TMI Blog2017 (9) TMI 1832X X X X Extracts X X X X X X X X Extracts X X X X ..... rits to be allowed in the hands of assessee. Accordingly, the ground of appeal No.3 is partly allowed. Addition under the head bad debts and irrecoverable balances written off - CIT(A) however, restores this issue back to the file of Assessing Officer to verify whether the amount has been written off - HELD THAT:- Assessee fairly pointed out that the issue has been restored back to the file of Assessing Officer but the Assessing Officer till date has not allowed the appeal effect. We direct the Assessing Officer to allow the claim of assessee in case the said amount has been written off; then the assessee is entitled to claim the deduction under section 36(1)(vii) Debit balances written off - HELD THAT:- The assessee had claimed the expenditure on account of sundry debit balances in the corporate division totaling ₹ 93,66,115/-. The said details included various debit balances written off by the assessee but in the absence of the assessee having established that the said amounts were shown as income in earlier years, the claim of assessee was not allowed. The assessee also made a plea under section 28 of the Act, which was also rejected. Now, before us, the learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the nature of repairs and maintenance and merits to be allowed in the hands of assessee. The expenditure incurred on security cabins and also cabin for computer gate pass system are temporary in nature and are also to be allowed as revenue in nature. Accordingly, we direct the Assessing Officer to delete the addition Non-allowance of loss on forward contract cancellation - revenue or capital expenditure - HELD THAT:- The issue stands squarely covered by the ratio laid down in CIT Vs. Woodward Governor India Pvt. Ltd. [ 2009 (4) TMI 4 - SUPREME COURT] . In view of the ratio laid down by the Hon'ble Supreme Court, we allow the claim of assessee in entirety being revenue expenditure. The ground of appeal No.10 is thus, allowed. Disallowance of advertisement publicity expenses - AO disallowed 5% of total expenditure as not wholly and exclusively for the purpose of business - HELD THAT:- We direct AO to verify the nature of expenses debited under the head product advertisement and publicity expenses and in case the said expenditure has been incurred for the purpose of business, then the same is to be allowed as business expenditure. The balance if any, which is cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the decisions of Hon'ble Supreme Court are misplaced as in both the cases, damages were paid on account of infraction of law and hence, were held to be not allowable as expenditure in the hands of said assessee. In the present case, liquidated damages are paid by the assessee on account of violation of terms of contract entered into with the parties to whom the goods have been supplied by the assessee. There is no infraction of law in such cases and accordingly, we find no merit in the orders of authorities below in this regard. Reversing the order of CIT(A), we direct the Assessing Officer to allow the claim of assessee also on account of provision made Disallowance of sales and service charges - AO had disallowed the same to be on account of infraction of law - HELD THAT:- Order of CIT(A), wherein the assessee has not established its case with regard to provisions made in the books of account on account of sales and service charges. The said liability arises from the terms of contract entered into but the onus is on the assessee to establish the factum of liability, which it claims it had to fulfill. The assessee had also not clarified as to when the said reimburseme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, then the assessee cannot be taxed on book profits under section 115JB of the Act. The Assessing Officer is directed to allow reasonable opportunity of hearing to the assessee in this regard and pass the order within period of six months Addition of remuneration on tax free dividends - HELD THAT:- No merit in the ground of appeal No.1 raised by the Revenue, where the CIT(A) has observed that the remuneration / commission in any case was less than 11% of the net taxable profits, after excluding the tax free dividends also. Accordingly, the ground of appeal No.1 raised by the Revenue is dismissed. Additionof administrative and managerial expenses for earning tax free dividends - HELD THAT:- plea of assessee before the CIT(A) was that no part of expenditure was attributable to earning of dividend income and hence, no expenses merits to be allowed. CIT(A) relying on earlier years, made disallowance of ₹ 25,000/- and allowed relief to the assessee of ₹ 18,17,821/-. The Revenue is in appeal against the said relief granted by the CIT(A) and pointed out that disallowance at ₹ 25,000/- was very low. We find no merit in the plea of learned Departmental Represen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ween the borrowings made by the assessee and interest free investments made by the assessee. In the absence of the same and in view of the fact that where the assessee has sufficient interest free funds available with it, then no disallowance out of interest expenditure is to be made under section 36(1)(iii) of the Act. The assessee has explained the investments made and claims that the Assessing Officer was incorrect in adopting the figure of ₹ 75 crores and working out the disallowance. We have verified the stand of assessee and find that the total increment in investments during the year was only ₹ 25 crores and not ₹ 75 crores as held by the Assessing Officer. Further, the borrowings made by the assessee from the perusal of Balance Sheet clearly show that the same have got down by ₹ 50 crores when compared to borrowings as on 31.03.2000. Accordingly, we find no merit in the ground of appeal raised by the Revenue Addition of liaison expenses - CIT(A) has allowed the same on account of licence fees - HELD THAT:- As assessee pointed out that the said expenses were part of advertisement expenses and the Assessing Officer may verify the same. Accordingly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is held to be revenue in nature incurred for the purpose of business and hence, is to be allowed in the hands of assessee Disallowance made out of miscellaneous expenses for non-business expenses - HELD THAT:- CIT(A) had disallowed 5% of the said miscellaneous expenses for non-business purposes. We find no merit in the order of CIT(A), where the assessee is a limited company and no disallowance can be made for personal use. Accordingly, we