Income Tax Appellate Tribunal - Bangalore
Acit, Bangalore vs M/S. Abb Limited, Bangalore on 4 March, 2021
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" BENCH : BANGALORE
BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT
AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
ITA No.562/Bang/2007
Assessment year : 2001-02
M/s. ABB Limited (formerly Asea Vs. The Additional Commissioner
Brown Boveri Limited), of Income Tax,
Khanija Bhavan, Race Course Circle 8(1),
Road, Bangalore.
IInd Floor, East Wing,
Bangalore - 560 001.
PAN: AAACA 38348
APPELLANT RESPONDENT
ITA No.755/Bang/2007
Assessment year : 2001-02
The Additional Commissioner Vs. M/s. ABB Limited (formerly Asea
of Income Tax, LTU, Brown Boveri Limited),
Bangalore. Khanija Bhavan, Race Course Road,
IInd Floor, East Wing,
Bangalore - 560 001.
PAN: AAACA 38348
APPELLANT RESPONDENT
Assessee by : Shri Percy Pardiwalla, Sr. Counsel
Revenue by : Shri Dilip, Sr. Standing Counsel for the Dept.
Date of hearing : 23.02.2021
Date of Pronouncement : 04.03.2021
ITA Nos.562 & 755/Bang/2007
Page 2 of 42
ORDER
Per Chandra Poojari, Accountant Member
These are cross appeals by the assessee and the revenue against the order dated 07.03.2007 of the CIT(Appeals)-1, Bangalore relating to assessment year 2001-02.
2. Ground No.1 of the assessee reads as follows:-
"1. The Learned CIT (A) erred in confirming that while arriving at business income for the purpose of deduction u/s 80HHC, 90% of other income should be excluded under clause (baa) of the explanation below Section 80 HHC which includes receipts like rental income, commission, notice pay, income from cancelled orders and miscellaneous/sundry income etc. Without prejudice, it is further submitted that sundry income included insurance claim received, fees received for R & D activities and the said receipts would not fall within the ambit of the said clause."
3. This ground co-relates to grounds 1 & 2 raised by the revenue, which reads as follows:-
"1. The CIT (A) erred in directing the AO to exclude 90% of the 'net interest income' instead of 'gross interest receipts' from the 'profits and gains of business or profession' to arrive at 'business profit' under clause (baa) for the purpose of computation of deduction u/s 80HHC particularly in view of use of expression -receipt- and not "income" in the said clause.
2. The CIT(A) erred in directing the AO not to exclude 90% of the amount on account of sale of scrap, cash discount, excise duty, octroi, C S fees, country management fees, service charges and exchange gain, from the 'profits and gains of business or profession' to arrive at 'business profit' under clause (baa) for the purpose of computation of deduction u/s 80HHC."
4. Therefore, the above grounds of assessee and revenue are taken up together for consideration for the sake of convenience and brevity. The ITA Nos.562 & 755/Bang/2007 Page 3 of 42 facts relating to this issue is that the AO reduced 90% of following receipts from the export profits under clause (baa) of Explanation below section 80HHC of the Income-tax Act, 1961 [the Act] :-
S.No Particulars Amount Rs.
1 Dividend Income 686,000
2 Interest 8,253,000
3 Interest on bank deposits 2,006,000
4 Interest on Others 3,039,000
5 Profit on sale of fixed assets 280,000
6 Miscellaneous income 111,723,000
Total 125,987,000
5. The CIT(A) observed that 90% net interest income i.e., after allowing set off of interest paid which has a nexus with interest received has to be reduced, and not 90% of the gross interest. With regard to dividend income of Rs.6.86 lakhs, the CITJA observed that assessee has already reduced an amount of Rs.6,86,190 from the profits & gains, hence no further reduction is necessary. Regarding profit on sale of fixed assets, he observed that this amount has already been reduced from the profits & gains of business, no further reduction is required.
6. The miscellaneous income consisted of the following:-
S.No Particulars Amount in Rs.
1. Rent Recovery 137,843
2 Duty drawback on exports 11,461,043
3 Compensation in lieu of notice pay 1,621,235
4 Commission income received 25,023,424
5 Rental income 6,832,188
6 Scrap sales 17,267,001
7 Insurance claim 8,323,975
8 Cash discount on purchases 319,860
9 Sale of materials 382,844
10 Excise duty recovered 4,805,403
11 Octroi duty recovered 1,231,688
ITA Nos.562 & 755/Bang/2007
Page 4 of 42
12 Others- 5,976,527
specify:Miscellaneous
13 Research and development income 3,467,922
14 CS fees from AAP 494,500
15 Country management fees 4,535,650
16 Services fees from Daweoo 1,676,081
Power India Ltd.
17 Bonus from Swissair & Amex 295,7501
18 Fees for equipments unused 563,292
19 Mis.income 5,552,532
20 Exchange loss -47,198,767
21 Exchange gain 58,952,904
111,722,895
7. The CIT(A) observed that AO should not have excluded 90% of following income:-
1) Scrap sales 17267001
2) Cash discount 319860
3) Excise duty 4805403
4) Octroi 1231688
5) CS Fees 494500
6) Country Management fees 4535650
7) Service charges from Daewoo Power India Ltd. 1676081
8) Exchange Gain 58952904
8. Against these findings of the CITJA, both the assessee and the revenue are in appeal before us.
9. After hearing both the parties, we are of the opinion that this issue came up for consideration before this Tribunal in ITA No.3240/MUM/2004 for AY 2000-01 and the Tribunal vide order dated 18.3.2020 observed as under:-
"10. As far as ground of appeal No.(i) of revenue is concerned, it is directed against the action of the CIT(Appeals) in treating 'other income' as part of business income of the assessee not falling within ITA Nos.562 & 755/Bang/2007 Page 5 of 42 the ambit of Explanation (baa) of section 80HHC of the Act, insofar as it relates to other income, except rental income, commission, notice pay, income from cancellation of orders and miscellaneous income. In respect of the grievance projected by the revenue in its appeal, the CIT(Appeals) has in the impugned order followed his own order for the AY 1999-2000 dated 4.3.2004. The aforesaid order of the CIT(Appeals) dated 4.3.2004 was subject matter of appeal by the department in ITA No.3958/MUM/2004 for the AY 1999-2000 and by order dated 5.4.2019, the Tribunal decided the issue by holding as follows:-
"20. As regards the connected ground of appeal of revenue is concerned, it is seen that the CIT(Appeals) has adjudicated this issue as follows:-
"4. In so far as the issue at item No.(i) is concerned, the basis of the action of the Assessing Officer as well as the submissions made in this respect has been the same as in the immediately preceding assessment year, except that, the appellant's representative has also relied upon in this regard on the decision of the jurisdictional High Court in the case of CIT Vs. Bangalore Clothing Company 260 ITR 371 (Bom).
5. The submission made by the appellant's representative has been considered. A perusal of the High Court decision relied upon reveal that in the said decision, it has nowhere been stated that every receipt arising from the business activity is required to be taken as part of the business profits for the purpose of computation of deduction under the section. The Hon'ble High Court held that only the operational income is required to be taken as part of the business profits while those receipts that are incidental to the business can still be excluded by the operation of clause (baa) to the Explanation. The court have further held that no standard test can be laid down for deciding as to what would constitute operational income. In the circumstance and considering the fact that though the Hon'ble court have taken into account the decisions of the jurisdictional High Court in the case of CIT Vs. K. K. ITA Nos.562 & 755/Bang/2007 Page 6 of 42 Doshi & Co. 245 ITR 849 (Bom) and CIT Vs. Kantilal Chotelal 246 ITR 439 (Born) but not over ruled them, it cannot be accepted that the receipts that are only incidental to the main business activity of the appellant company though might be arising out of said activity are still required to be taken as part of the business profits for the computation of deduction under section 80HHC of the Act. In regard to the said receipts, the ratio of the decision in the case of Kantilal Chotelal (Supra) is still applicable and hence these are required to be excluded by the operation of Clause(baa) of the Explanation.
