2018 (12) TMI 632 - AT - Income Tax

Partial Win for Assessee: Deductions Allowed, Interest Levied, Lease Rental Deletions Upheld

The Tribunal partly allowed the assessee's appeal, directing the AO to delete the addition related to warranty receipts, re-examine the grant-in-aid, ... Receipts allocated towards Warranty period - contention of the assessee is that the method of accounting followed by the assessee complies with the accounting principle of “Revenue cost matching principle”, i.e., the revenue is being spread by the assessee over the warranty period, since warranty expenditure shall be incurred by the assessee during the warranty period - Held that:- It is well settled proposition of law that the genuine change in the method of accounting to comply with the requirement of the accounting principles and accounting standards should be accepted. As regards the methodology adopted by the AO, we notice the same only shifts the year of assessing the income, whereas the methodology adopted by the assessee would comply with the requirement of the accounting principles and the accounting standards. Accordingly we are of the view that there is no requirement to disturb the methodology adopted by the assessee in accounting for Warranty period receipts. Accordingly we set aside the order passed by the CIT(A) on this issue and direct the Assessing Officer to delete the addition made by him on this issue. Seduction claimed u/s 80HHE - Held that:- As earlier restored the issue relating to Grants in aid to the file of the AO for examining its taxability afresh by duly considering the agreement entered by the assessee with the Government. Hence the claim of the assessee for deduction u/s 80HHE in respect of this income would depend upon the view that will be taken by the AO in the set aside proceedings. As contended by D.R, if it is found that the Government has given grant in aid to meet the expenses incurred in development and implementation of government programs and accordingly if it was held that the same is taxable, then we are of the view that the grant in aid shall form part of operating income and would be eligible for deduction u/s 80HHE of the Act. Provisions written back - Held that:- We agree with the said submission of the assessee. It is quite normal in any business to create provisions for known liabilities and to write back the same when the liability is no longer payable. The amount so written back is usually treated as income of the year in which it is so written back. Hence, we do not find any merit in the apprehension of Ld CIT(A). Accordingly we agree with the contentions of the assessee that the amount so written back should be treated as part of operating profit of the assessee, as it is not an independent source of income. Accordingly we direct the AO to include the amount written back by the assessee in “Profits of business” and allow deduction u/s 80HHE of the Act. Miscellaneous income - Held that:- There is some merit in the submission of the assessee that the miscellaneous income consisted of receipts arising during the course of carrying on of business. However, in the absence of actual details, in our view, it would be difficult to accept the claim of the assessee. Hence, in order to put this issue at rest, we direct the AO to take 50% of the miscellaneous income as income eligible for deduction u/s 80HHE of the Act and allow deduction accordingly. Levy of interest u/s 234D - Held that:- CIT(A) has decided this issue against the assessee. However, he has directed the AO to verify the computational error pointed by the assessee. In view of the above said binding decision, we confirm the order passed by Ld CIT(A). Addition of lease rentals claimed by the assessee - Held that:- CIT(A) has considered the issue in detail in AY 1997-98 and has given a finding that the lessor is the owner of the assets. It was not shown to us that the above said finding of CIT(A) was reversed by the Tribunal or High Court, meaning thereby, the said finding shall hold the field. During the year under consideration, the assessee has not entered into any fresh lease transactions and has paid only the lease rentals on the lease agreement entered in the earlier years. Hence the CIT(A) was justified in following his order passed in the earlier years on the very same issue. Accordingly we uphold the order passed by Ld CIT(A) on this issue. Issues Involved:1. Addition pertaining to the assessment of receipts allocated towards the warranty period.2. Assessment of grant-in-aid received by the assessee.3. Deduction claimed under Section 80HHE of the Income Tax Act.4. Levy of interest under Section 234D of the Income Tax Act.5. Deletion of addition of lease rentals claimed by the assessee.Issue-wise Detailed Analysis:1. Addition Pertaining to the Assessment of Receipts Allocated Towards the Warranty Period:The assessee company, engaged in software design and development, changed its accounting method from AY 1992-93 to allocate 10% of sales revenue to the warranty period, showing it as a liability in the balance sheet instead of income. The AO did not accept this change and assessed the entire sales revenue, including the amount allocated to the warranty period, as income. The Ld CIT(A) confirmed this approach. The assessee argued that the change was in compliance with accounting standards and principles, particularly the 'revenue cost matching principle.' The Tribunal found merit in the assessee's method, which aligns with accounting principles and standards, and directed the AO to delete the addition.2. Assessment of Grant-in-Aid Received by the Assessee:The assessee received a grant-in-aid of Rs. 565.50 lakh, which it contended was gratuitous and not income. The AO and Ld CIT(A) assessed it as income. The Tribunal noted that a similar issue in earlier years was restored to the AO for fresh adjudication. Following this precedent, the Tribunal restored the matter to the AO for fresh consideration, directing that the grant's nature be examined in detail.3. Deduction Claimed Under Section 80HHE of the Income Tax Act:The AO recomputed the deduction under Section 80HHE, excluding certain receipts like project grants, profit on sale of assets, and miscellaneous income. The Ld CIT(A) upheld the exclusion of project grants and provisions written back but rejected the assessee's claim due to lack of details for miscellaneous income. The Tribunal restored the issue of project grants to the AO for fresh examination. It directed the AO to treat provisions written back as part of operating profit and allowed 50% of miscellaneous income as eligible for deduction under Section 80HHE, given the lack of specific details.4. Levy of Interest Under Section 234D of the Income Tax Act:The Ld CIT(A) upheld the levy of interest under Section 234D, and the Tribunal confirmed this decision, citing the binding precedent set by the Hon'ble Bombay High Court in the case of CIT vs. Indian Oil Corporation Ltd.5. Deletion of Addition of Lease Rentals Claimed by the Assessee:The AO disallowed lease rentals of Rs. 84.14 lakhs, treating the transactions as finance leases, but allowed depreciation and interest components. The Ld CIT(A) deleted the addition, following earlier orders and the decision of the Hon'ble Bombay High Court in Development Credit Bank vs. Prakash Industries Ltd, which recognized the lessor as the asset owner. The Tribunal upheld the Ld CIT(A)'s decision, noting that the issue had been settled in earlier years and the lease transactions were genuine.Conclusion:The assessee's appeal was partly allowed, and the revenue's appeal was dismissed. The Tribunal directed the AO to delete the addition related to warranty receipts, re-examine the grant-in-aid, include provisions written back in operating profit, and allow 50% of miscellaneous income for deduction under Section 80HHE. The levy of interest under Section 234D was confirmed, and the deletion of lease rental additions was upheld.