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TMI Blog2011 (2) TMI 1351X X X X Extracts X X X X X X X X Extracts X X X X ..... ecting the AO not to exclude 90% of other income by way of debt recovery, discount and insurance claim etc. while computing the deduction u/s 80 HHC. (3) On the facts and in the circumstances of the case, the ld. CIT(A) ought to have upheld the order of the AO. (4) It is, therefore, prayed that the order of the ld. CIT(A) may be cancelled and that of the AO may be restored to the above effect. ITA No.1476/Ahd/2006 Asst. Year 2002-03 (Assessee's appeal) 3. In its appeal for Asst. Year 2002-03 the assessee has raised following grounds :- (1) The ld. CIT(A) failed to understand the facts and circumstances of the case. (2) The ld. CIT(A) erred in confirming the addition of Rs. 1,20,930/- being adjustment with regard to International transactions with Suzhou Pfaudler Glass lined Equipment Co. Ltd. China for sale of Firt 1912. He has considered the submission of the vouchers clarifying the actual facts as additional evidene though the same was submitted before the AO at the assessment stage. (3) (a) The ld. CIT(A) erred in holding that the acquisition of computer software of Rs. 508728/- is the intangible asset and the rate of depreciation is 25% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness income for the purpose of computation of deduction u/s 80 HHC of the IT Act, 1961 as the interest payment is more than the interest income. (13) The ld. CIT(A) erred in not directing the AO for calculating business profit as per assessment order Rs. 63,65,406/- instead of Rs. 24,77,032/- as returned by the appellant. It is contended that the assessed business profit should have considered as business income and not the business income as returned by the appellant for the purpose of computation of deduction u/s 80 HHC of the IT Act, 1061. (14) The ld. CIT(A) erred in confirming the charging of interest u/s 234D of the IT Act, 1961 on the excess refund granted u/s 143(1) prior to the operation of the provisions of section 234D i.e. 01/06/2003. It may be noted that the refund was granted as per intimation dated 03/01/2003 u/s 143(1). (15) The appellant prays for appropriate relief on the above grounds of appeals. (16) The appellant craves leave to add, alter, amend, substitute or withdraw any of the above grounds of appeal as circumstances may justify. ITA No.1476/Ahd/2006 Asst. Year 2002-03 (Assessee's appeal) 4. First we take up assessee's appeal for Asst. Year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hey are eligible for same rate of depreciation. We accordingly allow depreciation @ 60% on system software also as claimed by the assessee. So far as claim of Rs. 5,08,728/- is concerned the AO has not shown that they are system software but in fact they are only application software. The assessee does not get any right over them. They are to be modified from time to time, what assessee gets is licence to use them and they are not integral to computer system. Accordingly they are revenue expenditure and has to be allowed. Similar view has been taken by Hon. Punjab & Haryana High Court in CIT vs. Varinder Agro Chemicals Ltd. (2009) 309 ITR 272 (P & H) wherein it is held as under :- "6. It is well settled that for claiming deduction, apart from expenditure being for business, the same has to be revenue expenditure. Though, there is no rigid rule to determine when expenditure is capital or revenue, generally acceptable test is where advantage is for enduring nature, it may be capital expenditure, while if the expenditure is for running of the business, it is of revenue nature. Some of the leading judgments of the Hon'ble Supreme Court dealing with the issue are : Assam Bengal Cem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidiary Companies namely Karamsad Investment Ltd. & Karamsad Holding Ltd. Since the assessee had purchased shares in those companies being sister concerns, the nature of investment is the same as in shares and Mutual Fund of other companies. The assessee company had earned dividend income of Rs. 94.47 lacs during the year and has claimed as exempt under section 10(33). Invoking section 14A AO held that expenditure for earning exempted income cannot be allowed as deduction. Similarly, the AO identified that administrative expenditure which could have been incurred for handling the investment in shares and Mutual Fund. A part of such expenditure was considered attributable to investment made in sister concerns, the income therefrom was exempt under section 10(33). The assessee submitted that it has enough working capital and it has not increased its borrowings this year. Therefore, it cannot be said that investment in subsidiary was done during this year out of any borrowed capital made this year. Regarding administrative expenditure sought to be disallowed assessee submitted before the AO that there is no relationship of such expenditure with the investment activities. No specific s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be made this year as well. 12. In support of his arguments the ld. AR referred to the decisions of Hon'ble Punjab & Haryana High Court in the case of CIT vs. Hero Cycles Ltd. 323 ITR 518 (P & H); of ITAT Delhi Bench 'E' in the case of Minda Investments Ltd. vs. DCIT, Circle 6(1), New Delhi in ITA No.4046/Delh/2009 Asst. Year 2006-07; of ITAT, Mumbai Bench -G in the case of M/s Godrej Agrovet Ltd. vs. ACIT, Rg.10(2), Mumbai in ITA No.1629/Mum/09 Asst. Year 2005-06 & that of Hon'ble Supreme Court in the case of Munjal Sales Corpn. Vs. CIT 298 ITR 298 (SC) and Reliance Utilities & Power Ltd. 313 ITR 340 (Bom). He also referred to the judgments reported in 192 ITR 265 and 273 ITR 518 in support of above proposition. 