6. If in the circumstance, the case of the appellant is examined in the light of three decisions viz., Bangalore Clothing Company (supra), K.K. Doshi & Co. (supra) and Kantilal Chotelal (Supra) of the jurisdictional High Court, in so far as the application of clause (baa) of the Explanation is concerned, it has to be restricted in respect of the interest amount, profit on sale of assets, rent, notice pay, insurance claim, DBK on export, income from cancellation of order, sale of REP licence, commission amount received from Gujarat Prima and miscellaneous receipt. On the other hand, in the light of the decision of the jurisdictional High Court in the case of Bangalore Clothing Co. (Supra), in respect of receipts by way of scrap, sales, cash discount, excise duty recovered, exchange rate, sales-tax refund, it has to be held that the said clause has no application. These receipts are to be taken as part of the business profits as also as part of the total turnover. Further, the exchange gain is required to be taken as part of the export turnover as well apart from being taken as part of business profits. In so far as octroi refund amount is concerned, the submission of the appellant's representative reveal that it is a refund of payment of octroi made earlier both on purchases of raw material as well as part of the units. While the refund on account of the payment of octroi related to raw material is required to be taken as part of the business profits in respect of refund of octroi paid on ITA Nos.562 & 755/Bang/2007 Page 7 of 42 units, it has to be excluded by the application of clause (baa). In respect of the income from technical services, if the amount shown by the appellant in Schedule XIII refers to the income as arrived at after the deduction of the expenses incurred in that account, the said income is required to be excluded by the application of clause (baa). However, if the amount only reflects the receipt, the said income is required to be taken as part of the business profits as well as the turnover. The Assessing Officer is directed to verify this aspect."
21. The CIT(Appeals) in allowing relief to the assessee has placed reliance on the decision of the Hon'ble Bombay High Court in the case of Bangalore Clothing Co., 260 ITR 371 (Bom), which in our opinion is correct and calls for no inference. We therefore do not find any infirmity in the action of the CIT(Appeals)."
11. Respectfully following the aforesaid decision of the Tribunal, we uphold the order of CIT(Appeals) and find no merit in ground (i) raised by the revenue.
12. The second part of ground No.(i) raised by the revenue projects the grievance of the revenue with regard to the action of the CIT(Appeals) in holding that indirect expenses are required to be taken for the purpose of computation of amount eligible for deduction on account of exports done by the assessee by way of trading. The AO worked out the deduction in terms of section 80HHC(3)(c)(ii) of the Act relating to trading exports, by treating all expenditure incurred by the assessee, other than those directly attributable to the manufacturing activity, as indirect expenses incurred in earning profits out of exports by way of trading carried out by the assessee. On this aspect, the CIT(Appeals) held that it is only the indirect cost which were incurred by the undertaking which have carried out the export activity and the cost incurred at the Head Office that should be deducted as indirect expenses attributable to exports by way of trading carried out by the assessee. In doing so, the CIT(Appeals) followed the appellate order in assessee's own case dated 26.3.2003 for AY 1998-99.
ITA Nos.562 & 755/Bang/2007 Page 8 of 42
13. The connected grievance projected by the assessee in this regard is the second part of ground No.2 in which the assessee has contended that trading exports are independent units and Head Office expenses need not be allocated to the trading exports unit.
14. As far as the grievance of the revenue in 2nd part of ground (i) is concerned, we are of the view that the said direction of the CIT(Appeals) is in accordance with the laws and we find no grounds to interfere with the order of CIT(Appeals).
15. As far as the grievance projected by the assessee in 2nd part of ground No.2 is concerned, we are of the view that the Head Office expenses has to be allocated to trading exports also. In this regard, we find that there is no material on record to come to the conclusion that trading export is an independent unit requiring no assistance from the Head Office. To this extent, the grievance projected by the assessee in 2nd part of ground No.2 in its appeal is rejected.
16. That leaves for consideration only first part of ground No.2 raised by the assessee viz., considering rental income, commission, notice pay, income from cancellation of orders and miscellaneous income as income falling within the ambit of Explanation (baa) of the Act. As far as notice pay, rental income, commission income, income from cancellation of order is concerned, similar issue was considered in assessee's own case in AY 1999-2000 in ITA No.3330/MUM/2004 (supra) and the Tribunal held as follows:-
"12. As far as rent is concerned, it is the plea of the assessee that it takes on rent premises for use of employees and recovers a part of the cost from the employees. The amount recovered from the employees was shown as receipts in the P&L account and 90% of that was excluded from the profits of the business. It is the plea of assessee that only net income, after reducing the expenses, should be taken for the purpose of exclusion under clause (baa) of the Act. We are of the view that the rent expenses would have already been debited in the P&L account and would have gone to reduce the business profits of the assessee. Therefore, what has to be reduced under Explanation (baa) of the Act and is only the net rent income after reducing the expenses. We hold and direct accordingly. The AO is directed to compute the amount to ITA Nos.562 & 755/Bang/2007 Page 9 of 42 be excluded under Explanation (baa) of the Act accordingly.
13. As far as notice pay shown as income by the assessee is concerned, it has to be regarded as business income and it cannot be considered as income of similar nature like interest, rent, etc. Therefore, the action of the revenue authorities in this regard is held to be not justified.
14. As far as insurance claim and income from cancellation of orders is concerned, it has been held by the Hon'ble Bombay High Court in the case of Pfizer Ltd., 330 ITR 62 (Bom) that nexus of the income with the business has to be seen. The ld. counsel for the assessee pointed out that insurance claim is relatable to its business and income from cancellation of contracts is also relatable to its business being damages for breach of contract.
15. We are of the view that the plea made by the assessee deserves to be accepted, subject to verification by the AO with regard to receipts on account of insurance claim and income from cancellation of order and its nexus with the business of assessee.
18. As far as commission is concerned, the plea of ld. counsel of the assessee is only for netting of the commission expenses against commission receipts and only excluding 90% of net commission. The plea made in this regard is accepted, subject to verification of the nexus between commission payment and commission receipt. The ld. counsel did not press for adjudication of exclusion of 90% of miscellaneous income of Rs.1,41,71,000 under explan.(baa) to Sec.80HHC of the Act because of the absence of break-up of this item of income. "
17. The facts and circumstances in the present assessment year being similar, we direct that the directions given in the order of Tribunal for AY 1999-2000 (supra) should be followed and deduction u/s. 80HHC be computed accordingly.
18. As far as miscellaneous income is concerned, it was admitted by the parties before us that the said issue was decided against the assessee in the order of Tribunal for AY 1999-2000 (supra). The ITA Nos.562 & 755/Bang/2007 Page 10 of 42 grievance projected by the assessee in the first part of ground No.2 is decided accordingly against the assessee.
19. There are certain new items of other income which are excluded by the AO under Explanation (baa) of section 80HHC viz., fees from group companies and networking charges. These are receipts for providing facilities to group companies and have to be regarded as falling within the ambit of Explanation (baa) to section 80HHC.
20. There is another item of income which is drawback on export. This is an item which will get reduced under the proviso to section 80HHC of the Act and will be again added after such exclusion. Therefore, this cannot be treated as an item of income falling within Explanation (baa) to section 80HHC.
21. Grounds No.(i) by the revenue and ground No.2 by the assessee are decided accordingly."
10. Being so, taking a consistent view, we direct accordingly as directed in the Tribunal order for the AY 2000-01. However, we make it clear that while considering the income, the AO shall take net income after setting off the expenditure incurred to earn that income. Thus, the ground by the assessee is allowed, while the grounds of the revenue on this issue are dismissed.
11. The next ground (No.2) raised by the assessee reads as follows:-
"2. The learned CIT (A) erred in confirming that head office expenses is required to be allocated while arriving at the profit of the industrial undertaking for the purpose of allowing deduction u/s 80-I / 80-IA of the Income Tax Act.
Without prejudice, it is further submitted that allocation of expenditure is on a very higher side and it should be reduced substantially."
