TMI Blog2019 (9) TMI 784X X X X Extracts X X X X X X X X Extracts X X X X ..... of Prior period expenses - HELD THAT:- We observe that in the past as well the assessee has been claiming prior period expenditure . After being unsuccessful before the Commissioner of Income Tax (Appeals), the assessee carried the issue in appeal before the Tribunal. The Tribunal adjudicated this issue in favour of the Revenue. The Tribunal has been taking a consistent view in rejecting assessee s claim of prior period expenses in the past. Thus, following the order of Tribunal in assessee s own case, the assessee s claim of prior period expenses is rejected. Liquidated damages - assessee has been claiming penalty paid to customers for delay in delivery of consignment as liquidated damages - We find this issue is recurring in the past several assessment years. The Co-ordinate Bench in appeal of assessee for assessment year 2004-05 decided the issue in favour of the assessee by placing reliance on assessee s own case . [ 2019 (3) TMI 1608 - ITAT PUNE] Commercial expediency is a term of wide import and has been held to include such expenditure as a prudent businessman incurs for the purpose of business. The expenditure incurred though not under any legal obligation b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... THAT:- In view of the facts of the present case and the various decisions discussed above, we are of the considered view, consultancy charges paid by assessee to Mckinsey Co. for enhancing efficiency, efficacy, profitability and market penetration is revenue in nature . The Commissioner of Income Tax (Appeals) has rightly reversed the findings of Assessing Officer and has held that the expenditure is not capital in nature. We are in agreement with the observation of the First Appellate Authority that no intangible asset has come in existence and hence, expenditure is allowable as revenue. However, we do not subscribe to the observation of the First Appellate Authority that the expenditure is allowable as deferred revenue expenditure . In the light of the judgments discussed above, we hold the expenditure is on revenue account and hence, entirely allowable in the impugned assessment year. Disallowance of sales commission - HELD THAT:- As the assessee has not furnished cogent evidence to substantiate rendering of services by the aforementioned two parties. For the parity of reasons, we reverse the findings of Commissioner of Income Tax (Appeals) on this issue. Hence, ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Adhoc disallowances in respect of vehicle expenses, telephone expenses, miscellaneous foreign travel expenses, public relation expenses 3. Aggrieved against the assessment order dated 30.12.2008, the assessee filed appeal before the Commissioner of Income Tax(Appeals). In First Appellate Proceedings, the Commissioner of Income Tax(Appeals) granted part relief to the assessee by deleting so me of the additions in full. In the case of some of the disallowances/ additions, the Commissioner of Income Tax (Appeals) gave partial relief. 4. Against the findings of the Commissioner of Income Tax (Appeals), both, assessee and the Revenue are in appeal before the Tribunal. For the sake of convenience, we would first take the appeal of the assessee. ITA No.1033/PUN/2013 ( By Assessee) A.Y. 2005-06 5. The assessee has impugned the findings of the Commissioner of Income Tax (Appeals) by raising following grounds in appeal: 1. Revenue Recognition: On the facts and in the circumstances of the case and in law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The addition sustained by the learned CIT(A) be deleted. 6. Provision for warranty : On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in sustaining disallowance under this head to the extent of ₹ 59,83,918/- being 25% of warranty provision rejecting the contention of the Appellant that the provision made by the Appellant was on a consistent and sensible basis and was allowable as such. The disallowance sustained by the learned CIT(A) be deleted. 7. Legal and Professional Expenses- fees paid to Mckinsey Company : On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in treating the fees paid to Mckinsey Company as deferred revenue expenditure and allowing deduction there for only to the extent of 1/5th thereof and the balance over the next four years rejecting the contention of the Appellant that the whole of the expenditure was allowable in the year of incurrence thereof. The disallowance sustained by the learned CIT(A) to the extent of ₹ 7,21,60,000/-. Your appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Co-ordinate Bench of the Tribunal in assessee s own case for assessment year 2004-05 has decided this issue in favour of the assessee by allowing full deduction in respect of liquidated damages. 