13. On the other hand, the ld. DR relied on the orders of authorities below. He further referred to the decision of Punjab & Haryana High Court in CIT vs. Abhishek Industries Ltd. 286 ITR 1 (P & H) and of Hon. Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. (2010) 328 ITR 81 (Bom) and submitted that the issue regarding bifurcation of expenditure may go to the AO for determining reasonable disallowance. 14. We have considered the rival s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade on borrowed funds can be disallowed as held in S. A. Builders Ltd. vs. CIT (2007) 288 ITR 1 (SC). Hon'ble Punjab & Haryana High Court in CIT vs. Hero Cycles Ltd. (2010) 323 ITR 518 (P & H) held that no disallowance out of interest payment is permissible if AO does not establish nexus between the expenditure incurred and income generated. 16. Since assessee had sufficient profits generated this year and it had mixed funds and no nexus is established by the AO as to whether investment was made out of interest bearing funds, disallowance of interest cannot be made. Similarly no disallowance out of administrative expenditure can be made as there is no direct nexus. As a result, this ground is allowed. 17. Ground No.5 is not pressed by the assessee and hence it is treated as rejected. 18. Ground No.6 relates to accrued interest of Rs. 8,33,185/- payable to APSEB as per order of the City Civil Court. This issue has been decided against the assessee by the Tribunal in ITA No.1400/Ahd/2001 Asst. Year 1998-99 in the case of Addl. CIT, SR-8, Ahmedabad vs. GMM Pfaulder Ltd. as under :- "4. The second ground is pertaining to Rs. 8,33,185/- being interest paid to APSEB. During the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble High Court of Andhra Pradesh High Court has passed an interim order on 28.2.1995 in cross appeals of both the sides, by virtue of which decree passed in favour of the Board could not be executed. Since there is a clear direction of the Hon. High Court of Andhra Pradesh before which both the sides are in appeal with regard to enhancement of compensation from Boards side and reduction in compensation from assessee's side, and it is a case of contractual liability, therefore, in our considered view, the liability with regard to decretal amount cannot be held to be ascertained one. Therefore, the AO's action is legally correct in disallowing the claim of the assessee in this regard. Support can be taken from various decisions as cited by the ld. DR including Hon. Supreme Court decision in the case of CIT vs. Gajapatti Naidu 53 ITR 114 and Swadeshi Cotton and Flour Mills (P) Ltd. 53 ITR 134 and the decision of Hon. Madhya Pradesh High Court in the case of CIT vs. Ratlam Straw Board 152 ITR 425. This view gets further support from Hon. Gujarat High Court in the case of CIT vs. Ashwin Vanaspati Industrial (P) Ltd. 196 CTR (Guj) 117, in which following conclusion has been done: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xmi Machine Works (2007) 290 ITR 667. 22. The ld. DR on the other hand forcibly argued that the decision of Hon. Supreme Court in Laxmi Machine Works (supra) is confined to Asst. Year 1993-94 as per formula given in the statute for that Asst. Year. It cannot be extended to other Asst. Years particularly when after insertion of section 145A legal position has changed. 23. We have considered the rival submissions and perused the material on record. The short question is whether computation of trading results as per section 145A would affect computation of deduction under section 80HHC. Section 145A was inserted by the Finance Act (No.2) 1998 w.e.f. 1.4.1999. Section 145A so inserted, would be relevant for Asst. Year 2002-03 also. It would read as under :- [Method of accounting in certain cases. Sec.145A -Notwithstanding anything to the contrary contained in section 145 the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head "profits and gains of business or profession" shall be - (a) in accordance with the method of accounting regularly employed by the assessee; and (b) further adjusted to include the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has adopted exclusion principles i.e. if it has valued sale and purchase and inventories by excluding sales-tax and excise duty then by invoking section 145A the AO can direct the assessee to value purchase and sales and inventories by inclusion principle i.e. valuing the three items by including sales-tax and excise duty and then compute profits thereafter. In our considered view section 145A is a deeming section and it creates a fiction for directing to ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others include sales-tax and excise duty and other taxes while drawing trading/manufacturing account even though assessee might not have done so. But for the purpose of computing deduction under section 80 HHC the profits and gains of business computed under sections 28 & 43D whether by inclusion principle or exclusion principle, would not be disturbed. In other words wherever assessee has adopted inclusion principle for accounting in its books of accounts then same has to be followed for computing profits of business for the purpose of deduction under section 80 HHC, but where assessee has followed exclusion principle then provisions of section 145A would on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owever, following the decision of Hon. Punjab & Haryana High Court, we decide the issue in favour of the assessee. As a result, this ground of assessee is allowed. 