Income Tax Appellate Tribunal - Panji
Dcit, Cir.-8,, Pune vs Thermax Ltd.,, Pune on 30 November, 2017
1
आयकर अपील
य अ धकरण पण
ु े यायपीठ "ए" पण
ु े म
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
BEFORE MS. SUSHMA CHOWLA, JM AND
SHRI ANIL CHATURVEDI, AM
आयकर अपील सं
. / ITA No.259/PUN/2006
नधा रण वष / Assessment Year : 2002-03
Thermax Limited, ...अपीलाथ /Appellant
Thermax House,
4, Mumbai Pune Road,
Shivaji Nagar, Pune - 411 005
PAN: AAACT3910D
Vs.
The Asst. Commissioner of Income Tax, .... यथ / Respondent
Circle-8, Akurdi, Pune
आयकर अपील सं
. / ITA No.276/PUN/2006
नधा रण वष / Assessment Year : 2002-03
The Deputy. Commissioner of Income Tax,
Circle-8, Akurdi, Pune ...अपीलाथ /Appellant
Vs.
Thermax Limited,
Thermax House,
4, Mumbai Pune Road,
Shivaji Nagar, Pune - 411 005 ... यथ / Respondent
PAN: AAACT3910D
अपीलाथ क
ओर से / Appellant by : Shri H.P. Mahajani &
Shri R.D. Onkar
यथ क
ओर से / Respondent by : Shri A.S. Singh &
Shri Rajeev Kumar
MS.
सन
ु वाई क
तार ख / घोषणा क
तार ख /
Date of Hearing : 29.11.2017 Date of Pronouncement: 30.11.2017
आदे श / ORDER
PER ANIL CHATURVEDI, AM:
1. These cross appeals filed by Assessee and Revenue emanate out of order of Commissioner of Income-Tax(A)-III, Pune, dated 30.11.2005 for assessment year 2002-03.
2
2. The relevant facts as culled out from the material on record are as under :-
Assessee is a company stated to be engaged in the business of manufacturing and selling of steam boilers, water exchangers, water treatment chemicals etc. Assessee filed its return of income for A.Y. 2002-03 on 30-10-2002 declaring total income of Rs.12,12,36,490/-.
The case was selected for scrutiny and thereafter the assessment was framed u/s.143(3) vide order dated 31-03-2005 and the total income was determined at Rs.29,23,93,033/-. Aggrieved by the order of AO, assessee carried the matter before Ld. CIT(A), who vide order dt.30- 11-2005 in (appeal No.PN/CIT(A)-III/Cir-8/39/05-06) granted partial relief to the assessee. Aggrieved by the order of Ld. CIT(A), Assessee and Revenue are both in appeal before us.
3. The grounds raised by the Assessee in ITA No.259/PUN/2006 reads as under :
"Being aggrieved by the order passed by the CIT(A) III PUNE, your appellant submits the following grounds of appeal for your sympathetic consideration.
1. EXPENDITURE IN RELATION TO DIVIDEND ETC.
The learned CIT(A) erred in confirming the action of the AO of notionally attributing expenditure to dividend and interest-free income rejecting the contention of the Appellant that no such expenditure was, in fact, incurred for earning such income and accordingly none was so attributable.
The learned CIT(A) also erred in observing that the appellant had failed to furnish the relevant information in this connection.
In any event, the estimate made by the learned CIT(A) @ 2.5% of such income is excessive and unrealistic.
2. LOSS FUNDING OF SUBSIDIARY On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the action of the AO of rejecting the claim of the appellant for deduction of loss of Rs. 160.14 lacs suffered 3 by a subsidiary of the appellant but funded by the appellant as per contractual obligations.
The learned CIT(A) erred in also observing that the said ground is not maintainable since the disallowance was in conformity with the Return of income filed by the Appellant.
3. PREMIUM ON LEASE HOLD LAND The learned CIT(A) further erred in confirming the action of the AO in disallowing Appellant's claim for deduction of amortised amount of premium in respect of leasehold land in the amount of Rs.2,41,534/-.
4. REVENUE RECOGNITION The learned CIT(A) further erred in confirming the action of the AO in increasing the Appellant's income by the amount of Rs.10989970 being the provision for profit equalization made by the Appellant in accordance with the mandatory Accounting Standard 7 issued by the Institute of Chartered Accountants of India.
On the facts and in the circumstances of the case and in law, the learned CIT(A) ought to have accepted the contention of the Appellant that it had correctly applied the said Accounting Standard and accordingly only income as accounted by the Appellant in terms of the said Standard in respect of construction contracts undertaken by it could be brought to tax under section 4 read with section 28 of the Income-tax Act, 1961.
Without prejudice to the above the learned CIT(A), based on certain conjectures and surmises, erred in directing the issue back to the Assessing Officer for determination of the actual amount of addition to be so sustained (in place of Rs.10989970), when the same was wholly uncalled for.
Without prejudice to the above the learned the CIT(A) ought to have directed the AO to allow deduction for the amount of income already brought to tax in the immediately preceding year in view of the order of the CIT(A) for that year.
5. COMPUTER SOFTWARE On the facts and in the circumstances of the case and in law the learned CIT(A) erred in remitting back to the AO to decide afresh the issue of allowability of computer software expenses of Rs. 52,31,521 on the basis of certain criteria indicated by him instead of allowing the same as revenue expenditure as claimed by the Appellant.
6. DEPRECIATION On the facts and in the circumstances of the case and in law, the learned CIT(A) further erred in confirming the action of the AO of rejecting the contention of the Appellant that it was entitled to claim depreciation @ 100% in respect of certain items of plant and machinery which were so entitled in accordance with Appendix to Income-tax Rules, 1962 and instead allowing depreciation @ 25%.4
Without prejudice to the above the learned CIT(A) erred in wrongly concluding that machinery used in the manufacture of renewable energy devices referred to in entry 3(xiii)(r) of the Appendix has itself to be in the nature of renewable energy devices and in consequently observing that the appellant had failed to adduce evidence in support of such eligibility.
The learned CIT(A) failed to notice that the claim in respect of renewable energy devices and plant and machinery used in the manufacture there of was allowed in the earlier years.
The claim of the appellant be directed to be allowed.
7. PRIOR YEAR EXPENSES:
On the facts and in the circumstances of the case and in law the learned CIT(A) erred in remitting back to the AO to decide afresh the issue of allowability of Prior Year's expenses Rs. 92.37 lacs on the basis of certain restrictive criteria indicated by him instead of allowing the same in their entirety as claimed by the Appellant.
8. LOSS ON EMBEZZLEMENT:
On the facts and in the circumstances of the case and in law the learned CIT(A) erred in holding that the appellant's claim for deduction of loss on account of embezzlement of Rs. 74,39,989/- was not allowable in its entirety claimed by the appellant and instead directing the matter back to the AO to decide on the quantum of the admissible deduction ignoring the fact that the AO had already thoroughly examined the facts on record and allowed deduction to the extent of Rs. 4,04,327/-. The total claim was of Rs. 78,44,316/-
9. ADHOC DISALLOWANCES:
On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the action of the AO of making the following adhoc and aribitrary disallowances :
Expense Head Gross Disallowance by Disallowance confirmed
Amount Assessing by CIT(A)
Officer
Public Relation 984462 50000 Rs.25000
Expenses
Membership & 2308917 115446(5%) 115000 (on the incorrect
Subscription presumption that AO had
disallowed Rs.230456)
Vehicle Expenses 12325243 Rs.616262 Rs.250000
Telephone 7947667 Rs.397383 (5%) Rs.10000
Expenses
10. DEDUCTION U/s 80HHC
In the matter of deduction u/s 80HHC the learned CIT(A) erred in:
a) Without giving the appellant an opportunity of being heard in the matter, directing the AO to re-verify the figure of total turnover based on conjectures and surmises.
Not directing the AO to exclude trading turnover of Rs.14374,000 from total turnover as claimed by the Appellant 5
b) Directing inclusion of sale of scrap and Exchange Difference as part of total turnover;
c) Confirming exclusion from eligible profits of the business claims and refunds (Rs 1,15,82,359); liquidated damages balances written off recovered (Rs.55,57,243); settlement of claim on cancellation of contract (Rs.2,50,00,000); and miscellaneous income (Rs.1,60,55,992 plus some further amount to be determined on re-verification).
d) Confirming exclusion from eligible profits of business, loss 1 expenses on foreign representative offices Rs. 3,44,90,526/- instead of accepting the contention of the appellant that loss of foreign representative offices should go to increase the" profits of the business" eligible for deduction u/s 80 HHC instead of ignoring the same.
e) Confirming reducing the profits of the business by Rs. 72.71 lacs by not allowing deduction with reference to the proportionate export incentive (DEPB ).
f) Confirming the action of the AO in reducing the profits of the business by the amount of unabsorbed losses and depreciation u/s 72A and in also observing that the appellant had not pursued this ground in appeal proceedings.
11. On the facts and in the circumstances of the case and in law and without giving the appellant an opportunity of being heard in the matter the learned CIT(A) erred in directing the AO to determined and bring to tax certain portion of Exchange Difference under the head 'Income from Other Sources' when in fact the whole of it was assessable under Business Income.
12. INTEREST U/s 234D On the facts and in the circumstances of the case and in law the learned CIT(A) further erred in confirming the action of the AO confirming levying interest under section 234D of the Act without appreciating the fact that said interest was not leviable for the year under appeal.
Your appellant reserves the right to add to amend or delete the above grounds of appeal."
4. The Revenue in ITA No.276/PUN/2006 has raised the following grounds :
1. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition made by the AO. on account of lease rent on accrued basis.
2. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in holding that the entire amount accrued to the assessee as per invoice raised is not taxable and there is no fault on following AS-7.6
3. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the disallowance of prior period expenses Rs. 92,37,000/- when in fact the assessee follows mercantile method of accounting.
4. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in not allowing set off of brought forward losses with the profit of undertaking for the purpose of computation of deduction under sec. 80IA
5. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in directing that amount of Rs. 4,56,96,827/- being "Bad debts written off - recovered" and "doubtful debts written off -
recovered" be considered under clause (baa) to Section 80HHC.
6. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in directing to exclude sales tax and excise duty from the total turnover for the purpose of calculating deduction u/s.80HHC.
7. The order of the Ld.CIT(A) may be vacated and that of the A.O. be restored."
5. We first take up assessee's appeal and to the extent where the Revenue's ground are inter-connected, the same are also considered.
6. First ground is with respect to disallowance of expenditure attributable to earning of tax free income.
During the course of assessment proceedings AO noted that assessee had claimed dividend income of Rs.8,52,00,888/- and interest on tax free bonds of Rs.61,64,383/- as being not liable to tax. The assessee was asked to furnish details of expenditure incurred to earn the aforesaid income and also show cause as to why part of administrative, overhead and managerial expenses for earning the tax free income not be disallowed to which assessee inter alia submitted that it has not incurred any expenditure towards the exempt income and therefore no disallowance of expenditure is called for. The submission of the assessee was not found acceptable to the AO as he was of the view that company had an investment of Rs.189.43 crores 7 as at the end of the year and to manage such huge investment some expenses would have been incurred. In the absence of any details submitted by assessee, AO estimated an expenditure of Rs.25 lakhs to have been incurred for earning the exempt income and accordingly disallowed Rs.25 lakhs u/s.14A of the Act. Aggrieved by the order of AO, assessee carried the matter before Ld.CIT(A) who decided the issue by observing as under :
"6.2. I have carefully considered the appellant's submissions. During the course of the appeal proceedings, the appellant was called upon to furnish details as regards the immediate sources from out of which investments in shares and tax-free bonds had been made. It was also asked to establish that such investments had been made from out of free-funds. The above information was called for as the appellant was found to have made substantial borrowals as would be evidenced by its claim of deduction towards interest which was of the order of Rs.303.72 lakhs. Therefore, the possibility that the impugned investments would have been met, whether fully or partly, from out of interest- bearing borrowed funds could not be routinely ruled out. However, the required details have not been furnished. Instead, the learned Authorised Representative merely referred to the appellate orders for some of the earlier assessment years, viz. 1997-98, 2000-01 etc., and accepted that the facts relating to the present assessment year are identical. In the said appellate orders, the Commissioners of Income-tax (Appeals) had restricted the expenditure attributable to tax- free income etc. to 2.5% of such income as against 5% adopted in the assessments. I find that the disallowance of Rs.25 lakhs made for the present assessment year, which works out to 2.74% of the total tax-free income ofRs.9.13 crores, is only marginally higher. In any case, in line with the stand taken in this matter by the predecessor Commissioners of Income-tax (Appeals), and also as the appellant has not furnished any evidences as would disprove the incurring of any expenditures, financial or otherwise, on the earning of the tax-free dividend and interest income, the expenses which could be reasonably disallowed for the present assessment year too are hereby estimated at 2.5% of the exempt income. The Assessing Officer shall recompute the disallowance accordingly."
Aggrieved by the order of Ld.CIT(A) assessee is now in appeal before us.
7. Before us, at the outset, Ld. AR submitted that identical issue arose in assessee's own case in A.Ys. 2000-01 and 2001-02 and disallowance in those years was restricted at 2.5% of the exempt income. He fairly conceded that following the order of the Tribunal in 8 the earlier years, the ground may be decided accordingly. Ld. DR did not object to the aforesaid submission of the Ld. AR.
8. We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to disallowance u/s 14A of the Act. It is an undisputed fact that during the year assessee has earned aggregate tax free income to the tune of Rs.9.14 crores (rounded off) and had not disallowed any expenditure for earning the exempt income. AO estimated the disallowance of expenses for earning exempt income at Rs.25 lacs. When the matter was carried before Ld.CIT(A), he relying on the decision of his predecessors in assessee's own case for earlier years, restricted the disallowance @ 2.5% of exempt income. We find that identical issue arose before the Co-ordinate Bench of the Tribunal in assessee's own case in A.Yrs. 2000-01 and 2001-02 (in ITA Nos.1247 & 1248/PUN/2005 order dated 30-06-2015) and the issue was decided against the assessee by holding as under :
"12. The sixth ground raised by the assessee in its appeal is with respect to the amount of expenditure attributable to dividend and taxfree interest. We find that identical ground was raised by assessee in appeal for assessment year 1998-99 before the Tribunal. The Tribunal dismissed the contentions of the assessee with following observations :-
"45. In this context, the relevant facts are that the Assessing Officer estimated 5% of gross dividend and other tax-free incomes as an expenditure incurred for earning of such income and disallowed the same. The CIT(A) following the decision of her predecessor restricted the disallowance to 2.5% of the gross income. Not being satisfied with the order of the CIT(A), assessee is in appeal before us.
