay High Court in CIT vs. Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Bom) held that if there are fund available both interest free and interest bearing, then a presumption arise that investment were out of interest free funds generated or available with the assessee. If the interest free funds were sufficient to meet the investment no disallowance of interest paid on borrowed funds would be necessary. Once such presumption is established claim of interest was allowable.
15. There is another aspect of the matter. If the assessee has made investment in subsidiaries out of mixed funds and for commercial expediency then no interest out of payment made on borrowed funds can be disallowed as held in S. A. Builders Ltd. vs. CIT (2007) 288 ITR 1 (SC). Hon'ble Punjab & Haryana High Court in CIT vs. Hero Cycles Ltd. (2010) 323 ITR 518 (P & H) held that no disallowance out of interest payment is permissible if AO does not establish nexus between the expenditure incurred and income generated.
16. Since assessee had sufficient profits generated this year and it had mixed funds and no nexus is established by the AO as to whether investment was made out of interest bearing funds, disallowance of interest cannot be made. Similarly no disallowance out of administrative expenditure can be made as there is no direct nexus. As a result, this ground is allowed.
12ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others
17. Ground No.5 is not pressed by the assessee and hence it is treated as rejected.
18. Ground No.6 relates to accrued interest of Rs.8,33,185/- payable to APSEB as per order of the City Civil Court. This issue has been decided against the assessee by the Tribunal in ITA No.1400/Ahd/2001 Asst. Year 1998-99 in the case of Addl. CIT, SR-8, Ahmedabad vs. GMM Pfaulder Ltd. as under :-
"4. The second ground is pertaining to Rs.8,33,185/- being interest paid to APSEB. During the assessment proceeding, the AO noticed that the company has claimed an amount of Rs.8,33,185/- being payable to Andhra Pradesh State Electricity Board. The assessee company has claimed this deduction on account of the City Civil Court dated 16.12.1994. A copy of the said order has been filed in Asst. Year 1995-96 and 1996-97. However, the assessee company has filed petition before the Hon'ble High Court of Andhra Pradesh. The High Court has granted stay against the operation of City Civil Court's order. The AO noticed this fact and has also noticed that in Asst. Year 1995-96 and the claim of damage and interest has been disallowed in Asst. Year 1995-96 and subsequent Asst. Years. In Asst. Year 1995-96 to 1997-98 the CIT(A) has allowed the claim of the assessee company. The AO noted the fact that since the department has filed the further appeal before ITAT and in view of maintaining the consistency the AO made the addition. The CIT(A) allowed the claim of the assessee following the earlier year order. The AR filed a copy of the order of ITAT for Asst. Year 1995-96 and 1996-97 (supra) and pointed out that this issue has been decided against the assessee by the ITAT. The finding of the ITAT in para 20 & 21 which is reproduced as below :-
"We have heard both the parties and perused the material on record as well as the case law cited by rival parties. It is an undisputed fact that the assessee company had supplied a Hydrogen Plant to the Andhra Pradesh State Electricity Board (APSEB) in the year 1981. There was an explosion during the warrantee period and the Board had claimed damages amounting to Rs.2,36,38,477/- plus interest thereon in the City Civil Court at Hyderabad. The assessee had also filed counter claim. After having considered the case, the City Civil Court passed a decree in favour of the Board and against the assessee on 16th December, 1994 for 13 ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others Rs.1,63,85,973/- plus interest at 12 per cent from the date of filing the suit till the realization. The total amount of damages inclusive of interest for the period 2.9.1993 to 16.12.1994 was at Rs.1,63,85,973/-. The Court also asked to pay claim of Rs.18.83 lakhs to the assessee company. Later, the assessee company moved the Division Bench of High Court of Andhra Pradesh for staying the aforesaid decree, whereas the APSEB also filed an appeal for increased claim of Rs.3.93 crore. The Hon'ble High Court of Andhra Pradesh High Court has passed an interim order on 28.2.1995 in cross appeals of both the sides, by virtue of which decree passed in favour of the Board could not be executed. Since there is a clear direction of the Hon. High Court of Andhra Pradesh before which both the sides are in appeal with regard to enhancement of compensation from Boards side and reduction in compensation from assessee's side, and it is a case of contractual liability, therefore, in our considered view, the liability with regard to decretal amount cannot be held to be ascertained one. Therefore, the AO's action is legally correct in disallowing the claim of the assessee in this regard. Support can be taken from various decisions as cited by the ld. DR including Hon. Supreme Court decision in the case of CIT vs. Gajapatti Naidu 53 ITR 114 and Swadeshi Cotton and Flour Mills (P) Ltd. 53 ITR 134 and the decision of Hon. Madhya Pradesh High Court in the case of CIT vs. Ratlam Straw Board 152 ITR 425. This view gets further support from Hon. Gujarat High Court in the case of CIT vs. Ashwin Vanaspati Industrial (P) Ltd. 196 CTR (Guj) 117, in which following conclusion has been done:
"Disputed liability towards damages claimed by customer from assessee for the latter's failure to supply part of the contracted goods which was pending for adjudication before the sole arbitrator and was not discharged during the relevant year was not allowable as deduction."
21. In view of the above noted pronouncements and discussion held, we hold that the ld. CIT(A) was not justified in allowing the claim of the assessee with regard to contractual liability against which dispute is pending in the Hon. High Court of Andhra Pradesh during the year under consideration. As such his order is reversed and that of the AO restored."
Since the facts of the case under consideration are identical and both the lower authorities have followed their earlier orders. In view of that we find that the ITAT has decided the issue in favour of the revenue. In view of that, we also set aside the order of the CIT(A) and restore that of the AO."
14ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others Since the issue is already covered in earlier Asst. Years against the assessee, respectfully following above orders, we decide the issue in favour of the Revenue. In view of this, this ground of assessee is rejected.
19. Ground No.7 relates to assessment of interest income of Rs.19,51,000/- as income from other sources for the purpose of computation of deduction under section 80 HHC. This issue was not pressed by the ld. AR during the course of hearing and hence it is also treated as rejected.
20. Ground No.8 relates to inclusion of sales-tax and excise duty of Rs.8,13,47,795/- in total turnover for the computation of deduction under section 80 HHC. The ld. CIT(A) decided the issue against the assessee on the ground that section 145A was not in existence when decision for excluding excise duty and sales-tax was rendered. After insertion of section 145A the position has changed and, therefore, excise duty and sales-tax has to be included for the purpose of computing turnover.
