TaxTMI 
TaxTMI 
2002 (7) TMI 220
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....ny. In clause (6), it has been stated that provision for warranty expenses in terms of sale is made as per management estimate. According to the AO, the basis for arriving at the estimated figure of Rs. 13 lakhs was not submitted by the assessee. The provision for warranty expenses is held to be a contingent liability on an estimate basis and not on actual basis. The disallowance was accordingly made. 3. The CIT(A) was of the opinion that the assessee's provision for warranty obligations on the basis of certain percentage of sales was not correct in as much as the assessee was not engaged in the business of selling defective goods. According to him, the assessee did not mention in the sale bill that the sale price included specific cost of replacement of parts. The assessee's argument that the sale price included the warranty expenses, according to him, was not the fact. The learned CIT(A) further opined that in the sale of goods, the breach of stipulation collateral to the main purpose of the contract, gives rise to claim of a warranty liability. According to him, the following conditions need to be fulfilled in respect of goods sold to create warranty liability: ....
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....sure of which part of the equipment requires replacements. Based on the experience of business and historical data, the assessee has been providing a fixed percentage of sales as provision for warranties. Although the assessee has provided this, the assessee compares this provision and debits the actual expenditure to the said provisional account and creates the year and provisions based on the sales made during the year. Any excess claimed over the year will get neutralised by way of actual debits to the account. The assessee drew our attention to p. 17 of the paper book as well as p. 51 of the paper book to impress upon the sales and services that were rendered to the parties. According to him, the sale prize includes cost of services that are provided. The assessee has accounted the liability on the matching principle of accountancy. The Department is only unjustified in treating the liabilities as contingent. The liability is certain and only the quantum is contingent. The learned counsel for the assessee drew our attention to the actual figure of expenditure and made a comparison with the figure of warranty expenses to impress upon us that the provisions claimed are not unduly....
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.... that the liability to carry out repairs/replacement accrued on the date of sale agreement. Such estimated liabilities are to be treated as trading expenses and must be allowed. The Revenue in this case should have accepted the assessee's claim as following the method of accounting and as shown the basis for making such claims. The assessee has provided a meagre percentage of sale as provision for warranty claims during the period for which the assessee has produced the details of warranty claims. The claim shows that the warranty expenses claimed as deduction is not abnormally high and the gap between the warranty provisions and the warrant expenditure incurred have narrowed down over years and in fact, the detailed study of these expenses clearly shows that there is a perfect neutralisation between the expenditure incurred and the warranty claims claimed as deduction. In our view, the warranty liabilities are inbuilt in the sale price since all sales are with warranty liabilities. The liability towards warranty liabilities is certain and has accrued on the date of sale and only the ascertainment could be said to be contingent which the assessee has estimated based on its past....
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....ially reduced. 9. The learned Departmental Representative on the other hand strongly supported the disallowance sustained by the CIT(A). According to him, the reasons provided by the CIT(A) are sufficient to sustain the disallowance made by him. 10. We have gone through the details provided by the assessee and considered the rival submissions. The discussions in para 10 of the CIT(A)'s order shows that even the CIT(A) has resorted to some estimation based on his own working for the asst. yr. 1991-92. Accordingly some relief was granted. The claim of the assessee before us is that the working of disallowance under r. 6D would involve substantial time and processing of the back records and it is very difficult to provide per trip details in every case. This only shows that the assessee prays for ad-hoc disallowance on per trip basis. The assessee has provided some of these details in pages 47 to 51 of the paper book. The assessee has himself substantially worked out a disallowance to the extent of Rs. 12,45,283 to take care of the plausible omissions and commissions. We direct the disallowance to be maintained at a sum of Rs. 1,50,000. 11. Before parting with this, we wo....