46. On this aspect, the Ld. Representative for the assessee conceded that the disallowance as confirmed by the CIT(A) has been a subject matter of consideration by the Tribunal in assessment year 1997-98 and the same stands confirmed vide order dated 03.09.2014 (supra). In view of the aforesaid precedent, the action of the CIT(A) in restricting the disallowance to 2.5% of the gross income is hereby affirmed. Thus, assessee fails on this Ground."9
The Ld. AR of the assessee has fairly conceded that the issue has been decided against the assessee in earlier assessment years. This ground of appeal is dismissed, accordingly."
We thus find that the Co-ordinate Bench of the Tribunal had upheld the disallowance u/s 14A of the Act @ 2.5% of gross tax free income. In view of the Ld. AR's submission that the issue in the year under consideration is similar to A.Y. 2000-01 and 2001-02 and since in those years the issue was decided against the assessee by the Co- ordinate Bench of the Tribunal, we find no reason to interfere with the order of Ld.CIT(A) and thus the assessee's ground is dismissed.
9. Second ground is with respect to denial of deduction of loss of Rs.160.14 lakhs of subsidiary company.
AO on perusal of the Profit and Loss Account noticed that assessee had debited a sum of Rs.160.14 lakhs in respect of funding of loss on closure of Thermax Electronics Limited, the subsidiary of assessee. He also noticed that in the computation of income the assessee had added the amount but however vide letter dated 23-10- 2002 it has claimed that the aforesaid loss should be allowed as business expenditure. AO noticed that assessee had funded the losses incurred by Thermax Electronics Limited. AO was of the view that there was no commercial expediency for funding of the losses of the subsidiary except for helping it. He accordingly denied the claim of the assessee. Aggrieved by the order of AO, assessee carried the matter before Ld. CIT(A), who upheld the order of AO by holding as under :
"7.2 I have considered the ground thus raised. It is admittedly a very general one. During the course of the appeal proceedings, the appellant was asked to substantiate the contentions raised in the ground by 10 filing a copy of the contract, if any, with the subsidiary. Neither a copy of the said contract nor any other details pertaining to the issue have been furnished. In the circumstances, the ground on this score deserves to be treated as not having been established in any manner. Even otherwise, the arguments raised by the Assessing Officer are prima facie tenable. The appellant and its subsidiary are two different and independent taxable entities. Therefore, the payment made by the appellant to its subsidiary by way of funding the latter's loss cannot be allowed as a deduction either u/s.37(1) or u/s.28 merely because of the relationship between the two, and without there being anything to show that the payment had been necessitated by commercial expediency. The presence of any such commercial expediency has not even been highlighted, let alone proved. I would, therefore, hold that the stand taken in this matter by the Assessing Officer will have to be confirmed. The same is confirmed accordingly. Before concluding on this issue it may be pertinent to mention that as in the case of retention money, even in respect of loss-funding of the subsidiary, the appellant cannot be said to have had any grievance arising from the stand taken by the Assessing Officer since the latter merely proceeded on the basis of the treatment given to this issue by the appellant itself in its Return of Income and did not make any deviation therefrom. Therefore, strictly speaking, the appeal in this matter does not pass even the maintainability test. For these reasons, the ground raised by the appellant is hereby dismissed."
Aggrieved by the order of Ld.CIT(A) assessee is now in appeal before us.
10. Before us, Ld. AR reiterated the submissions made before AO and CIT(A) and further submitted that Thermax Electronics Limited was a Joint Venture between the assessee and Fuzi of Japan. Since Thermax Electronics Limited suffered losses, both the Joint Venture partners agreed to bear the losses. He further submitted that since the investment is made on the ground of commercial expediency, the resultant loss should be allowed as business expenditure. Ld. DR on the other hand supported the order of AO and CIT(A).
11. We have heard the rival submissions and perused the material on record. We find that CIT(A) while upholding the order of AO has noted that during the appellate proceedings the assessee was asked to substantiate the loss by furnishing the copy of contract with any of the subsidiary but the same was not furnished. He has further noted 11 that the presence of any commercial expediency was neither been highlighted nor was proved by the assessee and that merely because of relationship between the two, the payment cannot be allowed as deduction either u/s.37(1) or u/s.28 of the Act. Before us, assessee has not placed any material on record to controvert the findings of CIT(A). In view of the aforesaid facts, we find no reason to interfere with the order of Ld.CIT(A) and thus the ground of the assessee is dismissed.
12. Ground No.3 is with respect to disallowance of premium in respect of leasehold land.
AO on perusing the details of expenditure noticed that assessee had debited an amount of Rs.2,41,534/- being amortization of premium paid on leasehold land. AO noted that similar expenditure claimed by the assessee in earlier years was disallowed by the AO and the action of AO was also upheld by Ld.CIT(A). He therefore, by following the reasoning of AO and CIT(A)'s decision of earlier years, disallowed the claim. Aggrieved by the order of AO, assessee carried the matter before CIT(A), who upheld the order of AO, by holding as under :
"8. The next ground pertains to the disallowance of the appellant's claim of deduction of Rs.2,41,534/-, being amortization of the premium paid on lease-hold land. The appellant had made this claim as revenue expenditure by relying on the decision of the Hon'ble Karnataka High Court in the case of Commissioner of Income-tax Vs. HMT Ltd., 203 ITR
820. The Assessing Officer, however, rejected the claim by following, among other things, the decision of the Hon'ble Supreme Court in the case of Commissioner of Income- tax Vs. Govind Sugar Mills Ltd. 232 ITR 319. It was also observed by him that identical disallowances made for some of the earlier assessment years had been confirmed by the Commissioners of Income-tax (Appeals).
"8.1 In the grounds of appeal it has been argued that the Assessing Officer erred in disallowing the above claim. During the course of the appeal proceedings, however, the appellant fairly conceded that this ground is covered against it by the decision of the Hon'ble Apex Court 12 in the case of Gobind Sugar Mills Ltd., 232 ITR 319. In view of the submission thus made, the disallowance of Rs.2,41,534/- is hereby confirmed."
Aggrieved by the order of Ld.CIT(A) assessee is now in appeal before us.
13. Before us, at the outset, Ld. AR fairly conceded that identical issue arose is assesse's appeal before Tribunal in A.Ys. 2000-01 and 2001-02 and the issue was decided against the assessee. He pointed to the relevant findings of the Tribunal. He therefore submitted that the issue be decided accordingly. Ld. DR did not controvert the submissions made by the Ld. AR but supported the order of lower authorities.
14. We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to claim of amortization of premium paid for leasehold land. We find that identical issue of amortization of premium on leasehold land arose in assessee's own case in A.Yrs. 2000-01 and 2001-02. The issue was decided against the assessee by the coordinate Bench of the Tribunal by holding as under :
"8.1 The Ld. AR of the assessee fairly submitted that this issue has been decided against the assessee in assessment years 1998-99 and 1999-2000 by the Tribunal. We observe that this issue has been considered by the Co-ordinate Bench in assessment years 1998-99 and 1999-2000 and has decided the same against the assessee with the following observations :-
"15. In this context, the Ld. Representative for the assessee conceded that similar issue has been decided against the assessee by the Tribunal in the past years and in this context referred to the recent order of the Tribunal dated 03.09.2014 (supra) pertaining to assessment year 1997- 98. It was also an accepted position that the issue regarding assessee's claim for deduction of proportionate premium of leasehold land amortized and charged to the Profit & Loss Account for the year under consideration is liable to be decided in terms of the judgement of the Hon'ble Supreme Court in the case of Govind Sugar Mills Ltd. 13 vs. CIT, (1998) 232 ITR 319 (SC) against the assessee. Accordingly, the orders of the authorities below on this aspect are upheld and assessee fails."
Accordingly, ground No. 2 in the appeal of assessee is dismissed."
15. We thus find that the Co-ordinate Bench, relying on the decision of Hon'ble Apex Court in the case of Govind Sugar Mills Limited (supra) decided the issue against the assessee. Further, in view of the Ld. AR's submission that the issue in the year under consideration is similar to A.Y. 2000-01 and 2001-02 and since in those years the issue was decided against the assessee, we find no reason to interfere with the order of Ld.CIT(A) and thus the assessee's ground is dismissed.
16. Ground No.4 is with respect to addition made to the contract income.
AO noticed that assessee is a manufacturer of boilers and heat transfer equipments and undertakes the projects on contract basis and the contract normally runs over a period of more than one year. The assessee was accounting for income on such projects by following the "Projection Completion method" and was raising invoices as per the scheduled payments agreed with the clients but at the same time had created provision towards "Contribution Equalization Provision"
to adjust excess billing. During the year, the provision of contribution equalization debited to the Profit and Loss account was Rs.9,15,29,000/-. AO noticed that the excess amount realized as per the invoices was not offered as revenue receipts and to that extent profit was not offered as income. AO was of the view that since the invoices was raised as per the agreed schedule; the invoice value should be treated as revenue receipts. He further noticed that 14 identical issue arose in A.Y. 1997-98 and addition was made by AO in A.Y. 1997-98. AO therefore held that the deduction of Rs.9,15,29,000/- cannot be allowed. He accordingly disallowed the same. Aggrieved by the order of AO, assessee carried the matter before CIT(A), who upheld the order of AO, by holding as under :
"20.2 I have carefully considered the appellant's submissions. During the course of the appeal proceedings, the appellant filed at my instance project-wise contributions to the equilisation provision. The appellant also filed broad workings to show how the contributions during the relevant previous year had been worked out. These have been perused. As in the earlier years, for the relevant previous year too, the appellant recognised revenue not only in the same proportion as the actually cost incurred during the year bore to the total projected cost, but also by applying the following further percentages:
Project completion Percentage of revenue
stage recognized
Upto 33.33% Nil
33.33% to 50.00% 75%
50.00% to 75.00% 85.0%
Above 75.00% 95.0%
20.2.1 The application of the method followed by the appellant
can be seen by taking a few illustrations. In the Enviro project, the contract value of the Savo power work was of the order of Rs.66.15 lakhs. At the beginning, the cost and expenses had been estimated at Rs.57.55 lakhs. Accordingly, the contributions / profit had been projected at Rs.8.60 lakhs. By 31.3.2002, the appellant had billed the party for an accumulated amount of Rs.41.89 lakhs. The total cost / expenses upto this date amounted to Rs.32.28 lakhs thus giving an actual revenue of a Rs. 9 .61 lakhs. As per the ratio between the actual cost and the total estimated cost, the project had been completed upto 56%. Hence as per the bench-mark being followed by the appellant, only 85% of the contributions / revenue was recognisable. This worked out to Rs.4.82 lakhs as against the actual contributions / profit of Rs. 9 .61 lakhs. The excess of the actuals vis-a-vis the revenue recognition at the prescribed percentage worked out to Rs.4.79 lakhs. This was taken to the provision account. The actual profits were reduced to the above extent so as to equilise the profits with the proportionate revenue contribution as had been estimated. Yet another example may be taken. In the case of the Moser Baer-III Project, the total order value was Rs.755.14 lakhs. The budgeted expenses were Rs.493.89 lakhs leading to an estimated contribution/profit of Rs.261.25 lakhs. Year ending 31.3 .2002 was the first year of exclusion of this work. By the year end, the appellant had invoiced the contractee for an amount of Rs.100.61 lakhs. Against the net expenses of Rs.67.73 lakhs booked during the year (i.e. gross expenses of Rs.95.34 lakhs as reduced by closing stock of Rs.27.61 lakh), the actual profits worked out to Rs.32.88 lakhs. However, as the project had been completed upto the year end only to the extent 14% of the total project, the appellant 15 reversed the entire profit of Rs.32.88 lakhs by taking the same to the equalisation provision.
20.2.2 The moot question is if the appellant was justified in recognizing profit as per the above method. This presupposes a further question if Accounting Standard 7 was applicable to the projects taken up by the appellant. As already noted, both these questions have been already answered in the appellate orders in the appellant's own case for some of the earlier assessment years as well as in the cases of its sister concerns affirmatively. Even in the appellate order for the assessment year 1997-98 in the appellant's case, while confirming the stand taken by the Assessing Officer in principle, the Commissioner of Income-tax (Appeals) had all the same held that only the income which had actually accrued to the appellant could be assessed to tax and not the amounts billed by it. Coming to the orders in the cases of the sister concerns, the issue was discussed at great length in the appellate order in the case of Mis. Thermax Surface Coatings Ltd. for the assessment year 1998-99. It was held by the Commissioner of Income- tax (Appeals) that the appellant had appropriately followed Accounting Standard 7 for recognising its revenue from long-term contracts. It was also held that the said Accounting Standard 7 was binding on the Assessing Officer. The order of the Income-tax Appellate Tribunal in the case of yet another sister concern, i.e., M/s.Thermax Babcock & Wilcox Ltd., confirms the stand taken by the Commissioner of Income-tax (Appeals) in the appellate order in the case of M/s.Thermax Surface Coatings Ltd.. In fact, the decision of the Tribunal has a stronger bearing on the appellant's case in as much as the above sister concern, viz. M/s.Thermax Babcock & Wilcox Ltd., was engaged in similar works as the appellant's, i.e. designing, engmeermg, fabrication, procurement and assembling, errection, installation and commissioning of boilers. In the circumstances, the appellant cannot-be found fault with for having followed the Accounting Standard 7 in the matter of revenue recognition and, as a corollary, in making provisions for equilisation.