21. The ld. AR submitted that section 145A will not have any effect in computing deduction under section 80 HHC because section 145A relates to computation of gross total income and whereas deduction under section 80 HHC has to be worked out on the basis of business profit which has to be computed as per accounting principles. In any case the issue is covered in favour of the assessee by the decision of Hon. Supreme Court in the case of CIT vs. Laxmi Machine Works (2007) 290 ITR 667.
22. The ld. DR on the other hand forcibly argued that the decision of Hon. Supreme Court in Laxmi Machine Works (supra) is confined to Asst. Year 1993-94 as per formula given in the statute for that Asst. Year.
15ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others It cannot be extended to other Asst. Years particularly when after insertion of section 145A legal position has changed.
23. We have considered the rival submissions and perused the material on record. The short question is whether computation of trading results as per section 145A would affect computation of deduction under section 80HHC. Section 145A was inserted by the Finance Act (No.2) 1998 w.e.f. 1.4.1999. Section 145A so inserted, would be relevant for Asst. Year 2002-03 also. It would read as under :-
[Method of accounting in certain cases.
Sec.145A -Notwithstanding anything to the contrary contained in section 145 the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head "profits and gains of business or profession" shall be -
(a) in accordance with the method of accounting regularly employed by the assessee; and
(b) further adjusted to include the amount of any tax, dutycess or fee(by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.
Explanation -for the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment.] Thus according to section 145A income chargeable under the head 'profit and gains of business or profession' shall be computed by adjusting the profit after including the amount of tax, duty, cess etc. On the other hand, deduction under section 80 HHC would be allowable to the extent of profits derived by the assessee from the export of such goods or merchandise. The mechanism for computation of profit is provided in sub-section (3). It also lays down the mechanism for computation of 16 ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others deduction allowable under that section. In other words distinction has been created between the total income of the assessee and profits derived by the assessee from the export of goods or merchandise.
Clause (baa) of Explanation defines that profits of the business means profits of the business as computed under the head 'profits and gains of business or profession' as reduced by.............Thus for the purpose of computing profits of the business same mechanism has to be adopted as is to be adopted for computing the profits under the head of 'profits and gains of business or profession' as laid down in the provisions of the Act between section 28 to 43D. It is for this reason that 90% of the sums referred to in clause (iiia) and (iiib) etc. of the section which are in the nature of brokerage, commission, rent etc. are reduced from such profits. In other words, profits under the head 'profits and gains of the business or profession' would be the profits of the business for computing deduction under section 80 HHC. Thus the same mechanism has been provided for computing profits of the business as is provided for computing 'profits and gains of business or profession'.
24. However, section 145A does not fall between section 28 & 43D but it provides a separate mechanism for valuation of purchase and sales of goods and inventory. In fact it is a deeming provision which supersedes accounting done by the assessee. If assessee has adopted exclusion principles i.e. if it has valued sale and purchase and inventories by excluding sales-tax and excise duty then by invoking section 145A the AO can direct the assessee to value purchase and sales and inventories by inclusion principle i.e. valuing the three items by including sales-tax and excise duty and then compute profits thereafter. In our considered view section 145A is a deeming section and it creates a fiction for directing to 17 ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others include sales-tax and excise duty and other taxes while drawing trading/manufacturing account even though assessee might not have done so. But for the purpose of computing deduction under section 80 HHC the profits and gains of business computed under sections 28 & 43D whether by inclusion principle or exclusion principle, would not be disturbed. In other words wherever assessee has adopted inclusion principle for accounting in its books of accounts then same has to be followed for computing profits of business for the purpose of deduction under section 80 HHC, but where assessee has followed exclusion principle then provisions of section 145A would only alter the computation of income for the purpose of computing gross total income but it will not alter computation of profits of the business computation of deduction under section 80 HHC. Section 145A as such over rides only the accounting method followed by the assessee and substitutes different figure of sales and purchases and inventories calculated on the basis of inclusion principle but such over-riding effect cannot be extended to profits of the business which is equivalent to profits and gains of business or profession as computed under section 28 to 43D. Deeming fiction cannot be extended to Chapter VIA unless it is a part and parcel of the head 'profits and gains of business or profession'. Therefore, section 145A as such will not affect the working of profits of business and, therefore, sales-tax, excise duty if not included by the assessee in its accounting method cannot be forced to be included for computing deduction under section 80 HHC. Therefore, the decision of Hon. Supreme Court in Laxmi Machine Works (supra) would be applicable even in Asst. Years subsequent to Asst. Year 1999-2000 onwards. As a result, this ground of assessee is allowed.
18ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others
25. Ground No.9 relates to inclusion of service charges in the total turnover, while computing deduction under section 80 HHC. The ld. CIT(A) followed the decision for Asst. Year 2001-02 and included services charges in the total turnover.
26. The ld. AR pointed out that Hon. Punjab & Haryana High Court has decided the issue in favour of assessee by holding that services charges would be excluded from the total turnover. He referred to the judgment of Hon. Punjab & Haryana High Court in the case of CIT vs. Nahar Export Ltd. (2008) 174 Taxman 184 (P & H) wherein it was held as under :-
"Section 80 HHC of the Income-tax Act, 1961 -Deductions -Exporters - Assessment year 2000-01 -Whether unabsorbed depreciation of earlier years is to be reduced from profits of business computed for deduction under section 80 HHC -Held, no- Whether sales tax and central sales tax would be excluded from total turnover while computing deduction under section 80 HHC -Held, yes -Whether service charges of dyeing and knitting would be excluded from total turnover of assessee while computing deduction under section 80 HHC -Held, yes."
27. The ld. DR supported the order of ld. CIT(A).
28. We have heard the parties. However, following the decision of Hon. Punjab & Haryana High Court, we decide the issue in favour of the assessee. As a result, this ground of assessee is allowed.
29. Ground No.10 - relates to allowability of deduction under section 80 HHC on sale of scrap amounting to Rs.32,29,959/-. The AO did not allow the claim on value of the scrap treating it as not forming part of business income. For arriving at this decision the AO relied on the 19 ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others decision of ITAT, SMC, Mumbai Bench in the case of Coftab Exports vs. ITO in ITA No.913/Mum/1999 wherein it appears that it is held that sale of waste material generated during manufacturing of finished goods does not form part of total turnover. The ld. CIT(A) following the order of his predecessor in Asst. Year 2001-02 included these receipts in the total turnover. The assessee has challenged this decision to include the sale of scrap in total turnover.
