2017 (1) TMI 266 - AT - Income Tax

Enhancing the value of the closing inventory of raw material/ components - Held that:- As decided in assessee own case A Y 2007-08 if valuation of closing stock is changed then the value of opening stock should also be changed on the same basis or method. The closing stock of a particular year is the opening stock of the subsequent year. Not the case of the revenue that the method of valuation of closing stock is materially affecting the accounts and profits disclosed by the assessee. This adjustment sought to be made is revenue neutral and at best may result in preponment or postponement of revenue. The issue is whether such exercise is at all required on the ground of materiality. Materiality is a concept which is well recognized both in accountancy and law. Accounting standards notified by the CBDT u/s 145(2) mandate that the concept of materiality be taken into consideration when finalizing the accounts of an assessee.

Enhancing the value of closing inventory of finished goods - cost of rejection of semi finished goods and obsolete items - Held that:- As not found that how the loss of the assessee was found to be normal when the assessee submitted that it is an abnormal loss incurred by it during the course of manufacturing process. Further the Ld. dispute resolution panel has also stated that both the cost of normal and abnormal losses have to be loaded to the value of the closing stock is devoid of any merit as it is contrary to the accounting standard issued by the Institute of chartered accountants of India which has been mandated by the Ministry of corporate affairs ,which only says that, only normal losses are required to be included and abnormal losses are required to be excluded for the purpose of the valuation of the closing stock of the finished goods and semi finished goods.

Disallowance of provisions made towards net increase in prices of raw materials already supplied by the vendors - Held that:- The provision has been made on a scientific basis by estimating the actual increase in price of material and the amount of material that was already supplied and consumed in the vehicles manufactured up to the end of the year. Considering principles laid down in the case of Rotork Control (2009 (5) TMI 16 - SUPREME COURT OF INDIA), the impugned provision made for an accrued liability is an allowable revenue expenditure in accordance with the mercantile system of accounting. Adjustments should not be made on issues which are revenue neutral. Accordingly there is no justification in sustaining the aforesaid disallowance.

Addition estimating the value of the scrap lying in stock as at the end of the relevant previous year on hypothetical and national basis - Held that:- Since doctrine of res judicata is not applicable to income tax proceedings, the Tribunal can deviate from earlier orders passed in the assessee’s own case as in those earlier decisions the provisions of the accounting standard A-S to with respect to valuation of inventories were not considered and whether they apply to the scrap generated in a manufacturing process by the company. Furthermore there is no evidences brought on record by AO that the assessee has sold scrap out of the books. Furthermore the amount of addition working out by the Ld. assessing officer was also on the estimate basis without any quantitative details of the scrap. It is also not the case of the assessee that compared to the earlier years the scrap sold by the assessee is lesser during the year. Addition made is deleted.

Addition in respect of liquidated damages recovered from transporters for late delivery of the goods - Held that:- Any estimation without any data for actual delay in delivery would be purely hypothetical and notional, which is outside the realm of taxation under the provisions of the Act. Furthermore, as we have repeatedly held in the preceding grounds of appeal, that a consistent and regular method of accounting, which has always been accepted by the Revenue in the past, should not be disturbed, merely for better presentation of accounts, more so when such exercise is revenue-neutral. We have also noted from the set-aside order dated 26.02.2016 passed by the assessing officer for the assessment year 2008-09, wherein the similar addition made in the original assessment order was deleted, while categorically observing that in the absence of information for late delivery of vehicles being available with the appellant before the end of the year, the liquidated damages could not have been estimated for recognition as income. In view of the above, we delete addition made.

Addition in respect of provision for advertisement expenses incurred at the head office made at the end of the relevant previous years which were subsequently reversed in the succeeding year alleging same to be excessive - Held that:- The present disallowance is revenue-neutral, since the impugned amount of provision, as also admitted by the assessing officer itself, was reversed in the succeeding year and consequential offered to tax in that year. If such provision is disallowed in this year, the corresponding reduction would need to be made in the return of the succeeding year, neutralizing the entire tax liability on the appellant company. For the aforesaid cumulative reasons, we hereby delete the disallowance

TDS U/S 194C - disallowance under section 40 (a) (ia) incurred on account of provision towards advertisement and publicity expenses provided at the end of the year - Held that:- Considering order of the coordinate bench in case of appellant for earlier years where in it is held that it is reimbursement of expenditure and on this there is no requirement of tax deductions at sources, we are bound to follow the order of coordinate bench and allow ground no 9 of the appeal of the assessee

TDS u/s 194H - non TDS on Provision made towards commission paid on institutional sales to dealers - Held that:- The vehicles in the present case are being sold by the dealers, which are normally less than the prevailing market price in view of the institutional sales, and therefore the dealers are being compensated for the sales made by them at concessional price and dealers are selling these goods to the institutional customers on principal-to-principal basis. For the less realization of the sale price by the dealer, they are compensated by the assessee at the predetermined rate. Thus we allow ground No. 10 of the appeal reversing the disallowance made

Disallowance of purchases as excessive - addition u/s 40A - Held that:- Referring to assessee's own case we are not inclined to uphold the disallowance made by the Ld. assessing officer on account of the purchases of ₹ 7 2.40 crores made from the parties who are related parties in terms of accounting standard 18 issued by the Institute of chartered accountants of India but not in terms of provisions of section 40A (2) of the income tax act.