20.2.3 However, even where an assessee is found to be justified in following Accounting Standard 7, its actual working is not above scrutiny. Such scrutiny can also extend to examine if any part of the revenue otherwise chargeable to tax as per sections 4 / 5 of the Income-tax Act, 1961, has not been so charged on account of adherence to the Accounting Standard 7. For, where there is a conflict between law and accounting, the former must prevail. Carrying such scrutiny into the appellant's case, it has been already noted that the appellant is omitting to recognise revenue wherever completion is less than 33% of the total project. It also appears that the appellant is not considering / recognising any profit on percentage completion method in respect of contracts which are less than Rs.25 lakhs. This is certainly not correct; particularly as the appellant is billing the contractee irrespective of the percentages upto which contract execution has progressed and irrespective of the total value of the contract. It would have been a different matter if no such billings had been made. Once the billings are made and payments are also received, on the contractee being satisfied that works reflected in the bills have been actually completed, the income embedded in the bill amounts would become chargeable to tax as per section 4. Such income can by no means be put on hold or postponed by adopting y pothetical bench-marks. As already mentioned, in the appellate order in the case of M/s. Thermax Surface Coatings Ltd. for the assessment year 1998-99, the Commissioner of Income-tax (Appeals)-III, Pune, had given an identical finding. I am in agreement with the finding thus given. I am in agreement with the 16 further finding given in the said order that there is no justification for further scaling down (i.e. as shown in the table in para 20.2) towards contingencies / unforeseeable losses when given the time-frame in which the contracts are executed, no unforeseeable losses can be expected. The learned Authorised Representative has submitted that the facts in the appellant's case are similar to the facts in the context in which the Commissioner of Income-tax (Appeals) had given the above finding in the case of M/s. Thermax Surface Coatings Limited (Assessment Year 1997-98).
20.2.4 In view of the above, during the course of the appeal proceedings, the appellant was asked to make a revised working of the provision by taking all the bill amounts into consideration and irrespective of values of contracts and stages of completion, and without any scaling down. In response, the appellant filed a revised working in which the revised provision as on 31.3.2002 was shown at Rs.12,85,26,000/-. The difference of Rs.1,09,89,970/- was mainly shown in respect of two projects, viz., ACD : Rs.35,81,970/- and Cogen : Rs.74,08,000/-. In the light of the above revised working, a minimum of Rs.1,09,89,970/- will have to be disallowed towards excess provision. The correct excess may be more. For, even while the appellant has stated that wherever the method leads to higher income to be recognised than actually realised / realisable such higher income is being recognised, it appears that this has not been done. In some of the instances which were verified by me, actual contributions which are less than the revenue to be recognised as per the standard have been retained instead of substituting the same by the latter. Same applies to actual contributions which are in the negative. In some such cases, no adjustments have been carried out. Instead, the appellant has given the narration 'hold'. The above deficiencies need to be made good. It also needs to be ensured that the appellant has worked out the revised provision without applying "scaling-down". If not, the same has to be done. It is, therefore, necessary that the Assessing Officer verifies the workings made by the appellant thoroughly, and works out the excess provision in the light of the remarks given hereinabove. The excess provision as may thus be worked out shall be taken in the place of the addition made in the assessment. The Assessing Officer shall also make suitable adjustment with reference to the addition deleted by the Commissioner of Income-tax (Appeals) in the appellate order for the assessment year 2001-02. The Assessing Officer is directed accordingly. The appellant is also directed to submit before the Assessing Officer all the details / workings as have been furnished before this forum as also such other details as the Assessing Officer may require to arrive at the admissible provision."
Aggrieved by the order of Ld.CIT(A) assessee is now in appeal before us. Revenue is also aggrieved by order to the extent of relief granted by Ld CIT(A) and has therefore raised ground No.2 in its appeal. Since the grounds raised by assessee and Revenue are inter- connected, both are considered together.
17
17. Before us, Ld. AR submitted that identical issue arose before Tribunal in assessee's appeal for A.Ys. 2000-01 and 2001-02 and the issue was decided by the coordinate Bench of the Tribunal in assessee's favour by following the Tribunal order in A.Yrs. 1997-98, 1998-99 and 1999-2000. He placed on record the order of Tribunal for A.Y. 2000-01 and 2001-02 and pointed to the relevant findings of the Tribunal. He submitted that since there are no changes in the facts of the case for the year under consideration and therefore following the order of the Tribunal, the issue be decided in favour of the assessee. Ld. DR did not controvert the submissions made by the Ld. AR but however supported the order of AO.
18. We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to increasing the income to the extent of provision for profit equalization. We find that identical issue of increase in the contract income arose in assessee's own case in A.Y. 2000-01 and 2001-02 and the coordinate Bench of the Tribunal decided the issue in assessee's favour by following the Tribunal order for A.Yrs. 1997-98, 1998-99 and 1999-2000, by holding as under:
"9. The third ground raised by the assessee in appeal relates to income recognition from contract in accordance with Accounting Standard 7 of the Institute of Chartered Accountants of India (ICAI). The Revenue in cross appeal for assessment year 2000-01 has also raised this issue as ground No.1. The assessee is manufacturing boilers and heat transfer equipments on contract basis. These contracts are spread over a period of more than one year. The assessee is recognizing income of the projects, on project completion method. The assessee raises invoice on the client as per schedule of payments. The bills raised are always more than the revenue that should be recognized on the basis of project completion method. The adjustment is required to be made to adjust excess billing. The adjustment is made in accordance with AS 7 by creating a provision 'Contribution Equalization Provision'. The Assessing Officer rejected this method of making adjustment by the assessee. In the first appeal, the Commissioner of Income Tax (Appeals) partly accepted the claim of the assessee. Against the finding of the 18 Commissioner of Income Tax (Appeals), both, the assessee and the Revenue have come in appeal.
9.1 We observe that similar issue had come up in the appeal of the assessee and the Revenue for assessment years 1998-99 and 1999- 2000. The Co-ordinate Bench decided the issue in favour of the assessee. The relevant extract of the order of the Tribunal reads as under :-
"22. On this aspect, it was a common ground between the parties that in assessment year 1997-98, the Tribunal vide its order dated 03.09.2014 (supra) in the assessee's own case has upheld the stand of the assessee by following the decision of the Pune Bench of the Tribunal on a similar issue in the case of Thermax Babcock & Wilcox Ltd. vs. DCIT vide ITA Nos.157 & 158/PN/1995 dated 11.05.2001 for assessment years 1990- 91 & 1991-92. The Tribunal in its order dated 03.09.2014 (supra) noted that in the case of Thermax Babcock & Wilcox Ltd. (supra) which was a group company of the assessee, the Tribunal upheld the allowability of provision for profit equalization while recognizing incomes on application of percentage of completion method in the case of long term contracts in the light of the AS-7 issued by the ICAI. In view of the decision of the Tribunal in the assessee's own case in the preceding assessment year, we do not deal with the issue any further except directing the Assessing Officer to implement the order of the Tribunal dated 03.09.2014 (supra) on this Ground too. As a consequence, whereas Ground of Appeal of the assessee is allowed that of the Revenue is dismissed."
There has been no change in the facts and circumstances in the present year, nor there is any change in the accounting treatment given by the assessee. We do not find any reason to deviate from the view taken by the Co-ordinate Bench in assessment years 1998-99 and 1999-2000. Accordingly, this ground in the appeal of the assessee is accepted and the ground raised by the Revenue in its appeal is dismissed."
19. Before us, since both the parties have admitted that the facts of the case in the present ground are identical to that of earlier years and since in earlier years, the issue has been decided by Co-ordinate Bench of the Tribunal in assessee's favour, we therefore following the decision of the coordinate Bench of the Tribunal in assessee's own case for earlier years and for similar reasons, allow the ground of assessee and thus the assessee's ground No.4 is allowed and Revenue's ground No.2 is dismissed.
19
20. Ground No.5 is with respect to disallowing computer software expenses.
On perusing the details of expenses, AO noticed that assessee had incurred an amount of Rs.47,36,521/- towards software expenses which were debited under the head of "Miscellaneous Expenses." He also noticed that assessee had also incurred expenses of Rs.4,95,000/- on software. The assessee was asked to substantiate its claim of expenditure being revenue in nature. The assessee inter- alia submitted that the software expenses were not expected to give enduring benefit to the assessee and that software rarely last for long and therefore it considered the expenses to be of revenue nature. The submissions of the assessee were not found acceptable to the AO. He was of the view that the benefit of acquiring software gives enduring benefit and it has to be treated as capital expenditure. He also noticed that the similar software expenses incurred by the assessee in A.Y. 2000-01 were held to be capital in nature. He therefore, following the same reasoning as of his predecessor for AY 2000-01, disallowed the claim of expenses as revenue expenditure but however granted depreciation and accordingly made net disallowance of Rs.44,96,008/-. Aggrieved by the order of AO, assessee carried the matter before CIT(A), who upheld the order of AO, by holding as under :
"17.4 I have carefully considered the submissions made by the appellant. Whether software expenses should be regarded as revenue or capital is not a matter of generalization. The issue has to be decided by examining the relevant facts, viz. nature of the software acquired, the purposes for which it is acquired and the uses to which it is put. If by its nature, a software is intended to activate the hardware in the sense of making it functional, but for which the computer cannot be made use of vis-a-vis a specific function, the software will be as much in the nature of an apparatus as the hardware is. Further, if a software helps in standardization and patternization as would help avoid fresh 20 in-putting each time, it cannot be seen as any the different from a die or a pattern or a mould. Similarly, if a software is intended to be used as a tool in the manufacturing operation much as a plant is used, it cannot be seen as different from a plant. In short, the issue has to be decided by posing the question if the software is a part of and aids the profit- making apparatus or the profit-making process. If it is the former, it will be capital in nature. If it is the latter, it will be revenue in nature. As can be seen from the assessment order, the appellant had not submitted before the Assessing Officer complete details in respect of the software acquired during the year and the manner in which these were put to use. Even before this forum, only the skeletal break-up for the software expenditures have been furnished. Their actual use has not been clarified. Even the invoices or bills have not been produced. No clarification has also been given regarding the deferred revenue expenditure included in the claim. In the circumstances, it is not possible to give any finding, on the basis of the very limited details submitted by the appellant, as to whether the software expenses incurred by the appellant could be regarded as capital or revenue, and to what extent. It is necessary that the Assessing Officer calls for and examines all the relevant details and evidences and decides the issue in the light of the guidelines given hereinabove. Directed accordingly."
Aggrieved by the order of Ld.CIT(A), assessee is now in appeal before us.
21. Before us, at the outset, Ld. AR fairly submitted that identical issue arose before Hon'ble Tribunal in assessee's appeal for A.Ys. 2000-01 and 2001-02. The Hon'ble Tribunal decided the issue (in ITA Nos. 1247 & 1248/PN/2005 order dated 30-06-2015) against the assessee. He pointed to the relevant finding of the Hon'ble Tribunal. He therefore fairly conceded that following the order of the Tribunal in the earlier years, the ground has to be decided against the assessee. Ld. DR did not object to the aforesaid submission of the Ld. AR.
22. We have heard the rival submissions and perused the material on record. We find that identical issue of expenditure on computer software arose in assessee's own case in A.Yrs. 2000-01 and 2001-02. The coordinate Bench of the Tribunal while deciding the appeal for those years decided the issue against the assessee by holding as under :
21
"10. The fourth ground raised by the assessee in appeal is expenditure on computer software. The assessee during the relevant assessment period had purchased license to use computer softwares like, Windows 95, AutoCAD, MS Office, FoxPro, etc.. The assessee treated the expenditure towards purchase of computer software as revenue in nature. The Assessing Officer held the same to be capital expenditure. In the first appeal, the Commissioner of Income Tax (Appeals) confirmed the findings of the Assessing Officer.
10.1 The Ld. AR of the assessee pointed out that an identical issue was raised in the appeals for assessment years 1998-99 and 1999- 2000 by the assessee, as well as, the Revenue. The Co-ordinate Bench dismissed this ground raised in the appeals of both the parties.
10.2 A perusal of the order of the Co-ordinate Bench in assessee's own case for assessment years 1998-99 and 1999-2000 shows that the Tribunal followed the judgement of the Hon'ble Bombay High Court in the case of CIT vs. Raychem Rpg. Ltd. reported as 346 ITR 138 (Bom.) and rejected the ground raised by the assessee, as well as, the Revenue by observing as under :-
"30. We have carefully considered the rival submissions. In our considered opinion, the issue regarding the nature of the expenditure incurred on account of acquisition of software is liable to be decided in terms of the ratio of the judgement of the Hon'ble Bombay High Court in the case of CIT vs. Raychem Rpg. Ltd., 346 ITR 138 (Bom.). The Hon'ble Bombay High Court upheld the order of the Tribunal whereby the expenditure incurred on acquisition of software which did not form part of the profit making apparatus of the assessee was treated as a revenue expenditure. In the said context, it is to be noted that the CIT(A) has given a finding that expenditure of Rs.22,16,107/- was incurred on acquisition of software connected with the manufacturing operations of the assessee. Such softwares have been identified as Autocad, project management software, designing software, etc.. The assessee is in the business of manufacturing of boilers and heat transfer equipment and therefore the aforesaid softwares form part of its profits making apparatus and thus it is liable to be considered as capital expenditure in view of the judgement of the Hon'ble Bombay High Court in the case of Raychem Rpg. Ltd. (supra). Therefore, assessee's grievance against the decision of the CIT(A) 10 ITA Nos.1247 & 1248/PN/2005 ITA Nos.1290 & 1291/PN/2005 ITA No.574/PN/2007 in sustaining the addition of Rs.22,16,107/- is unjustified having regard to the judgement of the Hon'ble Bombay High Court in the case of Raychem Rpg. Ltd. (supra). Further, the CIT(A) has recorded a finding that expenditure to the extent of Rs.17,97,051/- has been incurred on acquisition of routine standard softwares such as Windows 95, MS Office, etc. which are revenue in nature. Ostensibly, assessee's business is of manufacturing of boilers and other heat transfer equipment and the aforesaid softwares merely facilitate assessee's trading operations and/or enable conduct of its business more efficiently and the same are not in the nature of the profit-making apparatus of the assessee company. Therefore, in our view, the CIT(A) made no mistake in treating the expenditure of Rs.17,97,051/- incurred on acquisition of routine standard software as a revenue expenditure. Moreover, the said decision of the CIT(A) is in line with the ratio of the judgement of the Hon'ble Bombay High Court in the case of Raychem Rpg. Ltd. (supra). In the result, the Ground of Appeal 22 No.7 of the assessee as well as the Grounds of Appeal No.7.1 & 7.2 of the Revenue are dismissed.