29. Ground No.10 - relates to allowability of deduction under section 80 HHC on sale of scrap amounting to Rs. 32,29,959/-. The AO did not allow the claim on value of the scrap treating it as not forming part of business income. For arriving at this decision the AO relied on the ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others decision of ITAT, SMC, Mumbai Bench in the case of Coftab Exports vs. ITO in ITA No.913/Mum/1999 wherein it appears that it is held that sale of waste material generated during manufacturing of finished goods does not form part of total turnover. The ld. CIT(A) following the order of his predecessor in Asst. Year 2001-02 included these receipts in the total turnover. The assessee has challenged this decision to include the sale of scrap in total turnover. 30. We have heard the parties and carefully perused the material on record. The assessee has referred to the decision of the Tribunal Delhi Bench-A in the case of Claas India Ltd. vs. ACIT (2008) 21 SOT 580 (Delhi) wherein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amounts which are of the nature of brokerage, commission, interest, rent, charges or any other receipts of similar nature as provided in sub-clause (i) of clause (baa) of Explanation to section 80 HHC will be considered for exclusion of 90% thereof. Effect of explanation (baa)(i) of section 80HHC is that if any receipt is taxable and is included in the profit and is of the nature of brokerage, commission, interest, rent, charges or amount similar to them then 90% thereof will be excluded. If nature of receipt included in the profits is of the type as mentioned in sub-clause (i) then 90% shall not be excluded and, therefore, 100% thereof as such would be considered for computation of deduction under section 80 HHC. Hon. Bombay High Court in CIT vs. Asian Starch Co. Ltd. (2010) 326 ITR 56 (Bom) very elaborately and clearly explained as to which type of receipts are to be excluded @ 90% and why they should be so excluded. It would be pertinent to refer to the head Notes from that judgment - "The special deduction under section 80HHC of the Income-tax Act, 1961, is available to an assessee engaged in the export of goods or merchandise outside India to the extent of the profits specifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure incurred for the earning of the receipts. The distortion of the profits that would take place by excluding the receipts received by the assessee which were unrelated to export turnover and not the expenditure incurred by the assessee in earning those receipts was factored in by Parliament by excluding only ninety per cent. of the receipts received by the assessee. The extent of the exclusion which is statutorily mandated by Parliament is ninety per cent. of the total receipts. This is because the expenditure which is incurred by the assessee in earning these receipts would have gone into the computation of the profits and gains of business or profession and a distortion would be caused if the entirety of the income generated from the receipts alone were to be excluded. It is in order to obviate such a distortion that Parliament mandated that ninety per cent. of the receipts would be excluded. Once Parliament has legislated both in regard to the nature of the exclusion and the extent of the exclusion, it would not be open to the court to order otherwise by rewriting the legislative provision." Hon. Supreme Court in CIT vs. K. Ravindranathan Nair (2007) 295 ITR 228 (SC) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature and assessee has only challenged the computation of assessed income as a whole done by the AO as against the returned income. For the purposes of computation of ITA Nos.1241 & 1476/Ahd/2006 & four others Asst. Year 2002-03 & others deduction under section 80 HHC assessee wanted to take profits as declared by him at Rs. 24,77,032/- as against business profit at Rs. 63,65,406/- taken by the AO. Since various types of additions made by the AO while computing business profit have been separately agitated and considered, this ground becomes of academic interest only. The only argument of the ld. AR which requires consideration is that wherever additions are sustained then they should be taken into account while computing business profit for the purpose of deduction under section 80 HHC. We agree with the above submission and direct the AO to recomputed the deduction under section 80 HHC by considering the additions sustained in appeal while computing business profits. This ground is disposed of accordingly. 39. Ground No.14 relates to charging of interest under section 234D. The contention of the ld. AR is that interest should be charged with effect from 1.6.2003 as that section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp;The AO finally held that reasons given by the assessee are general in nature, no evidence was produced so as to show any effort made by the assessee to recover the amount. Certain amounts written off pertained to Asst. Year 2000-01 & 2001-02. These amounts were not quite old. He also held that it is for the assessee to show that debt has become bad and each amount written off has to be considered on its merits for allowing the claim. 