30. We have heard the parties and carefully perused the material on record. The assessee has referred to the decision of the Tribunal Delhi Bench-A in the case of Claas India Ltd. vs. ACIT (2008) 21 SOT 580 (Delhi) wherein it is held that scrap generated during manufacturing process if sold would only go to reduce the cost of material consumed and for computing deduction under section 80HHC same cannot be considered as part of turnover of business.
31. The ld. AR also referred to the decision of the Tribunal, Ahmedabad -B Bench in the case of Arvind Fashions Ltd. vs. ACIT in ITA No.1037/Ahd/2005 and ITA No.1304/Ahd/2005 for Asst. Year 2001-2002 ACIT vs. Arvind Fashions Ltd. pronounced on 18.12.2009 wherein it is held that sale of scrap is essential income generated from the operational activities of the assessee and, therefore, it is in the nature of business income and is, therefore, to be treated as business profit for the purpose of section 80 HHC.
32. Hon. Karnataka High Court in the case of CIT vs. Motor Industries Co. Ltd. (2010) 326 ITR 358 (Karnataka) held that while computing the total turnover for the purpose of section 80HHC the assessee is required to consider the value received on sale of scrap also as 20 ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others it cannot be excluded as the sale of scrap amounts to a turnover in domestic market. However, Hon. Madras High Court in CIT vs. Lucas TVS Ltd. (2009) 308 ITR 377 (Mad) held that source of scrap is important for deciding whether it is to be included in the total turnover for calculating deduction under section 80 HHC. In another decision Hon. Madras High Court in CIT vs. Ashok Leyland Ltd. (2008) 297 ITR 107 (Mad) (2008) 297 ITR 107 (Mad) held that if scrap does not form part of inventories then it will also not form part of turnover. From the above judgments it follows that if scrap is generated in the manufacturing process of the assessee and is considered as part of manufacturing and trading account and assessee also included the same in the gross receipt in the trading account then scrap would form part of turnover. Since as per facts available scrap has formed part of gross receipts of the assessee and it is coming out of manufacturing process and profit therefrom is included in the trading cum manufacturing account then scrap would form part of turnover. Accordingly, this issue is decided against the assessee. This ground of assessee is rejected.
33. Ground No.11 relates to CIT(A) deciding issue against exclusion of 90% of sale and scrap for the purposes of deduction under section 80 HHC.
34. We have heard the parties. Only that amounts which are of the nature of brokerage, commission, interest, rent, charges or any other receipts of similar nature as provided in sub-clause (i) of clause (baa) of Explanation to section 80 HHC will be considered for exclusion of 90% thereof. Effect of explanation (baa)(i) of section 80HHC is that if any receipt is taxable and is included in the profit and is of the nature of brokerage, commission, interest, rent, charges or amount similar to them 21 ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others then 90% thereof will be excluded. If nature of receipt included in the profits is of the type as mentioned in sub-clause (i) then 90% shall not be excluded and, therefore, 100% thereof as such would be considered for computation of deduction under section 80 HHC. Hon. Bombay High Court in CIT vs. Asian Starch Co. Ltd. (2010) 326 ITR 56 (Bom) very elaborately and clearly explained as to which type of receipts are to be excluded @ 90% and why they should be so excluded. It would be pertinent to refer to the head Notes from that judgment -
"The special deduction under section 80HHC of the Income-tax Act, 1961, is available to an assessee engaged in the export of goods or merchandise outside India to the extent of the profits specified in sub- section (1B) of the provision. Clause (a) of sub-section (3) of section 80HHC provides that where the exported goods are manufactured by the assessee, the deduction under sub-section (1) would be in accordance with the formula stated therein. The formula is that the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee. Explanation (baa) was inserted by the Finance (No. 2) Act of 1991. Under Explanation (baa), the expression "profits of the business"
means the profits of the business as computed under the head "Profits and gains of business or profession" as reduced by ninety per cent. of (a) any sums referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28 ; or (b)any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits. The profits of any branch, office, warehouse or any other establishment of the assessee situated outside India have also to be reduced. Since receipts by way of brokerage, commission, interest, rent, charges or other similar receipts have no nexus with the export activity, the Legislature thought it fit, for the purpose of deduction under section 80HHC to exclude such items from business profits. Parliament was, however, conscious of the fact that the expenditure incurred in earning the items which were liable to be excluded had already gone in to the computation of business profits. This was because the computation of business profits under Chapter IV is made by amalgamating the receipts as well as the expenditure incurred in carrying on the business. Since the expenditure incurred in earning the income by way of interest, brokerage, 22 ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others commission rent, charges or other similar receipts had also gone into the computation of business profits, Parliament thought it fit to exclude only ninety per cent. of the receipts received by the assessee in order to ensure that the expenditure which is incurred by the assessee in earning the receipts which has gone into the computation of the business profits is taken care of. In providing a simplified formula in these terms, Parliament evidently adopted a fair and reasonable statutory basis of what may be regarded as expenditure incurred for the earning of the receipts. The distortion of the profits that would take place by excluding the receipts received by the assessee which were unrelated to export turnover and not the expenditure incurred by the assessee in earning those receipts was factored in by Parliament by excluding only ninety per cent. of the receipts received by the assessee. The extent of the exclusion which is statutorily mandated by Parliament is ninety per cent. of the total receipts. This is because the expenditure which is incurred by the assessee in earning these receipts would have gone into the computation of the profits and gains of business or profession and a distortion would be caused if the entirety of the income generated from the receipts alone were to be excluded. It is in order to obviate such a distortion that Parliament mandated that ninety per cent. of the receipts would be excluded. Once Parliament has legislated both in regard to the nature of the exclusion and the extent of the exclusion, it would not be open to the court to order otherwise by rewriting the legislative provision."
Hon. Supreme Court in CIT vs. K. Ravindranathan Nair (2007) 295 ITR 228 (SC) held that independent income like rent, commission, brokerage etc. though had formed part of the gross total income had to be reduced by 90% as contemplated in explanation (baa) in order to arrive at business profit. The rationale as laid down by Hon. Supreme Court in their judgment was that profit inclusive of items which constitute independent income have no element of export turnover and are consequently liable to be excluded to the extent stipulated in explanation (baa). Legislative policy underlying the provision is that items which are unrelatable to the export activities must be excluded in the computation of business profit in order to prevent a distortion in the computation of deduction under section 80 HHC.
23ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others
35. From the above authorities what follows is that unless a receipt forms part of business profit it cannot be considered for exclusion to the extent of 90%. Secondly if a business receipt is of the nature of commission, brokerage, interest, rent or charges then 90% thereof shall be excluded from the business profits. If the receipt is directly relatable to business but it is not of the nature of brokerage, commission, interest, rent etc, no exclusion from the business profit would be given on account of such receipts. Here in the present case the scrap is business income generated from manufacturing activities and is, therefore, part of business profit but as it is not akin to commission, brokerage, interest, rent etc. any part thereof cannot be excluded from the business profit. Therefore, this ground of assessee is rejected.
36. Ground No.12 relates to exclusion of 90% of interest income of Rs.19,51,000/-. The AO excluded interest income of Rs.19,51,000/- treating it as income from other sources. Assessee wanted to treat it as business income and, therefore, wanted to exclude 90% and not 100% as done by the AO. The ld. CIT(A) also confirmed the order of AO.
37. We have heard the parties and carefully perused the material on record. Once interest income is treated as income from other sources, and there is no change to this finding as ground No.7 relating to this issue has not been pressed by the assessee then question of considering it as business income and, therefore, excluded 90% thereof as per explanation (baa) to section 80 HHC would not arise. Accordingly, this ground of assessee is also rejected.
38. Ground No.13 is general in nature and assessee has only challenged the computation of assessed income as a whole done by the AO as against the returned income. For the purposes of computation of 24 ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others deduction under section 80 HHC assessee wanted to take profits as declared by him at Rs.24,77,032/- as against business profit at Rs.63,65,406/- taken by the AO. Since various types of additions made by the AO while computing business profit have been separately agitated and considered, this ground becomes of academic interest only. The only argument of the ld. AR which requires consideration is that wherever additions are sustained then they should be taken into account while computing business profit for the purpose of deduction under section 80 HHC. We agree with the above submission and direct the AO to recomputed the deduction under section 80 HHC by considering the additions sustained in appeal while computing business profits. This ground is disposed of accordingly.
39. Ground No.14 relates to charging of interest under section 234D. The contention of the ld. AR is that interest should be charged with effect from 1.6.2003 as that section has come into statute w.e.f. 1.6.2003 only. Section 234D was inserted by the Finance Act, 2003 w.e.f. 1.6.2003. It laid down the proposition that if the amount refunded under section 143 exceeds the amount refundable on regular assessment then assessee would pay simple interest at the prescribed rate on the whole or excess amount so refunded. This provision of charging of interest will apply to all cases of refund granted but interest could be levied only w.e.f. 1.6.2003. It is so held by Hon. Kerala High Court in CIT vs. Kerala Chemicals & Proteins Ltd. (2010) 323 ITR 584 (Ker). Similar view has been taken by other Benches of the Tribunal such as Rayala Corporation Ltd. vs. ACIT (2009) 319 ITR (AT) 158 ITAT, Chennai, Sterlight Industry (India) Ltd. vs. Addl. CIT (2006) 6 SOT 497 (Mum) and Jindal Steel and Power Ltd. vs. Addl. CIT (2006) 10 SOT 106 (Del). As a result this ground is allowed in favour of the assessee.
25ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others
40. Ground Nos.15 & 16 are general in nature and hence are rejected. As a result, appeal filed by the assessee is partly allowed and partly allowed for statistical purposes.
ITA No.1241/Ahd/2006 Asst. Year 2002-03 (Revenue's appeal)41. The first issue relates to claim of bad debts. During the course of assessment proceedings the AO found that assessee company has written off debts to the extent of Rs.74,16,526/-. This amount pertained to various parties. The AO required the assessee to submit the reasons for writing off and copy of accounts showing actual writing off and efforts made to recover the amount. The assessee submitted chart showing how the amounts were written off in respect of each case. However, specific reasons for writing off in relation to several parties were not submitted. Subsequently on further correspondence, the assessee submitted some general reasons for writing off as under :-
(a) Levy of liquidated damages by the customer for infringement of the contractual terms.
(b) Rejection of material/parts supplied by the assessee,
(c) Raising of bills by mistake for supply of parts and services
during the warranty period,
(d) Levy of wrong charges in the bill, like packing charges,
(e) Weak financial position of the debtors,
(f) Cost of recovery looking to the smallness of the amount
involved, and
(g) To keep and maintain the business relations with the customers.
The AO finally held that reasons given by the assessee are general in nature, no evidence was produced so as to show any effort made by the assessee to recover the amount. Certain amounts written off pertained to Asst. Year 2000-01 & 2001-02. These amounts were not quite old. He 26 ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others also held that it is for the assessee to show that debt has become bad and each amount written off has to be considered on its merits for allowing the claim.
42. The ld. CIT(A) allowed the claim by holding that once amount is written off then it has to be allowed and where assessee is able to cover any sum then it has to be taxed under section 41(4). The ld. CIT(A) held as under :-
"3.2 I have considered the submissions of the appellant and facts of the case carefully. The appellant has emphasized that in the ledger accounts these amounts have been written off after considering that the amount is not recoverable in spite of the efforts made by the appellant company. Therefore, the conditions of 36(1)(vi) have been fully complied with. From the details of bad debt written off, I find that the amount represents reductions made by the clients' rejection of goods, rejection of packing charges, petty amounts not paid by the party, rejection of spares. I also find that the appellant has filed suit for recovery in number of cases and certain companies had closed their business and are in BIFR. The appellant has also offered the income wherever the amount has been recovered in subsequent years which have also been mentioned by the appellant and has been accepted by the AO. I have also gone through the various judgments cited by the appellant. The Gujarat High Court in the case of CIT vs. Girish Bhagwatprasad 256 ITR 772 (Guj) has held that under the provisions of section 36(1)(vii) of the Act deduction was to be allowed in computing the income referred to section 28 of the Act of the amount of any bad debt or part thereof which is written off or irrecoverable in the accounts of the assessee for the previous year subject to the provisions of sub-section (2). Under the provisions of section 36(1)(vii) as in force from 1st April, 1989 all that the assessee had to show was that the bad debt was written off as irrecoverable. Similarly in the case of ITO vs. Anil H. Rastogi ITAT, Mumbai 86 ITD 193, Shobanlal Jain vs. ACIT ITAT Delhi 79 TTJ 446 (Del). Pradeshiya Industrial & Investment Corporation of UP Ltd. vs. DCIT 54 TTJ 438 (All), Swastik Asbestos Products Ltd. vs. DCIT 89 TTJ 393, Wipro Information Technology Ltd. vs. DCIT 88 TTJ 778, DCIT vs. Catvision Products Ltd. 84 TTJ Delhi have held that as per the amended provisions of section 36(1)(vii) w.e.f. 1st April, 1989 the claim of the bad debt has to be allowed when the amount has been written off in the books of account without any 27 ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others further proof whether that has become bad. It has also been held in these cases that the appellant will have to offer the income in the year when the same is recovered u/s 41(4) of the IT Act. These all debts have arisen during the course of business and have become bad because of reasons given by the appellant. These have been duly written off in the books. Considering the above facts of the case that the amounts have been written off by the appellant in this year which is being not in doubt as per provisions of section 36(1)(vii) the above amount will have to be allowed as bad debts to the appellant. Therefore, the addition made by the AO is not justified and the same is hereby deleted."