Respectfully following the order of Tribunal in earlier assessment years in assessee's own case, we dismiss this ground in the appeal of assessee."
23. Before us, both the parties have admitted that the facts of the case in the present ground are identical to that of earlier years. In earlier years, the Co-ordinate Bench of the Tribunal has decided the issue against the assessee. We therefore following the decision of the coordinate Bench of the Tribunal in assessee's own case for earlier years and for similar reasons, find no reason to interfere with the order of Ld.CIT(A) and thus the assessee's ground No.5 is dismissed.
24. Ground No.6 is with respect to disallowance of higher depreciation.
On perusing the depreciation chart, AO noticed that assessee had claimed 100% depreciation on plant Nos.4, 8 and 11 wherein it was manufacturing shell type boilers and absorption cooling division. AO was of the view that due to the type of equipments that were manufactured by the assessee with the aforesaid machines, the aforesaid machines per se did not qualify for higher depreciation. He accordingly disallowed the claim of additional depreciation. Aggrieved by the order of AO, assessee carried the matter before Ld CIT(A), who decided the issue by holding as under :
"19.2.1 First coming to plant No.11, i.e., absorption cooling division, which manufactures heat pumps, the stand taken by the Assessing Officer will have to be confirmed. Entry No.3(iii)(C)(c) specifically deals with heat pumps. It provides for depreciation on heat pumps at the rate of 100%. This entry will not apply to the appellant as the appellant does not own / use the heat pumps. Instead, it manufactures them. This entry also does not cover to plants and machineries manufacturing 23 heat pumps. Hence plant No.11 would fall outside the purview of entry No.3(iii)(C)( c). It is the appellant's argument that heat pumps would come under entry 3(xii)(e), i.e., air/gas/fluid heating systems. Nothing has been adduced to establish that the heat pumps manufactured by the Appellant are in the nature of such heating systems. Further, even while it has been submitted that a heat pump is also an renewal energy device, no evidences have been adduced in this regard apart from stating that it is a waste heat recovery equipment. If the heat pump is a waste heat recovery equipment the same will come under entry No.3(iii)(C)(c) in which case the appellant would not be eligible for depreciation at the rate of 100% since it is not the owner user of the heat pumps. It also needs to be mentioned that by the appellant's own submission the heat pumps require minimum electricity for running the compressor, hence the same cannot be regarded as renewal energy devices. For these reasons, the action of the Assessing Officer in rejecting the appellant's claim of depreciation on the machineries in plant No.11 at the rate of 100% and in restricting the admissible depreciation to a rate of 25% is hereby confirmed."
Aggrieved by the order of Ld.CIT(A) assessee is now in appeal before us.
25. Before us, Ld. AR submitted that identical issue arose in assesse's appeal before Hon'ble ITAT in A.Ys. 2000-01 and 2001-02. The Tribunal while deciding the appeal in ITA Nos.1247 & 1248/PN/2005 order dated 30-06-2015 has decided the issue with respect to Plant Nos.4 and 5 in favour of the assessee and Plant No.11 against the assessee. He therefore submitted that since there are no changes in the facts for the year under consideration, therefore by following the order of the Tribunal, the issue be decided accordingly. Ld. DR did not controvert the submissions made by the Ld. AR but however supported the order of AO.
26. We have heard the rival submissions and perused the material on record. The issue in the present case is with respect to allowing higher rate of depreciation on certain machineries. We find that identical issue of disallowance of high depreciation arose in assessee's own case in A.Yrs. 2000-01 and 2001-02. The coordinate Bench of the Tribunal while deciding the appeal in ITA Nos. 1247 & 24 1248/PN/2005 decided the issue partly in favour of assessee by holding as under:
"11. The fifth ground in appeal of the assessee is with respect to claim of 100% depreciation on plant and machinery. The Revenue has also impugned the findings of the Commissioner of Income Tax (Appeals) on this issue as ground No.2 in its appeal.
11.1 The assessee had claimed 100% depreciation on its plant and machinery in Plant No.3, Plant No.4, Plant No.8, Plant No.10 and Plant No.11. In the first appeal, the Commissioner of Income Tax (Appeals) accepted the contentions of the assessee in respect of all the plants except Plant No.11. The assessee has come in second appeal with respect to the claim of depreciation @ 100% in respect of item of Plant No.11. Whereas, the Revenue in its appeal has assailed the findings of the Commissioner of Income Ta the Commissioner of Income Tax (Appeals) in respect of all the plants except Plant No.11.
11.2 Similar claims were made by the assessee in respect of Plant No. 11 and the Revenue in respect of other plants (excluding Plant No. 11). The issue was decided by the Tribunal in assessee's own case for assessment years 1998-99 and 1999-2000 as under :-
"35. Now, we may first take-up assessee's claim for depreciation 100% with respect to the plant & machinery used in the manufacture of air/gas/fluid heating systems. In this context, it is clear noted that having regard to the entry 3(xiii)(r) read with 3(xiii)(e) of the Depreciation Table annexed to the Rules, plant & machinery used for the manufacture of air/gas/fluid heating systems is eligible for depreciation @ 100%. The plea of the Assessing Officer that other items in Entry in 3(xiii) contain a reference to 'solar' and therefore item (e) of Entry 3(xiii) should also be read to be referring to solar air/gas/fluid heating systems, in our view, is not justified. The Assessing Officer has attempted to read into the statute a word which is conspicuous by its absence. Therefore, in our view, having regard to the item (r) read with item (e) of Entry 3(xiii) of the Depreciation Table, the claim of the assessee has been rightly allowed by the CIT(A) and we find no force in the Ground of Appeal raised by the Revenue.
36. Now, with regard to assessee's claim for allowance of depreciation @ 100% in respect of plant & machinery used in the manufacture of heat pumps is concerned, the same has been appropriately denied by the lower authorities. The CIT(A) has rightly pointed out that machinery & plant used in the manufacture of heat pumps is not eligible for depreciation @ 100% as it does not find a place in any of the items in the Depreciation Table which is entitled for depreciation @ 100%. On this aspect, the order of the CIT(A) is hereby affirmed. Thus, Ground of Appeal No.8 of the assessee as well as the Grounds of Appeal Nos.8.1 & 8.2 of the Revenue are dismissed."
The issue raised by both the sides are identical to the one already adjudicated by the Tribunal. Both the sides have not been able to controvert the findings of the Tribunal in earlier assessment years. We find no reason to take a contrary view. Accordingly, the ground with 25 respect to claim of depreciation in assessee's appeal and the appeal of Revenue is dismissed."
27. Before us, since both the parties have admitted that the facts of the case in the present ground are identical to that of earlier years, we therefore following the decision of the coordinate Bench of the Tribunal in assessee's own case of earlier years and for similar reasons hold that assessee is eligible to claim depreciation @ 100% with respect to plant and machinery used in the manufacture of air / gas / fluid systems but is not eligible for 100% depreciation in respect of plant and machinery used in the manufacture of heat pumps. Thus the ground of assessee is partly allowed.
28. Ground No.7 is with respect to prior period expenses.
During the course of assessment proceedings AO noticed that though the assessee was following mercantile system of accounting, it had claimed expenses to the extent of Rs.92.37 lakhs which pertained to prior period. Assessee was asked to justify the claim. AO has noted that assessee had only given head-wise break up without giving proper evidence of supporting vouchers. AO was of the view that since assessee was following mercantile system of accounting, it should have booked the expenses in the respective years. He was therefore of the view that the expenses pertaining to prior years aggregating to Rs.92.37 lakhs are not allowable and accordingly 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 :
"16.2 During the course of the appeal proceedings, the appellant was asked to submit details in respect of the expenses in question. The appellant was also required to substantiate that the liability in respect of the expenses actually got crystallised during the relevant previous year itself. In response, the appellant filed a prior period income / 26 expenditure statement along with narrations in respect of the entries appearing in this statement. The appellant also filed copies of invoices, bills, credit notes, inter-office memos etc. in support of some of these entries. In the above statement, the total prior period expenses were shown as consisting of Rs.8,93,281/- towards 'materials' and Rs.83,44,235/- towards 'others'.
16.3 I find that in the appellate orders for the assessment years 1977-78 & 1985-86, the Income-tax Appellate Tribunal had allowed the appellant's claim of deduction towards prior period expenses after being satisfied that even though the expenses related to the preceding years the appellant had received the bills, claims etc. relating to such expenses only during the previous years relevant to these two assessment years. In consonance with the approach thus adopted by the Income-tax Appellate Tribunal, it is necessary to verify if the bills, invoices, claims etc. relating to the expenses which have been claimed under the head 'prior period expenses' for the present assessment year had been received during the year ended 31.3.2002. Only then the appellant's liability in respect of the expenses covered by such bills as were received during the year could be said to have been incurred during the relevant previous year.
16.3.1 It has been mentioned by the Assessing Officer that at the time of the assessment supporting evidences and vouchers had not been filed. Even the details filed before this forum are not complete. No doubt, on the basis of some of the details and supporting evidences filed, liability in respect of some of the expenses appear to have got crystallised during the relevant previous year only. Examples are - commission on sales: Rs.6,15,576/-; domestic sales-spares :
Rs.2,84,673/-; legal and professional charges : Rs.9,97,500/-; accessories purchases and non modvat projects: Rs.50,670/-; site expenses: Rs.9,636/-; site expenses: Rs.20,000/-; legal and professional charges: Rs.30,000/-; premium on forward contract and reversal: Rs.76,640/- etc. But some other expenses also appear to be prima facie inadmissible as the credit notes, bills etc. relating thereto seem to have been received prior to the relevant previous year. Examples are - domestic sales-spares: Rs.l,87,757/-; Material purchase-site: Rs.l5,652/-; material purchase - Non-modvat project: Rs.2,31,540/-' legal and professional charges: Rs.21,762/-; customer- relation expenses: Rs.25,983/- etc. As for some other expenses, the appellant has not furnished any details or evidences to substantiate their crystallisation during the relevant previous year. Examples are - Shri R.V.Ramani-loan remission - gross of tax: Rs.37 lakhs; purchase trade - domestic: Rs.5,90,899/-; commission on sales - franchise: Rs.2,11,365/-; drawings and designings : Rs.6,41,695/- etc. These are not exhaustive. In these circumstances, it is appropriate that this issue goes back to the Assessing Officer who shall examine the evidences in respect of each and every prior period expenses and to the extent that the expenses are found to have got crystallised during this year itself in view of late receipt of bills, invoices, statements, credit notes etc. or late-booking of expenses due to factors beyond the control of the appellant etc., he shall allow the same as deduction. The appellant's claim in respect of the balance expenses, i.e., expenses which are not proved as crystalled during the relevant previous year, or, expenses in respect of which no evidences are furnished, shall be disallowed. As the issue is thus being remitted to the Assessing Officer with specific directions, the observations made earlier on regarding the prima facie admissible and inadmissible expenses should be seen as mere observations and not as decisions."27
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 thus raised ground No.3 in its appeal. Since the ground raised by assessee and Revenue are inter-connected, both are considered together.
29. Before us, Ld. AR submitted that CIT(A) had directed the AO to allow deduction of such expenses which have got crystallized during the year but were booked belatedly due to factors beyond the control of the assessee. He submitted that in the appellate giving effect order the AO has granted partial relief i.e., to the extent of Rs.43.85 lacs. As far as the allowing of the balance expenditure, Ld. AR submitted that in A.Y. 1977-98 & 1985-86 identical issue arose in assessee's own case and the expenses was allowed by the coordinate Bench of the Tribunal. He further submitted that considering the nature of expenses, the entire expenses should have been allowed, more so, when assessee was following consistent accounting policy. He further submitted that identical issue arose in assessee's group concern and the issue was decided in assessee's favour. He placed on record the copy of Tribunal order in the case of Thermax Surface Coatings Ltd., in ITA No.1211/PN/1997 dt.26.08.2005. Ld. DR on the other hand supported the order of AO and submitted that since assessee was following mercantile system of accounting it should have debited the expenses in the respective years. He also placed reliance on the decision of Hon'ble Madras High Court in the case of Fertilizers Vs. CIT reported in (2009) 8 ITR 174.
28
30. We have heard the rival submissions and perused the material on record. We find that CIT(A) while granting partial relief has noted that some of the expenses got crystallized during the year and therefore he directed the AO to allow the same. He also noted that for some of the expenses the relevant invoices, bills, statements etc., were received prior to the relevant previous years and for some of the expenses assessee did not furnish any details or evidence to substantiate the crystallization of the liability during the year under consideration. He further directed the AO to consider the evidence and thereby granted partial relief to the assessee. Before us, assessee has not placed any material on record to controvert the findings of Ld. CIT(A) nor has placed the details of expenditure to substantiate its stand that the liability got crystallised during the year under consideration. Before us, assessee has also not placed the details of expenses. Before us, Revenue has also not placed any material to point out any fallacy in the findings of Ld.CIT(A). In such a situation, we find no reason to interfere with the order of CIT(A) and thus the ground No.7 of the assessee is dismissed and likewise the ground of Revenue is also dismissed.