reverse the order of CIT(A) and allow the claim of expenditure Addition on account of interest relatable to investment made in bonds and shares which were exempt under section 10(33) - HELD THAT:- There was no outgo of money as the fresh investments were because of re-structuring. Further, the assessee had sold shares and made the investments under section 54EA of the Act. He stressed that fresh borrowings made during the year were also because of re-structuring although, the loan liability had reduced from ₹ 115 crores to ₹ 108 crores at the end of year. We find that similar issue arose before the Tribunal vide ground of appeal No.5 in assessment year 2001- 02 and following the same parity of reasoning and in view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure while determining the book profits though not claimed in normal computation. However, we have held in the paras hereinabove that income do not accrue to the assessee in the instant assessment year. Hence, there is no merit in the pleadings of learned Departmental Representative for the Revenue and the same are rejected. - ITA No.857, 884/PUN/2006, 1593, 1641/PUN/2011, 456, 542, 543, 877, 950/PUN/2012 Assessment Year : 2001-02 To 2004-05 - - - Dated:- 1-9-2017 - Ms. Sushma Chowla, JM And Shri Anil Chaturvedi, AM Assessee by: Shri C.H.Naniwadekar Revenue by: Shri Rajeev Kumar, CIT ORDER Sushma Chowla, JM: Out of this bunch of appeals, four cross appeals filed by the assessee and the Revenue are against separate orders of Commissioner of Income Tax (Appeals) III/V, Pune, relating to assessment years 2001-02 to 2004-05 against the respective orders passed under section 143(3) of Income Tax Act 1961 (in short the Act ). The Revenue has also filed an appeal against the order of CIT(A)-V, Pune, dated 28.12.2011, relating to assessment year 2003-04 against the order passed under section 143(3) r.w.s. 147 of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31,691/- The learned CIT (A) erred in disallowing 2% of the vehicle expenses u/s 37(1) on account of non-business expenditure and personal use of company‟s vehicles by officers of the company. He failed to appreciate that as per service conditions applicable to senior officers, company allows them to use company‟s vehicles for office work and any incidental personal use is treated as perquisites in the hands of officers as per Income-tax Rules, 1962. He further failed to appreciate the system followed by the company for use of company vehicles. 7.0 Disallowance out of Lease Rent on Cars ₹ 92,399/- The learned CIT (A) erred in disallowing 2% of the lease rent on cars on account of alleged use of cars by Executive and employees for other than business purposes. He failed to appreciate that as per service conditions applicable to senior officers, company allows them to use company‟s vehicles for office work and any incidental personal use is treated as perquisites in the hands of officers as per Income-tax Rules, 1962. He failed to appreciate that the lease rent was paid as per commercial terms. 8.0 Disallowance out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n section 37(2A) specifically dealing with disallowances of advertisement, sales promotion has been deleted from the statute. 12.0 Liquidated damages ₹ 33,56,236/- The learned CIT (A) erred on facts and in law in disallowing liquidated damages paid for breach of contract as penal charges. He failed to appreciate that these charges were paid on commercial terms of contract in the course of business and were not paid for any infraction or breach of law. 13.0 Disallowance out of sales and service charges ₹ 18,85,000/- The learned CIT (A) erred on facts and in law in disallowing damages paid to various customers for deficiency in commercial transaction being penal in nature. He failed to distinguish between penalty for infraction or breach of law and penalty for breach of commercial contracts. He ought to have allowed such expenditure for the purpose of business u/s 37(1). 14.0 Out of Legal and professional fees ₹ 33,60,000/- The learned CIT (A) erred on facts and in law in enhancing disallowance made by the A.O. out of fees paid to Kirloskar Institute of Advanced Management Studies (₹ 1,200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) Overhead expenses ₹ 18,17,821 (c) Interest relatable to investments ₹ 2,82,93,638 The learned CIT (A) also erred on facts and in law in not considering assessee‟s grievance against the A.O. on treatment of the amounts withdrawn from contingency reserves and credited to the P L account (₹ 36,78,38,000) for the purposes of computation of book profits under clause (i) of explanation to sec. 115 JB(2). 17.0 The assessee craves leave, to add, to alter, to modify any of the above grounds of appeal. 4. The first ground of appeal raised by the assessee is against disallowance of expenses under section 14A of the Act is not pressed and hence, the same is dismissed as not pressed. 5. The issue raised vide ground of appeal No.2 is against the disallowance out of aircraft expenses of ₹ 3,01,008/-. 6. Briefly, in the facts of the case, 50% of the expenses were disallowed out of aircraft expenses for using the same for non-business purposes. The learned Authorized Representative for the assessee fairly pointed out that the issue is decided against the assessee by the Tribunal in earlier ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , totaling ₹ 1,41,890/-, ₹ 9 lakhs on account of TDS, is not allowable in the hands of assessee. However, in respect of balance expenditure, the assessee explained that the said expenditure had crystallized during the year and hence, were booked during the year under consideration itself. 12. The learned Departmental Representative for the Revenue relied on the order of CIT(A). 13. We have heard the rival contentions and perused the record. The perusal of the details of prior period expenses at page 100 of the Paper Book reflects that various claims have made by the assessee i.e. on account of architecture fees payable at ₹ 4,72,318/- and short provision of GRR for raw material in Medium Engines Division. Further, in the Large Engines, Nashik Division, raw material Indg components of ₹ 7,22,426/- and discount commission on spares at ₹ 8,16,000/- and raw material imported of ₹ 5,57,521/- has been provided, rest are expenses booked by the assessee on account of various heads under different divisions. The explanation of assessee was that all these expenses have been booked in the instant assessment year as the bills were recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in view of the nature of expenses. The CIT(A) during the course of appellate proceedings, asked the assessee to clarify with evidences if the above debit balances / receivable were admitted as income in the earlier years. However, the requisite details were not filed and the CIT(A) held that no part of the said balances written off in the corporate division can be allowed as deduction. 