ITA Nos.562 & 755/Bang/2007 Page 11 of 42
12. This issue also came up for consideration before the Tribunal ITA No.3240/Bang/2004 for AY 2000-01 wherein the issue was decided against the assessee with the following observations:-
"2. The assessee is a company engaged in the business of various engineering fabrication, manufacture and trading of mechanical, electrical and other engineering items. The dispute raised by the assessee in ground No.1 is with regard to deduction u/s. 80IA of the Act. It is not in dispute that the assessee was entitled to deduction u/s. 80IA. The AO while allowing deduction u/s. 80IA allocated Head Office expenses on the basis of turnover of the various undertakings of the assessee. Consequent to such allocation, deduction u/s. 80IA of the Act was allowed at a much lesser figure than what was claimed by the assessee. It is not in dispute before us that identical issue came up for consideration in assessee's own case in AY 1988-89 in ITA No.3809/MUM/2003, order dated 19.10.2012. In para 12.4, the Tribunal followed its decision in assessee's own case for the AY 1995-96. The issue was considered by the Mumbai Bench of the Tribunal in assessee's own case in AY 1997-98 in ITA No.2555/MUM/2003 by order dated 05.04.2007 and on identical issue it was held as follows:-
"The case of the assessee, however, is that the subject matter of deduction u/s. 80IA is the profits derived from the business of industrial undertakings and hence it is only that expenditure which is directly attributable to the earning of the said profits that can be the subject matter of deduction for computing the aforesaid profits and not head office expenses. We are unable to agree with the aforesaid submission for two reasons. First reason is that it is the profit derived by the assessee from the business of industrial undertaking which has been made eligible for deduction u/s. 80IA d not any other profit. Second reason is that the computation of profits eligible for deduction u/s. 80IA has to be done in accordance with the provisions of section 28 to 43. Perusal of the aforesaid provisions reveals that all those expenses, which are incurred for the purposes of the business of the industrial undertaking, are to be allowed while computing the business profit. It cannot be said that Head Office expenses or common expenses are not incurred or are ITA Nos.562 & 755/Bang/2007 Page 12 of 42 uncommon for the purposes of the business of the industrial undertaking. What is now required to be computed is the profits derived from the business of industrial undertaking Therefore, there is no warrant for the proposition that only those expenses, which are directly attributable to earning of profits derived from the business of industrial undertaking alone should be considered. As already stated above the profits eligible for deduction u/s. 801A are net profits derived from the industrial undertaking and therefore they will have to be netted after adjusting all the expenses attributable to them in terms of the provisions contained in sections 28 to 43 of the I.T. Act. Therefore all expenses, whether they are direct or indirect or fixed, semi-fixed or variable, must be adjusted to determine the profits derived from the industrial undertaking. Of course, any component of Head Office expenses, which has been incurred exclusively for the purposes of the business of any particular unit/ undertaking/division will have to be adjusted against the receipts of that particular unit/undertaking/division only. Similarly, Head Office expenses or expenses which are common to all the units/undertakings/divisions expenses will have to be spread over and charged against the receipts of all the units/ undertakings/divisions. If this course is not followed, then what would stand allowed u/s 80IA would be inflated profits and not the net profits derived from the industrial undertaking in terms of the provisions of sections 29 to 43. In this view of the matter and in the absence of any better alternative, the CIT(A) is justified in holding assessee is entitled to deduction of the eligible amounts in respect of the profits derived from the eligible undertakings after the allocation of head office expenses in the ratio of turnover. We see no valid reason to take a view contrary to the one taken by the CIT(A) in this behalf. Ground no. 5 is dismissed."
3. This Tribunal following the aforesaid decision upheld similar allocation of head office expenses in Assessee's case for AY 1999-2000 in ITA No.3330/Mum/2004 order dated 5.4.2019 with the following observations:-
"7. We have given a careful consideration to the rival submissions. We are of the view that the decision of the Tribunal in AY 1995-96 which was ITA Nos.562 & 755/Bang/2007 Page 13 of 42 extracted in the earlier part of this order is applicable to the present assessment year also. We find no grounds to take a contrary view. The decision in the case of Zandu Pharmaceuticals Works Ltd. (supra) is with reference to apportionment of R&D expenses and no parity of facts exist with the present case. As far as the decision of the Hon'ble Madras High Court in the case of Hindustan Lever (supra) is concerned, that decision rests on the facts of that case, where it was found that common head office expenses were simple administrative expenses for running the business. In that view of the matter, we uphold the order of CIT(Appeals) and dismiss ground No.1 raised by the assessee."
4. In the light of the aforesaid decision of the Tribunal, we are of the view that there is no merit in ground No.1 raised by the assessee and accordingly the same is dismissed."
13. Following the Tribunal order for AY 2000-01 and taking a consistent view, this issue is decided against the assessee.
14. Ground No.3 by the assessee is as follows:-
"3. The Learned CIT (A) erred in confirming disallowance of the claim for deduction for a sum of Rs. 6,74,600/- being deduction claimed under section 80-0 at 50% of fees received for supply of engineering designs and drawings.
It is submitted that the claim is for fees received for developing and providing designs and drawings, As per the provision of section 80 0 of the Income Tax Act design and drawings need not be registered for availing the deduction under the aforesaid section. In the facts and circumstances of the case your appellant is entitled for deduction u/s 80-0 for fees received in foreign currency."
15. This issue came up for consideration before the Tribunal in ITA No.3330/Mum/2004 for AY 1999-2000 and vide order dated 5.4.2019 it was held as under:-
ITA Nos.562 & 755/Bang/2007 Page 14 of 42 "28. We have given a careful consideration to the rival submissions.
As far as the evidence filed by the assessee to show that it had supplied designs for use outside India by a foreign enterprise, the assessee filed copy of invoices at pages 21-23 of PB. The same is as under:-
INVOICE (dated 23.06.98) Consignee Asea Brown Boveri Ltd. (Taiwan), Air Pollution Control Group (PES), 6F, Nanhing E Road, Sec.4, P.O. Box 81 54, Taipei.
Taiwan R.O.C.
Description of Goods Quantity Amount
USD
TECHNICAL SERVICE CHARGE
Charges for
Mechanical Design Drawing
FAA-5*45M-2*24M-150M-A2 1 Lot.
Total order value is USD 45,000.00.
60% amount on USD 45,000.00 is 27,000.00
Payable against this invoice through
ABB netting arrangement.
INVOICE (dated 24.07.98)
Consignee
Asea Brown Boveri Ltd. (Taiwan),
Air Pollution Control Group (PES),
6F, Nanhing E Road, Sec.4,
P.O. Box 81 54, Taipei.
Taiwan R.O.C.
Description of Goods Quantity Amount
USD
TECHNICAL SERVICE CHARGE
Charges for
Mechanical Design Drawing
FAA-5*45M-2*24M-150M-A2 1 Lot.
Total order value is USD 45,000.00.
ITA Nos.562 & 755/Bang/2007
Page 15 of 42
60% amount on USD 45,000.00 is 27,000.00
received.
Balance 40% amount now payable ... 18,000.00
Additional charges as per MOM dated
01.07.98 to 07.07.98 8,500.00
-------------
Total 26,500.00
INVOICE (dated 28.07.98)
Consignee
Asea Brown Boveri Ltd. (Taiwan),
Air Pollution Control Group (PES),
6F, Nanhing E Road, Sec.4,
P.O. Box 81 54, Taipei.
Taiwan R.O.C.
Description of Goods Quantity Rate Amount
USD
TECHNICAL SERVICE CHARGE
Charges for
Mechanical Design Drawing
FAA-5*45M-2*24M-150M-A2 1 Lot.
