TaxTMI 
TaxTMI 
2023 (9) TMI 1453
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....epartment's appeal for A.Y. 2012-13 (ITA No. 3235/Ahd/2015) and assessee's Cross Objection (C.O. No. 219/Ahd/2015). 2. The Department has taken the following grounds of appeal:- "1. The Ld.CIT(A) has erred in law and on facts in capitalizing interest expense of Rs.20,18,037/- on CWIP, without properly appreciating the facts of the case and the material brought on record. 2. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance of Rs.84,000/- made u/s.36(1)(iii) of the Act, without properly appreciating " the facts of the case and the material brought on record. 3. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance of foreign commission expenses of Rs.60,64,640/- made u/s.40(a)(i) of the Act, without properly appreciating the facts of the case and the material brought on record. 4. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance of Rs.2,96,84,828/- made on account of warrant liability treating the same as contingent liability, without properly appreciating the facts of the case and the material brought on record. 5. The Ld.CIT(A) has erred in law and on facts in ....
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....ds and that the interest free funds available with the assessee which were utilized for making investment in Capital Work in Progress. Accordingly, the Assessing Officer added back a sum of Rs. 20,18,037/- under Section 36(1)(iii) of the Act and added the same to the total income of the assessee. 5. In appeal, Ld. CIT(A) decided the issue in favour of the assessee by observing that during the year under consideration, the assessee had sufficient interest free funds in the form of share capital, reserve and surplus of Rs. 18.12 crores as on 31.03.2012. Further, even the net profits before depreciation after tax were at Rs. 4.82 crores. At the same time Ld. CIT(A) observed that the Work-in-Progress reduced substantially from Rs. 4.05 crores as on 31.03.2011 to 0.5 crores as on 31.03.2012. Further, the addition in CWIP were on account of electric installation (Rs. 17.36 lakhs) factory building (Rs. 48.74 lakhs), furniture (Rs. 2.78 lakhs) and plant and machinery (Rs. 67.29 lakhs), totalling to Rs. 1.36 crores. In view of the above facts, Ld. CIT(A) held that since the interest free funds available with the assessee were much higher than the investment as Capital Work in Progress (C....
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....rpose of business in the year under consideration. 3.9. Further, the additions in the CWIP were on account of electric installation at Rs. 17.36 lacs, factory building at Rs.48.74 lacs, furniture at Rs.2.78 lacs and plant and machinery at Rs.67.29 lacs totaling to Rs. 1.36 crores. While, during the year, even the net profits before depreciation after tax were at Rs.4.82 crores. Thus, the interest free funds generated in the year under consideration on account of. the profits were even much higher than the expenditures made towards various heads under the CWIP as notified above. Thus, on this account also, it cannot be said that the interest bearing loans have been utilized for the purpose of investment in CWIP. 3.10. It was also noticed that the AO has worked out the disallowance of expenses based on average investment in W.I.P. as compared to average interest borrowings which was not correct as the AO has ignored the availability of own funds and assumed that the CWIP investment was entirely made out of the borrowed funds. 3.11. It has also been noticed that on this issue, which was identically involved in preceding years, the AO has not taken any advers....
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....lowing assessee's claim for deduction. In the case of E City Investments And Holdings Company (P.) Ltd. 117 taxmann.com 124 (SC), the Hon'ble Supreme Court held that where High Court upheld Tribunal's order allowing assessee's claim for deduction under section 36(1)(iii) by taking a view that assessee's decision to give loan to its subsidiaries was derived by business exigency, SLP filed against said order was to be dismissed. In the case of Amod Stamping (P.) Ltd. 45 taxmann.com 427 (Gujarat), the Hon'ble High Court held that where assessee had sufficient interest free fund available with it to be invested in mutual funds, deduction of interest expenditure on borrowed fund could not be disallowed under section 36(1)(iii) of the Act. In the case of Gujarat State Fertilizers & Chemicals Ltd. 36 taxmann.com 230 (Gujarat), the Hon'ble High Court held that where assessee's own funds exceeded investment made to earn exempted income, and borrowed funds had not been used for investments, disallowance of 10 per cent of dividend income was impermissible. In the case of Beekons Industries Ltd. 149 taxmann.com 383 (Punjab & Haryana), the High Court held that wh....
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.... 36(1)(iii) of the Act may be deleted. 13. On going through the facts of the instant case and the detailed discussion while discussing Ground No. 1 of the Department's appeal, where similar disallowance was made under Section 36(1)(iii) of the Act, we are of the considered view that Ld. CIT(A) has not erred in facts and law in deleting additions made under Section 36(1)(iii) of the Act. 14. In the result, Ground No. 2 of the Department's appeal is dismissed. Ground No.3:- Ld. CIT(A) erred in deleting disallowance of Foreign Commission Expenses of Rs. 60,64,640/- made under Section 40(a)(i) of the Act. 15. The brief facts of the case are that during the course of assessment, the Assessing Officer observed that the assessee had debited Foreign Commission Expenses of Rs. 60,64,640/- during the year under consideration. Further, the assessee was asked to furnish details of TDS deducted on all the aforesaid expenses. In response, the assessee submitted that the commission expenses has been paid to non-resident parties through banking channels for arranging orders of foreign parties. The details of services rendered are evident from their copy of bills / invoice....