18. The assessee is in appeal against the order of CIT(A). 19. The learned Authorized Representative for the assessee drew our attention to the details of debit balances written off at page 102 of the Paper Book and pointed out that out of total amount, it was pressing only sum of sales tax written off at ₹ 65,23,340/-. The learned Authorized Representative for the assessee referred to the sales tax payment made by the assessee and our attention was drawn to the challan placed at page 117 of the Paper Book. The assessee had paid only ₹ 30 lakhs on 30.01.2000. The learned Authorized Representative for the assessee revised its claim to ₹ 30 lakhs and fairly admitted that the balance amount needs to be added in the hands of assessee. 20. The learned Depart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 1,31,691/-, lease rent of cars of ₹ 92,399/- and telephone expenses of ₹ 1 lakh for non-business expenditure and personal use. The assessee is a limited company and there is no merit in the aforesaid disallowance made on account of non-business expenditure and personal use of the facility. 27. The learned Authorized Representative for the assessee pointed out that the issue is squarely covered by the orders of Tribunal in assessment year 1999- 2000 in ITA No.181/PN/2004, order dated 27.06.2012. He further pointed out that the disallowance out of vehicle expenses and telephone expenses has been deleted by the Tribunal and the lease rent on cars was in the same line, wherein leased cars were being used by the Executives and employees. We hold that there is no merit in the disallowance made on account of personal use out of vehicle expense and telephone expenses. Similarly, the leased vehicles which are being used by the Executives and other employees of the assessee company, then there is no merit in disallowing any part of the lease rent of cars for personal use in the hands of assessee company, which is a limited company. Consequently, the grounds of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 583/-. The contract was for purchase of foreign exchange for actual delivery of foreign exchange on specific date, difference was paid by the assessee to the bankers. The claim of assessee was that the same was due to fluctuation in foreign exchange rate and related to the trading related transactions and is to be allowed as revenue expenditure. The Assessing Officer and the CIT(A) disallowed the same being speculation loss. 33. The learned Authorized Representative for the assessee pointed out that the issue stands squarely covered by the ratio laid down by the Hon'ble Supreme Court in CIT Vs. Woodward Governor India Pvt. Ltd. (2009) 312 ITR 254 (SC). In view of the ratio laid down by the Hon'ble Supreme Court, we allow the claim of assessee in entirety being revenue expenditure. The ground of appeal No.10 is thus, allowed. 34. The next issue by way of ground of appeal No.11 is against the disallowance made out of advertisement publicity expenses of ₹ 29,77,787/-. The Assessing Officer on verification of expenditure, was of the view that certain expenditure requires to be disallowed as it was not laid out exclusively for the purpose of business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture needs to be disallowed in the hands of assessee. In respect of 5% out of guest expenses, presentation expenses and general expenses, we find no merit in the plea of assessee and the same is dismissed. Accordingly, the disallowance is upheld to that extent. It may be pointed out that the margin of 5% is to be applied only to net general expenses only as referred by the CIT(A) in para 20.2.2 at page 67 of the appellate order. The ground of appeal No.11 is thus, partly allowed. 38. The issue in ground of appeal No.12 is against the disallowance of liquidated damages of ₹ 33,56,236/-. 39. The assessee had made a claim under the said head to the tune of ₹ 1,99,10,567/-. As per the assessee, the liquidated damages represent the payments for late delivery, deficiency in quality of goods / material supplied vis- vis specifications / requirements, etc. The assessee explained that the liquidated damages had nothing to do with any infraction of law. The major recovery was of ₹ 1,56,62,034/- effected by M/s. Oil India Ltd., who had made the said recovery as the assessee had failed to complete installation and commissioning within the agreed contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn as to whether the demands were actually received or not, the CIT(A) held that the assessee was not justified in making the claims towards liquidated damages merely on the basis of provision. Hence, out of liquidated damages of ₹ 36,38,990/-, claim to the extent of ₹ 20,82,139/- was held as inadmissible and the disallowance was confirmed to that extent. 42. The assessee is in appeal vide ground of appeal No.12. The Revenue is also in appeal against the order of CIT(A) in allowing liquidated damages of ₹ 1,49,97,483/- paid to M/s. Oil India Ltd. vide ground of appeal No.7. 43. The learned Authorized Representative for the assessee pointed out that out of liquidated damages paid to M/s. Oil India Ltd., sum of ₹ 1.49 crores was allowed by the CIT(A), against which the Revenue is in appeal. However, balance sum of ₹ 6,64,552/- payable to M/s. Oil India Ltd. was to be verified by the Assessing Officer. However, till date, no such appeal effect has been allowed. He referred to page 190 of Paper Book and pointed out that clause (iii) related to charging of interest as per purchase order and he further referred to page 199 of the Paper B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t fulfill the same, M/s. Oil India Ltd. vide letter dated 20.01.2001 demanded damages of ₹ 1.49 crores. In view of the understanding between the parties, the claim of ₹ 1.49 crores on account of liquidated damages being relatable to carrying on of business of assessee, is duly allowable as expenditure in the hands of assessee. Accordingly, upholding the order of CIT(A), we dismiss the ground of appeal No.7 raised by the Revenue. 