2015 (12) TMI 1742 - AT - Income Tax

Assessee's Appeal Partly Allowed, Revenue's Appeal Dismissed. Tribunal Emphasizes Consistency in Accounting Methods

Sandvik Asia Pvt. Ltd. Versus The Jt. Commissioner of Income Tax, Range – 10, Pune

Sandvik Asia Pvt. Ltd. Versus The Jt. Commissioner of Income Tax, Range – 10, Pune - TMI Issues Involved:1. Disallowance of reimbursement of expenses to AB Sandvik Coromant (ABSC).2. Disallowance of provision for excise duty pertaining to obsolete inventory under section 145A.3. Disallowance of sales commission.4. Treatment of software expenditure as revenue expenditure.5. Deletion of addition to closing stock being provision for obsolete inventory.6. Allowing losses suffered by newly set up EOU against other business income.7. Computation of deduction under section 80HHC.Issue-wise Detailed Analysis:1. Disallowance of reimbursement of expenses to AB Sandvik Coromant (ABSC):The assessee claimed reimbursement of expenses amounting to Rs. 20,95,635 to ABSC, which was disallowed by the Assessing Officer (AO) due to non-deduction of tax at source, categorizing it as royalty. The CIT(A) upheld the disallowance due to lack of substantiating documents, which were reportedly lost in floods. The Tribunal found no merit in the assessee's claim due to the absence of basic details and upheld the addition of Rs. 20,95,635. The ground of appeal was dismissed.2. Disallowance of provision for excise duty pertaining to obsolete inventory under section 145A:The assessee included Rs. 10,06,000 relating to excise duty on obsolete inventory in its closing stock but did not remove the stock before filing the return. The AO added the amount under section 145A, disallowing the deduction under section 43B as the obsolete inventory was not cleared. The CIT(A) upheld the AO's order, but the Tribunal allowed the deduction under section 43B, noting that the excise duty was paid before the due date of filing the return. The ground of appeal was allowed.3. Disallowance of sales commission:The assessee claimed a sales commission of Rs. 27,62,303 paid to two agents. The AO disallowed the commission due to lack of evidence of services rendered. The CIT(A) upheld the disallowance, noting the failure to prove the expenses were incurred for business purposes. The Tribunal found no merit in the assessee's claim due to the absence of supporting evidence and upheld the disallowance. The ground of appeal was dismissed.4. Treatment of software expenditure as revenue expenditure:The AO treated software expenditure of Rs. 41,85,871 as capital expenditure, allowing depreciation at 60%. The CIT(A) allowed the claim as revenue expenditure, following the Tribunal's decision in the assessee's own case for earlier years. The Tribunal upheld the CIT(A)'s order, referencing the Bombay High Court's decision in Lubrizol India Ltd., which treated similar expenses as revenue in nature. The ground of appeal was dismissed.5. Deletion of addition to closing stock being provision for obsolete inventory:The AO disallowed the provision for obsolete inventory amounting to Rs. 90,91,000, stating it should be valued at cost or market value. The CIT(A) allowed the provision, noting the consistent method followed by the assessee and the scientific basis of the provision. The Tribunal upheld the CIT(A)'s order, referencing the Supreme Court's decision in Rotork Controls India (P) Ltd., which allowed provisions made on a scientific basis. The grounds of appeal were dismissed.6. Allowing losses suffered by newly set up EOU against other business income:The AO disallowed the set-off of losses from a newly set up EOU against other business income, referencing sections 10A/B. The CIT(A) allowed the set-off, noting the commercial production started in the next year and referencing the Bombay High Court's decision in Hindustan Unilever Ltd., which allowed set-off of losses from exempt units against other business income. The Tribunal upheld the CIT(A)'s order, dismissing the ground of appeal.7. Computation of deduction under section 80HHC:The AO excluded 90% of creditors written back from the eligible profit for deduction under section 80HHC. The CIT(A) included the amount in business profits, referencing the Supreme Court's decision in CIT Vs. K. Ravindranathan Nair and the Bombay High Court's decision in CIT Vs. M/s. Dresser Rand India Pvt. Ltd. The Tribunal upheld the CIT(A)'s order, noting the write-back related to purchases and should not be included in the total turnover. The ground of appeal was dismissed.Conclusion:The appeal of the assessee was partly allowed, and the appeal of the Revenue was dismissed. The Tribunal upheld the CIT(A)'s decisions on various grounds, emphasizing the consistency of accounting methods and the adherence to legal precedents.