TaxTMI 
TaxTMI 
2012 (7) TMI 587
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....ted 27.04.2009, has erred in- (i) Nullifying the recomputation of the profits made by the AO without appreciating the fact that the adjustment was made as per Explanation 1(f) to Section 115JB of the IT Act. (ii) Giving part relief to the assessee without assigning any specific reasons. (iii) Deleting the addition of Rs. 39,68,062/- without appreciating the provisions of section 36(2) of the IT Act and the fact that no explanation was tendered by the assessee during the course of the assessment proceedings with regard to the claim of bad debt. (iv) Granting relief to the assessee subject to the verification by the AO when no such power is vested with the CIT(A) under the provisions of the Act. (v) Deleting the addition to the extent of Rs. 13,68,671/- without appreciating the fact that no explanation was tendered by the assessee during the course of the assessment proceedings with regard to the claim of prior period expenses. (vi) Considering the employee benefit expense as ascertained liability instead of contingent liability without appreciating the fact of the case. (vii) Allowing the deduction u/s 80IB and 80IC on t....
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....ction u/s 80IB/80IC on recovery of bad debt: That the ld. CIT(A) has erred in confirming the addition of Rs. 8,36,020/- being bad debts recovered as the amounting being not eligible for deduction u/s 80IB/80IC as the same is not derived from the industrial undertaking. 5. Deduction u/s 80IB/80IC on bought out components: a. That the ld. CIT(A) has erred in confirming the treatment of AO on Rs. 1,08,12,103/- as profit from sale of bought out components as being ineligible for deduction u/s 80IB and 80IC. b. The ld. CIT(A) has erred in accepting the method of calculation of ineligible profit used in above point No. 5(a), which has been computed at the assumed rate of 15% of the total purchase price of Rs. 6,12,68,584/- and is arbitrary and bad in law. 6. Consequential: a. That the AO erred in levying interest u/s 234B/234D and withdrawing interest u/s 244A of the Act. b. That AO erred in initiating penalty proceedings u/s 271(1)(c). 7. That the appellant craves leave to add, alter, amend, modify or forego any ground of appeal with the permission of the Hon'ble Bench of Income Tax Appellate Tribunal, before or at the t....
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....umed rate of 30% of the total amount of Rs. 14,75,692/- which is arbitrary and bad in law. 8. Deduction u/s 80IB/80IC on Engineering and Consultancy Income: a. That the ld. CIT(A) has erred in confirming the disallowance of Rs. 19,35,642/- as profit margin from engineering and consultancy services by denying deduction u/s 80IB/80IC thereon. b. Further, the amount at Point No. 8(a) being treated as ineligible has been computed at the assumed rate of 30% of the total amount of Rs. 64,52,083/- which is arbitrary and bad in law. 9. Deduction u/s 80IB / 80 IC on bought out components: a. That the ld. CIT(A) has erred in confirming the treatment of AO on Rs. 1,15,07,683/- as profit from sale of bought out components as ineligible for deduction u/s 80IB and 80IC. b. The ld. CIT(A) has erred in accepting the method of calculation of ineligible profits used in above point No. 9(a), which has been computed as the difference of sale and purchase of bought out components and is arbitrary and bad in law. 10. Deduction u/s 80IB/80IC on High Sea Sales: That the ld. CIT(A) has erred in confirming the treatment of AO on Rs. 16,26,261/- ....
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.... being furnished by the assessee in relation to the satisfaction of the conditions of Section 36(2) of the Act, the said amount was not allowed as claimed. The assessee had claimed prior period expenses of Rs. 1649912/-. In the absence of any details the same was added as income of the assessee. The next item of expenses considered by the AO was employees benefit expenses totaling Rs. 4,19,39,972/- which was the value of ESOPs given by the assessee to its employees. The AO noted that special resolution was passed at the extra ordinary general meeting held on 31.3.2006 for the purpose of issue of equity shares to the employees as Sweat equity. The fair value of the equity share was adopted at Rs. 106.26p and the shares were issued under the scheme with lock in period of five years. No allotment to issue such shares was done and the same was pending on 31.3.2006. The said shares were included in shares outstanding account. In case any of the employees left the employment before the expiry of lock in period of five years, his shares were to be forfeited by the Management. As per the AO, the said expenditure booked to the profit and loss account, was not an ascertained liability but wa....