46. Now, coming to the balance expenditure of ₹ 6,64,552/-, which was the interest paid on mobilization advances. Clause (iii) of contract copy, which is placed at page 190 of the Paper Book and the evidence of having paid the said amount as per document at page 199 of the Paper Book, we find that the said claim of ₹ 6,64,552/- is also to be allowed in the hands of assessee. In view of the facts and circumstances and the evidences which are available on record, we find no merit in the order of CIT(A) in remitting the issue to the file of Assessing Officer to call for relevant particulars. Accordingly, we reverse the findings of CIT(A) in this regard and delete the addition of ₹ 6,64,552/-. 47. Now, coming t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vice charges of ₹ 18,85,000/-. 49. Brief facts relating to the issue are that, the assessee had debited provision for expenses in respect of its Nashik unit under the head Sales and service charges totaling ₹ 18,85,000/-. The assessee pointed out that the said charges were for late delivery of goods. However, the Assessing Officer was of the view that the same were in the nature of penalty payable to four parties i.e. (i) Lupin Chemicals Ltd. of ₹ 2,00,000/-, (ii) Hind Syntex Ltd. of ₹ 3,50,000/-, (iii) Orient Syntex Ltd. (APM) of ₹ 5,75,000/- and (iv) Carbon Everflow Ltd. of ₹ 7,60,000/-. 50. Before the CIT(A), the assessee filed copies of agreements in order to show that in view of guarantee clause on power quality and availability and also in respect of fuel clauses, penalty provisions were made if the fuel consumption exceeded the guaranteed efficiency, then the assessee was obliged to reimburse the value of such excess to the parties at actual landed cost. Similarly, there were clauses for consumption of oil. The CIT(A) on perusal of agreement observed that the assessee had not given any details to show that it had vio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee has not established its case with regard to provisions made in the books of account on account of sales and service charges. The said liability arises from the terms of contract entered into but the onus is on the assessee to establish the factum of liability, which it claims it had to fulfill. The assessee had also not clarified as to when the said reimbursements were actually made and consequently, we uphold the order of CIT(A) in disallowing of ₹ 18,85,000/-. The CIT(A) had not disallowed the amount on the account that these were penal in nature but on actual factum of liability arising on which account and whether any demand was made from the opposite party vis- -vis so-called penalty clauses and also when the reimbursement was made by the assessee against the provision made. Upholding the same, the ground of appeal No.13 raised by the assessee is dismissed. 54. The issue in ground of appeal No.14 i.e. disallowance out of legal and professional charges of ₹ 33,60,000/- has not been pressed and hence, the same is dismissed as not pressed. 55. The ground of appeal No.15 raised by the assessee is against disallowance of provision made f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here the assessee was following mercantile system of accounting and where the assessee was recognizing its liability towards leave encashment as accruing only in the year of payment and not earlier, then the onus was on assessee to justify the shift from consistently followed practice to the claim made in the instant assessment year. The CIT(A) rejected the claim of assessee and upheld the order of Assessing Officer in this regard. Since the plea of assessee was rejected, the CIT(A) did not go into applicability of provisions of section 43B of the Act w.e.f. assessment year 2002-03. 58. The assessee is in appeal against the order of CIT(A). 59. The learned Authorized Representative for the assessee pointed out that it had instituted a scheme for all the employees for all the past years of service and due to the change which was due to the change in accounting principles i.e. introduction of AS 15, he pointed out that in the year under consideration, the assessee made a provision for leave encashment for earlier years at about ₹ 12 crores, which was not claimed as deduction in any of the years. However, the deduction claimed was only relatable to the provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed following the decision of the Hon'ble Supreme Court in Bharat Earth Movers Vs. CIT (supra) as against the past practice of accounting the same in the year of availment of encashment; as a result of this, profit for the year is lower by ₹ 21.19 millions. Admittedly, the assessee was following mercantile system of accounting and has made the provision. The CIT(A) on the other hand, had observed that where the assessee was following mercantile system of accounting but was only debiting the actual expenditure on account of leave encashment payment, then the date of encashment was the date of accrual of said expenditure and hence, to be allowed as deduction in the hands of assessee. We find no merit in the stand of CIT(A) in this regard, wherein as per mercantile system of accounting, expenditure relating to the year under consideration whether accrued or paid is to be recognized as expenditure and debited to the books of account. 62. We further find that the issue is squarely covered by the decision of Hon'ble Supreme Court in Bharat Earth Movers Vs. CIT (supra), wherein the proposition has been laid down in respect of provision for liability towards encashme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the same would have overriding effect on the provisions of any other Act except Foreign Exchange Regulation Act or the Urban Land Ceiling Act. Reference was made to section 32(1) of Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). Reference was made to the order of BIFR, wherein it was specially sanctioned that the assessee shall be exempted from payment of MAT under the Income Tax Act till amalgamated losses of SWL were set off. The assessee claimed that it could not be made liable to taxes on book profits under section 115JB of the Act. The Assessing Officer was of the view that the order of BIFR given in assessee s case was not binding on him since the Department was not made a party while finalizing the scheme of reconstruction. The Assessing Officer also referred to the Explanation to section 115JB of the Act, as per which the amount by way of provision for losses of subsidiary company were required to be added to the net profit, in order to quantify the book profits. Accordingly, he computed the book profits under section 115JB of the Act and made certain adjustments. 