42. The ld. CIT(A) allowed the claim by holding that once amount is written off then it has to be allowed and where assessee is able to cover any sum then it has to be taxed under section 41(4). The ld. CIT(A) held as under :- "3.2 I have considered the submissions of the appellant and facts of the case carefully. The appellant has emphasized that in the ledger accounts these amounts have been written off after considering that the amount is not recoverable in spite of the efforts made by the appellant company. Therefore, the conditions of 36(1)(vi) have been fully complied with. From the details of bad debt written off, I find that the amount represents reductions made by the clients' rejection of goods, rejection of packing charges, petty a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d view there is no case for interference in the order of ld. CIT(A). It is admitted position that assessee has actually written off the amounts. Once it is so then matter is squarely covered by the decision of Hon. Supreme Court in the case of TRF Ltd. vs. CIT (2010) 323 ITR 397 (SC) wherein it is held that w.e.f. 1.4.1989 in order to obtain a deduction in relation to bad debts it is not necessary for the assessee to establish that the debt in fact has become irrecoverable. It is enough if the bad debt is written off and the bad debt is irrecoverable in the account of assessee. Following the above decision of Hon. Supreme Court, we confirm the order of ld. CIT(A) and dismiss this ground of Revenue. 44. The second ground in Revenue's appeal relates to decision of ld. CIT(A) in directing the AO not to exclude 90% of other income by way of debt recovery, discount and insurance claim etc. while computing the deduction under section 80 HHC. The AO had treated those items as other income and excluded 90% thereof as per sub-clause (i) of clause (baa) of Explanation to Section 80 HHC. The ld. CIT(A) treated them as business income but not of the nature of interest, commission, brokera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgments as under : i) CIT vs. Shri Ram Honda Power Equip. 289 ITR 475 (Del) ii) DCIT vs. Harjivandas Juthabhai Zaveri 258 ITR 785 (Guj) Besides in respect of various incomes netting has to be allowed. In view thereof, both parties agreed that various case laws have been developed in respect of these items of income. Both parties also agreed that issue in respect of 80 HHC computation may set aside restored back to the file of to be decided afresh in accordance with law keeping in view various case laws including on netting of income etc. Consequently ground no.1 of the Revenue is allowed for statistical purpose. In the result, Revenue's appeal is partly allowed for statistical purpose." Since the issue has been restored to the AO for fresh adjudication, respectfully following the above decision of the Tribunal, we restore the three matters to the file of AO for fresh adjudication in line with the decision he takes for Asst. Year 2001-02. As a result, appeal of the Revenue is partly allowed for statistical purposes. ITA No.1926/Ahd/2007 Asst. Year 2003-04 (Revenue's appeal) 48. The following grounds have been raised by the Revenue in this appeal:- (1) The ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tute, or withdraw any of the above grounds of appeal as circumstances may justify. Assessee's appeal 2003-04: 50. We first take up assessee's appeal. The first issue is general in nature and hence does not require any specific adjudication. 51. The second ground relates to taxing of bad debts recovered at Rs. 5,09,389/-. The amount recovered relates to bad debt written off in Asst. Year 2002-03. The ld. CIT(A) dismissed the ground of assessee on the ground that issue regarding claim of bad debt is pending for adjudication before the Tribunal. 52. We have heard the parties. While disposing of ground no.1 in Revenue's appeal for Asst. Year 2002-03 we have allowed the claim of bad debts following the decision of Hon. Supreme Court in the case of TRF Ltd. vs. CIT (supra). Therefore, once the amount is recovered by the assessee, it is rightly taxable under section 41(4). This ground of assessee is accordingly disposed of. 53. Ground No.3 relates to claim of liquidated damages of Rs. 26,76,000/- and bad debt written off to the extent of Rs. 7,58,000/-. The AO found that assessee has debited a sum of Rs. 49,05,038/- as provision of bad debts which was, however, added by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... restored to the file of AO and hence allowed for statistical purposes. 58. Ground No.4 relates to allowability of claim of accrued interest payable to APSEB as per order of City Civil Court. Similar issue had arisen in Asst. Year 2002-03 as per ground no.6. Following out decision in that year, we dismiss this ground of assessee. 59. Ground No.5 this year is similar to ground No.12 in Asst. Year 2002-03 wherein issue has been decided against the assessee as above. Following our above order, we dismiss this ground of assessee this year as well. 60. Ground no.6 relates to exclusion of 90% on sale of scrap from the business income for computing deduction under section 80 HHC. In Asst. Year 2002-03 similar ground has come up as ground no.11. This issue has been decided in favour of the assessee that year. As the facts this year are similar, following that order, we decide this issue this year also in favour of assessee. This ground of assessee is allowed. 