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.... section 80IA(12) for Assessment Year 2005-06, the same could not be the basis for allowing the deduction in assessment year 2006-07. 7. The AO also noted that the assessee was not eligible for deduction u/s 80IB/80IC of the Act on certain receipts or income. The items of income considered by the AO were the AMC charges and consultancy charges. Vide observations in para 13.10 the AO computed the profits of business in relation to consultancy services and AMC services and estimated the same to be 30% and deduction u/s 80IB and 80IC on the income of Rs. 12,52,627/- was not allowed. Further the assessee had shown other income of Rs. 23,39,114/- on which a sum of Rs. 8,36,020/- was claimed as deduction u/s 80IB/80IC of the Act. The AO held that the nature of income shown under other income could not be derived from manufacturing activity. Interest on income tax refund was held to be income from other sources and other amounts were the income u/s 41 of the Act and rental income were not derived from manufacturing activities. The word 'derived from' being narrower, the claim of deduction u/s 80IB/80IC on other income of Rs. 8,36,620/- was rejected. 8. The next issue conside....
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....uction on account of ESOP credited to the profit and loss account. The CIT(A) referred to the resolution of extra ordinary general meeting held on 31.3.2006 allowing specific number of equity shares as per guidelines of SEBI. The shares were also found to have been allotted immediately thereafter and hence the allowability was crystalised. The CIT(A) relied on the ratio laid down in SSI Ltd. v. DCIT, 85 TTJ 1049 (Chennai) wherein the Chennai Bench of the Tribunal allowed the claim of the assessee in view of the assertion of the assessee that in case the employee leaves the organization, the assessee was offering to tax in the subsequent year, the value of forfeited shares by the Management. The CIT(A) thereafter considered the claim of the deduction u/s 80IB/80IC of the Act elaborately vide paras 72 to 80 of the appellate order. Placing reliance on the circular issued and the ratio laid down in Tech Books Electronics Services P.L., 100 ITD 125 (Delhi) where identical issue was involved held that the assessee was entitled to deduction u/s 80IB/80IC of the Act for the unexpired period. 11. The next issue before the CIT(A) was the disallowance of deduction u/s 80IB which relates to....
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....e principle laid down by the Hon'ble Supreme Court in Apollo Tyres (supra) the Assessing Officer has limited jurisdiction while computing the book profits under section 115JB of the Act i.e. there is no jurisdiction to go beyond the net profit shown in the Profit & Loss Account except to the extent provided in the Explanation to section 115JB of the Act. It may be pointed out that the provisions of section 115JB and 115J, which were before the Hon'ble Supreme Court in Apollo Tyres (supra), are peri metria. As per the Explanation to section 115JB of the Act, book profit is defined to be the net profit shown in the Profit & Loss Account for the relevant previous years as increased/reduced by the amounts specified in the clauses mentioned thereunder. The disallowance worked in the hands of the assessee under the provisions of section 14A of the Act is not covered by the aforesaid clauses and consequently we are in conformity with the order of the CIT (Appeals) in allowing the claim of the assessee by holding that no addition of Rs. 14,05,700/- is warranted, while computing the book profits under section 115JB of the Act. The ground Nos. 1(i) and 1(ii) raised by the Revenue are....
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....s of the Act we are in conformity with the order of CIT(A) in directing the Assessing Officer to verify whether the assessee had fulfilled the provisions of section 36(2) of the Act and in case of the said fulfillment, the amounts written off by the assessee in its books of account during the previous year were to be allowed as business deduction. Ground Nos. 1(iii) and 1(iv) raised by the Revenue are thus dismissed. 19. The issue in ground No. 1(v) is against the deletion of addition made on account of prior period expenses. The assessee during the year under consideration had claimed prior period expenses totaling Rs. 16,49,912/- and in the absence of the details, the said amount was disallowed by the Assessing Officer. 20. Before the CIT (Appeals), the claim of the assessee was that sum of Rs. 13,68,671/- was disallowed by the assessee itself and added back as its income in the computation of income filed for the year under consideration. The CIT (Appeals) vide para 56 noted that sums of Rs. 8,36,671/-, and Rs. 5,32,000/- were disallowed by the assessee under the head 'preliminary expenses written off in unit-I' and Rs. 9,63,000/- under the head 'gratuity'.....