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....ied upon the discussions in the assessment order as well as the CIT(A)'s order is support of the Departmental stand. 13. We have carefully gone through the records. The assessee is having units in Bangalore and Goa which are eligible units for the purpose of deduction under s. 80-IA of the Act. The assessee at pp. 16 to 20 of the paper book has given its working for deduction under s. 80-IA of the Act. We have carefully seen the working which shows that the materials consumed have been allocated directly to the eligible units. The direct expenses and depreciation in respect of manufacturing activity, royalty, amortisation and technical knowhow fees on the basis of treating them as direct cost of the respective units based on these services directly used by these units. In other words, in our opinion, there is no need for allocation of any expenses when the expenses are directly connected with period. What is required is the allocation of common expenses or indirect expenses which the assessee has shown the allocation at p. 20. The salaries wages, bonus and commission have been allocated. For e.g., the assessee adopted wages as the basis for allocating salaries, wages, bonus,....
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....come to that extent in view of the subsequent development of the Departmental action in withdrawing the deduction. The AO was therefore, not right in ignoring the claim of the assessee. We, therefore, direct the AO to allow the deduction as claimed by the assessee for the asst. yr. 1993-94 itself. The CIT(A) in para 15 of his order has given a direction to consider it as deduction for the asst. yr.1995-96. In view of the fact that we have accepted the assessee's claim for asst. yr. 1993-94, this direction of the CIT(A) for asst. yr. 1995-96 need not be followed by the AO. 18. The next dispute in the asst. yr. 1997-98 relates to computation of profit under s. 115JA. The learned counsel for the assessee pleaded that the computation of the liability under s. 115JA may be done after giving effect to our order. The AO after hearing the Departmental Representative on the disputed issue and going through the discussions in para 27 to 29.2 of the order of the CIT(A),(sic) we direct the AO to compute the income under s. 115JA, if found necessary, after giving effect to our order. The assessee before such computation shall be given an opportunity of being heard in the matter. 19. T....
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....claration and undertaking that FIL will desist from doing any business either directly or indirectly or in association with any other persons, in medial diagnostic imaging business save and except the subsisting arrangement FIL had with M/s Elpro International. The sum of Rs. 22.20 million to FIL was to be paid as follows: (a) First instalment of Rs. 7.4 million on or before 30th June, 1991, relevant to the asst. yr. 1992-93. (b) Second instalment of Rs. 7.4 million on or before 30th June, 1992, relevant to the asst. yr. 1993-94 and (c) Third instalment of Rs. 7.4 million on or before 30th June, 1993, relevant to the asst. yr. 1994-95. The assessee paid Rs. 28.80 lakhs to IGE by way of service charges and the balance out of Rs. 101.30 lakhs as miscellaneous expenses. These payments were claimed as deduction in the computation of business income. 22. The AO held that the payment of Rs. 101.30 lakhs was an intial outlay for initiation and extension of the business in the asst. yr. 1991-92. She held that such payment was made for acquiring or bringing into existence an asset of an enduring benefit to the business of the assessee that is carried on. She....
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....e of Rs. 25 lakhs as receipt towards termination of agency and hence assessable under s. 28(ii) in the hands of the assessee. Though the sum of Rs. 25 lakhs is assessable in the hands of the recipient as income because the specific provisions of s. 28(ii) as a receipt for termination of agency, yet, as far as the assessee is concerned, IGE was not its agent and the payment was not for termination of any agency granted by the assessee. Considering it as a case of payment to ward off competition in a new line of business, IGE competing with the assessee in the agency business of GE at the end of the three year period mentioned in the agreement dt. 2nd April, 1991, depended totally on whether the agency business is granted by GE to IGE at the end of the period of 3 years. By April 90, the relevant time of agreement, IGE had ceased to be in agency business in medical equipments and the assessee had been granted the agency business to the exclusion of IGE and there was no case for IGE competing with the assessee during the period of subsistence of the contract of agency of the assessee with GE. Therefore, it cannot be said to be a payment wholly and exclusively for the purpose of busine....