Disallowance of expenditure incurred on account of advisory services availed - Held that:- As gone through the order of the Tribunal for AY 2007-08, wherein while following the settled legal propositions that an assessing officer cannot sit in the arm chair of the business man and decide the reasonableness of expenditure incurred or commercial expediency thereof, deleted the impugned disallowance made by the assessing officer. This disallowance directed to be deleted

Tds u/s 194C - disallowance of purchases made from certain Vendors - Held that:- The transaction entered by the appellant for purchase of material from vendors is outside the scope of section 194C of the Act.

TDS u/s 194I - exp incurred on account of booking of hotel to convene training courses - Held that:- In view of the aforesaid discussion, we feel that bonafide belief of the appellant for not deduction tax at source from aforesaid payment for taking room on hire on certain solitary occasion(s) cannot be doubted.

TDS u/s 194H - expenditure incurred towards quarterly target on turnover discount on trade discount given to the dealers/customers - Held that:- As dealership agreement entered between the appellant and dealers is on a principal-to-principal basis and dealers do not act as agents of the appellant while purchasing and further selling the vehicles. Accordingly, the incentives offered at the time of purchase of vehicles do not fall within the meaning of commission u/s 194H

TDS u/s 194C - payment toward room reimbursement of cost of gifts distributed to customers - Held that:- If we see the dominant nature of the transaction, the same is in the nature of purchases or, in other words, contract or sale inasmuch as the appellant never had title in the goods before same were procured by FX and further supplied either to dealers or the appellant. Even where the goods are purchased by the vendor as per the specifications of the purchaser, is not in the nature of work contract covered within the scope of section 194C

TDS u/s 194I - payment to forum Aviation’s private limited - Held that:- Appellant had rightly deducted tax at source from the aforesaid payments made to Forum India Aviation Ltd. u/s 194C of the Act. Since the appellant had deducted tax at source under the correct provision, the question of disallowance u/s 40(a)(ia) does not arise. Accordingly, the disallowance made by the assessing officer under that section stands deleted.

Treatment given to the gains arising from sale of investments - business income OR capital gain - Held that:- Consistent method has been followed by an assessee to treat the investment as on capital account corroborated with disclosure in balance sheet as investment, the same consistent stand should not be disputed by the assessing officer. It is also not disputed by the Ld. assessing officer that the capital gains arising on the various investments are held for less than 12 months and are not long-term capital gain. In view of the aforesaid reasons also, while respectfully following the appeal orders for AY 2007-08 and 2008-09, we reverse the action of the assessing officer in changing the head of income surplus arising from sale of shares/mutual funds, etc..

Disallowance account of portfolio management services fees on protective basis - Held that:- The revenue could not point out any other decision which can be controverted against the decision of the coordinate bench in the case of the assessee for assessment year 2008- 2009 wherein the PMS expenses from income under the head capital gain is granted as reduction. Following the decision of coordinate bench in appellant’s own case in AY 2008-09, we hold that expenses incurred towards portfolio management fees in respect of investment in mutual funds/ shares is not allowable as business expenditure and same deserves to be allowed as deduction from income from capital gains as per provisions of the Act.

Disallowance under section 14A - Held that:- No valid satisfaction was recorded by the assessing officer in the assessment order to reject the method followed by the appellant in computing disallowance u/s 14A, before mechanically resorting to and applying the provisions of Rule 8D of the Rules. In view of such findings, the additional disallowance made by the assessing officer u/s 14A stands deleted on the aforesaid ground at the threshold. That apart, we also agree with the submissions of the appellant that, since the appellant is a cash-rich company, which, in fact, is investing surplus/idle funds in various modes of investments, there could be no nexus of interest-bearing borrowed funds with such investments.