31. Ground No.8 is with respect to loss of amount on embezzlement.
During the course of assessment, AO noticed that assessee had debited a sum of Rs.78,44,316/- under the Head of Miscellaneous Expenditure on account of loss by embezzlement at its Regional Head Office at Mumbai. The assessee was asked to give the details of such loss and justify the claim as expenditure. AO after considering the submissions of the assessee noticed that the loss for the year was 29 only Rs.4,04,327/- and loss of Rs.74,39,673/- pertains to earlier period. He was of the view that the loss pertaining to earlier years should be adjusted against the income of the respective year. He accordingly disallowed the loss of Rs.74,39,673/-. Aggrieved by the order of AO, assessee carried the matter before Ld CIT(A), who decided the issue by holding as under :
"10.3 I have carefully considered the submissions made by the appellant and the factual details and other documents filed by it. In the light of the information and materials available in the above documents, there can be little doubt that embezzlement had been caused by senior officials of the appellant company who had been entrusted with responsibilities relating to accounts. In the circumstances, the loss resulting from such embezzlement must be said to have arisen in the course of the appellant's business activities. Consequently, such loss will have to be considered as trading loss and allowed as deduction. Even the AO has not questioned the deductibility of the loss per se. He has also not questioned the appellant's claim that the embezzlement was detected only during the relevant previous year. Therefore, admissibility of the loss arising to the appellant as a result of the embezzlement will have to be upheld in principle.
10.3.1 As already noted, the Assessing Officer has restricted the deduction only to such loss as related to the previous year relevant to this assessment year. In this connection, he has relied upon the decision in the case of Bombay Forgings Pvt. Ltd. Vs. Commissioner of Income-tax, 206 ITR 562. I am afraid, there is nothing in this decision as would support the Assessing Officer's stand. In the above case, the Hon'ble court held that as embezzlement had taken place during the relevant previous year, and the loss arising thereon had also been duly reflected in the books of account by omitting the value of the embezzled goods from sales as well as from losing stock (of the assessee) while preparing the final accounts, the fact that the loss was detected during the subsequent previous year would not be relevant. The facts in the present case are not similar. On the other hand, there are plethora of decisions, some of which have been already cited earlier on, as well as two circulars of the Board, to the effect that the entire loss arising on embezzlement should be allowed in the assessment year relevant to the previous year in which embezzlement is detected even though the loss actually relates to other years. Therefore, the stand taken by the Assessing Officer that only the loss relating to the present assessment year could be allowed as deduction is without any basis. The same is accordingly negatived.
10.3.2 Even while the appellant's claim is admissible in principle, it however appears, on the basis of the details and facts which are available and which have been filed, that the. entire claim of Rs.78 lakhs is not deductible. By the appellant's own submission, the quantum of the fraud amount as per the confirmations received from the bankers is Rs.93,86,463/-. This is less than the gross claim of loss of Rs.1,03, 12,693/-. Further, the above confirmed amount of 30 Rs.93,86,463/- includes a sum of Rs.3,82,523/- with the narration "details of other deposits in Memon Cooperative Bank, Jogeshwari Branch". It is not self- evident that these deposits had emanated from the appellant's account. It also includes a sum of Rs.8,63,687/- with the narration "cheques drawn from Bank of Baroda during April, 1997 to October, 1998". The statement in respect of the above amount does not contain any details regarding the cheques. Therefore, it can not be merely presumed that such cheques had been prepared and drawn from the appellant's account fraudulently. There is another reason as to why the amount of loss claimed by the appellant can not be routinely taken as correct. In the statement showing the loss of Rs.1,03,12,693/-, which includes the amount of Rs.8,63,637/- referred to supra, several amounts are not supported by any cheque numbers. Such instances aggregate to Rs.19,92,319/- (not including the sum of Rs.8,63,638/-). In the absence of cheque numbers, it cannot be presumed that the above amounts represented misappropriation of the appellant's own funds. Even the other statement showing withdrawal of funds by Shri Lucas D'souza, his family members and the other employees from the account of M/s.Madhav Electricals in the Memon Cooperative Bank, Jogeshwari Branch, casts doubts on the correctness of the loss claimed by the appellant. Out of the total withdrawal of Rs.94,33,619/-, there is no information as regards payees to the extent of Rs.11,31,200/-. While the deficiencies in the various statements illustrated hereinabove will have a bearing on the quantum of the loss claimed by the appellant, for the purpose of allowing deduction even the recoveries will have to be taken into account. It has been submitted by the appellant (during the course of the appeal proceedings) that recoveries to the extent ofRs.27.5 lakhs had been already made and recovery of a further amount of Rs.20 lakhs was expected shortly. It is also seen that the police had recovered from the accused property to the tune of Rs.50,83,000/-. It is not known if any part of the recovered property has since been permitted by the Court to be appropriated by the appellant. In these circumstances, I have to hold that even while the appellant's claim of deduction is admissible in principle, the quantum of the admissible deduction needs to be worked out on a thorough examination of the facts available on records as also such other facts and evidences as may be furnished by the appellant. The Assessing Officer is hereby directed to collect all the relevant facts and evidences and determine the admissible loss."
Aggrieved by the order of Ld.CIT(A) assessee is now in appeal before us.
32. Before us, Ld. AR reiterated the submissions made before AO & Ld.CIT(A). He submitted that against the total loss of Rs.78,44,316/-, AO allowed the claim of Rs.4,04,327/- during the assessment proceedings and later while giving effect to the order of Ld.CIT(A) allowed loss of Rs.64,82,136/- and thus the issue before Hon'ble Tribunal is with respect to loss of Rs.9,57,853/-. He submitted that in 31 principle the AO and Ld.CIT(A) have both held that the loss is allowable. AO allowed only loss relatable to the year under assessment. Ld.CIT(A) had allowed the loss since it was discovered during the year except for some items for want of details / narration etc. He further submitted that the entire loss have been written off in the accounts as reflected in the police complaint filed by the assessee on 04.04.2002 (the copy of which is placed at page 92 of the Paper Book) and therefore the entire loss should be allowed. Ld. D.R. on the other hand supported the order of AO and submitted that in the absence of any details, the entire loss cannot be allowed.
33. We have heard the rival submissions and perused the material on record. We find that Ld.CIT(A) while restoring the issue to determine the loss has noted that several amounts shown in the loss were not supported by any cheque numbers or any details. He thereafter remitted the issue to AO to verify the facts and allow the loss. We find that to the extent assessee furnished the required details, the loss was allowed by AO. It is also a fact that the Assessee has filed police compliant. It is an undisputed fact that the loss has arisen on account of embezzlement and the Assessee has also filed a police complaint. We find that the H'ble Apex Court in the case of Associated Banking Corporation Of India Ltd. v. CIT [1965] 56 ITR 1, has observed that the loss by embezzlement must be deemed to have occurred when the assessee came to know about the embezzlement and realised that the amounts embezzled could not be recovered. In the present case, it is not the case of the Revenue that the loss has not arisen during the course of business or is not incidental to business or the view of the assessee that the loss is not recoverable is 32 incorrect. In view of the aforesaid facts, we are of the view that the loss on account of embezzlement is allowable. Since the Ld CIT(A) has already allowed the loss to the extent of Rs 64,82,136/-, we direct the AO to allow the balance loss of Rs.9,57,853/-. Thus the ground No.8 of the assessee is allowed.
34. Ground No.9 is with respect to disallowance of expenses.
AO noticed that assessee had claimed Rs.9,84,462/- as Public Relation Expenses. AO was of the view that since the assessee failed to establish its reasonableness with supporting evidence therefore the reasonableness and genuineness of the entire transactions were not fully verifiable and therefore he disallowed a sum of Rs.50,000/- on adhoc basis. AO also noticed that assessee had claimed Rs.23,08,917/- being expenses of Membership and Subscription. In the absence of documentary evidence, AO held that the expenses were not fully verifiable and that they were for the purpose of business. He accordingly disallowed the disallowance of Rs.1,15,446/- (being 5% percent of expenses). With respect to Vehicle Expenses, AO noticed that assessee had debited Rs.1,23,25,243/- on account of vehicle expenses. In the absence of details of expenses i.e., bills, vouchers etc, AO held that the reasonableness and the genuineness of the expenses were not verifiable and the element of vehicle for perusal use cannot be denied. He accordingly disallowed Rs.6,16,262/- of the expenses (being 5% of expenses). AO also noticed that assessee had claimed Telephone Expenses of Rs.79,47,667/- being expenses of telephone installed at the residence of its executive. He was of the view that the personal use of the telephone cannot be ruled out. He 33 accordingly disallowed Rs.3,97,383/- (being 5% of residential telephone expenses). Aggrieved by the order of AO, assessee carried the matter before Ld CIT(A), who decided the issue by holding as under :
"11. The next ground relates to the disallowance of a sum of Rs.50,000/- from out of the appellant's claim of deduction towards public relation expenses which was of the order of Rs.9,84,462/-. The Assessing Officer noticed from the details filed before him that these were in the nature of sales promotion expenses which also included small gifts, lunch with guests, etc. It was held by him that in the absence of supporting evidences to establish that the above expenses had been exclusively incurred for the purpose of business, a certain disallowance was called for. He estimated such disallowance at Rs.50,000/-.
11.1 The appellant has argued that the Assessing Officer ought not to have made the above disallowance in an adhoc manner. During the course of the appeal proceedings, a copy of the relevant account was filed in respect of each division. Most of the expenses are seen to be in the nature of canteen expenses incurred on giving canteen coupons to the customers; lunch to customers, guests etc.; conference expenses; and other guest charges incurred on gifts given to guests.
11.2 In so far as lunch and conference expenses etc. are concerned, no part thereof can possibly be attributed to non-business purposes. However, the same can not be said of gifts given to the guests and the other guest expenses. It is not prima facie evident from the account that all the guests to whom gifts had been given and on whom guest charges had been incurred were having business connections with the appellant. In the circumstances, and also considering the total amount incurred on the guests, I am of the opinion that a small part of such expenses can be validly subjected to disallowance. It would also be relevant to mention here that some of the guest charges included in this account related to February, 2001, and, therefore, cannot even be considered for this assessment year. On a reasonable basis, the disallowable sum is hereby estimated at Rs.25,000/-. The addition made on this score is reduced accordingly.
12.2 I have carefully considered the submissions thus made. I have also perused the relevant accounts, copies of which were filed during the course of the appeal proceedings. The garden expenses account does not show any capital expenditure. The expenses were mostly in the nature of garden maintenance expenses. I also find merit in the appellant's submission that these expenses had to be necessarily incurred for adding to the decorum and ambience of the factory and office set-up and, therefore, should be considered as revenue. I would accordingly hold that the Assessing Officer was not justified in making any disallowance with reference to the garden expenses. Even the miscellaneous expenses account shows that most of the major expenses were in the nature of expenses incurred in the branch offices abroad such as in Bangladesh, Indonesia, Malaysia, etc. There were 34 also small pooja expenses, expenses incurred on stamps, and other incidental expenses. Prima facie, there is nothing in this account as would justify a disallowance. -Coming to the house magazine expenses, the account clearly shows that these expenses had been incurred on the publication of two magazines, 'Kshitij' and 'Fire-side'. The appellant also submitted a copy each of these magazines for perusal. It is only the membership and subscription account which shows a few items which are prima facie not admissible. Examples are the BCCI membership fees of Rs.22,000/-, 'listing fees' of Rs.l,40,250/- which have not been clarified, and, membership fees and subscription' of Rs.6,44,205/- (vide entry dated 31.1.2002) in respect of which no specific details have been furnished. In the light of the above analyses of the relevant accounts, I would hold that the Assessing Officer would have been justified in making some disallowance only in respect of the membership and subscription expenses. At the rate of 5% estimated by the Assessing Officer himself, the disallowance with reference to the membership and subscription expenses would work out to Rs.1,15,446/- . This is rounded off to Rs.1,15,000/-; and, accordingly, out of the disallowance of Rs.2,30,456/- made by the Assessing Officer, disallowance to the extent of Rs:1,15,000/- is hereby confirmed. The balance disallowance is deleted.
13.1 During the course of the appeal proceedings, the appellant filed copies of the vehicle expenses account running into several pages. The appellant also filed specimen copies of forms No.16 to show that perquisite value of use of motor cars had been duly included in the taxable salary of the concerned employees. It was accordingly submitted that the Assessing Officer should not have made any disallowance from out of the subject claim.
13.2 I have carefully perused the account. The first thing to be noted is that a few entries are not supported by any narration whatsoever. Examples are: 30.04.2001 Rs.17,337; 31.05.2001 Rs.3,200/-; 29.06.2001 Rs.10,271/-; 1.08.2011 Rs.7,080/-; 3.09.3011 Rs.4,994/- + Rs.3,325/-; 30.09.2001 Rs.9,080/-; 5.11.2001 Rs.8,180/-; 13.11.2001 Rs.3,200/-; 4.12.2001 Rs.8,905/-; 1.1.2002 Rs.11,805; 7.2.2002 Rs.10,422/-; 01.03.2002 Rs.10,466/-; 31.03.2002 Rs.7,691/-; 13.12.2001 Rs.5,500/-; 16.08.2001 Rs.7,035/-; 25.02.2002 Rs.3,500/-; 23.05.2001 Rs.10,916/-; 22.05.2001 Rs.2,813/-; 23.08.2001 Rs.5,929/-; 02.11.2001 Rs.4,215/-; 11.02.2002 Rs.3,500/-; 16.02.2002 Rs.2,717/-; etc. Here, amounts less than Rs.2,000 have not been mentioned. In the absence of any narration, the above amounts would certainly be liable for disallowance. I also find that the account contains certain provisions which have not been reversed / adjusted, e.g. provision of Rs.50,000/- for the assessment year 2001-02, a few other provisions made on 31.03.2002 etc. The above provision amounts to the extent not supported by bills or not being expenses actually incurred would qualify for disallowance. Having observed as above, I would all the same mention that the Assessing Officer was not justified in routinely making a percentage-based estimate working out to a substantial disallowance. No specific details have been mentioned in the assessment order in support of such a huge disallowance. On the basis of the infirmities which have been enumerated hereinabove on a sample basis, I am of the opinion that out of the appellant's claim of deduction towards vehicle expenses, a sum of Rs.2,50,000/- can be reasonably disallowed for want of supporting narrations / evidences. The disallowance made in the assessment in this matter is accordingly substituted.35
13.2.1 The issue has been decided as above on a scrutiny of the relevant account and without drawing any adverse inference on personal use of vehicles by the directors and other senior employees since the sample copies of forms No.16 show that perquisite value of use of motor cars had been duly considered in their hands.