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....e CIT(A) and the AO. The learned counsel for the assessee took us through the several clauses of the tripartite agreement, dt. 2nd April, 1990, a copy of which is filed in the paper book on behalf of the assessee at pp. 38 to 48. He pointed out that it is a valid trade agreement entered in the normal course of business. The learned counsel pointed out that the sum of Rs. 50 lakhs was paid to IGE for continuation of access to the computer links division of IGE for a period of 3 years from the date of agreement. The sum of Rs. 28.8 lakhs was payable to IGE for giving assessee to information base and for assisting the smooth transition of customer order filing and access to transitional office and administrative facilities. It is also pointed out by the learned counsel for the assessee that the sum of Rs. 22.20 million to FIL was for a declaration on undertaking that FIL will desist from doing any business either directly or indirectly or in association with any other person, in medical diagnostic imagining save and except the subsisting arrangement FIL had with M/s Elpro International. The payment has been made since the assessee was desirous of pursuing the development of its medica....
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....987) 165 ITR 63 (Mad) (g) Wellman Incandescent India Ltd. vs. Dy. CIT (1997) 57 TTJ (Cal) 562 : (1997) 55 ITD 338 (Cal); and (h) Sree Annapoorna Gowrishankar Hotels (P) Ltd. vs. Asstt. CIT (1991) 37 ITD 541 (Mad) The learned counsel for the assessee further pleaded that the AO as well as the CIT(A) have justified the treatment of the payment as capital in the light of the principle laid down by the Andhra Pradesh High Court in the case of CIT vs. Warner Hindustan Ltd. (1985) 48 CTR (AP) 231 : (1986) 160 ITR 217 (AP) and this decision, according to the learned counsel for the assessee has been reversed by the Hon'ble Supreme Court in the same case CIT vs. Warner Hindustan Ltd. (1999) 157 CTR (SC) 528 : (1999) 239 ITR 566 (SC). Therefore, the learned counsel pleaded that the decision of the authorities below, on this issue, requires to be reversed. 25. The learned counsel for the assessee also pleaded that the compensation of Rs. 22,50,000 paid towards 1/3 cost of voluntary retirement of the employees of IGE, can be treated as part of recruitment cost and the same is allowable as deduction since the payment was necessitated for business considerations. The....
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....roximately 2/3rd of the total strength of that division aggregating to 150 in number were taken over by the assessee and to the extent remaining 69 employees the assessee and GE together contributed Rs. 45 lakhs as subsidy for the employees who were to be allowed to voluntarily retire from service. By terminating the employees of the erstwhile company and paying compensation thereof, the assessee did not get any benefit of an enduring nature and did not acquire any capital asset at all. Therefore, in our opinion, this payment is part of regular business expenditure incurred by the assessee for the purpose of its business. The payment of Rs. 22,50,000 paid by the assessee is just like recruitment cost. The cost of recruiting the rest of the employees was necessary for the purpose of business. We, therefore, consider the compensation payment of Rs. 22,50,000 as revenue expenditure. As regards the payment made towards access to information base and for transition of customer order filing, this payment again, is for business consideration and we do not agree with the CIT(A) that the amount was paid for obtaining information useful for a long period and that the same could be treated as....
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....77,772. Treating the same as total turnover of the business, the assessee claimed deduction under s. 80HHE of the Act. The AO, however, arrived at the deduction under s. 80HHE in the following manner: . Rs. "Profits & Gains from Software Business as claimed 2,86,05,614 Less : Sundry income 1,48,02,545 Balance : Other income has been Disallowed by the assessee 1,38,03,069 Deduction under s. 80HHE Export Turnover 6,35,77,722 x1,38,03,069 Total turnover 152, 44,87,471 = 5,75,647" The CIT(A), however, accepted the export turnover at Rs. 6,35,77,722 but considered the total turnover of the entire business at Rs. 1,48,55,01,543 and computed the profits of the business at Rs. 1,14,39,002 and arrived at a smaller deduction under s. 88HHE of the Act. The AO had added excise duty and sales-tax to paid to arrive at the total turnover which the CIT(A) has directed to be excluded. 31. The learned counsel for the assessee vehemently opposed the determination made by the Departmental authorities. He drew our attention to pp. 48, 49, 50 & 51 of the paper book to impress upon us to the correctness of the assessee's claim under s. 80HHE. The....
