TaxTMI 
TaxTMI 
2012 (10) TMI 1101
X X X X Extracts X X X X
X X X X Extracts X X X X
.... account is a capital receipt or revenue receipt ? 2. Whether such payment of net present value of the future liability can be classified as remission or cessation of the liability so as to attract the provision of section 41(1)(a) of the Income Tax Act, 1961 or not ? 3. Whether difference in payment of net present value of the future liability can be termed as gain/benefit and accordingly business income or not ?" 3. Facts of the case, in brief, are that the assessee is a Private Ltd. company engaged in the business of sheet metal press parts and assemblies for automobile manufacturers, particularly for Bajaj Auto Ltd. and also wind power generation. During the course of assessment proceedings the AO noted that the assessee has disclosed vide note 3 to the return of income that an amount of Rs. 138.78 lakhs has been transferred to capital reserve being a capital receipt. The same is difference between net present value and principal value of sale tax deferral loan. For the sake of convenience the submission made by the assessee is reproduced as under : "The company has availed Sales Tax incentive under Part I of the 1993-1998 Package Scheme of Incenti....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... according to which the premature payment of the amount of tax deferred by the assessee equal to the net present value of the deferred tax is deemed to have been paid as sales tax liability. Therefore, according to him the assessee has paid nothing but the sales tax liability prematurely by getting the benefit, not of a capital receipt but of a trading receipt in the form of sales tax benefit. According to him, the assessee has made advance payment of deferred tax to get the benefit of the scheme. Therefore, it cannot be considered as capital receipt within the meaning of section 37(1) of the Act by deferring the sales tax liability. What the assessee has received, by following the same analogy, is a revenue receipt. He noted that the scheme has reduced the liability of the assessee to pay Rs. 57.83 lakhs as full and final settlement of the sales tax deferral loan. Resultantly the assessee has got benefit of Rs. 138.78 lakhs in the form of waiver of sales tax liability which otherwise would have been payable by the assessee to the State Government. Sales tax liability being a trading receipt of the assessee can never be a capital receipt and hence the same according to the AO ne....
X X X X Extracts X X X X
X X X X Extracts X X X X
....8(iv) of the Act. When the company discharges the deferred tax or the loan liability by paying the discounted amount as agreed, there is no benefit to the company or any disadvantage suffered by the lender as the company is paying the present value of the liability which in its normal course had to be discharged at a future date. It is arguable that if there is a benefit, it is in monetary terms. Section 28(iv) of the Act covers the 'value' of any benefit 'whether convertible into money or not'. This term signifies that the benefit has to be in kind and that monetary benefits are not covered by the said clause [ CIT Vs. Indokem Ltd. 132 ITR 125 (Bom.), CIT Vs. Alchemic Pvt. Ltd. 130 ITR 168 (Guj) and Ravinder Singh Vs. CIT 205 ITR 353 (Del.)]. If the view is taken that the pre-payment at a discounted value has resulted in a 'benefit' covered by section 28(iv) , then section 41(1) would be rendered totally otiose as all issues falling within section 41(1) would be covered by section 28(iv) 7. The decision of the Special Bench of the Tribunal in the case of Sulzer India Ltd. Vide ITA No.2944/2871/Mumbai/2007 was brought to the notice of the CIT(A). 7.1 Based on the arguments ad....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lf of the assessee. We have also considered the various decisions cited before us. We find the issue has been decided in favour of the assessee by the decision of the Pune Bench of the Tribunal in the case of Rucha Engineers Pvt. Ltd. vide ITA No. 667/PN/2006 and ITA No. 1338/PN/2007 for A.Y. 2003-04 order dated 19-01- 2011. For the sake of convenience the facts of that case including the finding of the Tribunal are reproduced as under : "3. As far as ground No.1 is concerned, the relevant facts of the case are that the assessee has collected sales tax from customers and has claimed deduction for the said amount in P&L account. The said deduction was allowed u/s.43B taking the sales tax collected as deemed payment for the purpose of section 43B. The sales tax collected and used was to be paid to State Government in five equal instalments. The assessee settled the sales tax deferral amount of Rs. 163.22 lakhs by paying Rs. 51.55 lakhs as full and final settlement. In this process, the assessee has gained Rs. 111.67 lakhs and claimed the same as capital receipt which was not accepted by the Assessing Officer. The matte was carried in before the first appellate authority but ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y expense is an allowable expenditure u/s.37(1) of the Act ?" 11. Facts of the case, in brief, are that during the course of assessment proceedings the AO noted that the assessee has debited an amount of Rs. 15,86,413/- to the profit and loss account as warranty claims. The AO asked the assessee to produce the following : 1. The amount of the claims pending before the assessee as on 31-03-2005 along with supportive documents. 2. The amount actually spent by the assessee during F.Y. 2004-05 on warranty claims. 3. Any scientific/industrial data to support the claim of the assessee. 4. Past history of the assessee regarding the claims for warranty 5. Whether warranty claims has been insured by the assessee or not 12. Rejecting the various submissions made by the assessee and in absence of certainty of such claims the AO disallowed the warranty provision made by the assessee on the ground that the said claim is a contingent liability. He accordingly made addition of Rs. 15,86,413/-. The AO subsequently restricted such disallowance to Rs. 9,77,000/- vide order passed u/s.154 on 05-02-2008. 