6.4 The ground No.4 of the appeal is relating to assessee s claim on depreciation @80% on plant machinery used in manufacture of air/gas/fluid heating systems being renewable energy devices. The ld. AR submitted that the assessee is manufacturing renewable energy devices. According to Appendix-I of Income Tax Rules, 1962, plant and machinery used in the manufacture of renewable energy device is eligible for deduction @80%. This issue was raised for the first time in assessment year 1998-99. The same was decided in favour of the assessee holding that air/gas/fluid heating systems were renewable energy devices and the plant and machinery need to be exclusively used for the manufacture thereof. Only additions to machinery plant exclusively used in the manufacture of heat pumps were held not eligible for higher rate of depreciation. Similar disallowance of depreciation was made in assessment year 2004-05. The Tribunal following its earlier decision on the issue granted rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii. CIT Vs. Carborandum Universal Ltd.(2009) 177 Taxman.347 (Madras); iii. CIT Vs. Crompton Engineering Co. Ltd. (2001) 117 Taxman 705 (Mad.); iv. Indo Rama Synthetics (I) Ltd. Vs. CIT (2009) 185 Taxman 277 (Delhi). 7. Mrs. Nandita Kanchan representing the Department vehemently defended the assessment order. The ld. DR submitted that the Revenue in cross appeal has raised grounds corresponding to grounds No.1, 2, 5, 7 and 8 of the appeal by assessee. The ld. DR fairly admitted that all the issues raised in the appeal by assessee, except payment of legal and professional fees to Mckinsey Company, have been considered by the Tribunal in immediately preceding assessment year in assessee s own case. 7.1 In respect of ground No.8, the ld. DR submitted that the assessee has claimed expenditure to the tune of ₹ 9.02 Crores towards payment of fees to Mckinsey Company. The Assessing Officer after considering the fact that the assessee has got advantage in the form of improvement in profit making apparatus of the company, disallowed assessee s claim of expenditure as revenue and held the same to be on c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under :- 11. Ground No.2 is with respect to addition made to the contract income. AO noticed that assessee is a manufacturer of industrial boilers and heat transfer equipments and undertakes the projects on contract basis and the contract normally runs over a period of more than one year. The assessee was accounting for income on such projects by following the Projection Completion method and was raising invoices as per the scheduled payments agreed with the clients but at the same time had created provision towards Contribution Equalization Provision to adjust excess billing. During the year, the provision of contribution equalization debited to the Profit and Loss account was ₹ 4,53,93,679/-. AO noticed that the excess amount realized as per the invoices was not offered as revenue receipts and to that extent profit was not offered as income. AO was of the view that since the invoices was raised as per the agreed schedule; the invoice value should be treated as revenue receipts. He further noticed that identical issue arose in A.Y. 1997-98 wherein it was held that the value reflected in invoices raised as per agreed schedule with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontrovert the submissions made by the Ld. AR but however supported the order of AO. 13. We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to increasing the income to the extent of provision for profit equalization. We find that identical issue of increase in the contract income arose in assessee s own case in A.Ys.2000-01 to 2002-03 and the coordinate Bench of the Tribunal decided the issue in assessee s favour by following the Tribunal order for A.Ys. 1997-98 to 2000-01, by holding as under: 18. We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to increasing the income to the extent of provision for profit equalization. We find that identical issue of increase in the contract income arose in assessee s own case in A.Y.2000-01 and 2001-02 and the coordinate Bench of the Tribunal decided the issue in assessee s favour by following the Tribunal order for A.Yrs. 1997-98, 1998-99 and 1999-2000, by holding as under: 9. The third ground raised by the assessee in appeal relates to income recogniti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recting the Assessing Officer to implement the order of the Tribunal dated 03.09.2014 (supra) on this Ground too. As a consequence, whereas Ground of Appeal of the assessee is allowed that of the Revenue is dismissed. There has been no change in the facts and circumstances in the present year, nor there is any change in the accounting treatment given by the assessee. We do not find any reason to deviate from the view taken by the Co-ordinate Bench in assessment years 1998-99 and 1999-2000. Accordingly, this ground in the appeal of the assessee is accepted and the ground raised by the Revenue in its appeal is dismissed. 