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....ct, 1956. However, in the books of M/s Spray Engineering Devices Limited, it has been booked at Rs. 106.26 per share (Face value of Rs. 10/- per share) at arms length price based on subscription agreement, representing a sum of Rs. 4,19,39,9721-. Accordingly, an amount of Rs. 4,19,39,9721- was charged to P&L account as employees benefit expenses. Pending allotment of 3,94,972 equity share to employees as on 31st March, 2006, the sum of Rs. 4,19,39,9721- has been shown as share outstanding account in the balance sheet. The reason for creating this share outstanding account of Rs. 4,19,39,972/- in the balance sheet is that at the time of finalizing the balance sheet i.e. 31st March, 2006, the company had offered fro sale 3,94,692 sweat equity shares by passing a board resolution and disclosure have been made in the balance sheet under the head "issued share capital". 25. The Assessing Officer vide para 11.4 observed as under: "Now from above it becomes evident that the said expenditure booked to Profit and Loss account was not an ascertained liability of Rs. 4,19,39,972/- but a contingent liability. It is not a benefit conferred on the employees without any restrictions. ....
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....ssessee, following the ratio laid down by the Chennai Bench of the Tribunal in S.S.I. Ltd. v. DCIT [85 TTJ 1049 (Chennai)]. 28. The relevant contention of the learned A.R. for the assessee in this regard was that in the extraordinary meeting held on 31.3.2006, the list of the persons to whom shares were to be allotted was before the Board during the meeting and the shares were allotted thereafter. 29. The learned D.R. for the Revenue placing reliance on the order of the Assessing Officer pointed out that the issue stands covered by the ratio laid down in Ranbaxy Laboratories Ltd. v. Addl. CIT [124 TTJ 771 (Del)], EIMC K.C.P. Ltd. v. CIT [242 ITR 659 (SC) and VIP Industries v. DCIT [ITA No. 7242/Mum/2008 - date of order 17.9.2010. The learned D.R. for the Revenue also pointed out that the facts are enumerated by the CIT (Appeals) at page 28 of the appellate order. 30. The learned A.R. for the assessee pointed out that liability had crystallized and it was not contingent liability. The above said expenditure was incurred for benefit of the employees and was to be allowed as a deduction. The learned A.R. for the assessee further pointed out that the reliance placed by the lea....
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....CIT (supra) is misplaced as the issue before the Delhi Bench of the Tribunal was at variance with the facts of the present case where the claim was allowance of notional value of shares i.e. difference between the market price of the shares and price at which shares were allotted to the employees under ESOP scheme. Similarly issue before the Hon'ble Supreme Court in EIMCO K.C.P. Ltd. v. CIT (supra) was at variance with the issue raised in the present appeal. The next reliance by the learned D.R. for the Revenue on the ratio laid down in VIP Industries v. DCIT (supra) where the issue raised was in respect of claim of expenditure being the difference between the market price of the shares and price at which shares were allotted to the employees under ESOP scheme. In the facts of the present case before us, what has been booked as expenditure, is the value of shares allotted to the employees under the sweat equity scheme. In the totality of the facts and circumstances of the case, we are in agreement with the CIT (Appeals) in allowing claim of deduction. 32. Ground Nos. 1((vii) to 1(ix) raised by the Revenue are against deduction claimed under section 80IB/80IC of the Act by th....
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....ss of manufacture, purchase, sale, i.e., in the field of sugar, energy, power, etc. Memorandum and Articles of Association of assessee company is enclosed at pages 640 to 677. The two manufacturing partnership concerns were claiming deduction under section 80IB/80IC of the Act. The assessee company on amalgamation claimed the above said deduction under section 80IB/80IC of the Act for the unexpired period as postulates under the Act. The issue arising in the present grounds of appeal is whether after the said amalgamation or take over by the assessee company, deduction under section 80IB/80IC of the Act for the remaining period was available to the assessee company. The Tribunal (supra) in assessee's own case while deciding appeal in assessment year 2005-06 have held that deduction under section 80IB/80IC of the Act was available to the undertaking and not the assessee as envisaged in CBDT Circular No. F15/5/63/IT (A-1) dated 13.12.1963. The Tribunal further held that the provisions of section 80IA(12) of the Act were not applicable to the facts of the present case as business of the two firms had been transferred under the scheme of the Income Tax Act. The Hon'ble Punjab &....