14. The next ground relates to the disallowance made from out of the appellant's claim towards telephone expenses. As already mentioned, the AO made such disallowance with reference to the charges incurred on the residential telephones only. It was held by him that since the appellant could not produce any bills, vouchers or other documentary evidences in support of the claim, the plea that the expenses had been incurred wholly and exclusively for the purpose of business was not amenable to verification, and, moreover, personal use could not be ruled out altogether.
14.1 During the course of the appeal proceedings, the appellant filed copies of the relevant account. The appellant also filed a couple of cash payment vouchers showing recoveries made towards personal calls. I have perused the above. No doubt the account shows residential telephone charges in several instances. The Assessing Officer himself has quantified the total expenses on residential telephones at Rs.79,47,667/-, the correctness of which has not been disputed by the appellant. Needless to say, use of residential telephones for personal purposes as well can be safely assumed. It is only the extent of use which is a matter of degree. As for the appellant's plea that it had made recoveries from the employees, I find from the sample vouchers that such recoveries had been made only in nominal amounts. The basis on which such nominal amounts were worked out has not been clarified. Therefore, it is difficult to accept that the entire charges attributable to personal or non-business calls had been recovered from the directors / employees. The appellant has also not furnished details of the total recoveries made. For these reasons and also allowing due margin for the factum of recovery, the expenses attributable to non-business / personal use of residential telephone is hereby estimated at Rs.1 lakh. The disallowance of Rs.3,97,383/- made in the assessment is reduced accordingly."
Aggrieved by the order of Ld.CIT(A) assessee is now in appeal before us.
35. Before us, Ld. AR reiterated the submissions made before AO and Ld.CIT(A) and further submitted that from A.Y. 2004-05 onwards Ld.CIT(A) has allowed full expenditure and no disallowance has been made. He further submitted that the AO has not pointed out any expenses which were not allowable and has proceeded to disallow the expenses on ad-hoc basis. As far as the disallowance of vehicle expenses are concerned, he submitted that since the assessee was a listed company, there was no element of personal expenses involved 36 and for the aforesaid proposition, he relied on the decision of Gujarat Hon'ble High Court in case of Sayaji Iron & Engg. Co. Vs. CIT 253 ITR 749 (Guj). He therefore submitted that the disallowance be deleted. Ld.D.R. on the other hand, submitted that in the absence of full details, AO was justified in disallowing expenses.
36. We have heard the rival submissions and perused the material on record. In the present case, we find that the disallowance of expenses under various heads has been made by the AO on adhoc basis. Ld.CIT(A) has granted partial relief to the assessee. With respect to disallowance of vehicle expenses, the AO disallowed the expenses for the reason that personal use of expenses cannot be ruled out. It is an undisputed fact that the assessee is a limited Company. With respect to a disallowance of expenses being personal in nature in case of limited company, we find that Hon'ble Gujarat High Court in the case of Sayaji Iron and Engineering Company (supra) has held that a limited company by its very nature cannot have personal use. In the absence of any contrary binding decision in favour of Revenue, we relying on the aforesaid decision of Hon'ble High Court of Gujarat in the case of Sayaji Iron & Engg. Co. (supra), hold that no disallowance of vehicle expenses on account of being personal in nature is called for in the present case. As far as the disallowance of other expenses on adhoc basis is concerned, we find that AO has not pointed out any expenses which are not for the purpose of business. Further it is not in dispute that the assessee's books of accounts are regularly maintained, audited and no discrepancies have been pointed out by the Auditor or the Revenue. The disallowance has been made on adhoc basis. Before us, assessee has submitted that no such 37 adhoc disallowance has been made in subsequent years in scrutiny proceedings and this fact has not been controverted by Revenue. Considering the totality of the aforesaid facts, we are of the view that no disallowance of expenses on adhoc basis is called for in the present case and thus the ground of the assessee is allowed.
37. Ground No.10 is with respect to deduction u/s 80HHC of the Act.
During the course of assessment proceedings, AO noticed that assessee had claimed deduction of 4,97,36,000/- u/s 80HHC of the Act. On perusing the details of deduction, he noticed that assessee had not included excise duty and sales tax collected in the total turnover. He was of the view that the sales tax and the excise duty was part of turnover and should have been considered as part of total turnover in view of Hon'ble Apex Court's decision in the case of Chowringhee Sales Bureau Pvt. Limited (87 ITR 542). He also noticed that while calculating deduction u/s 80HHC the trading export of Rs.1,43,74,000/- was not included in the total turnover while computing deduction u/s 80HHC of the Act. He also noticed that the assessee had earned income from sale of scrap, settlement of claim on order cancellation, exchange difference, miscellaneous income, balances written off earlier recovered in the year etc., aggregating to Rs.16,65,72,358/- (details of which are placed at Page 17 of the assessment order). AO was of the view that the aforesaid income should have been excluded while calculating deduction u/s 80HHC. AO therefore re-worked the deduction u/s 80HHC and computed the deduction at Rs.88,71,692/- as against the claim of Rs.4,97,36,000/- 38 made by assessee. Aggrieved by the order of AO, assessee carried the matter before Ld.CIT(A) who granted partial relief to assessee by holding as under :
"23.2 First coming to the excise duty and sales tax collections, the inclusion made by the Assessing Officer of such collections in 'total turnover' will have to be negatived. The Hon'ble Supreme Court have since rejected the Special Leave Petition filed by the Department against the decision of the jurisdictional High Court in the case of Sudarshan Chemical Industries Ltd. The above decision of the jurisdictional High Court has also since been followed in a few other cases. In the case of Commissioner of Income-tax Vs. Chloride India Ltd., 53 ITD 180/256 ITR 626, being one such case where the decision in the case of Sudarshan Chemical Industries Ltd. was followed, the Hon'ble Calcutta High Court had the occasion to analyse the earlier decision of the Hon'ble Supreme Court in the case of McDowell & Co. Vs. Income-tax Officer, (1985), 154 ITR 148, wherein it had been held that excise duty collections would form part of turnover. The Hon'ble Calcutta High Court held that as the Hon'ble Apex Court had rendered the decision in the McDowell & Co. case in the context of the Sales Tax Act, a separate enactment altogether, the interpretation of turnover given therein could not be applied to interpret the expression "total turnover" used under the Income-tax Act, 1961. Accordingly, the Hon'ble Calcutta High Court rejected Revenue's appeal for inclusion of sales tax and excise duty in "total turnover" for the purpose of computing deduction u/s.80HHC. Respectfully following the above decision of the Hon'ble Calcutta High Court as well as the decision of the jurisdictional High Court, the Assessing Officer is directed to recompute the deduction admissible to the appellant u/s.80HHC after excluding the excise duty and sales tax collections from "total turnover".
23.3 As for trading exports, inclusion thereof in 'total turnover' can not be questioned in principle. However, all the facts relating to this issue have not been mentioned in the assessment order. I find from the annexure to the report in Form No.10 CCAC that the appellant had shown "trading exports" at Nil and "others" at Rs.3,68,76,755/-. No categorical finding has been given by the Assessing Officer to the effect that the trading exports were independent of the above 'others'. The Assessing Officer has also made reference to the books of account, in which the turnover of Rs.1,43,74,000/- was found reflected, rather cryptically. In the circumstances, it would be appropriate that the Assessing Officer verifies the relevant account and the other details having a bearing on this issue once again. Should much verification conclusively show omission of any trading exports from 'total turnover', inclusion to the extent of such omission shall stand automatically confirmed. Directed accordingly.
23.4 The next ground which also relates to deduction u/s.80HHC is over the exclusion by the Assessing Officer of 90% of the following receipts from the "profits of the business" by applying clause (baa) of the Explanation to section 80HHC:
"Claims and refunds, Rs.1,32,37,677/-
39
Balance written off now recovered, Rs.5,12,54,000/-
Sale of scrap, Rs.1,37,16,681/-
Settlement of claim on order cancellation, Rs.2,50,00,000/-
Exchange difference, and, Rs.1,93,98,000/-
Miscellaneous income Rs.4,39,66,000/- "
24.1 The appellant had argued before the Assessing Officer that the above receipts related to its day-to-day activities and, therefore, it was eligible to get deduction u/s.80HHC on the same. The Assessing Officer, however, rejected the above argument on the ground that these receipts could not be said to have been 'derived from' business. In this connection, he relied on the decisions of the Hon'ble Supreme Court in the cases of Cambay Electrical Supply Industries Co. Ltd. Vs. Commissioner of Income-tax, 113 ITR 84; and, Commissioner of Income-tax Vs. Pandian Chemicals Ltd., 263 ITR 278. 24.2 In this appeal the appellant has argued that the Assessing Officer was not justified in excluding the above items of receipts under clause (baa). During the course of the appeal proceedings, it was contended that the facts and legal position vis-a-vis the impugned receipts are the same as obtained in the previous year relevant to the assessment year 1998-99. The appellant submitted an extract from the reply filed by it in connection with the appeal proceedings for the said assessment year.
24.3 On a careful consideration of the stand taken by the Assessing Officer as well as the submissions made by the appellant, the issue is decided as under.
(i) Claims and refunds The Assessing Officer has considered gross claims and refunds amounting to Rs.1,32,37,677/- under clause (baa). This is not correct because the appellant had already considered insurance claims and refunds of Rs.l6,55,318/- under this clause. Coming to the balance claims and refunds, amounting to Rs.1,15,82,359/- the same, being recovery of excise duty, customs duty and sales tax, are patently not includible in total turnover much as the collections earlier made were not so includible. For the same reason, these recoveries can not also form part of operational income. On the contrary, these are charges received back, hence in the nature of "charges". I would, therefore, hold that the Assessing Officer was justified in excluding 90% of the claims and refunds from the "profits of the business" under clause (baa) of the Explanation to section 80HHC. Accordingly, the stand taken by the Assessing Officer is confirmed. However, this confirmation applies only to an amount of Rs.1,15,82,359/-, i.e., the net claims and refunds.
(ii) Balances written off now recovered.
To the extent the balances recovered pertained to debts which in turn related to sales, such balances would be part of the 'total turnover' of the business and cannot be considered under clause 40 (baa) of the Explanation to section 80HHC. I find from the details furnished by the appellant that the gross recovery of Rs.5,12,54,071/- included Rs.85,39,666/- being "Bad-debts written off - recovered" and, Rs.3,71,57,161/- being "Doubtful debts written off - recovered." Exclusion of these two amounts under clause (baa) is hereby negatived. The same, however, can not be said of the remaining sum of Rs.55,57,243/- which represented "Liquidated damages written off'. Liquidated damages are not in the nature of operational income. On the contrary, the same are in the nature of compensatory charges. Hence recovery of the damages paid would also partake the nature of charges. Therefore, such recoveries would qualify to be considered under clause (baa). I would, therefore, hold that exclusion of 90% of the sum of Rs.55,57,243/- from the "profits of the business" deserves to be confirmed. The same is accordingly confirmed.
(iii) Sale of scrap.
Scrap generated In the manufacturing process will have to be considered as integrally connected with the business of the undertaking. Consequently, the proceeds realised on disposal of scrap would form part of 'total turnover'. In deciding as above, reliance is placed on the decision of the Income-tax Appellate Tribunal, Pune Bench, in the case of Thermax Babcock & Wilcox Ltd., Pune Vs. Deputy Commissioner of Income-tax (order in ITA No.158/PN/95 dated 31.5.2005) for the assessment year 1993-
94. Mis. Thermax Babcock & Wilcox Ltd. happens to be a sister concern of the appellant. In the above decision, the Tribunal followed the decision of the Mumbai Bench in the case of Ankit Diamonds, 75 ITD 329, and, the decision of the Calcutta Bench in the case of Reckitt & Colman of India Ltd., Vs. Deputy Commissioner of Income-tax, 77 ITD 198, and held that 'scrap sales' would form part of total turnover. Respectfully following the above decision of the Pune Bench, the Assessing Officer's action in excluding 90% of the scrap sales of Rs.1,37,16,681/- under clause (baa) is hereby negatived. The above amount is directed to be included in 'total turnover'.
(iv) Settlement of claim on order cancellation It is evident from the nomenclature of these receipts that the same preceded the implementation of the orders which were never acted upon. Therefore, the receipts of Rs.2,50,00,000/- cannot be considered as part of the appellant's operational income. On the contrary, the same will have to be treated as being in the nature of compensatory charges liable for consideration under clause (baa). Hence the action of the Assessing Officer in excluding 90% of the above receipts under clause (baa) is confirmed.
(v) Exchange Difference To the extent the exchange differences had been realised in respect of sales, the same would also partake the nature of sales, and, for the same reason, would form part of 'total turnover'. Consequently, exchange differences to such extent cannot be treated as receipt within the meaning of clause (baa). However, to the extent the exchange differences did not relate to sales nor could be considered as 'Income from Other Sources' (such as accretion to a deposit made from out of surplus fund on 41 account of exchange rate fluctuations) the same would qualify to be considered I excluded from 'profits' under clause (baa). As the relevant details have not been made available, the Assessing Officer shall call for and examine the same in the manner suggested hereinabove; and, decide to the extent the gains are (i) includible in total turnover, (ii) excludible under clause (baa), and, (iii) assessable under the head 'income from other sources'. The exchange gains shall be accordingly considered I assessed.
