TaxTMI 
TaxTMI 
2007 (9) TMI 623
X X X X Extracts X X X X
X X X X Extracts X X X X
....antial question Nos. 9 and 10), 440/2002 (two substantial question Nos. 9 and 10), 441/2002 (two substantial question Nos. 9 and 10), 442/2002 (three substantial question Nos. 12, 13 and 14, 443/2002 (two substantial question Nos. 13, 14 and 15 in I.T.A. No. 6/2004 (One substantial question No. 6) which are common, whereas in I.T.A. No. 3047/2005 two substantial question of law are framed regarding 'warranty' and 'provident fund' deduction. The substantial question of law framed by the Revenue in all the I.T.A. Nos. 438-444/2002, 6/2004 & 3047/2005 regarding 'warranty' and deduction claimed under Section 80(O). 80IA and 80-HHE in all the above referred Appeals are common except the substantial question of law No. 10in I.T.A. No. 3047/2005 regarding deduction of Provident Fund (P.F.) amount. The substantial question of law as mentioned in the appeal Memorandum at para Nos. 14, 15 and 16 in I.T.A. No. 438/2002 and para Nos. 9 and 10 in I.T.A. 3047/2005 excluding the other substantial question of law which are common in the other Appeals are extracted as hereunder: In ITA No. 438/02 "14. Whether the Tribunal was correct in holding that the provision of Rs. 13,0....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ther as the appellant in all these Appeals is the same, the substantial questions of law are also similar except the substantial question No. 10 in ITA No. 3047/2005 regarding deduction of 'Provident Fund' as stated above and the legal contentions urged by the learned counsel for the parties are same, therefore, we pass this common judgment. 4. Certain relevant and necessary facts are stated for the purpose of considering the rival contentions urged by the learned counsel on behalf of the parties. At the time admission, in ITA No. 438/2002 this court was of the view that the substantial question of law Nos. 14 to 16 would arise for consideration in that Appeal. subsequently all the remaining appeals are also admitted by this Court to consider and answer the substantial question of law framed in the above referred Appeals. 5. The Assessing Officer by passing separate orders has disallowed the claim of the Assessee towards the undisputed liabilities for payment towards warranty period and also disallowed the benefits claimed under section 80IA and 80HHEof the Act and the deduction for having paid P.F. amount in I.T.A No. 3047/2005. In IT No. 06/2004 the Assessing Officers....
X X X X Extracts X X X X
X X X X Extracts X X X X
....urt and therefore he submits that substantial questions framed above requires to be answered by this Court in its favour. 8. Mr. N. Venkataraman, learned Senior Counsel appearing on behalf of Smt. Anuaradha for the assessees rebutted the legal submissions made by the learned counsel for the Revenue in respect of the substantial question of law regarding warranty placing emphasis on the pharse "laid out" occurred in Section 37 of the I.T Act. He contended that the use of said pharse in the above Section has got a definite purpose having regard to the undisputed facts that the assessees in law are required to maintain their Accounts by following the Mercantile Account systems. Elaborating his submissions on this aspects, he has placed strong reliance upon Section 209 Clauses (a-d) of sub-sec. (3) of the Companies Act,, 1956, which speaks of books of accounts to be maintained by a company. sub-section (1) of Section 209(1) clauses-(a-d) mandates that all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place shall be maintained by following the Mercantile Accounts system. He also invited our attention to Sectio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....purpose relatable to the cases where assessees are required to maintain Mercantile accounting System. Therefore it is contended that the concurrent finding of fact recorded by the Appellate Authority/CIT id rightly set-aside by the Tribunal by passing the impugned order and granting the relief to the assessee, which can be neither termed as erroneous nor error in law. Therefore he submits that substantial question of law regarding warranty and deduction framed by the Revenue in its Appeals or any other question would arise for our consideration to answer in favour of the Revenue as the same is already considered with reference to the provisions of the I.T. Act and law laid down by the Apex Court in its earlier decisions. 10. It is well established legal principal pf law as held by the Apex court in the case of K.P. Varghese Vs. ITO reported in (1981) 131 ITR 597 SC in interpretation of statutory provisions that every word and phrase in the provision has got definite purpose and object. The purpose for which it is used shall be interpreted to achieve the object and internment of the provisions of the Act, the relevant portion at page 604 of the above referred judgment is extracte....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re required to maintain Mercantile System of Accountancy, the accrual of liability in future upon the assessee will be defeated. That is not the intentment and object of the statutory provisions of Section 37(1) of the I.T Act. Therefore we have to accept the submissions of Mr. N Venkataraman learned Sr. counsel for the assessees as the same are based on the statutory provisions referred to supra, the Notification and the decisions of the Supreme Court, Privy Council, and various other High Courts referred to supra. The decisions of the Apex Court, and various other High Courts relied upon by the learned Sr. counsel are extracted hereunder: The Apex Courts in the decision of Indian Molasses Co. (Private) Ltd. Vs. Commissioner of Income Tax, West Bengal reported in I.T.R. Vol. 37 SC 66 has laid down the law at page 80 of the above decision regarding the phrase 'expenditure', relevant portion of which reads thus: " In our opinion, the payment was not merely contingent but the liability itself was also contingent. Expenditure which is deductible for income-tax purpose is one which is towards a liability actually existing at the time, but the putting aside of money which ma....