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....terest was being paid by the assessee and consequently the Assessing Officer was of the view that the interest expenditure relatable to the investment made by the assessee in the shares of the companies, income from which was exempt, was disallowable under the provisions of section 14A of the Act. The Assessing Officer vide para 4.3 has noted the fact that during the year under consideration the assessee had not received any dividend income. Further in para 4.8 the Assessing Officer admits that there was no prescribed method for making disallowance under section 14A of the Act. The Assessing Officer vide para 4.8 considering the total expenditure and the investment made by the assessee which admittedly was made in the preceding years in relation to the total assets held by the assessee, computed the disallowance on account of interest under Rule 8D(2)(ii) of the Act at Rs. 12,55,100/- and further made disallowance of Rs. 1,50,600/- on account of other amount disallowable, resulting in disallowance of Rs. 14,05,700/-. The said observation of AO was upheld by the CIT (Appeals) vide para 2.1 of the appellate order against which assessee is in appeal. 38. The learned A.R. for the as....
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....lank of argument of the learned A.R. for the assessee vis-à-vis the aforesaid investment was that no funds were borrowed for the said investment and further in any case, the investment having made in the course of business by the assessee out of its accruals, does not warrant any disallowance under section 14A of the Act, in view of the ratio laid down by the Hon'ble Supreme Court in S.A. Builders (supra). We find merit in the plea of the assessee that where a business strategy had been adopted by the assessee by way of investment in shares of sick company in order to take over the said company for widening its operation of business, cannot be held to be investment per se. The decision making of a business man by way of strategy planning in allied line of business is a decision made in the course of carrying on the business and the Assessing Officer cannot sit in judgment seat to comment upon the same. Once the assessee has been found to have made a business investment by way of shares in related line of business, the said investment though held by way of shares in the said company cannot be subjected to disallowance under section 14A of the Act, which in any case is rel....
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....n the copy of account itself. The second plea of the assessee was that it had sufficient interest free funds for advancing the interest free advances to its subsidiary. In any case the borrowed funds were claimed to be utilized for specific business needs i.e. purchase of fixed assets investment in shares/securities. The disallowance of Rs. 4,40,150/- was made out of the interest expenditure claimed by the assessee by invoking provisions of section 36(1)(iii) of the Act. 43. After hearing both the parties and the plea of the assessee that the transaction was on account of commercial expediency and consequently the ratio laid down by the Hon'ble Supreme Court in S.A. Builders (supra) was applicable, we find that the assessee has raised secured advances against which it was paying interest, which is claimed an expenditure in the Profit & Loss Account. The perusal of the copy of account placed at Annexure A-3 reflects that the assessee had transferred funds for day-to-day running of the business of its subsidiary. The amounts have been advanced for the payment of salaries or for payment of rent and even for the payment to the parties i.e. for various bills raised by the subsidi....
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....ion (2) of section 80IC of the Act, which talks of manufacturing or production of any article or thing, not being any article or things specified in Thirteenth Schedule and where the assessee undertakes substantial expansation during the period specified thereunder section 2(a) to section 80IC of the Act and under section 2(b) refers to manufacture or production of any article or thing specified in Fourteenth Schedule or commencing any operation specified in that Schedule between the period enumerated thereunder. Implication of section is that the profits and gains which are eligible for deduction under section 80IC of the Act should be derived from the manufacturing or production activity carried on by the assessee. 49. Now coming to the facts of the present case, the explanation of the assessee vis-a-vis the AMC charges received by it is as under: "With regard to the above we would like to bring to your notice that we are providing customized cooling and condensing systems to the sugar systems to the sugar systems based on our own assessment of the clients' specific needs. Client needs are based on the sizes of the sugar mill and the type of the existing equipment....