Service Charges of our
Mr S K Datta who visited your
office in connection with cited
business and as per your lotus note
dated 15.06.98
a) Agreed charges [as per above LN]
for the period from 01.07.98-07.07.98 7 days 200/day 1,400.00
b) Out of pocket expense @ USD 25/day 7 days 25/day 175.00
b) Air Ticket Cost INR 33,205.00 - - 786.00
@ USD1 = Rs.42.25. -------------
Total 2,361.00"
-------------
29. It appears from the invoices, especially the third invoice (dt. 28.07.98) that one Mr. S.K. Datta visited Taiwan in connection with the mechanical design drawing. It thus appears to be a case where the assessee was only rendering technical services for which it received consideration and did not supply any design for use by the foreign enterprise outside India. In fact, ITA Nos.562 & 755/Bang/2007 Page 16 of 42 on similar grounds, the Tribunal in ITA No.3089/Mum/2003 in assessee's own case for the AY 1998-99, upheld the order of CIT(Appeals) with the following observations:-
"10.5 We have heard the rival submissions and perused the materials on record. On a close observation of the reasoning of the CIT(A) in rejecting the assessee's claim, it is observed that the assessee's representative was specifically asked to furnish a copy of agreement entered into Swiss Company. However, the learned AR admitted that no such agreement existed in respect of services rendered and what has been claimed as deduction was merely on the basis of invoices raised for the purpose, The main contention of the assessee all along was that it had provided certain engineering designs for the power plant(s) which Swiss company was, according to the assessee, to set up in India. However, no copies of engineering designs purported to have been provided to the foreign company were furnished for verification/examination even at this stage. As admitted by the learned AR before the first appellate authority, no agreement worth the name has been entered into with Swiss company to provide designs etc. It is rather surprising as to how the assessee - a Limited Company - had agreed to provide certain expertise such as engineering designs that too for setting up of power plant(s) without reducing the terms and conditions such as payment details etc., in writing. The learned A. R's argument that what has been claimed as deduction was on the basis of invoices raised for the purpose of receipt, in our considered view, doesn't have arty merit. Merely raising invoices for the purpose of having provided engineering designs cannot be a yardstick to determine the exact amounts received by the assessee for the services rendered by it. Mere raising of invoices and on the basis of which claiming deduction u/s 80-0 of the Act running into crores of rupees can neither be justified nor allowed without any sheer of documentary proof. In view of the above facts and circumstances of the issue, we inclined to agree with the reasoning of the CIT (A), which does not require our intervention. It is ordered accordingly."
ITA Nos.562 & 755/Bang/2007 Page 17 of 42
30. The facts of the case in the present assessment year being identical to the facts in the aforesaid decision of the Tribunal for AY 1998-99, We are of the view that there is no material before us in the present AY to take a contrary view. We are also of the view that in view of the aforesaid conclusion, the question as to whether; to claim deduction u/s. 80-O, the person claiming deduction should be the owner of the IPR or not, is academic and therefore does not call for any adjudication in the facts and circumstances of the present case.
31. In the result, ground No.3 raised by the assessee is dismissed."
16. Since the facts in the present assessment year are similar to those considered by the Tribunal in AY 1999-2000, this ground is rejected.
17. Ground No.4 of the assessee's appeal reads as follows:-
"4. The Learned CIT (A) erred in holding that expenditure of Rs. 18,14,331/- being amount spend towards Repairs and renovation of Leasehold premises is capital expenditure."
18. This issue also came up for consideration before the Tribunal in ITA No.3330/Mum/2004 for AY 1999-2000 wherein similar ground was dismissed. Since the CIT(A) in the present case followed the earlier order of Tribunal, being so, we do not find any infirmity in the order of CITJA and the same is confirmed.
19. Ground No.5 reads as under:-
"5. The Learned CIT (A) erred in disallowing a sum of Rs. 5,72,796/- being reversal of provision made for the obsolete stock in earlier years.
It is submitted that Learned Assessing Officer & CIT (A) has disallowed the claim for deduction of provision made for obsolete stock. The reversal thereof (write back) should not be taxed again. It is submitted that it may be so held now."
ITA Nos.562 & 755/Bang/2007 Page 18 of 42
20. This issue is with regard to provision for obsolescence. The AO made an addition of Rs.1,26,08,347/- to the income towards provision for stock obsolescence, consistent with the stand of the Department for the AY 2000-01. During the proceedings before the CIT(A), it was explained that the total value of closing stock as on 31/3/01 was Rs.127,67,60,633/-. This figure was arrived at as under :
year ending Year ending
Particulars
31/3/2001 31/3/2000
Stores & Maintenance spares 6,956,209 9,258,309
Raw Materials 111,027,513 80,262,682
Components 694,422,309 553,494,266
Finished Goods 75,743,881 86,868,628
Contract in progress/WIP 499,790,463 363,371,801
Provision for Obsolescence (-)111179742 (-)111752538
1,276,760,633 981,503,148
21. The CIT(A) observed that the above figures are the aggregate of the figures relating to 7 units at Maneja Andheri, Nasik, Faridabad, Chennai, Kolkatta and Peenya. From the total value of stock the company has reduced provision for obsolescence at Rs.11,11,79,742/-. The AO did not add back this amount and has added a different figure. After examining the details relating to the provision, the CIT(A) noted that as on 1/4/00 the total value of closing stock was Rs.98,15,03,148/-. As in the current year from the total of inventory in the 7 units, the company had reduced the provision for obsolescence standing at Rs.11,17,52,538/-. In the assessment order for the AY 2000-01 he found that an addition of Rs.2,80,33,285/- was made to the closing stock on account of the provision for obsolescence made during that year, which was confirmed by the CIT(A).
ITA Nos.562 & 755/Bang/2007 Page 19 of 42
22. In the present case, the CIT(A) was of the view that the only issue to be seen is whether any fresh provision was made towards obsolescence in the accounts for the year under consideration. As mentioned earlier as on 1/4/00 the total provision for obsolescence stood at Rs.11,17,52,538/-. As on 1/4/01 the provision had come down to a lower figure of Rs.11,11,79,742/-. Thus there has been a reversal in the provision and no fresh provision has been made. An attempt has also been made to show how the AO arrived at a figure of Rs.1,23,08,347/- as the provision for stock obsolescence. It is explained that details relating to provision created were provided to the AO during the assessment proceedings. In the details filed on 4/2/04, the following figures were given.
Location Amount
Andheri 9,660,369
Faridabad 5,106,000
Maenja 1,875,787
Nasik -987,825
Peenya -3,045,984
Total 12,608,347
23. According to the CIT(A), there are two mistakes in the details given. In respect of the Andheri unit the provision made during the year was shown at Rs.96,60,369/- instead of the correct figure of Rs.12,85,226/-. Likewise in respect of the Faridabad unit the provision during the year was shown at Rs.51,06,000/- as against provision of Rs.3,00,000/-. Subsequently the corrected figure was given. The AO proceeded on the basis of the original figures. The correct position with regard to opening balance, the provision made during the year and the closing balance in the obsolescence account is given below :
ITA Nos.562 & 755/Bang/2007 Page 20 of 42 Location Opening Fresh Provision Closing Provision for created/(Reversed) provision obsolete during the year as on inventory as on 1/4/00 to 31/3/01 31/3/01 Andheri 8,375,143 1,285,226 9,660,369 Faridabad 4,806,000 300,000 5,106,000 Maneja 21,528,121 1,875,787 23,403,908 Nasik 8,479,225 -987,825 7,491,400 Chennai 1,613,000 - 1,613,000 Peenya 66,951,049 -3,045,984 63,905,065 Total 111,752,538 -572,796 111,179,742
24. On verification, the CIT(A) was of the view that the mistake happened in respect of Andheri and Faridabad unit. The closing balance in the provision account was shown as provision made during the year ignoring the opening balance. To sum up there is a reversal in the provision account as under :-
Unit Provision made/reversed
Andheri Rs. 12,85,226/-
Faridabad Rs. 3,00,000/-
Maneja Rs. 18,75,787/-
Nasik Rs. 9,87,825/- } Provision
Peenya Rs.30,45,984/-} reversed
Net reversal in the provision A/c. : Rs. 5,72,796/-
25. Before the CIT(A), it was explained that the provision is normally made based on the accounting standards. On subsequent verification, the CIT(A) found that excess provision had been made in Nasik and Peenya units. Therefore, the excess provision was reversed. Since no fresh provision was made towards obsolescence, the addition deleted by the CIT(A).
