2007 (8) TMI 379 - AT - Income Tax

Summary

Issues Involved:

1. Nature of the receipt of Rs. 13 crore from the parent company.
2. Taxability of business income amounting to Rs. 35.20 lakh from running bills.
3. Deductibility of provision for expenses amounting to Rs. 13,26,724.

Issue-wise Detailed Analysis:

1. Nature of the Receipt of Rs. 13 Crore from the Parent Company:

The primary issue was whether the receipt of Rs. 13 crore by the assessee from its parent company was a capital receipt or revenue in nature. The revenue argued it was revenue in nature, compensating for trading loss, while the assessee claimed it was a non-refundable capital grant.

The Assessing Officer (AO) examined various evidences and concluded that the payment stemmed from business considerations due to the close commercial relationship between the assessee and its parent company. The AO relied on several judgments, including Handicrafts & Handloom Exports Corpn. of India v. CIT, to argue that the payment was not a gift or voluntary and was instead motivated by business considerations.

The assessee countered by highlighting that the payment was for recoupment of losses and not stemming from any direct business transaction between the two companies. The assessee cited the Foreign Inward Remittance Certificate (FIRC) and other communications to support that the receipt was a non-refundable capital grant.

The Tribunal concluded that the revenue failed to establish the receipt as income. The Tribunal found that the facts of the case were more aligned with the decisions in Handicrafts & Handloom Export Corpn., where reimbursements of losses by a holding company to its subsidiary were not considered revenue receipts. Therefore, the Tribunal held the receipt as a capital receipt.

2. Taxability of Business Income Amounting to Rs. 35.20 Lakh from Running Bills:

The issue was whether Rs. 35.20 lakh, estimated from running bills, should be taxed as business income. The AO argued that since the assessee followed the mercantile system of accounting, the income embedded in the receipts should be taxed in the year of receipt. The AO estimated the profit at 10% of the receipts, amounting to Rs. 35.20 lakh.

The assessee contended that the income should not be recognized until the contract reached a certain completion stage, following Accounting Standards-7 (AS-7). The assessee argued that recognizing income before 25% completion of the contract would not accurately reflect the financial position.

The Tribunal noted that the assessee had consistently incurred losses and had followed this method of accounting for several years. The Tribunal held that disturbing the method would lead to adjustments of profits in earlier and subsequent years. Therefore, the Tribunal concluded that no adjustment was required, and the income attributable to the receipts would work out to be a loss.

3. Deductibility of Provision for Expenses Amounting to Rs. 13,26,724:

The issue was whether the provision for expenses amounting to Rs. 13,26,724 should be allowed as a deduction. The AO disallowed the provision, stating that the liability did not accrue until 31-3-2000 and was merely anticipated expenditure.

The assessee argued that the provision was made for expenses related to specific projects and was a reasonable estimate of the liability. The assessee cited the decision in Calcutta Co. Ltd. v. CIT to argue that an estimated liability, if reasonable, should be considered accrued.

The Tribunal agreed with the assessee, noting that the liability was estimated reasonably and a significant portion of the provision was utilized within six months of the end of the previous year. The Tribunal held that the liability was an accrued liability and, subject to verification, allowed the deduction.

Conclusion:

The appeals of the revenue for both assessment years were dismissed. The Tribunal held that the receipt of Rs. 13 crore was a capital receipt, no adjustment was required for the estimated profit from running bills, and the provision for expenses was a deductible accrued liability.