(vi) Miscellaneous income The appellant has not furnished full details in respect of the total miscellaneous income of Rs.4,39,66,000/-. From the limited details available on records, it is seen that these included (i) excess provision (expenses) written back : Rs.1,15,04,678/-, credit balances appropriated : Rs.1,64,05,330/-, and, miscellaneous income I receipts Rs.1,02,90,430/-. Nature of the balance miscellaneous income of Rs.57,65,562/- is not ascertainable from the details available / filed. In so far as provision for expenses is concerned, the written back amounts would have to be considered as operational income to the extent the expenses related to the business operations and had been incurred / allowed in the year(s) of claim. Similarly credit balances appropriated would partake the nature of operational income to the extent the credits were in the nature of trade credits. Much as such trade credits had resulted in reduction of the operational income in the year in which the same had been availed, writing back thereof would amount to restoring the operational income so reduced. In the absence of full details, no definite finding can be given, as of now, as to the extent to which the written back / appropriated provisions and balances could be so considered, and, consequently, could not be excluded under clause (baa); and, to the extent to which the same would fall under clause (baa). The Assessing Officer shall call for and examine the details and decide the issue along the lines suggested above. In so far as the miscellaneous receipts of Rs.1,02,90,430/- are concerned, the appellant has not furnished any details. The appellant has also not furnished anything in respect of the balance amount of Rs.57,65,562/-. Nothing has been adduced to show that these receipts were in the nature of operational income. In the appellate order for the assessment year 2001-02, under identical circumstances, exclusion of the miscellaneous receipts under clause (baa) had been confirmed. Following the said order, exclusion of 90% of the miscellaneous and other receipts of Rs.1,60,55,992/- (Rs.1,02,90,430/- + Rs.57,65,562/-) under clause (baa) is hereby confirmed. 24.3.1 The Assessing Officer shall recompute the amounts to be excluded (i.e. 90%) under clause (baa) as well as the 'total turnover' in the light of the decisions given hereinabove.
25. The next ground relates to rejection of the computation made by the appellant of the net profit of business u/s.80HHC by adding to the profit a sum of Rs.3,45,90,526/- representing the loss incurred by the foreign representative offices. The Assessing Officer rejected such computation on the ground that "this loss is not related to the export activity and therefore not liable to be added in the profit worked out for deduction u/s.80HHC". 42
25.1 The appellant has argued against the above action of the Assessing Officer. During the course of the appeal proceedings, the appellant explained the various activities undertaken by the representative offices abroad and the circumstances under which losses had been incurred in such offices. It was also submitted that a similar claim had been allowed, by the Commissioner of Income-tax (Appeals), for an earlier assessment year.
25.2 I have carefully considered the appellant's submissions. There is nothing in section 80HHC authorising or permitting the addition of a loss or expenditure to profit. I would, therefore, hold that the Assessing Officer was justified in rejecting the appellant's claim in this matter. Accordingly, the ground raised by the appellant is hereby dismissed.
26. The next ground, which also deals with deduction u/s.80HHC, is over the action of the Assessing Officer in not considering the proportionate export incentive (DEPB) of Rs.72.21 lakhs for the purpose of computing the deduction admissible to the appellant u/s.80HHC; and, instead, in reducing the "profits of the business" by the above incentive amount. The Assessing Officer held that "DEPB is not entitled for deduction u/s.80HHC as per the instruction issued by the CBDT vide F.No.l53/93/2004-TPL dated 18.9.2004".
26.1 The recomputation made by the Assessing Officer without considering the DEPB incentive of Rs.72.21 lakhs has to be confirmed. It has been held by the Hon'ble Supreme Court in the case of Commissioner of Income-tax Vs. Sterling Foods, (1999), 237 ITR 579, that "the source of the import entitlements could only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlements became available", and, therefore, the sale consideration received by an assessee from the sale of import entitlements could not be treated as being in the nature of profits and gains derived from the assessee's industrial undertaking. In view of the above decision, as also the decisions of the jurisdictional High Court in several cases (viz. Commissioner of Income-tax Vs. Kantilal Chhotalal, 246 ITR 439; Commissioner of Income-tax Vs. Ravi Ratna Exports (P) Ltd., 246 ITR 443; Commissioner of Income-tax Vs. K.K.Doshi, 245 ITR 849, etc.) wherein it has been held that deduction u/s.80HHC could be availed only in respect of receipts having direct nexus with sales, the action of the Assessing Officer in not considering the DEPB incentive ofRs.72.71 lakhs for the purpose of computing deduction admissible u/s.80HHC is hereby confirmed. Consequently, the ground raised on this score is dismissed."
Aggrieved by the order of Ld.CIT(A) assessee is now in appeal before us vide ground Nos.10 and 11. Revenue is also aggrieved by the order of Ld.CIT(A), to the extent of relief granted by Ld.CIT(A) and has raised ground Nos. 5 and 6. Since the grounds raised by assessee and Revenue are inter-connected, both are considered together.
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38. The assessee by way of ground of appeal No.10 has raised various issues in respect of the items to be considered in total turnover and the items to be considered in export turnover. While applying the deduction u/s 80HHC of the Act, the AO had excluded certain items and included certain items against which the Ld. CIT(A) has given relief in respect of certain items and upheld the other items. Both the assessee and the Revenue are in appeal against the respective portions of the order of the Ld. CIT(A). Both the Authorised Representatives have made extensive arguments in support of their respective claims. However, the issue of various aspects of claim of deduction u/s 80HHC of the Act has been adjudicated by the Hon'ble High Court and the Apex Court in various decisions and we proceed to adjudicate the issues raised by making reference to the said decisions relied upon by the Ld.A.R. for the assessee and Ld.D.R. for the Revenue.
39. First we take up the ground of appeal No.10(a) and (b) raised by the assessee in this regard. i.e., determination of total turnover. The assessee is aggrieved by the inclusion of "trading turnover" in "total turnover". The Revenue is also in appeal against the order of Ld. CIT(A). The exclusion of sales tax and excise duty from total turnover vide ground of appeal No.6.
40. We find that the Hon'ble Apex Court in the case of CIT Vs. Catapharma (India) Pvt. Ltd., (2007) 292 ITR 641(SC) has held that while calculating the deduction under section 80HHC(3)(b) of the Income Tax Act, 1961, for computing the "total turnover" of exports 44 out of India of trading goods, excise duty and sales tax are not to be included. Accordingly, we hold that trading turnover is to be excluded from total turnover also. Sales tax and excise duty is to be excluded from total turnover.
41. The next item is the scrap sales, wherein the plea of the assessee is that the scrap is generated during the course of manufacturing. The aforesaid contention of the assessee is not controverted by the Revenue. In such a situation, we find that the ratio of the decision of Hon'ble Apex Court in the case of CIT Vs. Punjab Steel Industries India reported in 364 ITR 144 would be applicable to the present facts and therefore the sale of scrap cannot be considered as part of "total turnover" for the purpose of calculation of deduction u/s 80HHC of the Act.
42. The last item in ground of appeal No.10(a) is Exchange Difference, wherein the Ld.A.R. for the assessee fairly admitted that the said difference to the extent of sales would form part of the total turnover and the balance needs to be excluded. We find merit in the plea of the assessee that exchange difference to the extent of sales would be included as part of the total turnover. Thus, ground of appeal No.10(a) raised by the assessee is partly allowed and ground of appeal No.6 raised by the Revenue is dismissed.
43. Now coming to the issue raised by assessee in ground of appeal No.10(b) relates to disputed adjustments to the export turnover wherein the various claims have been raised before us and we proceed with the same by referring to each one of them.
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(i) Business claims and refunds :
In this regard the amount relates to insurance refund of Rs.1,15,82,359/-. The issue was remitted back to the AO with direction. We also remit this issue back to the AO to apply the said directions.
(ii) Balances written off now recovered :
The assessee pointed out that it was part of operational income recovered. Since the expenses when booked were allowed as expenditure, hence, the same is to be considered at cost of export turnover. We find merit in the plea of the assessee in this regard. However once the same is excluded as part of turnover, hence, the same cannot be excluded under Explanation (baa) to Sec.80HHC of the Act.
(iii) Settlement of claim of order cancelled totaling to Rs.2.50 crores :
The Explanation (baa) under Sec.80HHC defines the profit of business to mean the profits as computed under the head profits and gains of business to as reduced by 90% of the same referred to in clauses (iii)(a) to (iii)(e) of Sec.28 of the Act beyond any receipts by way of brokerage, claim, interest, rent, charges or any other receipt of similar nature included in such profits.
The receipts on account of settlement of claim of order cancellation is in the nature of operational income and cannot be excluded under Explanation (baa) to Sec.80HHC of the Act.46
(iv) Miscellaneous income :
The next item is Miscellaneous Income, wherein the assessee claimed the said income at Rs.4.39 crore to be part of export turnover. The Ld. CIT(A) allowed the claim of the assessee to the extent of Rs.2.29 crores referring the Ld. CIT(A) vide para 24.3 discussed the issue and we find merit in his observations and upheld the order of Ld. CIT(A) regarding miscellaneous income to be excluded. Hence, the ground of appeal No.10(c) is partly allowed.
44. Now coming to ground of appeal No.10(d) i.e., confirming exclusion from eligible profits of business, loss / expenses on over- sea losses to the extent of Rs.3,44,90,526/-.
The assessee is aggrieved by the non-exclusion of business losses. In this regard, it was pointed out that profits if any of the representatives of the assessee ought to be excluded u/s 80HHC of the Act, so consequently the losses have to be excluded under Explanation baa (2) of Sec.80HHC of the Act and consequently the profits eligible for claiming the deduction u/s 80HHC of the Act should be increased. We find merit in the plea of the assessee as Explanation (baa) to Sec.80HHC of the Act provides that the profits of any branch office, warehouse or any other establishment of the assessee situated outside India ought to be revised from the profits of business computed under the head of profits and gains of business and profession. Consequently in cases from the any loss of over-seas, branch or office then the same also needs to be excluded and the profits eligible to claim deduction u/s 80HHC of the Act should be 47 increased and we direct so. Thus, ground of appeal No.10(d) is allowed.
45. Now coming to ground of appeal No.10(e), assessee has sought proportionate deduction with reference to its export and on account of (DEPB). The said issue now stands decided as per the amendment to Section and the AO in this regard is directed to apply the amendment and decide the issue.
46. The issue in ground of appeal No.10(f) is against the claim of unabsorbed losses u/s 72A of the Act i.e., the same may be reduced from the profits of business. The Ld. CIT(A) has decided the said issue relying on the ratio laid down by the Hon'ble Bombay High Court at para 27 page 77, which has not been reversed. Applying the said principle, we dismiss the ground of appeal No.10(f).
47. The issue in ground of appeal No.11 raised by the assessee is against the assumption of exchange difference as business income or under the head 'income from other sources'. The Ld. CIT(A) relied on para Nos.73 and 74 of the order and has considered the plea of the assessee and in the absence of details of deductions, has directed the AO to call for the details and examine the same and decide the issue as per his direction and decide the same. We find no merit in the ground of appeal No.11 raised by the assessee in this regard, where the issue has been set aside to the AO for verification. Thus, this ground is dismissed.
48. Now coming to ground of appeal No.5 raised by the Revenue, which is also against the order of Ld. CIT(A) in directing the AO to 48 consider the following items of income u/s 80HHC of the Act. (a) bad debts written off recovered and (b) doubtful debts written off recovered. The said issue has been decided against the Revenue by the ratio laid down by the Hon'ble Bombay High Court 245 ITR 769 (Bom). Applying the said principle, we direct the AO to allow the claim of the assessee in accordance with the law. AO thus has directed to recompute the deductions available during the assessment u/s 80HHC of the Act after applying the directions of the Tribunal on various aspects of the said deduction i.e., the computation of total turnover and export turnover as directed in the paragraphs hereinabove, while deciding the ground of appeal Nos.10 and 11 raised by the assessee and ground of appeal Nos.5 and 6 raised by the Revenue. We thus adjudicated the said issues in ground of appeal No.10 raised by the assessee.
49. Ground No.12 is with respect to charging of interest u/s 234D.
Before us, at the outset, Ld.A.R. submitted that this ground needs to be decided against assessee as the provisions of Sec.234D were applicable as assessment was completed after 01.06.2003. In view of the submission of Ld.A.R., the ground of assessee is dismissed.
50. In the result, the appeal of the assessee is partly allowed.
51. Now we take up Revenue's Appeal in ITA No.276/PUN/2006 for the A.Y. 2002-03.
52. First ground is with respect to deleting the addition of lease rent on account of accrual basis.
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AO noticed that assessee apart from being in the business of manufacturing and selling of steam boilers, it was also engaged in the business of leasing and had given on lease of certain self- manufactured products but had not offered the lease rentals as its income. The AO therefore asked the assessee to show cause as to why lease rentals amounting to Rs.1.53 crores as in preceding year not be considered to have been accrued to the assessee. Assessee inter-alia submitted that as per the restructuring arrangement as approved by the Hon'ble High Court, the entire amount due was foregone by the assessee in the previous year relevant to A.Y. 2001-02 and there was no accrual of income in the year under consideration. The submission of the assessee was not found acceptable to AO. AO noted that the income from lease were estimated at Rs.1,53,21,302/- in A.Y. 2001-02. He also noted that the decision of Ld.CIT(A) in not considering it as income was not accepted by Revenue and appeal was preferred by the Revenue before the Tribunal. Since Revenue had preferred appeal and to keep the matter alive, AO estimated the income from lease at Rs.1,53,21,302/- and made its addition. Aggrieved by the order of AO, Assessee carried the matter before Ld.CIT(A), who decided the issue by holding as under :
"9.2 I have carefully considered the submissions thus made by the appellant and its learned Authorised Representative. I find that assessability of lease rents had figured in the assessment as well as appellate orders for the assessment years 2000-01 & 2001-02. It would, therefore, be of use of briefly discuss these orders.