ITA Nos.562 & 755/Bang/2007 Page 21 of 42
26. Now the contention of the ld. AR is net reversal of Rs.5,72,796 has to be allowed as a deduction in the assessment year under consideration. In our opinion, this amount of Rs.5,72,796 was allowed as a deduction in the earlier years when the provision was created. Now non-taxing of the same amounts to allowing double relief. Hence reversal of provision of Rs.5,72,796 has to be brought to tax in the assessment year under consideration. As such, we confirm the order of CIT(Appeals) on this issue and dismiss this ground of appeal by the assessee.
27. The assessee has raised ground No.6 as under:-
"6. The Learned CIT (A) erred in confirming disallowance made under section 14A of the income tax act being expenses incurred for earning the dividend from the investment made out of the interest bearing funds.
It is submitted that no investment has been made out of the interest bearing funds and therefore the CIT (A) ought to have held as such."
28. The company had claimed dividends of Rs.6,86,190 as exempt u/s.10(33). Based on the details given, in the assessment order the AO estimated the expenditure attributable to the earning of dividends at 8,93,184/-. The CIT(A) observed that basically the formula adopted is erroneous, since the expenditure estimated is more than the income. He noted that the AO considered the investment made in taxable investments also. The CIT(A) therefore directed to estimate the expenditure only on the investments made in tax free dividends.
29. We have heard both the parties on this issue. Similar issue also came up for consideration before the Tribunal in ITA No.3330/Mum/2004 for AY 1999-2000 wherein the Tribunal held as under:-
"40. From a perusal of the details of own funds available, it is clear that own funds of the assessee were much more than the ITA Nos.562 & 755/Bang/2007 Page 22 of 42 investments that yielded tax-free dividend income. In such circumstances, we are of the view that the revenue authorities were not right in concluding that the borrowed funds on which interest was paid was used for the purpose of making investments that yielded tax-free dividend income. In that view of the matter, we are of the view that the addition made by the revenue authorities cannot be sustained. The same is directed to be deleted."
30. The facts in AY 1999-2000 being identical in the case before us, we delete the addition on similar reasoning.
31. The next ground (No.7) by the assessee reads as under:-
"7. The Learned CIT (A) erred in confirming the disallowance of the sum of Rs. 20,264,477/- being provision made for loss order on the ground that same is contingent in nature and there is no scope for allowance of any liability that is unascertainable.
It is submitted that your appellant has provided for loss likely to be incurred on the execution of the particular order. As per the accounting standard on accounting for the contracts, it is mandatory to made provision for the loss order based on the technical and commercial evaluation of the contract and it cannot be considered as contingent."
32. A provision of Rs.2,02,64,477/- has been made by the assessee towards loss orders. The AO disallowed this as a contingent liability in line with the decision taken for the AY 2000-01. The CIT(Appeals) found that the issue was decided for that year by CIT(A) in para 42 to 45 of the order. On a detailed consideration of the facts and the legal position the CIT(A) upheld the action of the AO. The facts being the same the addition made was sustained by the CIT(Appeals).
33. This issue came up for consideration before the Tribunal in ITA No.3240/Bang/2004 for AY 2000-01 and vide order dated 18.3.2020 it was held as follows:-
ITA Nos.562 & 755/Bang/2007 Page 23 of 42
38. As far as Gr.No.5 is concerned, the facts are that the Assessee was also engaged in construction of power plants. The Assessee claimed that it was likely to incur loss in three contracts for construction of power plants that it had undertaken to construct. The loss so claimed was Rs.93,59,927/- as per the order of the AO but as per the basis of computation of such loss as given by the Assessee at page-32 of the paper book, the loss was computed at Rs.81,60,001 as follows:-
Name of the MVA Material Material Process Total Sale Provision customer cost O/H Cost Cost Price for Loss Order UPSEB 100 9.239,563 461,978 4,315,000 14,016,541 10,198,541 3,818,000 Tata Consulting 90 10,967,067 548,353 3,883,500 15,398,920 12,313,920 3,085,000 Engineers ABB THS-SS 25 4,931,667 246,583 1,078,750 6,257,000 5,000,000 1,257,000 (MSEB) Total 8,160,001
39. According to the AO, the loss in question was contingent in nature and cannot be allowed as deduction. According to the Assessee, as per the method of accounting followed by the Assessee, it provides for loss that are likely to be incurred on execution of particular order.
40. On appeal by the Assessee, the CIT(A) confirmed the order of the AO holding that the Accounting Standards claimed to have been followed in claiming the aforesaid deduction by the Assessee cannot override the provisions of the Act and that as per the Act only expenditure or loss that has accrued or ascertained can be allowed as deduction and not a loss that is likely to occur in future.
41. Aggrieved by the order of the CIT(A), the Assessee is in appeal before the Tribunal. The learned counsel sought to place reliance on Accounting Standard-7 of the Institute of Chartered Accountants of India (ICAI) which provides in paragraph-21, 31 and 35 that when it is probable that total contract costs will exceed total contract revenue, the expected loss should be ITA Nos.562 & 755/Bang/2007 Page 24 of 42 recognized as an expense immediately. In so far as the statutory recognition of AS-7 of ICSI is concerned, it is admitted position that the said AS has not been notified u/s.145 of the Act as an Accounting Standard. The learned counsel for the Assessee however sought to argue that AS-1 is an accounting standard notified u/s.145 of the Act as an AS applicable for AY 2000-01 and therefore the principle of prudence mentioned in the said AS-
1 will be applicable which provides that anticipated losses should be considered while arriving at the profit of the Assessee. He placed reliance on the decision of the ITAT Mumbai Bench in the case of Jacobs Engineering (India) Pvt. Ltd. Vs. ACIT (2011) 14 taxmann.com 186(Mumbai) in which it was held that foreseeable loss has to be allowed as deduction provided the calculation and quantification of such loss is acceptable and in terms of AS-7. That case related to AY 2002-03 & 2003-04 when AS-7 had not been notified as applicable AS u/s.145 of the Act. Reliance was also placed by him on the following other decisions in support of his contention that foreseeable loss has to be allowed as deduction:-
(1) Dredging International N.V. Vs. ADIT (IT) 1 (2). (2011) 48 SOT 430 (Mumbai) wherein it was held that foreseeable loss has to be allowed as deduction under AS-7 in a case relating to AY 2006-07.
(2) M.N. Dastur & Co. Ltd. Vs. DCIT (1997) 61 ITD 167(Cal). This case relates to percentage completion method (POC method) of recognizing income from the business of rendering consultancy services. The method was accepted in the past but in a subsequent AY, the AO rejected the said method and held that the POC method was contrary to mercantile system of Accounting. The Tribunal held that since the POC method was consistently and regularly employed and was a recognized method, the AO was not justified in departing from it.
(3) CIT Vs. Triveni Engg. & Industries Ltd. 336 ITR 374 (Delhi) for AY 2000-01, in which it was held that when the Assessee followed Completed contract method of accounting income from projects, provision for expenses to be incurred up to the stage of completion of contract was to be allowed as deduction as it was not disputed that it was not a contingent liability but the dispute was only in the year of allowability, the Court held that it was ITA Nos.562 & 755/Bang/2007 Page 25 of 42 allowable because the rate of tax for the year in which the liability would actually accrue and the year in which it was claimed as deduction was one and the same.
42. The learned Standing Counsel for the Department submitted that there has been no basis given by the Assessee as to how it quantified the loss in question. He submitted that it is, at best, a provision which cannot be allowed as deduction and in this regard relied on the observations of the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd. Vs. CIT 314 ITR 62 (SC) wherein it was held that for a provision to be recognized as liability a reliable estimate has to be made of liability, otherwise it does not satisfy the test of being called as a provision for liability.
