TaxTMI 
TaxTMI 
2012 (11) TMI 539
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..... 'Power Division" and "Transformer Division". In respect of the Transformer Division, the balance sheet owed an amount of Rs. 53,96,000 to M/s. Sree Rayalaseema Industries Ltd., categorised as "Investments". Besides, a further amount of Rs. 2,39,74,047 had been paid towards inter corporate advances. While no income had accrued from the investments, no interest had been charged on the inter-corporate advances also. The Assessing Officer noticed that the assessee had borrowed secured loans, both long term and short term to the tune of Rs. 4,08,92,293 and had paid Rs. 37,38,259 towards interest. On being required to explain as to why the proportionate interest on the above non productive investments should not be disallowed, the assessee contended that the said investments were not made out of borrowed funds and there was no diversion of funds, calling for any disallowance. However, the Assessing Officer observed that the assessee could not adduce any evidence in support of such contention. Accordingly, proportionate interest attributable to funds diverted for non productive assets, i.e., non productive assets divided by gross assets multiplied by interest paid, amounting to Rs. 9,6....
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....eliance Utilities and Power Ltd. (313 ITR 340), and the decision of Mumbai Bench of ITAT in the case Excellent Exports P. Ltd. vs. ITO, the AR contended that even if it is presumed that the assessee had diverted funds, the same would have to be presumed as made out of own funds, instead of presuming that those were made out of the borrowed funds. 7. The learned AR further relied on the decision of Supreme Court in the case of SA Builders vs. Cit & Anr. (288 ITR 1) wherein the Apex Court held that in respect of transfer of the borrowed funds it has to be seen whether it is on commercial expediency and not from the point of view whether the amount was advanced for earning profits - where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would ordinarily be entitled to deduction of interest on its borrowed loans 8. On the other hand, the learned DR relied on the order of the CIT(A) and judgement of P & H High Court in the case of CIT vs. Abhishek Industries Ltd. (286 ITR 1) 9. We have heard both the partie....
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....ister concern would be enjoying the benefits thereof. It cannot possibly be held that the funds to the extent diverted to sister concerns or other persons free of interest were required by the assessee for the purpose of its business and loans to that extent were required to be raised. We do not subscribe to the theory of direct nexus of the funds between borrowings of the funds and diversion thereof for non-business purposes. Rather, there should be nexus of use of borrowed funds for the purpose of business to claim deduction under Section 36(1)(iii) of the Act. That being the position, there would be no escape from the finding that interest being paid by the assessee to the extent the amounts are diverted to sister concern on interest free basis are to be disallowed. 11. If the plea of the assessee is accepted that the interest free advances made to the sister concerns for non-business purposes was out of its own funds in the form of capital introduced in business, that again will show a camouflage by the assessee as at the time of raising of loan, the assessee will show the figures of capital introduced by it as a margin for loans being raised and after the loans are rai....
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....nt of Delhi High Court in the case of CIT v. Aimil Ltd. & Ors. (321 ITR 508) (Del)] wherein it was held as follows: "The deletion with effect from April 1, 2004 by the Finance Act, 2003 of the second proviso to section 43B of the Income-tax Act, 1961 which stipulates that contributions to the provident fund and Employees State Insurance fund should be made within the time mentioned in section 36(1)(va), that is, the time allowed under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, as well as the Employees' State Insurance Act, 1948, is treated as retrospective in nature. If the employees' contribution is not deposited by the due date prescribed under the relevant Acts and is deposited thereafter, the employer not only pays interest on delayed payment but can incur penalties also, for which specific provisions are made in those Acts. In so far as the Income-tax Act, 1961, is concerned, the assessee can get the benefit of deduction of the payment, if the actual payment is made before the return is filed. Where for the assessment year 2002-03 the assessee had deposited employer's contribution as well as employees' contribution towards provident fund and ESI a....
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....re incurred in the accounting years 2005-06 to 2008-09 on providing services in respect of transformers sold during the year under consideration was more than the provision made. The AR submitted that the actual expenditure was Rs. 2,57,17,536, as against the provision of Rs. 2,54,96,766. 20. The AR further submitted that the Hon'ble Supreme Court in the case of Rotork Control India P Ltd. v. CIT (314 ITR 62) had recognized the right to deduction of warranty provision, holding that the provision is not against a contingent liability and hence deductable u/s. 37 of the Act. He also referred to the decision of Mumbai Bench of this Tribunal in the case of Indian Oiltanking Ltd. v. ITO (308 ITR (AT) 217), holding that the estimate made in the first year of operation by the assessee therein was reasonable, and as such allowable on the strength of the details submitted in respect of actual expenditure incurred in the subsequent years. The AR further relied on the following judgements: a) CIT v. Indian Transformers Ltd. (270 ITR 259) (Ker.) b) Rotork Controls India P. Ltd. v. CIT, 314 ITR 62 (SC) c) Kone Elevator India Pvt. Ltd. v. ACIT, 340 ITR 46 (Mad) d) Commissioner of Inland Re....
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....estimation of warranty provision 10% of total sales. In fact, at no stage, the assessee has been able to demonstrate that the said estimate was based on any "scientific method of accounting", It could also not been demonstrated that the estimate was based on the number of 'Units' sold, as admittedly it was made on the value of total sales. Nothing has been brought on record to substantiate that after a scientific analysis of the products and their performance, the assessee had identified certain parts or aspects, which would have required expenditure in the coming years, so as to quantify the relatable warranty @ 10%. Besides, it is clear that no instance of such expenditure could be brought on record in respect of the sales of 300 transformers made in the earlier year. 24. The DR submitted that as regards the reliance of the representative of the assessee on the decision of the Mumbai ITAT in the case of Indian Oiltanking India Ltd. v. ITO (308 ITR (AT) 217), it is seen that in the said case the assessee had made a technical assessment of warranty obligations through an independent agency, where the warrant expenses during the defect liability period had been estimated at the ra....
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....It is also submitted before us that a site report is prepared immediately after attending to the compliant received from customers and copy would be forwarded to the official of the respective region of the customer corporation. Details of expenditure incurred during the period 2005-06 (accounting year) to 2008-09 (accounting year), copies of material issue register are maintained for such period. Being so, in our opinion, the actual expenditure incurred on warranty during the warranty period of 5 years may be verified at the end of the Assessing Officer. Therefore, we accept the contention that the liability is not contingent and thereafter quantification thereto is to be examined by the Assessing Officer on the basis of actual expenditure incurred. Accordingly, we direct the Assessing Officer to examine the same and allow to the extent the expenditure incurred by the assessee for the relevant warranty period relating to this assessment year. 27. Further, to come to this conclusion, we place reliance on the judgement of Supreme Court in the case of Bharat Earth Movers v. CIT (245 ITR 428) and Commissioner of Inland Revenue v. Mitsubishi Motors New Zealand Ltd. (222 ITR 697) (PC)....
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.... some difficulty in the estimation thereof but that would not convert the accrued liability into a conditional one; it was always open to the tax authorities concerned to arrive at a proper estimate of the liability having regard to all the circumstances of the case. Applying the above said settled principles to the facts of the case at hand we are satisfied that the provision made by the appellant- company for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by employees of the company, inclusive of the officers and the staff, subject to the ceiling on accumulation as applicable on the relevant date, is entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability. The liability is not a contingent liability. The High Court was not right in taking the view to the contrary. The appeal is allowed. The judgment under appeal is set aside. The question referred by the Tribunal to the High Court is answered in the affirmative, i.e. in favour of the assessee and against the Revenue." 29. It will be useful for us to make a reference to the judgment of the Privy ....