43. We have heard the parties and carefully perused the material on record. In our considered view there is no case for interference in the order of ld. CIT(A). It is admitted position that assessee has actually written off the amounts. Once it is so then matter is squarely covered by the decision of Hon. Supreme Court in the case of TRF Ltd. vs. CIT (2010) 323 ITR 397 (SC) wherein it is held that w.e.f. 1.4.1989 in order to obtain a deduction in relation to bad debts it is not necessary for the assessee to establish that the debt in fact has become irrecoverable. It is enough if the bad debt is written off and the bad debt is irrecoverable in the account of assessee. Following the above decision of Hon. Supreme Court, we confirm the order of ld. CIT(A) and dismiss this ground of Revenue.
44. The second ground in Revenue's appeal relates to decision of ld. CIT(A) in directing the AO not to exclude 90% of other income by way of debt recovery, discount and insurance claim etc. while computing the deduction under section 80 HHC. The AO had treated those items as other income and excluded 90% thereof as per sub-clause (i) of clause (baa) of Explanation to Section 80 HHC. The ld. CIT(A) treated them as business income but not of the nature of interest, commission, brokerage, charges etc. , therefore, directed not to exclude 90% of the sum from the business profit for computation of deduction under section 80 HHC. The 28 ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others amount of bad debt recovered were Rs.7,83,377/-, insurance claim was of Rs.15,62,887/- and discount was of Rs.2,64,235/-. The ld. CIT(A) held that bad debt recovered is taxable under section 41(4) and is business income. In respect of insurance claim also held that it is business income. He followed his predecessor's order for Asst. Year 2001-02. In respect of discount also he held that it represents the concession available to the assessee from various suppliers and, therefore, it would go to reduce cost of raw material and, therefore, it would affect business income.
45. The ld. DR submitted that there is no direct nexus of these three amounts with the business of the current year and, therefore, they are other income and, therefore, 90% should be excluded as per clause (baa) of Explanation to section 80 HHC. The ld. DR pointed out that the issue regarding bad debt recovery, discount and insurance claim have been set aside to the AO in Asst. Year 2001-02 by the Tribunal's order dated 8.6.2007. Therefore, the issue in Asst. Year 2002-03 should also be restored to the file of AO for decision in accordance with his decision for Asst. Year 2001-02.
46. The ld. AR on the other hand, supported the order of ld. CIT(A).
47. We have heard the parties and considered the material before us. In Asst. Year 2001-02 the Tribunal in ITA No.2708/Ahd/2003 Asst. Year 2001-02 in the case of ACIT-4, Ahmedabad vs. M/s GMM Pfaudler Ltd. and in ITA No.2778/Ahd/2003 Asst. Year 2001-02 in the case of M/s GMM Pfaudler Ltd vs. ACIT-4, has restored the issue to the AO for fresh consideration as per following observations:-
29ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others "Revenue's appeal Ground No.1 The ld. CIT(A) has erred in law and as well as on facts in directing not consider the income from chemical testing, bad debts recovered insurance claim and discount for 90% exclusion for the purpose of calculating the deduction u/s 80 HHC.
Coming to ground no.1 of the revenue and the ground as raised in the assessee's appeal they are all pertained to computation of deduction under section 80 HHC in respect of exclusion of various items of income as raised in the grounds of appeal. Ld. Counsel for the assessee contends that the issues are covered by various Tribunal judgments as under :
i) CIT vs. Shri Ram Honda Power Equip. 289 ITR 475 (Del)
ii) DCIT vs. Harjivandas Juthabhai Zaveri 258 ITR 785 (Guj) Besides in respect of various incomes netting has to be allowed. In view thereof, both parties agreed that various case laws have been developed in respect of these items of income. Both parties also agreed that issue in respect of 80 HHC computation may set aside restored back to the file of to be decided afresh in accordance with law keeping in view various case laws including on netting of income etc. Consequently ground no.1 of the Revenue is allowed for statistical purpose. In the result, Revenue's appeal is partly allowed for statistical purpose."
Since the issue has been restored to the AO for fresh adjudication, respectfully following the above decision of the Tribunal, we restore the three matters to the file of AO for fresh adjudication in line with the decision he takes for Asst. Year 2001-02. As a result, appeal of the Revenue is partly allowed for statistical purposes.
ITA No.1926/Ahd/2007 Asst. Year 2003-04 (Revenue's appeal)48. The following grounds have been raised by the Revenue in this appeal:-
30ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others (1) The ld. CIT(A) erred in law and on the facts of the case in deleting the disallowance of Rs.46,84,621/- made on account of Bad Debts written off.
(2) The ld. CIT(A) erred in law and on the facts of the case in directing the AO to exclude sales tax and excise duty from the total turnover for the purpose of computation of deduction u/s 80 HHC of the IT Act.
(3) On the facts and in the circumstances of the case, the ld. CIT(A) ought to have upheld the order of the AO.
(4) It is, therefore, prayed that the order of the ld. CIT(A) may be cancelled and that of the AO may be restored to the above effect.ITA No.2002/Ahd/2007 Asst. Year 2003-04 (Assessee's appeal)
49. The following grounds have been raised by the assessee :-
(1) The ld. CIT(A) failed to understand the facts and circumstances of the case.:
(2) The ld. CIT(A) erred in not accepting the request of the appellant to tax the recovery of bad debts Rs.5,09,389/- u/s 41(4) of the IT Act, 1961 on the basis of the final outcome of the Department's appeal before Hon. ITAT, Ahmedabad in respect of disallowance of bad debts u/s 36(1)(vii) in asst. year 2002-03.
(3) The ld. CIT(A) erred in confirming the action of the AO not to accept the additional claims made by the assessee during the course of the assessment proceedings in respect of the provision for liquidated damages Rs.26,76,000/- and bad debts written off Rs.7,58,000/- which were included in the provision for bad debts disallowed in the return of income. The lower authorities have rejected such claim in the absence of the revised return of income.
