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TMI Blog2018 (8) TMI 2169X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. AO as well as the Ld. CIT (Appeals) erred on facts and in law in not appreciating that the provisions of section 43B(f) of the Act were not applicable in the instant case. 2. That the Ld. CIT(Appeals) erred in remanding back to the Ld. AO the issue of verification of provision for leave encashment reversed during the year of Rs. 3,33,28,504/- when complete details in this regard were produced before the ld. CIT (Appeals). 3. That the Hon'ble CIT (appeals) erred on the facts and in the circumstances of the case, by remanding back for verification, the disallowance made by the AO on account of provision for warranty expenses amounting to Rs. 4,56,36,435. 4. That the Ld. CIT(Appeals) erred in remanding back to the Ld. AO the issue of verification of provision for warranty reversed during the year of Rs. 1,87,15,822/- to the Assessing Officer, when complete details in this regard were produced before the Ld. CIT (Appeals). 5. That the Ld. AO as well as the Hon'ble CIT (appeals) grossly erred on facts and in law in disallowing bad debts written-off of Rs. 23,94,011 being TDS written off by the appellant. 6. That the Ld. AO as well as the Hon'ble CIT (appeals) erred on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y comparables for computing the arm's length price and also has disregarded the comparability analysis undertaken by the appellant. 9.5 That the Ld CIT(Appeals) grossly erred on facts and in law by confirming the decision of the Ld. TPO of not allowing working capital adjustment to the margins of the comparable to bring them in the line with the working capital requirements of the appellant and in doing do confirming the decision of the Ld TPO that the appellant is engaged in undertaking 'high end' software development activities.. 9.6 That the Ld. CIT (Appeals) has erred by not commenting on the decision of the Ld. TPO of not allowing any adjustment for difference on account of risk undertaken by comparables vis-a-vis appellant which is not a risk bearing entity. 9.7 That the Ld CIT(Appeals) has grossly erred on fact and law by holding that the benefit of (+/-) 5% range mentioned in the proviso to section 92C, of the, Act is not available as a standard deduction to the appellant for computing the transfer pricing, adjustment. 9.8 That the Ld. CIT(Appeals) erred in directing the Ld AO/ Ld TPO to verify the value/ Percentage of related party transactions in case of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not applicable in the instant case. 2. That the Hon'ble CIT (Appeals) erred on the facts and in the circumstances of the case, by remanding back for verification, the disallowance made by the AO on account of provision for warranty expenses amounting to Rs. 14,68,29,299 when complete details in this regard were produced before the Ld CIT(Appeals) and the Ld. AO. 3. That the Ld. AO as well as the Hon'ble CIT (Appeals) erred on facts and in law in disallowing Rs. 42,00,977 (after giving depreciation @ 60%) on account of software expenses without appreciating that the same was a revenue expenditure and not capital expenditure 4. That the Ld. AO as well as the Hon'ble CIT(Appeals) grossly erred on facts and in law in restricting the claim of deduction under section 80HHE of the Act to Rs. 39,90,777 as against the claim of Rs, 41,09,176 made by the appellant in its return of income. 4.1 That the Ld AO as well as the Hon'ble CIT (Appeals) grossly erred on facts and in law in computing 'profit of the business for the purpose of deduction under section 80HHE of the Act, by reducing 90% of gross rental income without reducing the proportionate depreciation and 90% of gross inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s regard were produced before the Ld. CIT (Appeals) as well as Ld TPO and in directing the Ld AO/ Ld TPO to re-compute the ALP. 6 That the Ld. AO erred on facts and in law in initiating penalty proceedings under section 271(1)(c) of the Act." 5. The revenue has raised the following grounds of appeal in ITA No. 4581/Del/2011 for the Assessment Year 2004-05. "1 On the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) has erred both on facts and in law, in directing the AO to verify the submissions of assessee and then grant the relief of Rs. 14,68,29,299/- on a/c of warranty provisioning which tantamount to setting aside the case and are contrary to the provisions of the amended section 251(l)(a) of the Income Tax Act, 1961." 2. On the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) has erred both on facts and in law, in directing the TPO to exclude M/s AFTEK from comparable on the ground of high margin company. Removing a comparable on the ground of high profit making would neither be as per the Act nor would it be a representative set. The above concept is impliedly approved by the ITAT in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3B (f) of the Act does not apply. The assessee further submitted that the provision of section 43B(f) do not apply to the assessee as the provision is towards leave encashment and it is not sum payable in lieu of leave. In nutshell the assessee contested that accrued leave which has not become payable is not hit by the provision of section 43B (f) of the Act. The ld AO rejected the contention of the assessee and disallowed the above sum u/s 43B(f) of the Act. The assessee contested the same before the ld CIT (A) who vide para No. 4.2 has held that the provision of section 43B (f) of the Act are squarely applicable and hence, the disallowance was confirmed. Before us, this ground is agitated. 8. The ld AR vehemently submitted that the issue is squarely covered in favour of the assessee by the decision of the Samtel Colour Ltd Vs. DCIT 157 Taxman 39 (Delhi) and Sitaram Textiles Ltd Vs. DCIT 57 ITD 439. The ld AR submitted that the claim for leave encashment is an estimated value of accrued leave and only the employees who have resigned can take leave encashment. It is not the sum payable and therefore, provision of section 43B (f) does not apply. He submitted that the company does n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by it under the leave encashment scheme proportionate with the entitlement earned by the employees of the company would be allowable as deduction the year in which the provision was made for that liability. It was further held that liability was not contingent liability but accrued liability. The above decision was referred for Assessment Year 1978-79. However, disallowance has been made by the ld AO and confirmed by the ld CIT (A) u/s 43B(f) of the Act. There cannot be any doubt that leave encashment liability is an eligible deduction available to the assessee. But, in view of the clear-cut provisions of the law that from 1 April 2002 leave salary payable by the assessee as an employer to his employees is brought within the purview of section 43B of the act However, the relaxation contained in the 1st proviso is available. On further it is clarified that once deduction of the provision made in an earlier year's is allowed, no deduction is permissible in respect of the same amount once again on payment basis. Therefore, if the assessee has made the provision of leave salary which has not been paid on or before the due date prescribed under the income tax act for filing of the retur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 04-05 and therefore it is dismissed. 