19. Before us, since both the parties have admitted that the facts of the case in the present ground are identical to that of earlier years and since in earlier years, the issue has been decided by Co-ordinate Bench of the Tribunal in assessee s favour, we therefore following the decision of the coordinate Bench of the Tribunal in assessee s own case for earlier years and for similar reasons, allow the ground of assessee and thus, the assessee s ground No.4 is allowed and Revenue s ground No.2 is dismissed. 14. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. AR fairly admitted that the assessee had claimed prior period expenses in assessment year 2004-05 as well. The assessee carried the issue in appeal before the Tribunal. The Tribunal rejected assessee s claim and upheld the addition. The assessee in the impugned assessment year has claimed prior period expenses of ₹ 10,77,994/-. We observe that in the past as well the assessee has been claiming prior period expenditure . After being unsuccessful before the Commissioner of Income Tax (Appeals), the assessee carried the issue in appeal before the Tribunal. The Tribunal adjudicated this issue in favour of the Revenue. The Tribunal has been taking a consistent view in rejecting assessee s claim of prior period expenses in the past. For the sake of brevity, we are not reproducing the findings of the Tribunal for assessment year 2004-05. Thus, following the order of Tribunal in assessee s own case in ITA No.1765/PUN/2012 (supra.), the assessee s claim of prior period expenses is rejected. Thus, ground No.2 raised in appeal by the assessee is dismissed. 8.3 The Ground No.3 in appeal by the assessee relates to liquidated damages. The assessee has been cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tribunal following the order of Tribunal in assessee s own case in ITA No.1055 1056/PUN/2009 for assessment year 2002-03 and 2003-04 held that the assessee is eligible for depreciation @80% with respect to plant and machinery used in Plant No. 4 and 8. Whereas, assessee s claim of depreciation @80% on plant and machinery used in Plant No.11 was denied. For the sake of completeness, the relevant extract of the findings of Tribunal in assessment year 2004-05 are reproduced herein below: 35. We have heard both the sides and perused Para 26 to 29 of the Tribunal s order wherein the Pune Bench of the Tribunal has decided the issue by observing as under : 26. Ground No.6 is with respect to disallowance of higher depreciation. 26.1. On perusing the depreciation chart, AO noticed that assessee had claimed depreciation at higher rate of 80% depreciation on plant Nos.4 and 8 and 11 wherein it was manufacturing shell type boilers and absorption cooling devices. It was Assessee s contention that these items of plant and machinery were used in the manufacture of renewable energy devises and therefore it was eligible for higher rate of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n at the rate of 100% since it is not the owner user of the heat pumps. It also needs to be mentioned that by the appellant s own submission the heat pumps require minimum electricity for running the compressor, hence the same cannot be regarded as renewal energy devices. For these reasons, the action of the Assessing Officer in rejecting the appellant s claim of depreciation on the machineries in plant No.11 at the rate of 100% and in restricting the admissible depreciation to a rate of 25% is hereby confirmed. Coming to the remaining plants and machineries under discussion i.e., plants no.4 and 8, the appellant s arguments have been already noted. The Assessing Officer was certainly not justified in holding that entry 3(xii)(e) applies only to solar heating system. There is nothing in this entry enabling such a conclusion. In the absence of any prefix such as solar any renewal energy device being in the nature of an air / gas / fluid heating system will be covered by this entry. However, the crucial questions is if the products manufactured by the appellant are renewal energy devices as distinguished from energy saving devices which are covered by entry no.3(i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut however supported the order of AO. 28. We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to allowing higher rate of depreciation on certain machineries. We find that identical issue of disallowance of higher depreciation arose in assessee s own case in A.Ys. 2002-03. The Co-ordinate Bench of the Tribunal while deciding the appeal in ITA Nos.259 276/PUN/2006 order dated 30.11.2017 decided the issue partly in favour of assessee by holding as under : 26. We have heard the rival submissions and perused the material on record. The issue in the present case is with respect to allowing higher rate of depreciation on certain machineries. We find that identical issue of disallowance of high depreciation arose in assessee s own case in A.Yrs. 2000-01 and 2001-02. The coordinate Bench of the Tribunal while deciding the appeal in ITA Nos. 1247 1248/PN/2005 