43. The learned counsel for the Assessee in his rejoinder submitted that the basis of quantification has not been disputed by the AO and that he has disallowed only on the basis that the loss is contingent in nature. He also submitted that the decision cited by the learned Standing Counsel for the Department is in the context of provision for warrant which is not applicable to the facts of the case of the Assessee in this appeal and in the context of claim for allowing anticipated loss.
44. We have given a careful consideration to the rival submissions. In our view when the AO says that the loss in question is contingent he is deemed to have questioned the basis on which the Assessee has quantified the loss. Without assigning a basis on which the loss is said to be accrued loss, the Assessee cannot claim deduction on account of foreseeable loss. We deem it fit and proper to remand the issue to the AO for fresh consideration with a direction that the Assessee will furnish the basis on which he claims that there would be loss in the three contracts, the details of which are given above. The AO will consider the same and decide the issue afresh in accordance with law after affording Assessee opportunity of being heard.
34. On similar reasoning as in Tribunal's order for AY 2000-01, we set aside the issue to the file of AO for reconsideration.
ITA Nos.562 & 755/Bang/2007 Page 26 of 42
35. Ground No.8 by the assessee is as follows:-
"8. The Learned CIT (A) erred in confirming disallowance of bad debts written off of Rs. 2,18,33,372/- on the ground that said amount represent debts, which are more than 5 years old as on 01/04/2000. It is submitted that as per provisions of Section 36 of the income tax act your appellant is entitled for the deduction as and when the debts are written off.
The Learned CIT (A) further erred in confirming the disallowance of Rs. 53,23,247/-. It is submitted that Rs. 53,23,247/- includes Rs. 10,41,178/-, which is already considered in the disallowance of Rs. 2,18,33,372/- above. To this extent it would amounts to double disallowance.
Further, Rs. 53,23,247/- includes advances made during course of business and written off during the year. It is submitted that considering the nature of advances, Learned CIT (A) ought to have allowed the deduction."
36. The company made a claim of Rs.8,46,74,000/- towards bad debts and advances written off. The company was asked to explain the basis for writing off various items amounting to Rs.8.46 crores. The company filed a list showing general reasons for the write off such as dispute about taxes and dues, excess supplies not accepted, claim for demurrage, dispute relating to freight, insurance and discount, dispute relating to quality, specification, guarantee and the category including companies which become sick or transactions in respect of which records are not available. The AO took note of the fact that the company did not explain the efforts made to recover the same. On being given a further opportunity the company reiterated its earlier stand. Copies of correspondence with various parties were filed. The AO held that the same are not acceptable as evidence. He further held that the company was unable to establish how it made an honest judgement regarding the amounts written off. The AO also concluded that the books of earlier years were not produced to show that ITA Nos.562 & 755/Bang/2007 Page 27 of 42 the amounts in question had been part of the computation. The AO took a view that the decision to identify and write off bad debts should be a bonafide judgement. He therefore disallowed the entire claim.
37. During the appellate proceedings all details were filed/produced before the CIT(A), who sought a remand report from the AO on the submissions. In the first remand report dated 27.6.2005 submitted, the ACIT submitted that the company was requested to furnish the details relating to the bad debts and also individual details in respect of debts exceeding Rs.2 lakhs. Examination of the details revealed that the claim of bad debts included advances written off and commission receivable written off. A major component of the bad debt related to penalty and liquidated damages as a consequence of deficiency and delay in delivery of material. A test check showed the deduction had been made by the parties. In some of the cases amounts have been due for over a decade. The AO also conducted detailed enquiries with KEB, now KPTCL who had levied two penalties as under :
1) In respect of PO No.9108 dated 24/6/94 : Rs.3,20,487/-
2) In respect of PO No.9519 dated 9/11/94 : Rs.1 1,13,565/-
38. The AO found that KPTCL confirmed that the deductions had been made as a penalty. He however was of the view that these amounts represented liquidated damages and penalty relating to trade. At best the same can be allowed as a business loss. The AO also pointed out that the following items cannot be treated as bad debt. :
1) ABL Ltd. : Rs.7,08,844/-
2) ABL, Germany : Rs.1,64,660/-
39. These amounts are advances paid to group companies for services to be rendered. Advances made to ABL Ltd and ABL, Germany were ITA Nos.562 & 755/Bang/2007 Page 28 of 42 written off since the company was sold to an outsider. The AO noted that the company was sold to another group entity.
3) M/s.MMC of Rs.29,44,403/-
40. The amount advanced to this company was written off since it went into liquidation. The AO noted that it was an advance paid and not included in the profits of the company.
41. In addition the AO pointed out in respect of an aggregate amount of Rs.50,48,446/-. details were not forthcoming. During the proceedings it was clarified that the amount of Rs.50,58,446/- represented the total write off in respect of individual items below Rs.2 lakhs.
42. In response to the remand report, the company filed a rejoinder in a reply dated 20/1/06. The same was forwarded to the AO for a further report. In the further report dated 20/7/06, the AO has made the following submissions.
a) Before sending the original remand report detailed enquiries were made.
b) No details were filed in respect of aggregate sum of Rs.50,48,446/-since it would include items below Rs.2 lakhs.
c) In addition, the AO has provided a classification of the bad debts In respect of 53 items exceeding Rs.2 lakhs each he has submitted a tabulation. The total claim of Rs.8,46,73,674/- has been written off for various reasons as under :
ITA Nos.562 & 755/Bang/2007 Page 29 of 42 ITA Nos.562 & 755/Bang/2007 Page 30 of 42
43. The CIT(A) noticed that in respect of items exceeding Rs.2 lakhs each write off is supported by documents and valid reasons. During the proceedings the learned representatives were asked to indicate the basis for identification of bad debt and the hierarchy involved in the decision making. It was clarified that each division has its own marketing and other functions. The marketing department of each division is responsible for recovery of dues. Since each division is treated as a profit centre, there is pressure on the marketing persons to realise all the dues. In this background, in case recovery has become difficult for any reason, the marketing group head of a particular division identifies such items and submits a proposal for write off. The proposal for write off was examined at 5 subsequent levels ending with the Managing Director and CEO as under :
ITA Nos.562 & 755/Bang/2007 Page 31 of 42
44. It was therefore submitted that a decision for write off cannot be taken without documentation, valid reasons and application of mind. At every level the proposal is examined and vetted by a responsible group. It is further pointed out that no division would like to show a loss by writing off dues since the premium is on performance.
45. During the appellate proceedings the company was asked to file the location wise chart showing the volume of the debts written off which was provided as under:-
SUMMARY Nature Total Nos Total Amount Late Delivery 279 71,398,699 Dispute of taxes 11 3,285,756 Freight not 3 45,699 paid/freight Others 12 5,323,047 Technical disputes 6 2,908,918 Liquidity problem/co. 2 1,711,555 do not exist Total 313 84,673,674 It was stated that in respect of smaller bad debts full details are not available.
46. On the first issue as to whether a tax payer can write off any debt, the CIT(A) relied on the decision of full Bench of ITAT in the case of Oman International Bank Corporation 2006-TIOL-118-ITAT-MUM-SB. In that case the ITAT agreed with the interpretation that even after the amendment, only bad debts can be written off. The tax payer has to establish the bonafides of the write off. The CIT(A) observed that the proposal and procedure for write off involves an elaborate decision making process at various levels ITA Nos.562 & 755/Bang/2007 Page 32 of 42 starting with the field force and ending with the Managing Director. Each division does the appraisal independently. There is standardisation since the proposals from all divisions are examined at a central level. The details filed also show that many of the debts are more than 2 years old. It is a business judgement whether to enter in to litigation or to write off the debts.
Bulk of the claim is because of delay in delivery. On account of delay in delivery alone the company suffered a recovery of Rs.7,13,98,699/- on account of dispute of taxes it suffered a further shortage of -7- Rs:32,85,756/-. On account of technical disputes relating to specification there was a further deduction of Rs.29,08,918/- and on account of dispute on freight of Rs.45,699/-. A write off of Rs.17,11,555/- was occasioned because of the liquidity problems suffered by the purchasers. Each of these figures has been quantified by the AO himself after going through individual details. There is no question or doubt about the veracity.