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....rity of reasoning and in view of the factual aspect brought on record by the assessee, we hold that AMC charges received by the assessee are directly relatable to the business carried on by the assessee of manufacturing, commissioning and erection of cooling system and consequently the assessee is eligible to the claim of deduction u/s 80IB/80IC of the Act. Ground No.3 raised by the assessee is allowed. 52. The next issue raised is against non-allowance of deduction under section 80IB/80IC of the Act on the addition made of Rs. 8,36,020/- being bad debts recovered. The assessee during the year under consideration had claimed deduction under section 80IB/80IC of the Act on other income of Rs. 8,36,020/-, the detail of which are as under: Amount (Rs. ) Excess provision written back 1,29,662/- Bad Debts recovered 5,56,696/- Income tax Refund 92,090/- Amount written off 38,234/- Rental Income 18,000/- Excess and short 1338/- Total 8,36,020/- 53. The assessee has raised the issue vide ground No.4 against the addition on account of bad debts recovered being not eligible for deduction under section 80IB/80IC of the Act....
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....l valve, cable, etc.. The assessee was requisitioned to furnish copies of its contract with the customers or the purchase orders placed by the customers and to explain how the profits on the said items not manufactured by it, were eligible for deduction under section 80IB/80IC of the Act. Copy of purchase order is enclosed as Annexure A-7 of the order. The Assessing Officer was of the view that the assessee is just a supplier of some major parts of the cooling and condensing system or sugar industry machinery which go into making of a complete cooling and condensing system or sugar industry machinery. Civil work is an important ingredient of the system as without proper foundation no such installation of heavy machinery is possible but the assessee is not into doing the said work. The contract is normally for supply of such manufactured components as well as the other bought out things and the assessee enters into a civil contract for the same. So claim of the assessee that it is claiming deduction for manufacture of sugar industry machinery or cooling systems is not correct. The Assessing Officer thus held that the assessee was not entitled to the benefit of deduction u/s 80IB/80I....
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.... it was also assembling -the bought out items in order to make available the whole unit in running condition at the site of the company/plant. The components manufactured by the assessee in addition of the bought out items were integral part of the cooling and condensing system, which was the manufacturing business carried by the assessee. The issue arising in the present appeal is whether deduction under section 80IB/80IC of the Act is to be allowed on such bought out components. 61. Similar issue arose before the Mumbai Bench of the Tribunal in Mihir Engineers Ltd. (supra) where the Tribunal vide paras 23 to 30 held as under: 23.The deduction under section 80-IA of the Act is restricted to the profits and gains derived from the business of an industrial undertaking being an eligible business, subject to conditions enumerated in sub-section (2) of section 80-IA of the Act. The clause (iii) to section 80-IA(2) of the Act provides that for the eligibility of deduction, the industrial undertaking should manufacture or produce any article or thing, other than those specified in Eleventh Schedule. The deduction under section 80- IA of the Act is limited to the items manufac....
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....e to an article which is totally different from the parts and could amount to manufacture. This is so even though the component parts from which the automotive chasis is made, retain their individual identity in the whole article which is thus manufactured or produced." 25. The requirement of law is manufacturing but the whole process may not be carried out the assessee himself. The Chandigarh Bench of Tribunal in the case of Sond Bharat Pedals (India) v. ITO [2003] 84 ITD 89 had held as under :- "It is not necessary that the assessee should carry out all the manufacturing operations itself, in order to be entitled to benefit of deduction under section 80-I. Such operations can be got done from outside agencies on payment of labour service charges. In fact certificate issued by the Punjab Government showed that the assessee was registered as a small scale industrial unit and the trading account showed the assessee's sales of Rs. 45.98 lakhs for the year under consideration. Since the assessee was engaged in the business of manufacturing cycle pedals, it would be entitled to deduction under section 80-I even though part of such operations was got done from outs....
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.....C. Budharaja & Co.'s case (supra) that the various findings given related solely and exclusively to concerns engaged in the business of construction of dams and civil works. There was not a single word or whisper in the said judgment by which it could be inferred that an assessee engaged in the activities of designing, fabricating, erecting, supplying, installation and commissioning of a plant like the one supplied by the assessee could be covered by the aforesaid judgment. It is well-settled law that the judgment in each case has to be seen in the light of the facts of that case. A decision is to be understood in the context of the facts in which the decision is rendered. A case is precedent for what it explicitly decides and nothing more in the conditions of people, even the words occurring in a statute are required to be interpreted differently keeping in mind the context in which such expressions have been used in the relevant provisions of law. Therefore, the aforesaid judgment did not in any manner support the revenue's contention. The provisions of section 80-I are intended to provide an incentive for investment in certain desired sectors and promote industrializati....