decided the issue partly in favour of assessee by holding as under: 11. The fifth ground in appeal of the assessee is with respect to claim of 100% depreciation on plant and machinery. The Revenue has also impu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igible for depreciation @ 100% as it does not find a place in any of the items in the Depreciation Table which is entitled for depreciation @ 100%. On this aspect, the order of the CIT(A) is hereby affirmed. Thus, Ground of Appeal No.8 of the assessee as well as the Grounds of Appeal Nos.8.1 8.2 of the Revenue are dismissed. The issue raised by both the sides are identical to the one already adjudicated by the Tribunal. Both the sides have not been able to controvert the findings of the Tribunal in earlier assessment years. We find no reason to take a contrary view. Accordingly, the ground with respect to claim of depreciation in assessee s appeal and the appeal of Revenue is dismissed. 27. Before us, since both the parties have admitted that the facts of the case in the present ground are identical to that of earlier years, we therefore following the decision of the coordinate Bench of the Tribunal in assessee s own case of earlier years and for similar reasons hold that assessee is eligible to claim depreciation @ 100% with respect to plant and machinery used in the manufacture of air / gas / fluid systems but is not eligible for 100% depre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12. The Ground No. 7 of the appeal is in respect of disallowance of provision for warranty. The assessee has created provision of ₹ 2,39,35,670/- on account of provision for warranty. The assessee provides warranty for a period of 1-2 years on the products manufactured by it. In case of manufacturing defects, the assessee is under obligation to replace the product or repair the product free of cost. The Assessing Officer had disallowed assessee s claim in respect of provision for warranty in full. In First Appellate Proceedings, the Commissioner of Income Tax (Appeals) after considering the decision of Hon ble Apex Court in the case of Rotork Controls India P. Ltd Vs. CIT(supra.) granted partial relief to the assessee by restricting assessee s claim to 75% of the provision created by the assessee. 12.1 We observe that assessee s claim for Provision for Warranty is being consistently disallowed by the Assessing Officer right from the year 1993-94 to 2001-02. The assessee carried the issue in appeal before the Tribunal. The Tribunal allowed assessee s claim on provision for warranty in full. The observations of the Co-ordinate Bench on this issue in ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee in the same terms. The ld. AR has pointed that no disallowance in respect of warranty provision was made in assessment years 2002-03 to 2004-05 as no incremental provision was made by the assessee. Rather there was reversal of provision during the aforesaid assessment years. The ld. DR has failed to controvert the findings of the Tribunal on this issue. Thus, respectfully following the decision of the Co-ordinate Bench, we allow assessee s claim in entirety. Thus, ground No.7 raised in appeal by the assessee is allowed. 13. The Ground No. 8 of the appeal by assessee is on disallowance of legal and professional expenditure amounting to ₹ 7,21,60,000/- paid to Mckinsey Co. 13.1 The assessee has claimed legal charges to be on revenue account whereas, the Department is of the view that consultancy and legal fees paid by the assessee to Mckinsey Co. is capital in nature, as the assessee has acquired intangible asset that has resulted in enduring advantage to the assessee. The question whether the expenditure is revenue or capital in nature is a mixed question of fact and law. In the present case, we observe assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in affirmative relying on Commissioner of Income Tax Vs. Crompton Engg. Co. Ltd. (supra) and held as under: 5.It is well-settled that it is not only permissible, but is also necessary for any business to update its own knowledge and adopt better ways of organising its business, if it is to survive in the market. The expenditure incurred for such purpose cannot be regarded as capital expenditure and it is only a revenue expenditure. The assessee, with an intention of bringing about improvements in the way it did its business, had sought for and obtained reports of the consultant for assessment of market attractiveness in terms of gaining global market, reputise on dealing with global markets, evaluation of assessee's business ability to compete, analysis of the future growth trend of the business, development of detailed business strategies for the assessee to grow in the dynamic business environment. The fees paid to the consultant was disallowed by the revenue officials as capital expenditure on the premise that the benefits derived from such consultancies would enure to the future years also. According to the learned counsel for the assessee, this question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant company. Based on a review of the cost-benefit analysis, the said assignment for carrying out the detailed operational efficiency and profitability study was, however, terminated shortly after the mandate had been given. In respect of the work already done by the said McKinsey Co. until the date of the termination of the mandate, a sum of ₹ 74,04,128 was paid by the appellant to the said McKinsey Co. In the previous year relevant to the asst. yr. 2000-01, the said payment was claimed deduction by the appellant. 