(4) The ld. CIT(A) erred in confirming the non allowance of claim of accrued interest Rs.8,33,185/- payable to APSEB as per order of the city civil court.
(5) The ld. CIT(A) erred in accepting the AO's action to exclude 90% of interest income Rs.17,73,000/- from the business income for the 31 ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others purpose of computation of deduction u/s 80 HHC of the IT Act, 1961 as the interest payment is more than the interest income.
(6) The ld. CIT(A) erred in confirming the exclusion of 90% of sales of scrap Rs.1,03,19,875/- from the business income for the purpose of computation of deduction u/s 80 HHC of the IT Act, 1961.
(7) The appellant prays for appropriate relief on the above grounds of appeal.
(8) The appellant craves leave to add, alter, amend, substitute, or withdraw any of the above grounds of appeal as circumstances may justify.
Assessee's appeal 2003-04:
50. We first take up assessee's appeal. The first issue is general in nature and hence does not require any specific adjudication.
51. The second ground relates to taxing of bad debts recovered at Rs.5,09,389/-. The amount recovered relates to bad debt written off in Asst. Year 2002-03. The ld. CIT(A) dismissed the ground of assessee on the ground that issue regarding claim of bad debt is pending for adjudication before the Tribunal.
52. We have heard the parties. While disposing of ground no.1 in Revenue's appeal for Asst. Year 2002-03 we have allowed the claim of bad debts following the decision of Hon. Supreme Court in the case of TRF Ltd. vs. CIT (supra). Therefore, once the amount is recovered by the assessee, it is rightly taxable under section 41(4). This ground of assessee is accordingly disposed of.
53. Ground No.3 relates to claim of liquidated damages of rs.26,76,000/- and bad debt written off to the extent of Rs.7,58,000/-. The AO found that assessee has debited a sum of Rs.49,05,038/- as provision 32 ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others of bad debts which was, however, added by the assessee in computation statement. However, during the course of assessment proceedings assessee claimed a sum of Rs.26,76,000/- towards liquidated damages on the ground that liabilities were crystallized during this year. The assessee had to pay the damages on account of late delivery of goods. The AO had disallowed the claim by holding that claim was made before him through a letter only and not by way of revised return. Accordingly the AO not only decided the provision of bad debt of Rs.49.05 lacs but also disallowed the claim of liquidated damages at Rs.26.76 lacs.
54. The ld. CIT(A) confirmed the order of AO on the ground that assessee had only made provisions for liquidated damages and also bad debts. Once claim of bad debt is added back in the computation of income then no further claim of liquidated damages can be allowed. The ld. CIT(A) invoked the decision of Hon. Supreme Court in the case of Geotze (India) Ltd. vs. CIT 284 ITR 323 wherein it is held that AO does not have any power to entertain any fresh claim otherwise than by way of revised return.
55. Out of claim of bad debt AO had allowed the claim of Rs.25.39 lacs out of total claim of Rs.46,84,621/- on the ground that even though this amount was written off this year but it has been recovered and offered for taxation in Asst. Year 2004-05. The ld. CIT(A) allowed the entire claim of bad debt at Rs.46,84,621/- which was actually written off in the books and it was partly offered for taxation at the time of recovery as per section 41(4).
56. We have heard the parties and carefully perused the material on record. In our considered view the issue regarding liquidated damages requires a fresh look by the AO. He would allow the claim on actual 33 ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others basis. Wherever the other party has claimed liquidated damages against the assessee in the current year Asst. Year it should be allowed. The assessee would submit individual account and the AO will examine such accounts and take a decision as per law. This ground is allowed but for statistical purposes.
57. Regarding bad debt written off at Rs.7.58 lacs, we are of the considered view that AO will examine each account and to the extent amount is written off, the claim will be allowed as per decision of Hon. Supreme Court in TRF Ltd. vs. CIT (supra). As a result, ground no.3 is restored to the file of AO and hence allowed for statistical purposes.
58. Ground No.4 relates to allowability of claim of accrued interest payable to APSEB as per order of City Civil Court. Similar issue had arisen in Asst. Year 2002-03 as per ground no.6. Following out decision in that year, we dismiss this ground of assessee.
59. Ground No.5 this year is similar to ground No.12 in Asst. Year 2002-03 wherein issue has been decided against the assessee as above. Following our above order, we dismiss this ground of assessee this year as well.
60. Ground no.6 relates to exclusion of 90% on sale of scrap from the business income for computing deduction under section 80 HHC. In Asst. Year 2002-03 similar ground has come up as ground no.11. This issue has been decided in favour of the assessee that year. As the facts this year are similar, following that order, we decide this issue this year also in favour of assessee. This ground of assessee is allowed.
34ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others
61. Ground No.7 is general in nature and hence it is rejected. As a result, appeal of assessee is partly allowed and partly for statistical purposes.
Revenue's appeal Asst. Year 2003-04
62. Ground No.1 relates to bad debt written off. In Asst. Year 2002-03 Revenue had raised similar issue as ground no.1. The issue has been decided in favour of assessee that year. Following that order and decision of Hon. Supreme Court in TRF Ltd. vs. CIT (supra) we decide this issue in favour of the assessee and confirm the order of ld. CIT(A). This ground is accordingly rejected.
63. Ground No.2 relates to exclusion of sales-tax and excise duty from total turnover. Similar issue was taken up by the Revenue in Asst. Year 2002-03. In that year we have decided the issue against Revenue following the decision of Hon. Supreme Court in the case of Laxmi Machines Works (supra). Following that order we decide this issue in favour of assessee and confirm the order of ld. CIT(A).
64. Other two grounds are general in nature and do not require any specific adjudication. As a result, appeal filed by the Revenue is dismissed.
ITA No.12/Ahd/2008 Asst. Year 2004-05 (Revenue's appeal)65. The Revenue has raised the following grounds in its appeal:-
(1) The ld. CIT(A) erred in law and on the facts of the case in deleting the disallowance of Rs.32,58,572/- being bad debts written off.
(2) The ld. CIT(A) erred in law and on the facts of the case in deleting the disallowance of Rs.6,43,000/- on account of provision for warranty expenses.35
ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others (3) The ld. CIT(A) erred in law and on the facts of the case in deleting the disallowance of interest expenses of Rs.13,62,983/- u/s 14A and restricting the disallowance of administrative expenses of Rs.11,20,324/- u/s 14A to Rs.1,20,00/-.