67. Before the CIT(A), the assessee referred to the appellate order for assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany M/s. Shivaji Works Ltd. The amalgamation was pursuant to the order of BIFR, under which the losses were also taken over by the assessee. In respect of BIFR proceedings, it may be pointed out that in the initial order dated 19.08.2001, it was held that the assessee would not be liable to pay taxes on the book profits under section 115JB of the Act till the losses of SWL are adjusted. The said order was passed without giving an opportunity of hearing to CBDT. Thereafter, the proceedings were conducted and notice was given to CBDT, who failed to appear before BIFR nor filed any communication. Consequently, BIFR passed another order dated 19.08.2003, wherein similar proposition was again made by BIFR. 73. We find that similar issue of determination of book profits arose in assessee s own case in assessment year 1999-2000 and the Tribunal held that no taxes on book profits under section 115JB of the Act are to be charged in the hands of assessee till the losses of SWL are adjusted. The Revenue went in appeal against the order of Tribunal before the Hon ble High Court and the Hon ble High Court of Bombay in Income Tax Appeal (Lodging) No.1924 of 2012, vide judgment dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - without appreciating the fact that the assessee worked out remuneration on tax free dividends. 2. On the facts and in the circumstances of the case, and in law, the CIT (A) erred in deleting the addition of ₹ 17,92,821/- made on account of administrative and managerial expenses for earning tax free dividend u/s.14(A). 3. On the facts and in the circumstances of the case, and in law, the CIT (A) erred in deleting the addition of ₹ 1,03,342/- made on account of penal interest in view of the decisions of the Supreme Court reported in the case of Meddi Venkataraman Co. Pvt. Ltd. Vs. CIT (229 ITR 534). 4. On the facts and in the circumstances of the case, and in law, the CIT (A) erred in deleting the addition of ₹ 19,20,000/- as interest paid was not for the purpose of business. 5. On the facts and in the circumstances of the case, and in law, the CIT (A) erred in deleting the addition of ₹ 2,82,93,638/- on account of interest relatable to investment made in bonds and share which are exempt u/s.10(33). 6. On the facts and in the circumstances of the case, and in law, the CIT (A) erred in deleting the addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of ₹ 29,51,493/-. 78. The CIT(A) held that it was not disputed by the Assessing Officer that the assessee s claim of remuneration / commission paid to the Directors was within the limits laid down under the Companies Act. He further noted that remuneration / commission paid to the Directors was less than 11% of the net taxable profits i.e. even after excluding the tax free dividends. He thus, held that the question whether or not tax free dividends ought to be excluded from the profits for the purpose of arriving at the admissible remuneration / commission becomes merely academic. He accordingly, deleted the addition of ₹ 29,51,493/-. 79. The Revenue is in appeal against the order of CIT(A). However, we find no merit in the ground of appeal No.1 raised by the Revenue, where the CIT(A) has observed that the remuneration / commission in any case was less than 11% of the net taxable profits, after excluding the tax free dividends also. Accordingly, the ground of appeal No.1 raised by the Revenue is dismissed. 80. The issue in ground of appeal No.2 raised by the Revenue is against deletion of addition of ₹ 17,92,821/- made on account o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on private placement to LIC, UTI, etc.). The said securities in respect of debentures were required to be credited on or before 31.12.1992. But they were credited on 10.03.1993 and 01.09.1993. The institutions invoked the penal interest clause in the agreement and held the assessee liable to pay 2% per annum as penal interest for delay in creation of securities. However, later the said rate of interest was reduced to 1%, which was paid on 23.05.1994 and on redemption of debentures on 01.01.2000 when the assessee sought no objection letters from the institutions for satisfaction of the charges, UTI asked the assessee to pay further sum of ₹ 1,03,342/-. The said payment was made by the assessee to UTI. The assessee claimed that it was only compensatory in nature as it was not incurred for any offence prohibited by law. The CIT(A) on perusal of the details filed, held the said payment to be compensatory in nature as it had nothing to do with any infringement of law. The learned Departmental Representative for the Revenue has failed to controvert findings of CIT(A). We find no merit in the ground of appeal No.3 raised by the Revenue in this regard and upholding the findings of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es in line with the agreement, then the said advance having been made during the course of carrying on of its business and against such advances, no part of interest relatable to interest bearing funds merits to be disallowed. Accordingly, we uphold the order of CIT(A) in this regard and dismiss the ground of appeal No.4 raised by the Revenue. 85. The issue in ground of appeal No.5 raised by the Revenue is against the order of CIT(A) in deleting the addition of ₹ 2,82,93,638/- on account of interest relatable to investments made in bonds and shares which are exempt under section 10(33) of the Act. The Assessing Officer noted that total investments during the year amounted to ₹ 75.44 crores and since the assessee had taken secured and unsecured loans aggregating ₹ 115.38 crores as on 31.03.2001 and had claimed the deduction towards interest on the same, the Assessing Officer made disallowance in the hands of assessee since the funds were in common hotchpotch. Another point noted by the Assessing Officer was that the assessee had made borrowals from Bank of Baroda of ₹ 669.32 lakhs during the year and in case it had sufficient funds, then there was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... making the said investments. Our attention was drawn to the Balance Sheet at pages, 20, 24 and 25 of the Paper Book. 89. We have heard the rival contentions and perused the record. The sole basis for making the aforesaid disallowance of interest expenses in the hands of assessee is on account of interest bearing funds utilized by the assessee. The Assessing Officer was of the view that in case the assessee had enough reserves and surplus, where was the need to borrow funds. We find no merit in the order of Assessing Officer, wherein the assessee is the best person to carry on any of its business in the