14. Vide order dt. 31st Dec., 2002 passed by the AO under s. 143(3) of the Act, the AO, being of the view that the appellant had failed to establish that the payment made to M/s McKinsey Co. was revenue in nature and that since the appellant itself had treated the said expenditure as deferred revenue expenditure, disallowed the said expenditure of ₹ 74,04,128 holding the same to be capital expenditure. 15. Appeals preferred by the appellant before the CIT(A) as well as the Tribunal were dismissed and this is how the appellant has filed the present appeal under s. 260A of the Act raising the aforesaid questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lplessness shown by the Tribunal, for want of written agreement, was, therefore, clearly inappropriate. Once it is accepted as a fact that the assignment given to the said consultants was for the purpose of improving operational efficiencies and was not to incur any enduring benefit in capital field but to carry on the existing business more efficiently and profitably, the irresistible conclusion which follows is that such expenditure was allowable as business expenditure. [see CIT vs. Praga Tools Ltd. (1985) 49 CTR (AP) 269 : (1986) 157 ITR 282 (AP) and CIT vs. Crompton Engineering Co. Ltd. (2000) 242 ITR 317 (Mad)]. Therefore, this question has also to be answered in favour of the assessee and against the Revenue. Thus, in view of the facts of the present case and the various decisions discussed above, we are of the considered view, consultancy charges paid by assessee to Mckinsey Co. for enhancing efficiency, efficacy, profitability and market penetration is revenue in nature . The Commissioner of Income Tax (Appeals) has rightly reversed the findings of Assessing Officer and has held that the expenditure is not capital in nature. We are in agreement with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17.1 We observe that in assessment year 2004-05, the Revenue in ground No.5 of the appeal has assailed deleting of ad-hoc disallowances of various expenditures viz. public relation expenses, telephone expenses, vehicles expenses and public relation expenses, etc. and the Tribunal upheld the findings of the Commissioner of Income Tax (Appeals) by following its earlier order in ITA No.1055 1056/PUN/2009 for assessment year 2002-03 and 2003-04. Since head of expenses for which disallowance has been made in the impugned assessment year are same and ad-hoc disallowance has been made for similar reasons, we find no reason to deviate from the view already taken by the Co-ordinate Bench in assessee s own case. Hence, ground No.3 of appeal by the Revenue is dismissed being devoid of any merit. 18. In ground No.4 of appeal, the Revenue has assailed the findings of the Commissioner of Income Tax (Appeals) in deleting the addition of ₹ 50.58 Lakhs u/s.14A of the Act being proportionate interest attributable to the exempt income earned. The ld. AR pointed that own funds of the assessee comprising of share capital and reserves are to the tune of ₹ 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment year. The facts in the impugned assessment year are similar and the nature of services for which commission is paid is also similar. We find that the Co-ordinate Bench of the Tribunal has rejected assessee s claim for the reasons that the assessee has not been able to substantiate rendering of services by aforesaid two parties despite providing reasonable opportunity. For the sake of completeness, the relevant Para of the Tribunal s order on this issue is reproduced herein below: 80. We have perused the case record and heard the rival contentions. We observe that during assessment proceedings, as required by the Assessing Officer, parties failed to submit proof of rendering of services while they are in constant touch with the respective parties in subsequent years. Despite sufficient and reasonable opportunities, the said five parties have not been in a position to furnish requisite documentary evidences to demonstrate that the services were actually rendered by them to the assessee. It is also apparent from the order of the Ld. CIT(A) during First Appellate proceedings that the parties were not able to provide any proof of rendering of services. Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X
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