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....r, the overseas brokers did not have any business connection in India. It was further claimed that there is no income deemed to accrue or arise in India in view of the explanations to the provisions of section 9(1)(i) of the I. T. Act as the overseas brokers had rendered services outside India and the commission was also paid to them outside India. Hence, there was no obligation to deduct the tax from such commission payments as per the provisions of section 195 of the I. T. Act. It was also claimed that the appellant had been making the commission payments to the overseas brokers since F.Y. 2009-10 which shows that this was not a single year in which such commission payments have been made and also emphasized that these payments have been allowed by the AO in the preceding years in scrutiny assessment completed u/s. 143(3) of the I. T. Act, 1961. ...... 6.16 The issue whether the payer has to apply for a certificate under section 195 if some payment has been made, has been considered by various courts. The special bench of Chennai ITAT in the case of Prasad Productions reported in 125 ITD 263 has held in para-35 of the order that if the assessee has not applied t....
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.... decision of honourable Supreme Court of India in the case of CIT vs. Toshoku Limited 125 ITR 525, still prevails as on date and is the law of the land as regards applicability of TDS provisions to commission paid to overseas/non-resident agents by Indian Exporters. 6.19. Further, reliance is placed on the following decisions / judgments:- * ACIT Vs. Modern Insulators Ltd. [56 DTR 362 (Jaipur Trib.)] * Ishikawajama - Harima Heavy Industries Ltd. Vs. Director of Income Tax [207 CTR 361] * Dy. Commissioner of Income Tax Vs. Divi's Laboratories Ltd. [(2011) 60 DTR (Hyd) (Trib) 210] * ITO, International Taxation, Chennai Vs. Prasad Production Ltd.[ (2010) 125 ITD 263 Chennai) (SB) * ACIT, Circle - 16(3) (Hyderabad-Trib) vs. Priyadarshini Spinning Mills (P.) Ltd. (2012) ITA No. 1776 (2011) 6.20. In view of the preceding discussions and the submissions of the appellant, besides the judgments / decisions of various courts, it is clear that the appellant was not liable to deduct tax on the commission payment to foreign agents. Therefore, the disallowance of Rs. 60,64,640/-under section 40(a)(ia) made by the AO is directed t....
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....ed to the file of Assessing Officer for denovo consideration, after giving the opportunity of hearing to the assessee. 18. In the result, Ground No. 3 of the Department's appeal is allowed for statistical purposes. Ground No.4:- Ld. CIT(A) erred in deleting disallowance of Rs. 2,96,84,828/- made on account of warranty liability. 19. The brief facts in relation to this ground of appeal are that during the course of assessment, the Assessing Officer observed that the assessee has debited a sum of Rs. 2,96,84,828/- on account of warranty claim expenses. During the course of assessment, the assessee was required to furnish complete details and reasonableness for the claim of warranty expenses. The Assessing Officer, on analysis of details furnished by the assessee was of the view that there was no consistency in recognizing warranty claim expenses based on any scientific formula. Further, the Assessing Officer observed that prior to Assessment Year 2009-10, there was no such claim of warranty expenses or warranty provision made by the assessee. Further, the assessee has not expressed as to why it made the provision for warranty is for a period of 5 years. Further, no....
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....een made i.e. 5 years by the assessee was fair and does not warrant any interference. Further, Ld. CIT(A) observed that even the bank guarantee @ 10% of sale amount of the contract value has been provided to the customers as is evident from the details provided by the assessee during the course of appellate proceedings. Further, Ld. CIT(A) observe that the assessee has written back the provision after the expiry of warranty period i.e. 5 years and offered the amount at the maximum marginal rate of tax and it was therefore a tax neutral exercise. Accordingly, Ld. CIT(A) was of the view that the provision were made was not a contingent liability and the Assessing Officer had allowed the claim of the assessee in previous year as well and in absence of any new details / information the assessee had no basis to change its stand during the impugned year under consideration. 21. The Department is in appeal before us against the aforesaid relief granted by the CIT(A). 22. Before us, the Ld. D.R. submitted that during the past 5 years the assessee has not claimed any actual expenses towards warranty expenses have not been incurred warranty expenses towards the sale made by the assesse....
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....e assessment years. In the instant case, certain facts are noteworthy. Firstly, on identical set of facts, the Department has allowed the appeal of the assessee for the past years as well. The Department has not pointed out to any specific circumstances which would necessitate a change in the position taken by the Department. Second, it is observed that in some cases, the goods supplied by the assessee carry a warranty period of upto eight years. It is for this specific reason, as observed that Ld. CIT(A) that the assessee has made a provision for warranty for a period of five years from the date of sale. Thirdly, after the period the warranty period is over i.e. after five years, the assessee has suo moto offered the unutilized portion of the provision for warranty expenses and offered the same to tax in the return of income. Therefore, the provision for warranty is a Revenue neutral exercise and after the period when the warranty is over, the assessee suo moto offers the same to tax in its return of income. This fact has also been specifically taken note of by Ld. CIT(A) while allowing the appeal of the assessee on this issue. Fourthly, the assessee has given a reasonable basis a....
