TaxTMI 
TaxTMI 
2016 (12) TMI 1926
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....assed for the sake of convenience and brevity. First, we take Revenue's appeal in ITA No.2126/Kol/2013. 3. Brief facts of the case qua the assessee are that the assessee filed its return of income on 27.09.2008 declaring total income of Rs.34,58,89,112/- for the assessment year 2008-09. The return of income was processed u/s.143(1) of the I.T.Act on 12.08.2009 by the DCIT, Circle-10, Kolkata. Later on, the case was selected for scrutiny U/s 143(3) of the Act and the AO completed the assessment by making the addition on account of cash credit u/s.68 of the Act at Rs.4,80,63,259/-, addition on account of repairs and maintenance expenses at Rs.1,43,46,644/-, addition on account of irrecoverable advance written off at Rs.1,49,00,000/-, provisions for future warranty claims at Rs.4.51 crores and expenditure incurred in acquisition of bid at Rs.1,18,96,000/-. 4. Aggrieved from the order of ld. AO, the assessee filed an appeal before the ld. CIT(A), who has deleted the additions made by the AO, by observing the followings :- Observations of ld CIT (A) for Ground No.1 "4. I have considered the finding of the A.O. in his order dt. 30-12-2010 and the written su....
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.... during the appellate proceeding. I find that the A.O. asked the assessee to file complete address, PAN and other Identity proof of all the parties with whom the assessee had transactions at the fag end of assessment proceeding. It would not be possible for the A.R. to collect & file the complete details of such large no. of people within such a short time. Later on, the A.R. has submitted complete details with address proof etc. at the time of appellate proceeding which were sent to A.O.also. Regarding creditors since all the payments by the assessee had been made by account payee cheques, therefore, existence of such parties cannot be denied. Further, the AR. has brought on record that mostly the creditors are listed companies whose financial status is already available in public domain. I have also considered the case law cited by the A.R. I think the creditors existence is hardly questionable as observed by the Hon' ble Patna High Court in the case of Bahri Bros. Pvt. Ltd. (supra)". After-taking into consideration all these facts and material (submission, details, documents etc. filed by the AR) available on record, I think AO is not justified in making addition of Rs. 4,80....
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....iture incurred for assets of capital in nature. Thus, AO's addition under this head is restricted to Rs. 7.82 lakhs plus Rs.4.20 lakhs i.e. Rs. 12,02,000/-. Hence, assessee's appeal on ground no. 2 is partly allowed. Observations of ld CIT(A) for Ground No.3 7. Appeal on ground no.4 is against the disallowance of Rs. 1,49,00,000/- being irrecoverable advance written off. The fact of the case is that the assessee company had 70% of equity in a subsidiary company which was in the same line of business as that of the assessee. During the year under assessment the assessee company had given advances of Rs. 149 lakhs to the subsidiary company for its working capital requirements. But the subsidiary company was continuously making losses. Therefore, the management of the assessee company decided to come out of the affairs of the subsidiary company and thus transferred its shares. As the subsidiary company was making losses only, therefore, the assessee company could not recover its advances and thus charged it to its profit and loss account as business expenditure. In the assessment order the A.O. disallowed this amount giving his finding that the advance was gi....
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....Supreme Court held that where there was warranty obligation such obligation was a part of the sale price and stood attached to the sale price of the product. It was held that a warranty obligation is 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. If it is so made it is a liability allowable as deduction u/s. 37 of the Act. I have considered the finding of the A.O. on this issue and the written submission and case law filed by the A.R. during the appellate proceedings. I think this issue is squarely covered by the ratio decided by the Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd (supra). Thus, assessee's appeal on ground no. 5 is allowed. Observations of ld. CIT(A) for Ground No.5 9. Appeal on ground no. 6 is against the disallowance of Rs.1,18,96,000/- being expenditure incurred on account of acquisition bid. The fact of the case is that in order to expand its business in international market the assessee company participated in the biding process for acquisition of M/s. KXI in USA and for that purpose the assessee incurred an exp....
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..... 1,43,46,644/- out of total expenditure of Rs. 4.09 crores, claimed for repair and maintenance, as capital in nature on the basis of detail filed by the assessee? 3. Whether Ld CIT(A)-XII, Kolkata, was justified in holding that irrecoverable advance of Rs. 1,49,00,000/- written off was allowable as the same was wholly and exclusively for the business purpose when the A.O in his assessment order made the addition since the assessee did not discharge its onus by submitting anything to prove that the claim was genuine and trade relationship with the subsidiary to whom the advance was made, was disadvantageous as well as on the basis of the fact that write off was capital loss, hence can not be allowed ? 4. Whether Ld CIT(A)-XII, Kolkata, was justified in holding that Rs. 4.51 crores as provision for future warranty claims as allowable business expenditure when the A.O. in his assessment order made addition on the ground that this provision for unascertained liability was not allowable business expenditure and the basis of calculation to arrive at this figure was not according to scientific method? 5. Whether Ld CIT(A)-XII, Kolkata, was justified in holding ....