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as receipts, but accrued due are brought in for income tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business; (iii) A condition subsequent, the fulfilment of which may result in the reduction or even extinction of the liability, would not have the effect of converting that liability into a contingent liability; (iv) A trader computing his taxable profits for a particular year may properly deduct not only the payments actually made to this employees but also the present value of any payments in respect of their service in that year to be made in a subsequent year if it can be satisfactorily estimated. So is the view taken in Calcutta Co. Ltd. V. CIT (1959) 37 ITR 1 (SC) wherein this Court has held that the liability would be an accrued liability on the assessee having been imported, the liability would be an accrued liability and would not convert 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ively as framed in the Appeals against the Revenue for the following reasons. It is necessary for us to extract the relevant provisions of Sections 37(1), 145(1)(2) of the I.T Act and Section 209(1)(a)(3)(a-b) of the Companies Act in support of our reasons. The above referred provisions read thus:- "37.(1) Any expenditure (not being expenditure of the nature described in section 30 to 36) and not being in the nature of capital expenditure or personal expenses of the wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Section 145(1) & (2) of the I.T. act reads thus "145(1) In come Chargeable under the head "Profits and gains of business or profession: or "income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile systems of accounting regularly employed by assessee. (2). The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assesses or in respect of any class of income." ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 14. The aforesaid important aspects notified in the Notification issued by the Central Government under Section 145(1)(2) of the I.T. Act are read alongwith Section 209(1) clauses (q-d) of sub-section (3) of the Companies Act and the accounting standard Notification regarding procedure to be followed for maintaining Accounts of a company issued by the Central Government in the year 1979 wherein it is stated "accrual" extracted in the said Notification which, is extracted in the preceding paragraph of this judgment. It mandates the assesses to maintain mercantile systems of accounting. Therefore the phrase 'accrual' occurred in the notification has got importance to interpret the phrase "laid down" occurred in section 37(1) of the I.T. Act. 15. Accordingly, we answer the said substantial questions of law Nos. 14, 9, 12 and 13 framed in these Appeals in favour of the assesses against the Revenue. Regarding substantial Question No. 10(P.F.) in I.T.A. 3047/2005; 16. In so far as Appeal No. 3047/2005 is concerned, the substantial question No. 10 with regard to the deduction claimed towards payments of Provident Fund, the said question is already answered by us in favour of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Distributors (Baroda) P. Ltd. Vs. Union of India & Ors. reported in ITR 1985 vol. 155 P. 120 it has specifically overruled its earlier decision in Cloth Trader's case (1979) 1118 ITR 243 (SC) held that deduction is to be allowed only on the net dividend income and not on the gross income of the business of the assessee. Therefore it is contended by the learned counsel for the Revenue that the impugned order passed in the above Appeals by the Tribunal by setting aside the concurrent finding of fact recorded by the Appellate Authority on the claim of disallowing certain benefits claimed by the assesses under Section 80-O, 80-IA and 80-HHE of the I.T. Act is bad in law. Therefore, he has requested this Court to answer the aforesaid substantial questions of law in favour of the Revenue as the findings and reasons in the impugned order by the Appellate Tribunal are not only erroneous but also suffers from error in law. 18. The claim under Sec. 80-O of the I.T. Act was preferred by the assesses before the Assessing Officer. In ITA No. 444/02 for the assessment year 1997-98 the special benefit is claimed by the Assesses for deduction from out of its gross income unde....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ring & Systems Pvt. Ltd. reported in 2006 287 ITR 201 Kar. Under sec. 80(O) under Chapter Vi-A of the Income tax act has examined and answered the similar substantial question of law in favour of the revenue by assigning reasons. Therefore, he submits that the above substantial questions of law framed by the Revenue in these appeals are no longer res-integra and requested this Court to apply the above substantial questions in favour of the revenue and set aside the impugned judgments. 20. the deduction claimed by the Assessee is sought to be justified on the basis of the decision of the Bombay High Court reported in (2000) 245 ITR 769 (CIT Vs. Sudeashan Chemicals Industries Ltd.). With regard to the claim of the assessee that it has spent Rs. 22.50 lakhs towards the 1/3^rd cost of the voluntary retirement of IG employees is concerned, it has placed reliance upon the agreement between it and transferor establishment. 21. The grievance of the assessee in respect of Se. 80I and 80HHE, the substantial questions of law No. 14 (ITA No. 442/02 and 14 & 15 (ITA No. 444/2002) framed by the Revenue is required to be answered in favour of the revenue. 22. The learned counsel has also....