manner it so likes and in case he thinks it fit to make certain borrowals, then merely because the borrowals have been made does not warrant the disallowance of interest in the hands of assessee in the said assessment year i.e. assessment year 2001-02. The Courts have time and again held that nexus had to be established between the borrowings made by the assessee and interest free investments made by the assessee. In the absence of the same and in view of the fact that where the assessee has sufficient interest free funds available with it, then no disallowance out of inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accept the said claim of assessee and allowed only to the extent of 1/5th. The CIT(A) noted that the assessee had engaged Smt. Aarti Kirloskar as the consultant since 01.04.1998. He also noted that she was to set up a web initiative department with an objective to digitize information and move towards ebusiness. The CIT(A) held that there was no scope for amortizing the remuneration and allowed the claim in entirety in the hands of assessee. The Revenue is in appeal against the same. 94. The learned Authorized Representative for the assessee pointed out that the said professional fees was being paid since 1998 and even the Company Law Board had approved vide letter dated 15.03.2001 to pay remuneration of ₹ 60,000/- per month. In the totality of the above said facts and circumstances, where remuneration was being paid to Smt. Aarti Kirloskar for the past so many years and in view of the work allocated to her, there is no merit in allowing the said expenditure partly. The assessee has incurred the said expenditure during the year and hence, is entitled to claim as business expenditure in the year under appeal itself. The ground of appeal No.8 is thus, dismissed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13862 The learned CIT (A) erred in facts and in law in arbitrarily disallowing 2% of the expenditure incurred on Vehicles under section 37(1) amounting to ₹ 5693115/- as non business expenditure. He failed to appreciate that as per service conditions applicable to senior officers, company allows them to use company‟s vehicles for office work and any incidental personal use is treated as perquisites in the hands of officers as per Income Tax Rules, 1962. He further failed to appreciate the system followed by the company for use of company vehicles. 5.0 lease Rent on Cars ₹ 32398/- The learned CIT (A) erred in facts and in law in arbitrarily disallowing 2% of the expenditure incurred on Vehicle amounting to ₹ 16,19,872/- as non business expenditure. He failed to appreciate that as per service conditions applicable to senior officers, company allows them to use company‟s vehicles for office work and any incidental personal use is treated as perquisites in the hands of officers as per Income Tax Rules, 1962. He failed to appreciate that the lease rent was paid as per commercial terms. 6.0 Telephone Expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee, the treatment given in the accounts and particularly when admittedly there is no provision in the Act to defer the expenditure. He thus exceeded his authority by going beyond the statute books. The disallowance is also based on estimates, surmises, conjectures and is without any basis and is untenable in law. 10.0 Disallowance out of Repairs ₹ 2,07,728/- The learned CIT (A) erred on facts and in law in treating the expenses on fencing as capital expenditure. He failed to appreciate that we had already capitalized the cost of compound wall in earlier assessment years and during the current year no new asset has come into existence with the expenses of ₹ 2,07,728/-. 11.0 Disallowance out of Miscellaneous Expenses ₹ 4,75,207/- The learned CIT (A) erred on facts and in law in disallowing 5% of General Expenses and miscellaneous expenses as non-business expenditure. He ought to have appreciated that in case of corporate assessee there cannot be any non business expenditure when auditors of the company in their reports under the Manufacturing and Other Companies (Auditor‟s Report) Order as well as the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed as prior period expenses in the hands of assessee. 99. The issue in ground of appeal No.3 raised by the assessee is not pressed and hence, the same is dismissed as not pressed. 100. The issue in grounds of appeal No.4, 5 and 6 is against disallowance out of vehicle expenses, lease rent on car and telephone expenses. The assessee had raised similar grounds of appeal No.6, 7 and 8 in assessment year 2001-02, wherein we have allowed the claim of assessee holding that no disallowance was to be made on account of personal use in the hands of assessee company. Following the same parity of reasoning, we allow grounds of appeal No.4, 5 and 6 raised by the assessee. 101. The ground of appeal No.7 is also linked to the issue raised by the assessee in assessment year 2001-02 vide ground of appeal No.11. Following the same parity of reasoning, we remit this issue also back to the file of Assessing Officer to carry verification exercise to work out the expenditure which is incurred on product advertisement and we uphold the disallowance of 5% out of total expenditure on guest expenses, presentation expenses and article general expenses. Accordingly, the gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) and allow the claim of expenditure of ₹ 4,75,207/-. 107. The ground of appeal No.12 is in respect of applicability of section 115JB of the Act i.e. exemption from MAT as per BIFR order. The first issue raised vide ground of appeal No.12a is identical to the issue raised in assessment year 2001-02 vide ground of appeal No.16 (first part) and following the same parity of reasoning, we direct the Assessing Officer to verify the claim of assessee that the losses from amalgamating company are still available in its hands and if that is so, then no tax is to be charged on the book profits under section 115JB of the Act. The other ground of appeal No.12b become academic in nature and hence, the same is dismissed. 108. The Revenue in ITA No.1593/PUN/2011, relating to assessment year 2002-03 has raised the following grounds of appeal:- 1. On the facts and circumstances of the case, and in law the Ld. CIT (A) erred in deleting the addition of ₹ 42,45,425/- without appreciating the fact that the assessee worked out remuneration on tax free dividends. 2. On the facts and circumstances of the case, and in law the Ld.CIT (A) erred in deleti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to sister concern. Similar issue has been decided by us in assessment year 2001-02 vide ground of appeal No.4 raised by the Revenue and following the same parity of reasoning, we dismiss the ground of appeal No.3 raised by the Revenue. 