9.2.1 For the assessment year 2000-01, the appellant had not accounted lease rentals from 8 lessees including M/s.Arvind Mills Ltd., M/s.Parasrampuria Industries Ltd. and M/s.Parasrampuria International Ltd. The Assessing Officer brought to tax the income not so accounted for in respect of four parties (excluding M/s. Arvind Mills Ltd.). This is how an addition of Rs.57,75,268/- had been made. The appellant had argued that it had not recognised the income in accordance with "prudence" which was one of the prescribed policies 50 as per the mandatory Accounting Standard-I recognised u/s.145. The Assessing Officer, however, held that the only course open to the appellant was to offer the income to tax and claim it as bad debt in the event of the debt becoming bad. Before the first appellate authority, the appellant submitted that even though it was following the mercantile method of accounting, generally and even as regards lease rentals, where, however, existed any significant uncertainty about ultimate collection, revenue was being recognised only as and when received. In the cases of the concerned lessees, it was impossible to reasonably expect ultimate collection in view of their fragile financial positions. In fact, some of these parties subsequently approached the Board for Industrial and Financial Reconstruction (BIFR). In these circumstances, there was no possibility of accrual of income even under the mercantile method of accounting. Accounting Standard-I also requires that provisions should be made for known liabilities and losses even if the amounts cannot be ascertained with precision. This Accounting Standard overrides section 5 which is 'subject to the other provisions of the Act'. The appellant also relied on Accounting Standard - IX. It was further argued that profit should be understood as per the ordinary principles of commercial accountancy.
Mere passing of book entries could not generate real income. The appellant also relied on the decision of the Hon'ble Punjab and Haryana High Court in the case of RBL Banarasidas & Co. Pvt. Ltd., 264 ITR 671, wherein, under identical circumstances, it had been held that lease rentals had not accrued and, therefore, could not be brought to tax. The Commissioner of Income-tax (Appeals) examined the cases of the concerned lessees one by one. In the case of the Parasrampuria group companies she found that both these parties had made references before the BIFR as sick companies and the appellant had not been able to recover a single rupee from them till date. In the year-ended 1.3.1999, the appellant had already written off as bad debts sums of Rs.18,12,600/- and Rs.11,37,370/- being monies due from these two parties respectively. Such write-off had also been allowed in the assessment for the assessment year 1999-
00. Taking these facts into account, the Commissioner of Income-tax (Appeals) held that the appellant was justified, in view of the deteriorating financial position of the two companies, in not recognising revenue in respect of which there were no prospects of recovery. "In my opinion even for accrual to take place there must be a bonafide probability of ultimate collection. Existence of a mere legal right without the possibility of its enforceability can give rise to only a hollow claim of income and not real income". In deciding as above and, consequently, in deleting the addition made in the assessment on this score, she also relied on the judgement in the case of RBL Banarasidas & Co. Pvt. Ltd.
9.2.2 For the assessment year 2001-02, the appellant had not shown lease rentals amounting to Rs.1,53,21,302/- from 5 parties which were the same as the parties figuring in the present appeal. The Assessing Officer brought the above amount to tax. As for lease rentals from M/s. Parasrampuria Industries Ltd. and M/s. Parasrampuria International Ltd., the Commissioner of Income-tax (Appeals) followed the decision given by her in the appellate order for the assessment year 2000-01 and deleted the addition. As regards the leases (3 in number) with M/s. Arvind Mills Ltd., it was submitted before the Commissioner of Income-tax (Appeals) that the lessee came out with a debt restructuring plan in March, 2001, with three options. Vide its letter dated 28.3.2001 addressed to the lessee, the appellant communicated its acceptance of participation in this debt restructuring plan and informed that it was opting for scheme B, being one of the three options proposed by the lessee. As per this option, the appellant was entitled to get only 45% of 51 the principal amounts due as on 3l.3.2000 and was to forego the balance. The appellant was also obliged to transfer the leased assets to M/s. Arvind Mills Ltd. after getting 45% of the principal amounts. No further dues for the period after 1.4.2000 were to accrue to the appellant. Pursuant to this plan, Mis. Arvind Mills Ltd. paid to the appellant RS.117.65 lakhs in April, 2000. As a result, the appellant wrote off, in March 2001, the unpaid debts due to the extent of Rs.6,18,344/-, Rs.18,12,692/- and Rs.3,02,157/- under the three contracts pertaining to the period-ended 31.3.2000. The Commissioner of Income-tax (Appeals) accepted the submissions of the appellant and held that as the restructuring plan had frozen the debts at the figures as on 3l.3.2000, there was no justification for making any addition for the assessment year 2001-02.
9.3 In the light of the appellate orders for the assessment years 2000-01 & 2001-02, the entire addition of Rs.1,53,21,302/- made by the Assessing Officer for the present assessment year (i.e. 2002-03) deserves to be deleted. In so far as M/s. Arvind Mills Ltd. is concerned, by virtue of the restructuring arrangement to which the appellant had given its consent, there was no more lease rental to accrue beyond 31.3.2001. In so far as M/s. Parasrampuria Industries and M/s. Parasrampuria International Ltd. are concerned, the factum of the lease rental-cum-debts having become bad had been accepted even as early as for the assessment year 1999-00. The debts having been written off in the accounts relevant to the said assessment year, no debts were left thereafter on which any interest could accrue. In the circumstances, and also as the Commissioner of Income-tax (Appeals) held that not even a single rupee could have been offered by the appellant for the assessment years 2000-01 & 2001-02 towards lease rentals from these two concerns, a different stand cannot possibly be taken for the present assessment year. I would accordingly hold that the addition of Rs.1,53,21,302/- made for the present assessment year with reference to the subject leases was without any basis. For these reasons, the addition of Rs.1,53,21,302/- is hereby deleted." Aggrieved by the order of Ld.CIT(A), Revenue is now in appeal before us.
53. Before us, Ld. D.R. submitted that identical issue arose in assessee's own case in A.Y. 2000-01 and 2001-02 and the Co- ordinate Bench of the Tribunal vide order dated 29.08.2016 had restored the issue to the file of Ld.CIT(A). He submitted that the issue for the year under consideration being identical to that of earlier years the matter be restored back as earlier years. Ld.A.R. on the other hand supported the order of Ld.CIT(A).
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54. We have heard rival submissions and perused the material on record. We find that identical issue of accrual of lease rental income arose in assessee's own case for A.Y. 2000-01 and A.Y. 2001-02 and the issue was set aside to the file of Ld.CIT(A) by the Co-ordinate Bench of the Tribunal by observing as under :
"9. We have heard the submissions made by the representatives of rival sides and have perused the orders of the authorities below. The only issue before us for adjudication is, whether the lease rental income not received by the assessee is liable to be taxed in the assessment year 2000-01 or the same should be excluded from total income of the assessee on the basis of real income theory. The ld. AR of the assessee has contended that the lease rental income which have not been received are not liable to be taxed in assessment year 2000- 01 as the income has not accrued to the assessee. Undisputedly, the assessee is following mercantile system of accounting. It is a well settled law that Accounting Standards do not override provisions of the Act. However, the ld. AR of the assessee has asserted that the income has been recognized by the assessee on the basis of real income theory. Reliance has been placed on the decision of Hon'ble Supreme Court of India in the case of Commissioner of Income Tax Vs. M/s. Excel Industries Ltd. (supra). The relevant extract of the findings of Hon'ble Supreme Court of India are reproduced here-in-under :
27. Applying the three tests laid down by various decisions of this Court, namely, whether the income accrued to the assessee is real or hypothetical; whether there is a corresponding liability of the other party to pass on the benefits of duty free import to the assessee even without any imports having been made; and the probability or improbability of realisation of the benefits by the assessee considered from a realistic and practical point of view (the assessee may not have made imports), it is quite clear that in fact no real income but only hypothetical income had accrued to the assessee and Section 28(iv) of the Act would be inapplicable to the facts and circumstances of the case.
Essentially, the AO is required to be pragmatic and not pedantic.
10. We are of the considered view that this issue needs a revisit to the file of Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) while dealing with the issue in assessment year 2000-01 partly deleted the addition in respect of Parasrampuria Industries Ltd. and Parasrampuria International Ltd. by following the concept of real income and upheld the addition in respect of Modi Alkalies Ltd. and Inertia Industries Ltd. whereas, all the four companies are similarly placed. Accordingly, we deem it appropriate to remit this issue back to the file of Commissioner of Income Tax (Appeals) for deciding the issue afresh, in the light of decision rendered in the case of 8 ITA Nos. 1247, 1290 & 1291/PN/2005 Commissioner of Income Tax Vs. M/s. Excel Industries Ltd. (supra). The findings of Commissioner of Income Tax (Appeals) on this issue are set aside and the ground No. 7 in the appeal of the assessee and ground No. 4.1 to 4.5 in the appeal of the Revenue for assessment year 2000-01 are allowed for statistical purpose."
53We thus find that the Co-ordinate Bench, while deciding the issue in assessee's own case in earlier year had set aside the issue to the file of Ld.CIT(A). It is also a fact that both the parties have admitted that the issue in the year under consideration is identical to that of earlier years. We therefore following the same reasoning as given by the coordinate Bench of Tribunal while deciding the issue in A.Y.s 2000- 01 and 2001-02 and for similar reasons, restore the issue to the file of Ld.CIT(A). Needless to state that the Ld.CIT(A) shall grant reasonable opportunity of hearing to both the parties. Thus this ground of Revenue is allowed for statistical purpose.
55. Second ground is with respect of accrual of income.
Before us it was submitted that the present ground is interconnected to the ground No 4 of Assessee's appeal. Ground No 4 of Assessee's appeal was decided herein above by us in para no 16 to 19 wherein the ground of Assessee was allowed and ground of Revenue was dismissed. In view of the aforesaid reasons, the grounds of Revenue is dismissed.
56. Third ground is with respect to prior period expenses.
Before us it was submitted that the present ground is interconnected to the ground No 7 of Assessee's appeal. Ground No 7 of Assessee's appeal was decided herein above by us in para no 28 to 30 wherein the ground of Assessee was allowed and ground of Revenue was dismissed. In view of the aforesaid reasons, the ground of Revenue is dismissed.
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57. Fourth ground is with respect to claim for deduction u/s 80IA of the Act.
AO noticed that assessee has claimed deduction of Rs.3,37,27,000/- under Sec.80IA of the Act with respect to Resins / PPD & Allied Products and Water Management Unit. AO noticed that during the year Thermax Technologies Limited Company was amalgamated with the assessee company and it had total loss of Rs.15,21,06,020/- for the assessment years 1997-98 to 2002-03. He was of the view that if the losses of the aforesaid units was set off against the income, then the assessee would not be left with any profits in respect of the two units for which the deduction u/s 80IA of the Act was claimed. He therefore recomputed the profits of the two units at Rs.1092.4 lacs and after setting up of brought forward losses of Thermax Water Technologies Limited, worked out the net profit at Rs.Nil and accordingly denied the claim of deduction u/s 80IA of the Act. Aggrieved by the order of AO, assessee carried the matter before Ld.CIT(A) who decided the issue in favour of the assessee by holding as under :
"21.3 I have carefully considered the submissions thus made by the appellant and its learned Authorised Representative. The same carry considerable force. No doubt, both section 80AB as well sub-section (5) of section 80IA are in the nature of over-riding provisions. But there need not be any debate as to which of the two shall prevail. For, these two over-riding provisions operate in domains which are separate. Section 80AB deals with an assessee at large. In section 80IA the assessee has been consciously reduced to an undertaking. Therefore, while vis-à-vis the other sections appearing under the heading 'C' of chapter VIA, the losses including unabsorbed depreciation of the assessee on the whole will have to be considered for set off before arriving at the gross total income, in so far as section 80IA is concerned, only the losses and unabsorbed depreciation etc. of the eligible business undertaking can be so considered. This is because of the fiction that the eligible business undertaking is the only business of the assessee. In other words, while section 80AB will apply to section 80IA as well, such application will be through the medium of the fiction. Accordingly, the stand taken by the Assessing Officer in setting off the entire unabsorbed loss of M/s. Thermax Water Technologies Co. Ltd. against the profits from the eligible business undertaking within the 55 meaning of section 80IA, and, in the process, computing Nil profit u/s.80IA is hereby negatived. The ground raised by the appellant succeeds to this extent. The Assessing Officer shall verify if there were any losses or unabsorbed depreciation of the eligible business undertaking itself. If there were such losses or unabsorbed depreciation, he will be justified in setting off the same against the profits of the business undertaking and in computing the deduction admissible u/s.80IA accordingly. Directed as above."
Aggrieved by the order of Ld.CIT(A), Revenue is now in appeal before us.
58. Before us, ld. D.R. supported the order of AO. Ld. A.R. on the other hand supported the order of Ld.CIT(A).
59. We have heard rival submissions and perused the material on record. In the present case, Ld.CIT(A) while deciding the issue has noted that as far as deduction u/s 80IA is concerned, only the losses and unabsorbed depreciation of the eligible business undertaking has to be considered. He therefore after upholding the reliance placed on the decisions referred by assessee held that AO was not justified in setting off of the entire unabsorbed loss of Thermax Water Technologies Company Limited against the profit from eligible business undertaking and in the process computing nil profit u/s 80IA of the Act. Before us, Revenue has not pointed out any fallacy in the findings of Ld.CIT(A) nor has pointed to any contrary binding decision in its support. In such a situation, we find no reason to interfere with order of Ld.CIT(A) and thus, the ground of the Revenue is dismissed.
60. Fifth and sixth grounds are with respect to allowability of deduction u/s 80HHC of the Act.
56
We have adjudicated the said grounds with ground No.10 raised by assessee hereinabove wherein the issue has been restored to AO to decide it afresh. In view of the aforesaid facts, the grounds of Revenue are allowed for statistical purposes
61. In the result, the appeal of assessee and Revenue are partly allowed.
Order pronounced on this 30th day of November, 2017.
Sd/- Sd/-
Sd/- Sd/-
(SUSHMA CHOWLA) (ANIL CHATURVEDI)
या यक सद य / JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER
th
पण
ु े / Pune; दनांक Dated : 30 November, 2017.
Yamini
आदे श क" # त%ल&प अ'े&षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. CIT(A)-6, Pune.
4. CIT-5, Pune.
5 !वभागीय $त$न%ध, आयकर अपील य अ%धकरण, "ए" / DR, ITAT, "A" Pune;
6. गाड+ फाईल / Guard file.
ु ार/ BY ORDER,स आदे शानस या // True Copy // व-र.ठ $नजी स%चव / Sr. Private Secretary आयकर अपील य अ%धकरण ,पण ु े / ITAT, Pune.