(4) The ld. CIT(A) erred in law and on the facts of the case in directing the AO to exclude sales tax and excise duty from the total turnover for the purpose of computation of deduction u/s 80 HHC.
(5) The ld. CIT(A) erred in law and on the facts of the case in directing the AO not to exclude 90% of other income by way of insurance claim received of Rs.9,02,851/-, bad debt recovered of Rs.18,23,00/-, sundry credit balances written back of Rs.10.50,803/-, sales tax refund of Rs.7,32,651/-, excise refund of Rs.8,35,731/-.
(6) On the facts and in the circumstances of the case, the ld. CIT(A) ought to have upheld the order of the AO.
(7) It is, therefore, prayed that the order of the ld. CIT(A) may be cancelled and that of the AO may be restored to the above effect.
ITA No.4402/Ahd/2007 Asst. Year 2004-05 (Assessee's appeal)66. The assessee has raised following grounds in this appeal:-
(1) The ld. CIT(A) failed to understand the facts and circumstances of the case.
(2) The ld. CIT(A) erred in confirming the non-allowance of claim of accrued interest Rs.8,33,185/- payable to APSEB as per order of the city civil court.
(3) The ld. CIT(A) erred in confirming disallowance of Rs.16,52,778/-
out of total disallowance Rs.59,71,000/- of provisions of Bad debts on the ground that the appellant has received the said amount in financial year 2006-07 and therefore this amount has not become bad in this year. It is contented that since the provision has been made in respect of advances given during the course of business, the claim is allowable u/s 37(1) of the Act, there is no question of the amount becoming bad during this year.
36ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others (4) The ld. CIT(A) erred in confirming the disallowance of Rs.1,20,000/- being administrative expenses u/s 14A of the Act, considering them incurred in relation to exempted dividend income.
(5) The ld. CIT(A) erred in accepting the AO's action to exclude 90% of interest income Rs.18,14,000/- from the business income for the purpose of computation of deduction u/s 80 HHC of the IT Act, 1961 as the interest payment is more than the interest income.
(6) The appellant prays for appropriate relief on the above grounds of appeal.
(7) The appellant craves leave to add, alter, amend, substitute, or withdraw any of the above grounds of appeal as circumstances may justify.
Assessee's appeal Asst. Year 2004-05
67. We first take up assessee's appeal. The first ground of this appeal is general in nature. It does not require any specific adjudication.
68. Ground No.2 relates to claim of accrued interest payable to APSEB as per order of City Civil Court. This issue has been decided against the assessee in Asst. Year 2002-03 and 2003-04. Following our above orders for those years, we decide this issue against the assessee. This ground of appeal is rejected.
69. Ground No.3 relates to claim of bad debt. The assessee had debited a sum of Rs.59,71,000/- as provision of bad debt. Assessee also wrote back a sum of Rs.43,06,690/-. However, the AO had disallowed entire sum of Rs.59,71,000/- overlooking the fact that assessee has already wrote back a sum of Rs.43,06,693/- and what was required to be considered was only a sum of Rs.16,64,310/-. The AO had disallowed the claim on the ground that provisions of bad debt as such is not allowable. The ld. CIT(A) on the other hand found that AO had already rectified his 37 ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others order reducing the addition of Rs.43,06,690/- and further that assessee has recovered a sum of Rs.16,52,778/- out of amounts of Rs.16,64,404/-. Since most of the amounts were recovered in FY 2006-07 he held that amount has not become bad debt this year. He accordingly confirmed the addition of Rs.16,64,310/-. He also gave direction not to tax the sum in Asst. Year 2007-08 at the time of recovery thereof. He allowed the balance sum of Rs.11,626/- under section 37.
70. We have heard the parties and carefully perused the material on record. In our considered view the claim of the assessee on bad debt would be allowed on the basis of amount actually written off as per decision of Hon. Supreme Court in the case of TRF Ltd. vs. CIT (supra). This decision has already been referred above. One has not to see whether amount was recoverable or not or whether it has actually become bad debt or whether it has been recovered in subsequent year. Once particular amount of debt which has already been taken into account by computing income in earlier year or even in current year is written off then the same has to be allowed as deduction as per the ratio of Hon. Supreme Court in TRF Ltd.'s case (supra). If any amount is recovered subsequently, then the same is taxable under section 41(4). We, therefore, restore this issue to the file of AO to allow the claim of bad debt to the extent the amount is actually written off. The assessee will submit independent account to the AO and specify how and when such amount has been written off in the account of individual parties. To that extent ground raised by the assessee is allowed but for statistical purposes.
71. Ground no.4 relates to disallowance of administrative expenses of Rs.1,20,000/- under section 14A as it apparently related to exempted dividend income. The AO found that assessee has earned dividend 38 ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others income of Rs.2.97 crores and has shown investment of Rs.14.56 crores in Mutual Fund of Rs.4.05 lacs in shares during the year. Such dividend income was exempt. AO sought to disallow proportionate interest expenses and administrative expenses. In response to show cause notice assessee submitted detailed reply which is reproduced by the ld. CIT(A) in his order. Similar issue had arisen before us in Asst. Year 2002-03 as ground No.14A. We have decided this issue in Asst. Year 2002-03 in favour of the assessee. Hence following our above order, we allow this ground of assessee.
72. Ground No.5 relates to exclusion of 90% interest income of Rs.18,14,000/- for computation of deduction under section 80 HHC. In Asst. Year 2002-03 & 2003-04. Similar issues had arisen and the same have been decided against the assessee. Following our above orders, we decide this issue against the assessee this year as well. As a result, this ground of assessee is rejected.
73. As a result, appeal filed by the assessee is partly allowed and partly allowed for statistical purposes.
Revenue's appeal for Asst. Year 2004-05
74. The first ground relates to allowing claim of bad debt.
75. We have heard the parties. This issue has been restored in assessee's appeal to the AO with direction as above that actual amount written off would be allowed as deduction. Accordingly, this ground is restored to the file of AO and is allowed for statistical purposes.
76. Ground No.2 relates to deletion of a sum of Rs.6,43,000/- as provisions for warranty expenses. The assessee debited a sum of 39 ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others Rs.25,70,000/- in the P & L a/c. The AO disallowed warranty expenses for three months on proportionate basis as pertaining to the subsequent year. The ld. CIT(A) allowed the entire claim following the decision of ITAT, Bangalore in the case of Wipro Ge Medical Systems Ltd. vs. DCIT 81 TTJ 455.
77. The ld. DR submitted that claim of deduction should be properly estimated and not that any provisions made should be allowed as deduction.