13. Before the CIT(A) the assessee made elab....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d CIT(A) deleted the addition made by the AO. While doing so, he noted that the assessee has sold the products manufactured by it with warranty. In the past the assessee has paid warranty claims to its customers and claimed the expenditure on actual basis. Due to introduction of AS29 w.e.f. F.Y. 2004-05 by the ICAI, the assessee company has changed its method of recognising the expenditure on warranty claims from actual basis to accrual basis. The assessee company has accordingly made provision of warranty claims on the basis of past experience/records. According to him the allowability of warranty claim accrues on the date of sale of product though the quantification and payment of the same is made on specific dates. Therefore, the liability is not unascertained liability disallowable under the provisions of Income Tax Act as claimed by the AO. Relying on the decision of the Pune Bench of the Tribunal in the case of Thermax Surface Coating Ltd. Vs. JCIT reported in 104 ITD 199, the decision of the Delhi Bench of the Tribunal in the case of Honda Seil cars India Pvt. Ltd. (Supra), the decision of the Hon'ble Gujarat High Court in the case of CIT Vs. Himalay Machinery Pvt. Ltd. (Sup....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sion, and claimed deduction of the net provision of Rs. 5,18,554/-. But the Assessing Officer disallowed the claim on the ground that it was merely a contingent liability. The High Court on appeal held that no obligation was cast on the date of sale and consequently there was no accrued liability. On appeal to the Supreme Court : Held, reversing the decision of the High Court, that the valve actuators, manufactured by the assessee, were sophisticated goods and statistical data indicated that every year some of these were found defective; that valve actuator being a sophisticated item no customer was prepared to buy a value actuator without a warranty. Therefore, the warranty became an integral part of the sale price; in other words, the warranty stood attached to the sale price of the product. In this case the warranty provisions had to be recognized because the assessee had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of obligation. Therefore, the assessee had incurred a liability during the assessment year which was entitled to deduction under section 37 of the Income Tax Act, 1961. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....missioner (Appeals) was to be set aside and the impugned disallowance was to be deleted." 19. We find the Pune Bench of the Tribunal in the case of Thermax Surface Coating Ltd. (Supra) which has been reproduced by the CIT(A) in his order has held as under : "2.1 In Ground No.1 is against the finding of the learned CIT(A) in which disallowance of Rs. 1,33,400/- made by the AO, representing the provision for warranty obligation, was upheld. It was mentioned in the ground that the liability had crystallized in the year and the provision was made with reference to the available data. On perusal of the order it is found that the learned CIT(A) came to the conclusion that the liability was a contingent liability and it did not accrue in the relevant previous year. Before us, the learned counsel of the assessee pointed out that the liability for warranty arose on account of sale of goods. Under the contract the assessee was under obligation to set right the defects within the prescribed period. Thus, the liability was fastened to the event of sale and since the sales were effected in this year, the liability had accrued. As against the aforesaid, the learned Departmental Repre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y dismissed the grounds raised by the revenue by upholding the order of the CIT(A). Therefore, the grounds filed by the assessee in the CO become infructuous. Accordingly the SO filed by the assessee is dismissed. ITA No.687/PN/2011 (By Revenue) (A.Y. 2007-08) : 22. The only effective ground raised by the revenue in this appeal relates to the order of the CIT(A) in allowing the interest on share application money which was disallowed by the AO u/s.37(1) of the Income Tax Act. 23. Facts of the case, in brief, are that the AO during the course of assessment proceedings noted that the assessee company is a closely held company and only the family members are share holders of this company. The total number of shares of this company is 7,13,752 of the value of Rs. 10/- each. The assessee has received share application many from Vax Infradeveloper Ltd. during A.Y. 2004- 05 and 2005-06. However, shares were not allotted and the share application money pending allotment for the impugned assessment year as on 31-03-2007 was shown at Rs. 1,43,74,942/-. The assessee for the impugned assessment year has paid interest of Rs. 14,59,440/- being interest @8% per annum on share application....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 26.5 lakhs is not monies borrowed within the meaning of subrule (v) of r.1 of Schedule II of the Companies (profits) Surtax Act, 1964 ?." The issue decided in the above decision is under Companies (Profits) Surtax Act, 1964 and the same is not relevant for deciding the issue under appeal. In the case of Addl. CIT Vs. Bangalore Soft Drinks (P) Ltd. (1980) 126 ITR 38 the issue decided was in respect of deduction u/s.80J and computation of capital employed for the said deduction u/s.80J and applicability of Rule-19A(3) etc. The issue decided in this case is also not relevant for deciding the issue under appeal. The identical issue has been decided by Hon'ble ITAT, Pune in the case of Western India Forging Ltd. ITA No. 419/PN/2002 dated 24-07-2007 (PCAS journal February, 2008 Page No. 49 to 52). It has been held that following the principle of commercial expediency, interest on share application money pending allotment is allowable. In the said case also, the share application money was used as working capital of business. On perusal of the said case, it has been noticed that as per provis....