47. The AO's objection that the company has not established that the amounts written off were not part of the book results in earlier periods, the CIT(A) held that this is a clear contradiction in terms. Having quantified the write off under various heads, the AO cannot say that these sums were not part of the book results. The objection of the AO was misplaced. The CIT(A) therefore held that the company has produced details to substantiate the claim by and large. The entire write off was a business decision based on facts and circumstances except in the following cases :
i) In respect of smaller items a total claim of Rs.53,23,047/- has been made. The full details of the claim are not available.
ii) It is seen that the above amount further cannot be allowed as a deduction-
a) The following advances were made to group concerns :
i) Rs.7,01,844/-
ii) Rs. 1,64,660/-
ITA Nos.562 & 755/Bang/2007
Page 33 of 42
The advances were written off on the ground that the companies which had received the advances had been sold. It is found that the another group entity purchased the company. Therefore the assessee was not justified in writing off the above amounts.
b) Advances to MMC : Rs.29,44,403/- : The CIT(A) observed that this amount does not represent an advance but resented an inter corporate deposit. It is fairly conceded by the representatives the surplus funds were deployed with MMC. The company went into liquidation. Even then the amount cannot be written off because the deposits were not made during the course of business and the deposits had not come out of income charged to tax in any earlier year. The AO was therefore directed to disallow the total sum of Rs.53,23,247 which includes the above sums.
48. Regarding the age of debts written off, the CIT(A) noted that some of the debts written off are extremely old dating back to the 1980's. For instance on account of late delivery there are six items relating to transactions prior to 1982 amounting to Rs.20,02,229/-. Likewise under 'others', there are two items relating to the period 1980-1982 aggregating Rs.10,25,000/-. The representatives were asked to explain this unusual occurrence in the context of the claim that debts are regularly reviewed and written off every year. It was explained that once supplies are made the buyer could make deductions on account of a number of factors such as deficiency in quality, late delivery etc. As a policy, the company pursues the matter with the buyer to recover as much as possible. It is only when all hopes of recovery stand eliminated that the debt is eventually written off. While the CIT(A) was of the view that this is a reasonable explanation it was still felt that the process of negotiations, recovery and write off should not take as long as 15 years time. During such a length of time many factors can undergo a change. Such delays are abnormal and contrary to ITA Nos.562 & 755/Bang/2007 Page 34 of 42 business practice. A bad debt occurs out of a contractual liability. Under the Contracts Act and the Sale of Goods Act there are time limits to initiate action. The assessee indicated that the debts received relate to regular transaction and there is no question of litigation.
The CIT(A) observed that in respect of contractual liability a claim can be made when the liability has crystalised. Applying this test it was held that write off of debts which are less than 5 years old as on 1/4/00 is justified. This takes into account the business practice and the system employed for write off. In respect of older write off would not be in conformity with the system employed and the treatment of contractual liabilities. The details filed were therefore analysed. It was seen that 239 items amounting to a total of Rs.6,28,40,382 represent debts which are less than 5 years old. 74 debts aggregating Rs.2,18,33,372/- represent debts which are more than 5 years old as under :-
Nature Number of Items Amount Late Delivery 63 18,563,076 Dispute of taxes 2 28,432 Frieght not 1 6,097 paid/freight Others 3 1,041,178 Technical disputes 3 483,034 Liquidity 2 1,711,555 problem/company do not exist Total 74 21,833,372
49. The Assessing Officer was directed to disallow the amount of Rs.2,18,33,372/- which represent debts which are more than 5 years old as on 1/4/2000. This is over and above the disallowance of Rs.53,23,247/- towards similar items. The balance was allowed as a deduction.
ITA Nos.562 & 755/Bang/2007 Page 35 of 42
50. We have heard both the parties and perused the material on record on this issue. Section 36(1)(vii) provides as follows:-
36. Other deductions.--(1) the deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in S.28-
(i) to (vi) ** ** **
(vii) subject to the provisions of sub-s. (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year."
51. Thus, it is evident that after 1-4-1989 it is not necessary for the assessee to establish the fact that the debt in fact had become irrecoverable and it is sufficient if the bad debt is written off as irrecoverable in the books of account of the assessee.
52. In the facts of the case, twin issues viz., (i) whether debt which was written off during the relevant year was offered to income in Previous year or earlier years, (ii) whether the assessee has debited the amount of doubtful debt to profit and loss account and has reduced the same from the asset side of the balance sheet require determination to decide the claim of the assessee with regard to writing off the bad debt. The Supreme Court dealt with Section 36(1)(vii) of the Act, which was amended with effect from 1-4-1989 in Southern Technologies Ltd. 320 ITR 577 (SC). It was inter alia held that after 1-4-1989, a mere provision for bad debt would not be entitled to deduction under section 36(1)(vii) of the Act. It was further held that if an assessee debits an amount of doubtful debt to profit and loss account and credits the asset account like sundry debtors account, it would constitute a right of an actual debt. However, if an assessee debits 'provision for doubtful debit' to profit and loss account and makes a corresponding credit to current liabilities and provisions on the liabilities side of the balance sheet then it would constitute a provision for ITA Nos.562 & 755/Bang/2007 Page 36 of 42 doubtful debt. It was thus held that in the latter case the assessee would not be entitled to deduction after 1-4-1989. The aforesaid decision was referred to with approval in Vijaya Bank (supra).
53. However, from the close scrutiny of the orders passed by the lower authorities, we find that aforesaid aspect of the matter has not been examined. Therefore, the issue is remitted to the assessing officer to ascertain twin questions viz., (i) whether debt which was written off during the relevant year was offered to income in Previous year or earlier years,
(ii) whether the assessee has debited the amount of doubtful debt to profit and loss account and has reduced the same from the asset side of the balance sheet. The matter is remitted to the AO for de novo consideration of the aforementioned aspect.
54. In the result the assessee's appeal is partly allowed.
55. Coming to the revenue's appeal, ground No.3 reads as follows:-
"3. The CIT(A) erred in directing the AO to allow deduction u/s 80HHB when no separate books in respect of foreign project were maintained."
56. The AO did not allow deduction u/s.80HHB in respect of specified projects. He held that the assessee has not maintained separate books in respect of business of foreign project. The CIT(A) noted that separate accounts were maintained in respect of each project and audit certificates in form I0CCAH have also been furnished in respect of each project. A summary of such projects has been filed and is available in the audit report which has also been filed in page 56 of the paper book filed. In the circumstances, the CIT(A) observed that the AO is incorrect in holding that separate accounts are not maintained. For AY 1999-2000 and 2000-01 the CIT(A) had also taken a similar view in respect of foreign projects. The AO ITA Nos.562 & 755/Bang/2007 Page 37 of 42 was therefore directed to allow deduction u/s.80HHB in respect of the income of the eligible foreign projects.
57. After hearing both the parties, we find that this issue came up for consideration before the Tribunal in ITA No.3330/Mum/2004 for AY 1999- 2000 wherein the Tribunal held in favour of the assessee as follows:-
"57. We have given a careful consideration of the rival submissions. The order of the CIT(Appeals) is based on the decision of the Hon'ble Supreme Court in the case of Continental Construction Co. Ltd. (supra). In the decision in the case of Continental Construction Limited (supra), the Hon'ble Supreme Court pointed out as to how Section 80HHB of the Act should be interpreted. It was held that Section 80HHB of the Act should not be interpreted in a narrow or pedantic fashion, as the Section provides for an exemption in respect of profits for a foreign project undertaken outside India in the course of business. The Hon'ble Apex Court further held that the expressions "business of execution of a foreign project" or work forming part of it or the 'profits derived' from the business, take in all aspects of a business involving the activities referred to in Sub-Section (2)(b) of Section 80HHB of the Act together with all activities, commitments and obligations ancillary and incidental thereto and the profits flowing therefrom. It was also held that the definition cannot be restricted to the mere physical activity or putting up the superstructure, machinery or plant, but should be understood to take within its fold all utilization of technical knowledge or rendering of technical services necessary to bring about the construction, assembly and installation.