61. Ground No.7 is general in nature and hence it is rejected. As a result, appeal of assessee is partly allowed and partly for statistical purposes. Revenue's appeal Asst. Year 2003-04 62. Ground No.1 relates to bad debt wr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see's appeal) 66. The assessee has raised following grounds in this appeal:- (1) The ld. CIT(A) failed to understand the facts and circumstances of the case. (2) The ld. CIT(A) erred in confirming the non-allowance of claim of accrued interest Rs. 8,33,185/- payable to APSEB as per order of the city civil court. (3) The ld. CIT(A) erred in confirming disallowance of Rs. 16,52,778/- out of total disallowance Rs. 59,71,000/- of provisions of Bad debts on the ground that the appellant has received the said amount in financial year 2006-07 and therefore this amount has not become bad in this year. It is contented that since the provision has been made in respect of advances given during the course of business, the claim is allowable u/s 37(1) of the Act, there is no question of the amount becoming bad during this year. (4) The ld. CIT(A) erred in confirming the disallowance of Rs. 1,20,000/- being administrative expenses u/s 14A of the Act, considering them incurred in relation to exempted dividend income. (5) The ld. CIT(A) erred in accepting the AO's action to exclude 90% of interest income Rs. 18,14,000/- from the business income for the purpose of computat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eady been taken into account by computing income in earlier year or even in current year is written off then the same has to be allowed as deduction as per the ratio of Hon. Supreme Court in TRF Ltd.'s case (supra). If any amount is recovered subsequently, then the same is taxable under section 41(4). We, therefore, restore this issue to the file of AO to allow the claim of bad debt to the extent the amount is actually written off. The assessee will submit independent account to the AO and specify how and when such amount has been written off in the account of individual parties. To that extent ground raised by the assessee is allowed but for statistical purposes. 71. Ground no.4 relates to disallowance of administrative expenses of Rs. 1,20,000/- under section 14A as it apparently related to exempted dividend income. The AO found that assessee has earned dividend income of Rs. 2.97 crores and has shown investment of Rs. 14.56 crores in Mutual Fund of Rs. 4.05 lacs in shares during the year. Such dividend income was exempt. AO sought to disallow proportionate interest expenses and administrative expenses. In response to show cause notice assessee submitted detailed reply which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he warranty provisions had to be recognized because the assessee had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of the obligation. Therefore, the assessee had incurred a liability during the assessment year which was entitled to deduction under section 37 of the Income-tax Act, 1961. The present value of a contingent liability, like the warranty expense, if properly ascertained and discounted on accrual basis can be an item of deduction under section 37. The principle of estimation of the contingent liability is not the normal rule. It would depend on the nature of the business, the nature of sales, the nature of the product manufactured and sold and the scientific method of accounting adopted by the assessee. It would also depend upon the historical trend and upon the number of articles produced. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when : (a) an enterprise has a present obligation as a result of a past event ; (b) it is probable that an outflow of resources will be required to settle the obligation, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The assessee has referred to the judgment of Hon. Bombay High Court in the case of CIT vs. M/s Pfizer Ltd. (2010) 233 CTR 521 wherein it is held that insurance claim on account of stock-in-trade would not be subject to deduction of 90% as per clause (i) of Explanation (baa) to section 80HHC. 84. In case of bad debt recovered of Rs. 18,23,000/- it is to be enquired whether they are related to trade and what treatment has been given in computation of deduction under section 80 HHC when they were written off in the books of account and claim was allowed accordingly. If the bad debt directly related to trade then they would be business receipts and exclusion of 90% would not be applicable. Similarly, if sundry credit balance which were written back also related to trade then they would be business income and exclusion of 90% will not be applicable. Same is the position in respect of sales-tax and excise duty refund. They are apparently business receipts and they are not akin to interest, commission, brokerage charges etc. Therefore, the principle of exclusion of 90% would not be applicable. In any case the AO will examine the account and apply the principles of exclusion of 90% onl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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