Disallowance of expenditure incurred on advertisement on the death anniversary of founder of the assessee company - Held that:- Any expenditure incurred by the company to pay him homage satisfies the test of business / commercial expediency and, thus, cannot be said to be not incurred for the purpose of business. More so when in past assessment years the similar expenditure have been incurred by the assessee but have not been disallowed by the Ld. assessing officer and this fact has not been controverted by the Ld. departmental representative even on the principle of consistency also we are not inclined to upheld the disallowance

Addition on account of commission paid to the managing director - Held that:- In making payment of commission to the managing director of the company of 29.50 crore the provisions of section 36 (1) (ii) of the income tax act cannot be applied. The commission’s leading to the percentage of the profit earned by the company has for the companies act and there is an outer limit which is also been fixed in the terms and conditions of employment of the managing director therefore it cannot be said that there is no business expediency in payment of such commission to the managing director of the company.

Disallowance of deduction u/s 80 IA in respect of captive power generating unit situated at Gurgaon - Held that:- Considering that three different prices for supply of power are available in the market, the method adopted by the appellant to compute inter-unit transfer price by imputing a reasonable mark-up on its cost of production, i.e., ₹ 8.75, which was less than the rate of ₹ 9.84 charged by Maruti, was quite a reasonable for the purposes of computing deduction u/s 80IA(4) of the Act. Therefore we reverse the disallowance made by the Ld. assessing officer of deduction of ₹ 8 0 7.76 Lacs under section 80 IA, in relation to the generation of power

Disallowance of mark to market loss in export of 2 wheelers - Held that:- The aforesaid issue that reinstatement of assets and liabilities on revenue account in foreign currency is allowable business loss under the mercantile system of accounting has been settled by the Supreme Court in the case of CIT vs. Woodward Governor India Pvt. Ltd.[2009 (4) TMI 4 - SUPREME COURT ]

TDS u/s 194C OR 194J - disallowance on account of dealer’s conference for deduction of tax at lower rate or wrongful rate - Held that:- The services provided by the vendor, in our opinion, are predominantly physical or, in other words, predominantly not based on mental or intellectual attributes, being that of organizing an event involving booking of hotel, organizing airport transfers, organizing various artistes and professionals to stage the show, etc. The vendor has acted as a ‘one-stop shop’ for the appellant for coordinating with all the other thirty- party professionals or service providers. In our opinion, the predominant attributes in the service so provided by the vendor is that of contract for carrying out work, which would more appropriately be covered u/s 194C instead of section 194J of the Act

Disallowance under section 80IC - Held that:- The claim of deduction of the appellant is also duly supported with the audit report in Form 10CCB issued by the auditors, answering each question in the format and how the appellant satisfied all such conditions. In the final assessment order, the assessing officer has not pointed out violation of any such condition precedent. We agree with the submissions of the Ld. Counsel that the various errors (assuming without admitting) in submission of complete details/information by the appellant to the assessing officer, as noted in the assessment order, related to the computation of deduction, on the basis of which entire claim could not have been denied. Accordingly, in our view, the assessing officer was not justified in denying the benefit of deduction

Disallowing deduction under section 80 IC - whether the deduction needs to be computed by recording internal unit transfer at market price - Held that:- Even by applying the provisions of section 80IA(8), in our opinion, there can be no substitution of the price at which goods are debited by the eligible unit in its independent books of account. Similarly, with respect to components having value of ₹ 6.34 crores, which were transferred by the non-eligible unit to the eligible unit at Haridwar after nominal processing, does not result in enhancement of any market price of such goods. No disallowing deduction u/s 80IC, by enhancing the purchase price by adding certain markup thereon

Denial of deduction under section 80 IC - inflation of profit by charging higher basic price - Held that:- We reverse the action of the assessing office in partly disallowing deduction under section 80IC on account of the have profit earned by the assessee in the eligible unit.

Disallowance of deduction under section 80 I.C on account of the work and outsourcing of the manufacturing activity - Held that:- The profit earned by the eligible unit is from manufacturing of two wheelers, which is an eligible activity covered under section 80IC of the Act. Outsourcing of certain intermediary processes or procurement of some finished components for assembly thereof in the vehicle does not, in our view, mean outsourcing of the manufacturing operations. Thus, disallowance made by the assessing officer on the aforesaid ground was not based on any valid reasons

Disallowance of deduction under section 80 IC of the act on account of profit attributable to advertisement and marketing activities carried out at head office - Held that:- Head office is a separate cost centre and expenses incurred thereat needs to be allocated to various profit centers/manufacturing units on a rational and scientific basis, without any element of profit/markup. The issue raised by the assessing officer in the present ground of appeal is categorically similar to that raised in the aforesaid ground. Accordingly following our findings stated above, we reverse the action of the assessing officer and delete the disallowance made under section 80IC

Denial of deduction under section 80 IC on account of other income - Held that:- Interest on loan given at subsidized rates to employees, the source of such income is, thus, not the activity of giving loan, but benefit extended to employees engaged in the business. The first-degree nexus of such income, in our view, is the eligible business carried on by the appellant. Therefore, such income would be eligible for deduction u/s 80IC of the Act.