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.... has submitted before us that the assessee, had submitted the details of major parties of Small Scale Suppliers, Other Suppliers and Other Liabilities. Apart from this, the assessee had made a detailed submission before the ld CIT(A) which is reproduced below: "However, due to inadequate time provided by the A.O. of 1 week, the assessee was unable to submit details of all the parties due to voluminous nature of transactions. At the Outset, it is submitted that such disallowances are unjustified and unwarranted in case of large Company like Appellant which regularly gets its annual accounts audited by Statutory auditors (Annexure-I) and Tax Audit u/s 44AB, has Gross Sales of more than Rs.800 Crores, earned Net Profit of Rs.51.74 Crores during the year and paid taxes of Rs. 11.72 Crores. The AO failed to appreciate that in such a short time the Appellant was able to provide PAN and other details of more than 90% parties and could have provided the details of balance parties if sufficient time was granted to the Appellant. The Appellant also submits that the genuineness of Company is evident from the fact that Appellant is assessed under section 143(3) every year but no such ....
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...., do not bear the character of revenue expenditure or not in nature of repairs and maintenance. The ld. CIT(A) did not follow the proper procedure and he could not obtain the remand report from the Assessing Officer. As per section 250(4) of the Act, the ld CIT (A) did not conduct further inquiry to establish whether expenditure is in the nature of Revenue or Capital. It is settled position of law that a lot of factors would determine whether the expenditure is capital or revenue in nature. It is seen in the said Annexure that the assessee has debited expenses like purchase of scanners, UPS, batteries, provisions for earlier years, huge plumbing expenses, expenditure in civil construction like extra space for godown, aluminium cubicals and fittings, purchase of chairs, sofas. There are some entries which do not have any head but only amount has been mentioned. The expenditure mentioned by the assessee have an enduring benefit and has brought into existence a new capital asset for the assessee. Like for example, the scanner, the battery, the chairs are permanent assets. The office of the assessee, the godown, the computer, the building are permanent business assets of the assessee a....
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....ets. Therefore any repairs and maintenance expenditure incurred by the assessee on leased assets do not give ownership to claim depreciation. That is, in order to claim depreciation the assessee must be legal owner of the asset. Therefore, the expenditure incurred to maintain the leasehold property is revenue in nature. The ld AR for the assessee has shown us lease agreements and lease details. The AR for the assessee also relied on the following judgment: "Commissioner of Income Tax Vs. Madras Auto Service (P) Ltd. [1998] 99 Taxman 575 (SC): "In order to decide whether this expenditure is revenue expenditure or capital expenditure, one has to look at the expenditure from a commercial point of view. What advantage did the assessee get by constructing a building which belonged to somebody else and spending money for such construction. The assessee got a long lease of a newly constructed building suitable to its own business at a very concessional rent. The expenditure, therefore, was made in order to secure a long lease of new and more suitable business premises at a lower rent. In other words, the assessee made substantial savings in monthly rent for a period of 39 years b....
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....e shares and then charged this advance under revenue expenditure. The allowability of expenditure has been dealt with u/s.30 to 36 and Section 37 of the I.T. Act 1961. The Key principles of allowability of an expenditure have purpose as the cardinal point to be considered before its allowance or otherwise. As discussed, the assessee is in the business of selling, manufacturing of vacuum cleaners and not in the business of advancing loans. In this instant case of the assessee, the assessee himself has admitted to have advanced loans as working capital to the subsidiary company wherein it had held 70% equity. The assessee has failed to discharge its onus to establish any nexus between its own business and the business of the subsidiary. It has failed to adduce any evidence to bring out any covert or overt advantage in the business of the assessee itself. The assessee has failed to provide any evidence like the object clause of memorandum of association of the subsidiary company, the qualification of the stake holder, the results of the subsidiary company, the nature of the advance alongwith agreement, the price in which this investments in the subsidiary company was sold, the efforts....
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....) for the Revenue, has primarily reiterated the stand taken by the Assessing Officer, which we have already noted above. 7.2 On the other hand the ld. AR for the assessee has submitted that subsidiary company was set up as a service provider for maintenance of various electrical and electronic appliances. The assessee is presently engaged in a similar type of activity i.e. service provider, for its water purifiers. Thus, there is a clear nexus between the business carried on by the subsidiary company and the assessee. Since the subsidy company was incurring losses, the assessee sold off its share. However, the advances given by the assessee were not recoverable. Hence, the expenditure in form of advances incurred by the assessee is in the nature of normal business expenditure, and hence, be allowed u/s. 37(1) of the Act. The Ld. AR for the assessee has also relied on the judgment of Bombay High Court in the case of Western India Oil Distributing Company Ltd. Vs. CIT [1970], 77 ITR 140 in which the Hon`ble court held that the expense incurred for the purpose of termination of disadvantages trade relationship are incurred wholly and exclusively for the purpose of company`s trade. ....