112. The issue in ground of appeal No.4 is against deletion of addition of ₹ 1,07,61,723/- on account of interest relatable to investment made in bonds and shares which were exempt under section 10(33) of the Act. The learned Authorized Representative for the assessee in this regard, pointed out that there was no outgo of money as the fresh investments were because of re-structuring. Further, the assessee had sold shares and made the investments under section 54EA of the Act. He stressed that fresh borrowings made during the year were also because of re-structuring although, the loan liability had reduced from ₹ 115 crores to ₹ 108 crores at the end of year. We find that similar issue arose before the Tribunal vide ground of appeal No.5 in assessment year 2001- 02 and following the same parity of reasoning and in view of the facts and circumstances being similar, we find no merit in the ground of appeal No.4 raised by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amation of the company with Shivaji Works Ltd. (SWL) sanctioned by the BIFR, the company is not liable to pay minimum alternate tax till all the carried-forward unabsorbed losses of SWL are fully absorbed. He failed to appreciate that the order of the BIFR is directory and is not a mere recommendation and as per CBDT notification it is binding on him. He further failed to appreciate that that under section 32(1) of the SICA, orders passed by the BIFR have overriding effect over the Income Tax Act. The CIT (A), therefore, erred in disallowing unabsorbed depreciation of SWL while computing profit u/s 115JB of the Act. 3.2 Capital receipts credited to Profit Loss Account ₹ 32,95,359/- Without prejudice to the above, while computing profit u/s 115JB of the Act, the learned CIT (a) failed to appreciate that the amount of ₹ 32,95,359/- included in operating income is of capital nature and is to be excluded. 116. The learned Authorized Representative for the assessee at the outset pointed out that ground of appeal No.1 raised by the assessee become academic in case the liquidated damages disallowed in earlier years are allowed in the hands ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no merit in making any adjustment on account of un-utilized CENVAT credit at the end of year. Accordingly, we reverse the findings of CIT(A) in this regard and delete the addition of ₹ 18,90,099/-. The ground of appeal No.2 raised by the assessee is thus, allowed. 120. The issue in ground of appeal No.3 raised by the assessee is against computation of book profits under section 115JB of the Act. The issue arising is as in earlier years. However, change in the year under consideration as against unabsorbed losses, the assessee for the year under consideration has pointed out the availability of unabsorbed depreciation of SWL to the extent of ₹ 14.81 crores. Following our parity of reasoning as in the paras hereinabove in relation to the ground of appeal No.16 decided in assessment year 2001-02, we remit this issue also back to the file of Assessing Officer to verify the claim of assessee in this regard. The ground of appeal No.3.1 is thus, allowed for statistical purposes. The ground of appeal No.3.2 is dismissed. 121. The Revenue is in appeal against the order of CIT(A) in ITA No.542/PUN/2012, relating to assessment year 2003-04 against the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lanation and material available on record. It is contended by the appellant that it was only the payment at discount at net present value (NPV) of the future liability to pay the outstanding sales tax amount. It is stated that such payment at a discounted value cannot be treated as remission or cessation of liability so as to attract the provisions of section 41(1). In fact, it was only a premature payment of the sales tax outstanding amount which was treated as loan. The appellant has cited the Special Bench decision in the case of Sulzer India Ltd. (2010) 134 TTJ (Mumbai)(SB) 385 in its support. It is noted that in this decision of the Special Bench, it was held that such premature payment of the deferred sales tax liability at its discounted value or at NPV cannot be treated as remission or cessation of liability u/s.41(1). This was because it cannot be said that the assessee had obtained the benefit of deduction of sales tax liability simply because the deduction was allowed for the purposes of section 43B initially, by applying the CBDT Circular No.496 dated 25/09/1987, and this circular only stated that the statutory liability was to be treated to have been discharged for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re payment of sales tax outstanding amount, which was treated as loan by the assessee. 126. We find the issue raised in the present appeal is also covered by the order of Special Bench decision in the case of Sulzer India Ltd. Vs. JCIT (2010) 134 TTJ (Mumbai) (SB) 385, which has been confirmed by the Hon ble Bombay High Court in CIT Vs. Sulzer India Ltd. (2014) 369 ITR 717 (Bom) and also by the decision of Hon ble High Court of Delhi in CIT Vs. Virtual Soft Systems Ltd. in ITA Nos.216/2011, 398/2011, 403/2011, 404/2011 and 680/2011. Following the same parity of reasoning, we find no merit in the ground of appeal No.1 raised by the Revenue and the same is dismissed. 127. Now, coming to the second issue which is raised by way of grounds of appeal No.2 and 3 i.e. against the order of CIT(A) in deleting the addition made by the Assessing Officer on account of lease rental income of ₹ 3,50,44,140/-. 128. Brief facts relating to the issue are that, the Assessing Officer noted from Note No.16 forming part of accounts, that the assessee in terms of financial restructuring package sanctioned by IDBI in respect of Kirloskar Ferrous Industries Ltd. (KFIL), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nent considered in the lease rentals and depreciation. The appellant has also stated that in the earlier A.Y. 2001-02 also, it was not considered as income, whereas in the A.Yrs. 99- 2000 and 2000-01 when it was having a debit balance, it was not claimed as deduction. It was thus stated that actually only the lease rental amount of ₹ 3,50,44,140/- was in fact receivable from KFIL as per agreement but it was not accounted for during the year. The appellant has cited the ITAT Delhi Bench decision in the case of Goodwill India Ltd Vs DCIT (2008) 114 ITD 665 which is also on the same ratio that the leas equalization charges as per ICAI Guideline are not to be considered for computing lease rental income under the I.T. Act. The Tribunal observed that even the ICAI was of the view that this method was meant only for recognizing the net income in respect of a finance lease at constant periodic rate of return, on the lessor's net investment outstanding in the lease and are not to be considered for determining the taxable income in accordance with the I.T. Act. Neither a debit under this head is to be allowed as deduction nor any credit is to be treated as income. Therefore there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eturned income of ₹ 82.40 crores for A.Y. 2004-05 was inclusive of the lease rental income for A.Y. 2001-02 to 2003-04 which was not accounted for in these years; but has been taken into account while computing this total income in A.Y. 2004-05. 