58. Bearing in mind the above legal principle, if we examine the nature of work done by the assessee in the foreign country, we fully subscribe to the factual finding recorded by the CIT (A).
It has to be borne in mind that Section 80HHB of the Act is a provision, which grants incentive to the assessee for growth and development and as held by the Hon'ble Supreme Court in several decisions, such provision should be liberally construed, as it will promote economic growth of the country. We therefore ITA Nos.562 & 755/Bang/2007 Page 38 of 42 uphold the order of CIT(A) and find no merits in the relevant ground of appeal (iii) raised by the revenue."
58. Accordingly, we reject this ground by the revenue.
59. The next ground by the revenue is as under:-
"4. The CIT(A) erred in allowing the claim of expenses towards entrance and the subscription fees paid by the assessee to clubs holding them to be revenue expenditure."
60. The AO has disallowed an amount of Rs.9,05,227/-. This includes both entrance fees and subscription. This disallowance was deleted by the CIT(A) for AY 99-00 and 2000-01. Besides the ITAT, Bangalore Bench in East West Hotels Ltd. vs. ACIT 2006 9 SOT 48 has also held that entrance fees paid to club has to be allowed as business expenditure. Following the decision of the ITAT the disallowance was deleted by the CIT(Appeals).
61. This issue came up for consideration before this Tribunal for AY 1999-2000 wherein the Tribunal decided the issue against the department by para 68 of the order which is as follows:-
"68. Aggrieved by the order of CIT(Appeals), the revenue has raised ground (v) before the Tribunal. This issue is no longer res integra and has been settled by the Hon'ble Supreme Court in the case of CIT v. United Glass Mfg. Co. Ltd. [Civil Appeal Nos. 6447 to 6449 of 2012, dated 12-9-2012] wherein it was held that club membership fee paid by the company is an admissible business and cannot be regarded as capital expenditure. In view of the aforesaid decision of the Hon'ble Supreme Court, we are of the view that there is no merit in ground (v) raised by the revenue."
62. Accordingly, we dismiss this ground.
63. Ground No.5 by the revenue is as follows:-
ITA Nos.562 & 755/Bang/2007 Page 39 of 42 "5. The CIT(A) erred in allowing the claim of the assessee amounting to Rs. 2,85,58,731 being R & D expenditure u/s 35(I)(iv) when the activity claimed to be the R&D activity is part of normal business of the assessee."
64. The above amount represents capital expenditure on R&D activity and the claim has been made u/s.35(1)(iv). Consistent with the stand for AY 2000-01 the AO held that no research activity was conducted by the assessee and therefore deduction u/s.35(1)(iv) could not be allowed. The CIT(A) observed that the issue has been decided in favour of the assessee by the CIT(A)-VIII, Mumbai in his appellate order for AY 2000-01. During the proceedings all the details relating to research activity have been filed in the paper book. It is seen that the R&D Division has been approved by the Department of Scientific Industry Research. The approval initially granted has been extended up to 31/3/06. The details at pages 106, 107 relate to the projects in progress and the status of each research project. Under company law necessary disclosure has to be made in the accounts. The assessee has also filed copies of the status reports in respect of each project. Considering the above and following the decision of the CIT(A) for AY 2000-01, the AO was directed to allow R&D expenditure at Rs.2,85,58,731/- by the CIT(A). Against this, the revenue is in appeal before us.
65. This issue was considered by the Tribunal for the AY 2000-01 and decided against the revenue vide para 64 of the order dated 18.03.2020 as under:-
"64. At the time of hearing, it was brought to our notice that identical issue was decided by the Hon'ble Karnataka High Court in the case of Tejas Network Ltd. Vs. DCIT (2015) 60 taxmann.com 309 (Karn.) and it was held that where assessee claimed deduction under section 35(2AB) pursuant to certificate issued by prescribed authority, i.e., Department of Scientific & Industrial Research (DSIR), approving such claim, Assessing ITA Nos.562 & 755/Bang/2007 Page 40 of 42 Officer could not have denied weighted deduction under section 35(2AB) in respect of scientific expenditure. It was held that Assessing Officer cannot sit in judgment over report submitted by prescribed authority . It was held that where Assessing Officer does not accept claim of assessee made under section 35(2AB), he should refer the matter to Board, which will then refer question to the prescribed authority. In view of the aforesaid decision, we are of the view that there is no merit in ground No.(iv) raised by the revenue."
66. Accordingly, we reject this ground of appeal by the revenue.
67. Ground No.6 reads as follows:-
"6. The CIT(A) erred in allowing the claim of expenses on the basis of purchase of packing materials, loose tools and consumables in the year of purchase without regard to actual consumption thereof."
68. The AO noted that the assessee had a practice of writing off packing materials, loose tools and consumables in the year of purchase irrespective of the fact whether they were used for the business during the year or not. In the assessment order for the AY 2000-01, the AO rejected this method on the ground that it would disturb the profits of the company. Consistent with this stand, the AO has treated 24% of the total amount debited (12,60,72,000/-) as the value of packing materials and loose tools and consumables in the closing stock. He therefore made an addition of Rs.3,02,57,280/-.
69. The CIT(A) found that the issue is covered by the order of the CIT(A) mentioned earlier for the AY 2000-01 in paras 20 to 24 wherein it was held that the method adopted by the AO is incorrect since a regular method adopted by the tax payer can be disturbed only if a more proper formula is ITA Nos.562 & 755/Bang/2007 Page 41 of 42 followed. There is no change in the facts. That being the case following the decision of the CIT(A) for AY 2000-01 the addition made was deleted for the CIT(Appeals). Aggrieved, the revenue is in appeal before us.
70. The Tribunal dealt with this issue for the AY 2000-01 and vide para 72 decided the issue against the revenue as follows:-
"72. We have given a careful consideration to the rival submissions and are of the view that the order of the CIT(A) on this issue has to be upheld. Admittedly the method of accounting followed by the Assessee was consistent and accepted in the past by the revenue authorities. There is no reason why the same should be disturbed. The decision in the case of Abdul Latif (supra) supports the plea of the Assessee. In the said decision, the facts were that the Assessee was engaged in business of manufacture of papers. In return of income for AY 2005-06, assessee had shown, inter alia, purchases of packing material as on 31-3-2005, but no amount of packing material was shown in closing stock. The Assessee submitted before Assessing Officer that; (i) packing material shown as purchases as on 31-3-2005 was actually purchased in earlier months and such packing material was consumed during process; (ii) on account of some computer problem, bills were posted on 31-3-2005, and (iii) entire packing material left after end of year became obsolete and, therefore, it was not shown in closing stock. The Assessing Officer rejected account books of assessee and made certain addition to his income. The Tribunal held that:- (i) it was not case of revenue that purchases as debited as on 31-3-2005 were not genuine, and (ii) assessee was following a consistent method of valuing closing stock by including packing material as consumed at time of purchase. Rejection of account books of assessee and addition to his income was held to be not justified.
We therefore uphold the order of CIT(A) on this issue and dismiss ground No.(v) raised by the revenue."
ITA Nos.562 & 755/Bang/2007 Page 42 of 42
71. Accordingly, we dismiss this ground of appeal by the revenue.
72. In the result, the revenue's appeal is dismissed.
73. Thus, the appeal by the assessee is partly allowed, while the appeal by the revenue is dismissed.
Pronounced in the open court on this 4th day of March, 2021.
Sd/- Sd/-
( N V VASUDEVAN ) ( CHANDRA POOJARI )
VICE PRESIDENT ACCOUNTANT MEMBER
Bangalore,
Dated, the 4th March, 2021.
/Desai S Murthy /
Copy to:
1. Assessee 2. Revenue 3. CIT 4. CIT(A)
5. DR, ITAT, Bangalore.
By order
Assistant Registrar
ITAT, Bangalore.