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....obable outflow of resources, the probability of incurring of which is more high. Hence the assessee have recognized provision on the best estimate of the cost to make good the warranty products sold before the balance sheet date. Therefore, disallowance should be deleted and the amount of provision recognized for warranty claims be allowed under section 37 of the Act. The Ld. AR for the assessee has also relied on the judgment of Hon`ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. Vs. CIT, 314 ITR 62, wherein the Hon'ble Supreme Court held that where there was a warranty obligation such obligation was a part of the sale price and stood attached to the sale price of the product. It was held that a warranty obligation is a present obligation as a result of past events resulting in an out flow of resources and a reliable estimate could be made of the amount of obligation. If it is so made it is a liability allowable as deduction U/s 37 of the Act. 8.3 Heaving heard the rival submissions, perused the material available on record, we are of the view that there is merit in the submissions of the assessee, as the proposition canvassed by the ld.AR for the assessee ....
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....o failed to prove that the transaction of acquisition of this company was in any way related to the commencement, and carrying on of the assessee's own business and hence, in a normal course cannot be regarded as expenditure for the purpose of the business, which was carried in the accounting period. The assessee has also not been able to bring anything on record to make out a case of advancement of business by entering into this transaction at any future date. The assessee has not provided any evidence in as much as the projections of profits after the acquisition of this company. The assessee has not provided any material evidence on the due diligence procedure carried out if any. The assessee has not furnished its analysis if any, of the company in question purportedly for acquisition. In fact, the assessee has not even mentioned the nature of products being manufactured by the company purportedly to be acquired. Hence, in a nutshell, the assessee has failed to bring anything on record to prove the genuineness of this transaction, the complementary nature of both the businesses, and the way in which this expenditure was for the purposes of smooth and efficient condu....
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....ppeal filed by the Revenue on this issue is dismissed. Revenue's appeal in ITA No.2625/Kol/2013(AY 2009-2010) The grounds raised by the Revenue in this appeal are as under :- 1. Whether Ld. CIT(A)-XII, Kolkata, was justified in restricting the disallowance to Rs.11,16,629/- on the strength of the verdict given by the Hon'ble Delhi High Court in the case of Modi Spg. & Wvg. Mills Company Ltd. (supra) ? 2. Whether Ld. CIT(A)-XII, Kolkata, was justified to consider the relationship between the assessee and distributors/dealers as principal to principal instead of principal and agent which nullifies the invoking of Section 40(a)(ia) of the I.T. Act ? 10. Ground No.1:The ld. CIT(A) while dealing with the ground No.1, has observed as under :- "I have carefully considered the submission put forth on behalf of the appellant along with the supporting documents/details furnished & case laws relied upon, perused the facts of the case including the observation of the AO made in the assessment order and other materials brought on record. I find substantial force in the argument advanced by the A/R of the appellant. It is submitted that the appellant h....
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....he expenditure incurred and debited under this head have an enduring benefit and has brought into existence new capital assets for assessee. The AO has also pointed out that the assessee/AR. failed to establish as to how the expenditure incurred could help the appellant in the process of earning profit in the course of its business. During the appellate proceeding the AR. has submitted that the assessee spent Rs.40964919/- out of which the AO has disallowed Rs. 14346644/- treating it as capital expenditure. The A.R,. has also submitted a value-wise and quantity-wise summary of list of items disallowed. From the details filed by the AR it is seen that the expenditure of Rs. 76.47 lakhs has been incurred on leased premises. The AR has brought on record the case law of Modi Spg."& Wvg. Mills Company Ltd. Vs. CIT (1993)200 ITR 544 Delhi. In its judgement the Hon'ble Delhi High Court has observed that if a tenant incurs an expenditure on rented building for its renovation or alteration, he does not acquire any capital assets because the building does not belong to him and, such an expenditure will be revenue in nature. From the chart filed by the AR it is seen that Rs. 13.65 lakhs h....
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....iscounts in such transactions. In support of this contention, the A/R of the appellant placed reliance on the judgments of a number of High Courts and ITATs as above. My attention is also drawn to the decision of my predecessor on the issue while adjudicating the appeal for the Assessment Year 2008-09 in appeal no. 507/XII/Cir- 10/10-11 and contended that the same was decided in favour of the appellant on the identical set of facts and ground. It is noted that the Commissioner of income Tax (Appeal -XII) has observed that the relationship between the appellant company and distributing companies is not of principal and agent but of transaction between 'principal to principal' and therefore, in this case TDS on incentives is not applicable. Hence disallowance u/s 40(a)(ia) of the Act is not justified. Accordingly appellant's appeal was allowed. The relevant portion of the order of my predecessor is reproduced below: "Appeal on ground no. 3 is against the disallowance of expenses on selling and sales promotion of Rs. 30200000/- u/s. 40(a)(ia) of the I.T. Act, 1961. The AO has given his finding that the assessee spent Rs. 285216992/- on sales promotion during the y....