14. Having carefully considered the facts and circumstances of the case as discussed above, I find no reason for adding the lease rental income of ₹ 3,50,44,140/- in this year and the same is directed to be deleted. Ground No.3 is therefore, held as allowed. 131. The Revenue is in appeal against the order of CIT(A) and has pointed out that where the income had accrued during the year, then the same merits to be added in the hands of assessee. 132. The learned Authorized Representative for the assessee on the other hand, referred to the Notes to accounts, Sr.No.16 at page 49 of Paper Book attached to the Balance Sheet, wherein it was pointed out that because of financial restructuring package, the assessee was not entitled to the said rent due from KFIL as per undertaking by the said concern with IDBI. The learned Authorized Representative for the assessee referred to the terms of the said restructu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Assessing Officer in the assessment year. The assessment was made at book profit under section 115JB of the Act at ₹ 37.48 crores in assessment year 2003-04, on the other hand, in assessment year 2004-05, the returned income was ₹ 82,40,49,730/-, as per normal computation of income and the assessment was completed on total income of as per normal computation itself. In the totality of the above said facts and circumstances, where the assessee has paid taxes in assessment year 2004-05 on the said lease rentals on receipt basis, we find no merit in the grounds of appeal No.2 and 3 raised by the Revenue and the same are dismissed. 134. The Revenue is also in appeal against the order of re-assessment passed under section 147 of the Act vide ITA No.543/PUN/2012, relating to assessment year 2003-04 and has raised the following grounds of appeal:- 1. Whether on the facts and in the circumstances of the case, the Ld.CIT(A) was justified in directing the A.O. to delete the amount of lease equalization charges of ₹ 2,69,37,617/- and lease rental income of ₹ 3,50,44,140/- from the book profit computed u/s 115JB by ignoring the fact that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther lease equalization of ₹ 2.69 crores nor the lease rental of ₹ 3.50 crores were liable to be added to the income of this year. Consequently, the same could not be added to the book profits for the year under consideration as not having been accounted for as income in this year. Consequently, the CIT(A) held that there is no need to adjudicate the issue of reopening under section 147/148 of the Act. 137. The Revenue is in appeal against the order of CIT(A). 138. The learned Departmental Representative for the Revenue pointed out that in view of the ratio laid down by the Hon ble High Court of Delhi in CIT Vs. Sain Processing Weaving Mills (P) Ltd. (2010) 325 ITR 565 (Del), the said items of income though not considered in the Profit and Loss Account but the same needs to be added to the profit for the purpose of computation of book profits under section 115JB of the Act in the re-assessment proceedings. 139. The learned Authorized Representative for the assessee on the other hand, pointed out that the legal issue of reopening of assessment needs to be adjudicated in favour of the assessee, where the notice under section 148 of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were very old and were not acquired out of borrowing. The assessee company did not incur any expenditure attributable for earning dividend. The CIT (A) could not point out any expenditure directly attributable for earning the tax free income and arbitrarily made ad-hoc disallowance of ₹ 50,000/- and no nexus of the expenditure with the tax free income was established. 2.0 Disallowance out of Aircraft Expenses ₹ 4,25,448/- The learned CIT (A) erred in holding that the aircraft were used for nonbusiness purposes when it was averred before him that the aircraft are jointly owned with other companies and there is no element of personal use at all. The details of flights (statement in lieu of logbook) were submitted at the time of assessment. 3.0 Bad debts and irrecoverable balances written off ₹ 53,18,440/- The learned CIT (A) erred on facts and n law in disallowing irrecoverable debit balances as written off under section 36(1)(vii) of the Act when the assessee has claimed amount of ₹ 53,18,440/- under section 28 of the Act. The learned CIT (A) further erred in allowing him to be misguided with nature of claim u/s 28 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al No.2 is against disallowance out of aircraft expenses of ₹ 4,25,448/-. Similar issue has arisen in assessment years 2001- 02 and 2002-03 vide ground of appeal No.1 and following the same parity of reasoning, this ground of appeal is decided against the assessee. 145. The issue in ground of appeal No.3 is against allowability of debit balances written off of ₹ 53,18,440/- is not pressed and hence, the same is dismissed as not pressed. 146. The next issue raised vide ground of appeal No.4 is against disallowance out of advertisement and publicity expenses of ₹ 47,86,632/-. We find similar issue has been addressed by us vide ground of appeal No.11 in assessment year 2001-02 and ground of appeal No.7 in assessment year 2002-03. Following the same parity of reasoning, we remit this issue back to the file of Assessing Officer to carry out verification exercise. However, we uphold the disallowance of 5% out of expenditure on guest expenses, presentation expenses and article general expenses. No disallowance is to be made out of liaison expenses. The ground of appeal No.4 raised by the assessee is thus, allowed for statistical purposes. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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