Interest on loans provided for making capital support to vendors – Held that:- Loan has been given to vendors to provide uninterrupted supply of goods to the appellant. The first-degree nexus of giving loan is, thus, business of manufacturing. Accordingly following our findings in the preceding issue, the action of the assessing officer on this account is reversed.

Freight recovery from customers - There is no profit element in the aforesaid recovery. In the absence of any income on the aforesaid recovery there was no warrant to deny benefit of deduction under section 80IC on the above

Sundry Sales - The sale of some finished components also does not involve any income element inasmuch as semi-finished components are supplied to ancillary units for further processing and finished components procured there from are subsequently debited at cost in the books. There is no profit element in the aforesaid transaction and therefore the benefit of deduction under section 80IC cannot be denied on above

Miscellaneous income – cash discounting from vendors - any benefit towards purchase price would have direct nexus with the computation of the aforesaid profits. The aforesaid income is, thus, directly related to business of manufacturing. Accordingly the action of the assessing officer in disallowing deduction under section 80IC on above was not valid and therefore, the action of the assessing officer on aforesaid ground is reversed.

Exchange fluctuation gain on import of goods is going to directly reduce foreign exchange liability to be discharged against import of goods being debited in the profit and loss account to arrive at the profits of the eligible business, such benefit has direct nexus with the said business, which is eligible for deduction under section 80IC of the Act.

Disallowance of expenses incurred on repairs and maintenance of assets at Nagpur premises alleging that the premises were not put to use - Held that:- These expenses were incurred since the possession was with the appellant and considering the transaction as per the terms and conditions of agreement to sale was executed, the appellant invested sum of ₹ 47.21 lacs on the property. Accordingly, the property was clearly in possession with the appellant. In that view of the matter there was no valid basis to disallow the expenses.

Disallowance of expenses incurred on purchase of computer software for sending fax - Held that:- Respectfully following the decision of the coordinate bench in the appellant’s own case where it is been held that the software are revenue expenditure and whereas the server purchase are capital expenditure. In view of this we direct the Ld. assessing officer to allow the deduction of expenses on account of purchase of the software including their up gradation treating it as revenue expenditure and to allow depreciation on server purchased treating it as capital expenditure.

Disallowance of various expenses incurred on repairs and maintenance to plant and machinery and store said tool consumed - Held that:- No adverse remark in maintenance of books of account has even been pointed by the auditors. Further, AO also on the verification of the books of accounts. On the other records could not point out any expenditure, which is not supported by the relevant evidences. Therefore, in these circumstances, the action of the Ld. assessing officer in making ad-hoc disallowance was purely unjustified and is thus deleted.

Disallowance of claim of depreciation in respect of rainwater harvesting system - Held that:- The assessee, in order to fulfill its corporate social responsibility and also in view of the public notice issued to provide safe drinking water for the purposes of use by general public/ inhabitants in the area in which the assessee’s factory is situated, incurred the expenditure on construction of rain water harvesting system, on account of business / commercial expediency. Thus expenditure satisfies the test of having been incurred for the purposes of business.

Disallowance of credit card expenses due to non-furnishing of information in prescribed format - Held that:- The company reimburses credit card expenses only after establishing nexus of same with the business activities. The books of account of the appellant are audited and no adverse inference in relation to incurrence of such expenses have been pointed out by the auditors. No unvouched expenditure has been pointed out by the assessing officer. This is not the first year of the incurrence of such expenses. No disallowance on the aforesaid account was made in any preceding assessment year or the succeeding assessment years.

Disallowance on account of right above certain obsolete store right - Held that:- The fact that the assessee could not maintain quantitative details of scrap does not lead to a conclusion that the entire claim should be disallowed. AO should have, in our opinion, considered the reasonableness of the claim based on the size of the company, its operations or on the basis of similar comparable cases. As AO does not dispute the realization from the sale of scrap, the disallowance of the entire value of scarp is not justified.

Deemed dividend addition - Held that:- Even assuming that the transaction is in the nature of loan, we have to agree with the arguments of the assessee that the transaction cannot be deemed as dividend in terms of exemption provided in clause (ii) of section 2(22)(e) since the loan would be considered as given by HHFL, which is engaged in the business of money lending, in the ordinary course of its business. Therefore, the amount cannot be deemed as dividend in the hands of the assessee.

TDS u/s 194J - payment to the person doing the repair job - Held that:- The dealer is playing a role similar to that of the TPA in as much it is making payment to the person doing the repair job. This payment made for service rendered is only being made by the dealer. Applying the proposition laid out in the Board Circular, technically it is the dealer who is liable to deduct tax at source on payments made to the service provided for doing the repair jobs but not the assessee. On this factual matrix, and as Sec.194J is not attracted in this case