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....1.45 per cent of the total receipt had been taken for deduction under section 80HH as that work alone was done in backward area and it was not expected from the assessee to have its office or plant in backward area. The crux of the case laws is that if an industrial undertaking begins to manufacture or produce outside in any backward area, it is entitled to deduction under section 80HH. The assessee for, set up its own industrial undertaking at the site of its customers for whom water air pollution control plant was manufactured and of the places which were falling under the backward area declared under the Act, then, naturally the assessee should be getting benefit of the same and the computation made by the assessee-firm of the same was correct one." 29. The objection of the learned DR for the revenue that situs of assembly is important, has been dealt with by the Pune Bench of Tribunal in Indocan Engg. Systems (P.) Ltd. v. Dy. CIT [1997] 60 ITD 649. There is no merit in the contention of the learned DR for the revenue that main activity of the assessee is of erection at client's site. The end-product is an integrated unit. The assessee is required by its clients to ....
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.... derived from an industrial undertaking as per stipulations in section 80-IA(2), which inter alia requires the manufacturing or production of an article or thing not being any article or thing specified in Eleventh Schedule. In the instant case before us, the assessee was manufacturing components of cooling towers in its factory unit at Chhatral, which in-turn were exigible to Excise Duty. The profits on sale of said components were entitled to deduction under section 80-IA of the Act and as allowed by Assessing Officer. The assessee in the present case was not in the business of sale of components of cooling towers, but the cooling tower as a whole, as is evident from the enquiries of the client, Quotations and Performa Invoice raised by the assessee. In the instant case, the assessee purchases various bought out components, which along with manufacturing components are assembled at the client's site and the cooling tower is erected. The ultimate product erected by the assessee was a cooling tower, which was a distinct product from the various components, bought from outside or manufactured by it. The aforesaid activities of the assessee were covered within the definition of m....
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....r section 80-IA shall be allowed on bought out components used for erection of Round Bottle Cooling Towers. The Assessing Officer is directed to allow the deduction under section 80-IA of the I.T. Act only on profits on sale of cross flow (XE series) and counter flow (CM series) cooling towers. 63. The CIT (Appeals) while deciding the present issue had relied upon the ratio laid down by the Hon'ble Punjab & Haryana High Court in M/s Arisudana Spinning Mills Ltd. (supra) where the assessee in addition to manufacturing yarn was engaged in the trading of raw wool and knitted cloths. In respect of the trading activities carried on by the assessee the Hon'ble High Court held that the assessee was not entitled to the deduction under section 80IA of the Act. However, in the facts of the present case before us the assessee is not engaged in the trading of any items, but is purchasing certain items from the market like electric motors, Watt. conductor, cables, etc. In order to complete its project of supply the customers cooling and condensing system for the sugar industry on the specific need of its clients, the bought out components are part of the assembly unit assembled by th....
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....ground No.2 by the assessee in assessment year 2006-07. In line with our decision in paras hereinabove the facts being identical, we dismiss ground No.3 raised by the assessee. 69. The issue in ground No. 4 raised by the assessee is against the allowance of deduction under section 80IB/80IC of the Act for unexpired period of the eligible deduction available to the erstwhile partnership firms. In line with our decision to ground Nos.1(vii) to 1(ix) raised by the Revenue in assessment year 2006-07, the facts being identical, we allow the claim of the assessee. Ground No.4 raised by the assessee is thus allowed. 70. The issue in ground No.5 raised by the assessee is against the computation of deduction under section 80IB/80IC of the Act on recovery of bad debts. In line with our decision to ground No.4 raised by the assessee in assessment year 2006-07 the facts being identical, we allow the claim of the assessee. Ground No.5 raised by the assessee is thus allowed. 71. Ground No.6 raised by the assessee is not pressed hence the same is dismissed as not pressed. 72. The issue in ground No.7 raised by the assessee is against the computation of deduction under section 80IB/80I....