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....rt has observed as under: - "Where there are a number of obligations (e.g., product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole. In this connection, it may be noted that in the case of a manufacture and sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction under section 37 of the said Act. However, when there is manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative to settling that obligation. " 8. Further, the learned Counsel for the assessee also relied on Bharat Earth Movers (supra), which has been relied on by the learned Sr. Departmental Representative and he referred to the particular observations of Hon'ble Supreme Court which reads as under:- "4. The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liabi....
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.... Ground No. 5:- Ld. CIT(A) erred in deleting disallowance of Rs. 31,96,800/- out of interest expenses claimed on business advances under Section 36(1)(iii) of the Act. 27. The brief facts in relation to the ground of appeal are that the assessee had given advances of Rs. 2,66,40,000/- for the purchase of office to M/s. Shivalik Reality Pvt. Ltd. in F.Y. 2010-11 i.e. A.Y. 2011-12. The said purchase was completed in F.Y. 2014-15 i.e. A.Y. 2015-16. 28. During the course of assessment, the Assessing Officer observed that the assessee has not given any documentary evidences in support of the contention that the advances for the purchase of office were made out of surplus funds and internal approvals. Thus, in absence of evidences, the Assessing Officer held that borrowed fund was utilized for giving capital advances for the purchase of office. Had the assessee not utilized borrowed funds for the purpose of advances towards purchases of capital assets, there would not have been any need for taking loans to the extent of amount utilized for advances towards purchase of capital assets. Accordingly, the Assessing Officer held that interest on borrowed funds to the extent of adv....
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....outset, the Counsel for the assessee submitted that he shall not to be pressing for the Cross Objection and accordingly, the matter may be decided in accordance with law. Further, with respect to Cross Objection Ground No. 2 filed by the assessee (Non-grant of TDS of Rs. 2,800/-), the matter is being set-aside to the file of the Assessing Officer to carry out necessary verification and grant credit of the same as per law. 33. Now coming to the Department's appeal, we observe that during the course of assessment, the Assessing Officer had made disallowances under Section 14A of the Act amounting to Rs. 3,95,014/-. In appeal, the CIT(A) observed that during the year under consideration, the dividend income which was claimed to be exempt amounted to Rs. 1,95,599/-. During the appellate proceedings, the assessee placed on record several judicial precedents in which it was held that disallowance of interest expenditure under Section 14A of the Act cannot exceed the dividend income. Accordingly, Ld. CIT(A) restricted the disallowance to Rs. 1,95,599/- which was the dividend income claimed to be exempt by the assessee. While passing the order CIT(A) made the following observation:-....
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....at the assessee could not establish that such interest free advances made to the related concerns were out of business expediency. 1.2 The Ld CIT(A) failed to appreciate that it was for the assessee to lead evidence to prove the business expediency test. 2. The Ld. CIT(A) has erred in law and on facts in deleting the disallowance amounting to Rs. 11071224/- paid on the alleged export handling charges. 2.1 The Ld. CIT(A) has erred in law and on facts in deleting the disallowance of commission to foreign agents amounting to Rs. 11071224/- without properly appreciating the facts that the assessee was unable to lead evidences to prove the genuineness of such expenditure and also the factum of actual rendering of services by such recipients. Reference in. this regard is made to the decision of Hon'ble Supreme Court in the case of Premier Breweries Ltd vs. CIT Cochin 2015 56 Taxmann.com 361 (SC). 2.2 Without prejudice to the above, the Ld. CIT(A) has erred in law on facts in deleting the disallowance u/s. 40(a)(ia) of the I.T. Act on export commission payments made to the Non- resident Agents solely relying on the decision of the Hon'ble Suprem....
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....d. CIT(A) has erred in law and on facts in deleting the disallowance amounting to Rs. 6512709/- paid on the alleged export handling charges. 2.1 The Ld. CIT(A) has erred in law and on facts in deleting the disallowance of commission to foreign agents amounting to Rs. 6512709/- paid without properly appreciating the facts that the assessee was unable to lead evidences to prove the genuineness of such expenditure and also the factum of actual rendering of services by such recipients. Reference in. this regard is made to the decision of Hon'ble Supreme Court in the case of Premier Breweries Ltd vs. CIT Cochin 2015 56 Taxmann.com 361 (SC). 2.2 Without prejudice to the above, the Ld. CIT(A) has erred in law on facts in deleting the disallowance u/s. 40(a)(ia) of the I.T. Act on export commission payments made to the Non- resident Agents solely relying on the decision of the Hon'ble Supreme Court in the case of CIT vs. Toshuku Ltd. (1980) 125 ITR 525 (SC) which stands superseded by the subsequent amendment;, brought in I.T. Act. 2.3 The Ld. CIT(A) has failed to appreciate that such payments are chargeable to tax in India under the provisions of Section ....