78. The ld. AR also referred to the decision of Hon. Supreme Court in the case of Rotork Controls India (P) Ltd. vs. CIT (2009) 314 ITR 62 (SC) wherein the Hon'ble Court has held as under :-
"Held,_ reversing the decision of the High Court, that the valve actuators, manufactured by the assessee, were sophisticated goods and statistical data indicated that every year some of these were found defective ; that valve actuator being a sophisticated item no customer was prepared to buy a valve actuator without a warranty. Therefore, the warranty became an integral part of the sale price ; in other words, the warranty stood attached to the sale price of the product. In this case the warranty provisions had to be recognized because the assessee had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of the obligation. Therefore, the assessee had incurred a liability during the assessment year which was entitled to deduction under section 37 of the Income-tax Act, 1961.
The present value of a contingent liability, like the warranty expense, if properly ascertained and discounted on accrual basis can be an item of deduction under section 37. The principle of estimation of the contingent liability is not the normal rule. It would depend on the nature of the business, the nature of sales, the nature of the product manufactured and sold and the scientific method of accounting adopted by the assessee. It would also depend upon the historical trend and upon the number of articles produced.40
ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when : (a) an enterprise has a present obligation as a result of a past event ; (b) it is probable that an outflow of resources will be required to settle the obligation, and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized.
The principle is that if the historical trend indicates that a large number of sophisticated goods were being manufactured in the past and the facts show that defects existed in some of the items manufactured and sold, then provision made for warranty in respect of such sophisticated goods would be entitled to deduction from the gross receipts under section 37 .
Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC) and Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC) relied on.
Indian Molasses Co. (Private) Ltd. v. CIT [1959] 37 ITR 66 (SC) distinguished.
Decision of the Madras High Court in CIT v. Rotork Controls India Ltd. [2007] 293 ITR 311 reversed on this point."
79. We have heard the parties. The assessee has to submit present value of warranty expenses. It has to be properly ascertained and discounted on accrual basis. A proper calculation on this issue will be submitted to the AO who will examine the same and allow the claim as per decision of Hon. Supreme Court in Rotork Controls India (P) Ltd. (supra) as above. This ground of Revenue is allowed but for statistical purposes.
80. Ground No.3 relates to disallowance of interest expenses and administrative expenses under section 14A. Similar issue had arisen before us in Asst. Year 2002-03. In that year we have held that since assessee had sufficient profits generated this year and it had mixed funds and no nexus is established by the AO as to whether investment was made out of interest bearing funds, disallowance of interest cannot be 41 ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others made. Similarly no disallowance out of administrative expenditure can be made as there is no direct nexus. Following our above order we dismiss this ground of Revenue
81. Ground No.4 relates to issue of sales tax and excise duty for computation of deduction under section 80HHC. Similar issue had arisen before us in Asst. Year 2002-03 & 2003-04. Following our order in that year we decide this ground against the Revenue. This ground is accordingly rejected.
82. Ground No.5 relates to exclusion of bad debts recovered, sundry credit and sales-tax refund and excise refund.
83. We have heard the parties and perused the material on record. Similar issue had arisen in Asst. Year 2002-03 and 2003-04 on different items. The assessee has referred to the judgment of Hon. Bombay High Court in the case of CIT vs. M/s Pfizer Ltd. (2010) 233 CTR 521 wherein it is held that insurance claim on account of stock-in-trade would not be subject to deduction of 90% as per clause (i) of Explanation (baa) to section 80HHC.
84. In case of bad debt recovered of Rs.18,23,000/- it is to be enquired whether they are related to trade and what treatment has been given in computation of deduction under section 80 HHC when they were written off in the books of account and claim was allowed accordingly. If the bad debt directly related to trade then they would be business receipts and exclusion of 90% would not be applicable. Similarly, if sundry credit balance which were written back also related to trade then they would be business income and exclusion of 90% will not be applicable. Same is the position in respect of sales-tax and excise duty refund. They are 42 ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others apparently business receipts and they are not akin to interest, commission, brokerage charges etc. Therefore, the principle of exclusion of 90% would not be applicable. In any case the AO will examine the account and apply the principles of exclusion of 90% only in respect of those sums which are directly akin to interest, brokerage, commission, charges etc. If any recovery or receipt is directly relatable to business then exclusion of 90% will not be applicable. We accordingly restore this matter to the file of AO to decide afresh in the light of above observations. This ground of Revenue is allowed but for statistical purposes.
85. Ground Nos.6 & 7 are general in nature and hence no specific adjudication is required. As a result, appeal of the Revenue is allowed for statistical purposes.
86. In the result -
1. ITA No.1241/Ahd/2006 Asst. Year 2002-03 (Revenue's appeal) partly allowed for statistical purposes.
2. ITA No.1476/Ahd/2006 Asst. Year 2002-03 (Assessee's appeal) is partly allowed and partly allowed for statistical purposes.
3. ITA No.1926/Ahd/2007 Asst. Year 2003-04 (Revenue's appeal) is dismissed.
4. ITA No.2002/Ahd/2007 Asst. Year 2003-04 (Assessee's appeal) is partly allowed and partly allowed for statistical purposes.
5. ITA No.12/Ahd/2008 Asst. Year 2004-05 (Revenue's appeal) is allowed for statistical purposes.
43ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others
6. ITA No.4402/Ahd/2007 Asst. Year 2004-05 (Assessee's appeal) is partly allowed and partly allowed for statistical purposes.
Order was pronounced in open Court on 11/2/11.
Sd/- Sd/-
(Mukul Kr. Shrawat) (D.C. Agrawal)
Judicial Member Accountant Member
Ahmedabad,
Dated : 11/2/11/
Mahata/-
Copy of the Order forwarded to:-
1. The Assessee.
2. The Revenue.
3. The CIT(Appeals)-
4. The CIT concerns.
5. The DR, ITAT, Ahmedabad
6. Guard File.
BY ORDER,
Deputy/Asstt.Registrar
ITAT, Ahmedabad
1.Date of dictation 28/1/2011
2.Date on which the typed draft is placed before the Dictating 4/2/ 2011 Member................Other Member................
3.Date on which the approved draft comes to the Sr.P.S./P.S.............
4.Date on which the fair order is placed before the Dictating Member for pronouncement..............
5.Date on which the fair order comes back to the Sr.P.S./P.S...............
6.Date on which the file goes to the Bench Clerk...........
7.Date on which the file goes to the Head Clerk.............
8.The date on which the file goes to the Asstt. Registrar for signature on the order........................
9.Date of Despatch of the Order.................
44