X X X X Extracts X X X X
X X X X Extracts X X X X
....see. Thereafter, he had come to the right conclusion on the contentious points framed in the Appeal and held that on comparison with the explanation contained in the above said provisions the first appellate authority has held that I the absence of details given by the assessee, he was of the view that it is safe to adopt the figure of the total turnover of the business at Rs. 148,55,01,543/- furnished by the assessee of the purpose of computation of deduction under sec. 80HHE. Further, at Paragraph 19.02 of the first appellate authority order, he has recorded a finding with regard to the contention urged by the assessee with reference to the profit and liability account for the year extracted in the above para of its order, the total turnover excluding other incomes is shown as 1,82,09,130 which amount would works out a profit of Rs. 13,04,90,640 and other income aggregate to Rs. 1,9432,996. After referring to the said figures, he has further stated that the assessee has claimed clearly 30% of the turnover as an item profit, which is excluded from the purview of tax. Further, he has made an observation that assessee has not given proper details or eveidence regarding its audit to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t decision in the case of Shriram Refrigeration industries Ltd. Vs. CIT 127 ITR 746, wherein it was held that "if the agreement results in the absolute transfer of technical knowledge etc. to the assessee, the assessee could be said to have acquired an asset of enduring advantage and the expenditure incurred may be of a capital nature. Therefore, it is held that the expenditure of that amount constitutes capital expenditure. Further, the appellate authority also being the fact finding authority with reference to the claim of the assessee spending Rs. 22,50,000/- towards 1/3 cost of voluntary retirement of the employee of M/s. IGE employee who would be surplus and whose services could not be utilised and therefore the amount paid to them was claimed deduction by the assessee, contending that it is a revenue receipt is also rightly disallowed by the Assessing Authority after referring to Sec. 25 FF of the I.D. Act, 1947, which provisions of the act provides the transfer of ownership or management of business undertaken as a result of which the retrenchment of workmen occurs, the liability to pay the retrenchment compensation is upon the transferor employer not the transferor. I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f fact holding that the assessee' case is that M/s. IGE having ceased to do its business in X-ray medical equipment for all times to come-the assessee company has warded off competition for an indefinite period and hence, this payment of Rs. 50 Lakhs constitutes a capital expenditure in its hands, since it has been received for the purpose of securing an enduring advantage to the business as a whole. 26. Therefore, the findings of fact recoded by the Assessing Authority in disallowing the claim of the assessee on the various other heads made by the assessee to deduct out of gross total income for payment of tax stating that it is revenue receipt comes with the total turnover of the business of the assessee, the said findings have been confirmed by the first appellate authority in exercise of his appellate power and jurisdiction erroneously is the legal contention urged by the us with reference to the findings and reasons recorded by the appellate tribunal in the impugned order. The first appellate authority with reference to the rival legal contention urged on behalf of the parties and after examining the item wise claim on the various aspects referred to supra considered the sa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....efore the reliance placed upon the said case in misplaced. 28. Now we answer the aforesaid substantial questions of law Nos. 16, 10, 13, 14 and 6, it is necessary for us to consider and examine the statutory provisions of Se. 80-O r/w 80AB of the I.T Act. The aforesaid statutory provisions have been duly considered by the Apex Court in the case referred to supra upon which strong reliance is placed by the learned counsel for the revenue and the Division Bench of this Court in the case of Asst. CIT Vs. Abcon Engineering and Systems P.Ltd (Karn) After extracting the relevant special provisions of Sec. 80-O and 80-AB and also the head note from CIT Vs. Chemical and Metallurgical Design Co. Ltd (2000) 247 ITR 749 which case is considered by the Full Bench of the Delhi High Court and the 2^nd case in the case of CIT Vs. M.N. Dastar and co. Ltd. (2000) 243 ITR 10 referred to supra, its head note is extracted and also referred to the decision of the Motilal Pesticides (I) P. Ltd. Vs. CIT (2000) 243 ITR 26b wherein the Supreme Court has referrd to Sec. 80AA, 80AB of the Income tax which were introduced by finance (act No. 1) 1980. Sec. 80AA has got retrospective effect....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h foreign exchange but there could also be business in relation to these goods which may not be exported or which may not fetch foreign exchange. The thrust of the opening clause of (b) of sub-section (3) of Sec. 80HHC of the Act, has a stress on the words "does not consist exclusively of the export". The words "total turnover of the business" would be controlled by and have to be read in the colour of the opening clause. Therefore, the total turnover of business should be taken into consideration for the purpose of granting special benefits under the aforesaid provisions pf the Act. He submits that the aforesaid decision aptly supports and justifies the findings and the reasons recorded by the Appellate Tribunal in the reasons recorded by the Appellate Tribunal in the impugned order by granting the relief with regard to the acquisition of medical division by spending the amount of 101.30 lakhs i.e., 28.08 lakhs paid to M/s. IGE for access to latest information base and smooth transition of customer order filling, 22.50 lakhs paid towards 1/3^rd of cost of voluntary retirement of IGE employee and a sum of Rs. 50 lakhs paid towards IGE from desisting in carrying on similar bus....