16. Ground number 5 of the appeal for assessment year 2003-04 of the assessee is against the disallowance of the bed that written off. Before the learned assessing officer assessee claimed the bad debts written off being the tax deduction at source by the customers of the assessee for which neither the certificates were received nor claimed as advance tax in the return of income of Rs. 2394011/-. During the course of assessment proceedings it was noted by the learned assessing officer that the assessee has claimed a sum of Rs. 3 4946539/- as bad debts written off. The assessee justified its claim stating that the amount in question is actually written off. However the learned assessing officer allowed the claim of the assessee of Rs. 9 024070/- and the balance claim of Rs. 25922469/- was disallowed. Assessee preferred an appeal before the learned CIT - A allowed the claim of the assessee partly however the learned CIT appeal confirmed the disallowance of the bad Debt, which was arising out of the tax deduction at source written off by the assessee. The learned assessing officer stated that the TDS written off does not constitute a debt related ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same has not been allowed correctly by the learned AO. 19. We have carefully considered the rival contention and perused the orders of the lower authorities. The learned CIT - A has not allowed the claim of the assessee for tax deduction at source not recovered from the various the payments of customers as according to him the assessee has not cared to take the credit of the tax deducted at source and therefore the same cannot become a trade debt recoverable from the concerned customer. However the learned CIT - A has mentioned that it can be treated as an admissible expenditure only if it is proved that the amount in question could not be claimed as the tax deduction at source was either not actually deducted or after deduction not deposited at all and the TDS certificates was not issued by the concerned debtor. On the same reasoning had the TDS certificates been issued by the customers or debtors to the assessee the assessee would have claimed the same as tax paid against his liability for payment of tax. In the present case, the assessee has neither presented the tax deduction at source certificates issued by the customers and claim them as tax paid by the assessee nor does the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee. 21. Before us the learned authorized representative submitted that assessee has furnished the complete details of the software expenditure incurred by the assessee of Rs. 1 0502442/-. He submitted that assessee has incurred software expenditure amounting to Rs. 6 714164/- and most of such expenditure are the annual maintenance contract expenditure for the various software used by the assessee. He submitted complete month -wise details of those expenditure. Details were also provided to the learned departmental representative. Based on the details it is submitted that assessee has given most of the expenditure on the software maintenance expenditure as annual maintenance of the software and the software licenses, which are time-based and does not have any benefit of enduring nature accruing to the assessee. He therefore submitted that software expenditure is in the nature of the revenue expenditure, recurring expenditure, annual maintenance expenditure, and annual renewal of the licenses of the various software and therefore they are not capital expenditure. 22. The learned departmental representative vehemently supported the order of the lower authorities and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 (1) of the income tax act. During the year the assessee has incurred expenditure of Rs. 9 55200 because of late cancellation charges. Before the learned AO assessee submitted that these expenditure are compensatory in nature. However, the learned assessing officer disallowed the same. Before the learned CIT - A, assessee stated that the assessee has submitted the ledger account, however it was disallowed holding that no details have been furnished by the assessee. Even before the learned CIT - A the assessee submitted the same details and therefore the learned CIT - A confirmed the finding of the learned assessing officer. Therefore, the assessee in appeal before us. 26. The learned authorized representative submitted before us that these are the cancellation charges paid by the assessee to the various agencies on account of the general meeting expenditure incurred by the assessee. He submitted that the complete ledger account was provided by the assessee before the learned assessing officer however, the same was ignored. He submitted that these are the expenditure of compensatory nature. 27. The learned departmental representative vehemently submitted that when the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out. The learned assessing officer noted that there is no such provision under the income tax act. Therefore, he reduced the whole rental income at the rate of 90% from the profits of the business of the assessee. It was further noted by him that assessee has not reduced the income from interest stating that the expenditure relatable to the interest income exceeds the interest income. Therefore, the learned assessing officer also reduced 90% of the interest income from the eligible profit. In addition, thereby against the claim of the assessee of Rs. 3 650192/- the deduction was worked out at Rs. 3 454016/-. The assessee aggrieved with the order of the learned assessing officer preferred an appeal before the learned CIT - A on the same issue. The learned CIT appeal also rejected the claim of the assessee holding that in view of the decision of jurisdictional High Court in the case of CIT versus liberty footwear private limited 287 ITR 339 (Punjab and Haryana), which is against the assessee wherein the Hon'ble High Court has decided with respect to the deduction under section 80HH C that it is the gross interest received by the assessee which is to be considered in terms of explan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be allowed as expenses. After including such receipts of income and after deducting such expenses, the total of the net receipts are profits of the business of the assessee computed under the head "Profits and gains of business or profession" from which deductions are to made under clauses (1) and (2) of Explanation (baa). 