TaxTMI 
TaxTMI 
2012 (10) TMI 1101
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....? 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 Incentive of Government of Maharastra by way of deferment of Sales Tax Liabilit....
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.... 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 needs to be offered for income. Even otherwise also according to the AO the liability of the assessee is seized to exist within t....
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....tage 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 advanced by the assessee and following the decision of the Special Bench of the Tribunal in the case of Sulzer India Ltd. (Supra) the learned CIT(A) held that the AO is not justified i....
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....bunal 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 without any success. 4. During the proceedings before us, the learned counsel for the assessee submitted that the issue raised in this appeal is squarely covered by the decision of Special Benc....
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....rofit 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 elaborate arguments. It was submitted that sales as well as warranty are inextricably linked with each other and therefore if the sale proceeds are taken note of in a year, the liability in respect of the warranty is also to be taken note of in the same year. The quantifica....
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....ng 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. (Supra) reported in 62 DTR 141 and the decision of Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. (Supra) the learned CIT(A) deleted the addition. Aggrieved with such order of the learned CIT(A) the revenue is in appeal before us. 16. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the Paper....
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.... 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. The present value of a contingent liability, like the warranty expense, if properly ascertained and discounted on accrual basis can be an item of deduction under section 37. The principle of estimation of the contingent liability is not the normal rule. It would depend on the nature of the business, the nature of sales, the nature of the product manufactured and sold and the scien....
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....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 Representative did not make any specific argument, but relied on the decision of the learned CIT(A). 2.2 We have considered the arguments placed before us in the context of the decision of the Hon'ble Supreme Court in the case of Bharat Earth Movers Vs. CIT (2000) 162 CTR (SC) 325; (2000) 245 ITR 428 (SC); in which it was inter alia held that if the business liability had definitely arisen in the accounting ....
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....hich 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 money pending allotment. The assessee claimed the same as business expenditure treating it as borrowed capital/loan on the ground that the same is used for day-today business. For the above proposition the assessee relied on the following decisions : 1. CIT Vs. Hindustan Conductor Pvt. Ltd. 240 ITR 762. 2. Kejariwal Enterprises Vs. CIT 260 ITR 341 3. India Cements Ltd. Vs. CIT 60 ITR 52 4. Challapalli Sugard Ltd. ....
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.... 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 provisions of section 69(5) of the Companies Act, a company has to pay interest @6% per annum and as per provisions of section 73(2) of the Companies Act, the maximum interest rate prescribed is 15% on return of share application money in the circumstances cited u/s.73 of the Companies Act. The appellant has paid interest @8% per annum which cannot be regarded as excessive. Another reason stated by the AO for disallowance of interest is that it was not obligatory for the appellant ....