10. Under clause (1) of Explanation (baa), ninety per cent. of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in any such profits are to be deducted from the profits of the business as computed under the head "Profits and gains of business or profession". The expression "included any such profits" in clause (1) of Explanation (baa) would mean only such receipts by way of brokerage, commission, interest, rent, charges or any other receipt which are included in the profits of the business as computed under the head "Profits and gains of business or profession". Therefore, if any quantum of the receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature is allowed as expenses under sections 30 to 44D of the Act and is not included in the profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been included in the profits of business of an assessee as computed under the head "Profits and gains of business or profession", ninety per cent. of such quantum of the receipt cannot be deducted under Explanation (baa) to section 80HHC. 12. If we now apply Explanation (baa) as interpreted by us in this judgment to the facts of the case before us, if the rent or interest is a receipt chargeable as profits and gains of business and chargeable to tax under section 28 of the Act, and if any quantum of the rent or interest of the assessee is allowable as an expense in accordance with sections 30 to 44D of the Act and is not to be included in the profits of the business of the assessee as computed under the head "Profits and gains of business or profession", ninety per cent. of such quantum of the receipt of rent or interest will not be deducted under clause (1) of Explanation (baa) to section 80HHC. In other words, ninety per cent. of not the gross rent or gross interest but only the net interest or net rent, which has been included in the profits of business of the assessee as computed under the head "Profits and gains of business or profession", is to be deducted under clause (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per cent. of the gross total income arising from processing charges had to be deducted under Explanation (baa) to arrive at the profits of the business. In this case, this court held that the processing charges received by the assessee were part of the business turnover and accordingly the income arising therefrom should have been included in the profits and gains of business of the assessee and ninety per cent. of this income also would have to be deducted under Explanation (baa) under section 80HHC of the Act. In this case, this court was not deciding the issue whether ninety per cent. deduction is to be made from the gross or net income of any of the receipts mentioned in clause (1) of Explanation (baa). 15. The Bombay High Court has also relied on the Memorandum explaining the clauses of the Finance Bill, 1991, contained in the circular dated December 19, 1991, of the Central Board of Direct Taxes to come to the conclusion that Parliament intended to exclude items which were unrelated to the export turnover from the computation of deduction and while excluding such items which are unrelated to export for the purpose of section 80HHC, Parliament has taken due note of the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also dismiss ground number 5 of the appeal of the assessee for assessment year 2004-05 which is also on the transfer pricing adjustment made by the learned assessing officer which on the direction of the learned CIT A after verification has been reduced to nil. Therefore the grievance of the assessee does not remain hence the ground is dismissed. 37. Ground number 10 of the appeal of the assessee is against the initiation of penalty proceedings under section 271(1)(C). The above ground is premature at this particular stage and therefore it is dismissed. For similar reasons we also dismiss the ground number 6 of the appeal of the assessee for assessment year 2004-05 against the initiation of penalty proceedings. 38. Before us the assessee has also raised additional ground of appeal numbering the is ground number 11 & 12 as under:- "11. without prejudice to the grounds of appeal already filed by the appellant the learned AO as well as the Hon'ble CIT - A and in not allowing the deduction available under section 10 A of the income tax act on the increased profits of the business of the eligible undertaking on account of various disallowance made. 12. Without prejudice to the gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reduce, enhance, or annul the assessment where the appeal relates to an assessment order. It is further stated that the power to set aside has been omitted by the finance act, 2001 with effect from 1/6 2001 and therefore the order passed by the learned CIT - A on 17/03/2001 giving the direction to the learned assessing officer are contrary to the provisions of section 251(1)(a) of the act. 44. The learned authorized representative referred to the direction of the learned CIT - A and it was submitted by him that the learned CIT appeal has given a specific direction to the learned assessing officer to recompute the disallowance after proper verification of the certain aspects which are not available on the record of the learned CIT - A. Therefore there is no infirmity in the order passed by the learned CIT - A. 45. We have carefully considered the rival contention and perused the orders of the lower authorities. We have also perused the orders of the appeal effect order passed by the learned assessing officer which are placed at page number 838/845 of the paper books and also the order of the learned transfer pricing officer dated 9/3/2012 wherein the adjustment and the addition m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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