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....HC and s. 80-HHE, although speak of deductions with reference to profits from export business, s. 80HHC provides for deduction in respect of profits retained for export business whereas s. 80HHE deals with export out of India of computer software or its transmission from India to a place outside India by any means and providing technical services outside India in connection with the development or production of computer software. What is an export turnover is again defined in s. 80HHE(5). Identical provision in s. 80HHC(4B) deals with goods and merchandise to which that section applies whereas the provisions of s. 80HHE(5) deals with consideration received in respect of computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-s. (2). The total turnover is defined not to include freight, telecommunication charges or insurance attributable to the delivery of the computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India. What essentially s. 80HHE is dealing with is with reference to the turnover of computer software. The total turnover for the p....
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....Court in the case of CIT vs. Sudarshan Chemicals Industries Ltd. In this regard, it would be relevant to quote from the judgment of the Hon'ble Supreme Court in the case of K.P. Varghese vs. ITO & Anr. (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC): "A statutory provision must be so construed, if possible that absurdity and mischief may be avoided. Where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the legislature, the Court may modify the language used by the legislature or even some violence to it, so as to achieve the obvious intention of the legislature and produce a rational construction." If the Department's computation is accepted, it would only result in manifest anomalies and arbitrariness. Therefore, in our view, for the purpose of deduction contemplated by s. 80HHE, the total turnover for the said section should not include turnover on account of manufacturing, trading etc. which is totally unconnected with the public software business. Therefore, in our considered view, the total turnover, for the purpose of s. 80HHE consists of turnover from compute....
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....stantial reduction in the deduction allowed by the AO. This, the assessee is agitating on the ground that the order of the CIT(A) was to the effect of enhancing the income. The assessee objects to the assumption of jurisdiction by the CIT(A) for all these years, both for want of valid notice under s. 251(2) and also enhancing the income. The assessee further disputes the direction by the CIT(A) for computing the deduction afresh. The CIT(A)'s letter dt. 19th Dec., 2000, which is placed at pp. 49 & 50 of the paper book for asst. yr. 1991-92 is extracted below. "Sub: IT Appeal No. ITA 271/CC-IV/CIT(A)-1/98-99 Asst. yr. 1991-92-Reg. While examining the IT records in connection with the appeal, it is noticed that your claim for deduction under s. 80-O is erroneous. 2. You have claimed deduction under s. 80-O to the tune of Rs. 15,29,878. The computation given at Annexure IV to the statement of computation of income filed with the return shows that the deduction claimed is at 50 per cent of Rs. 30,59,740 being the total of consideration received in foreign export services rendered during the previous year ended 31st March, 1994, given by you as fo....
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....e CIT(A), pointed out that the CIT(A) has sought for enhancement and after the letter he has not issued any notice before enhancement. Therefore, according to the learned counsel the mandatory requirement of s. 251(2) are not satisfied, and the assessee had not been given a reasonable opportunity of showing cause for any such action which results in enhancement of reduction of the relief. Reliance was placed on the decision of the Full Bench of the Delhi High Court in the case of CIT vs. Sardari Lal and Co. (2001) 170 CTR (Del)(FB) 431 : (2001) 251 ITR 864 (Del)(FB), as regards want of jurisdiction in the matter. On merits, it was pointed out that the decision relied upon by the CIT(A) came much later to the date of framing the assessment which was between 1994 to 1998. The AO would not have had the benefit of this decision. Therefore, it is wrong, on the basis of this premise, to conclude that there is a non-application of the kind in deciding the issue by the AO. The learned counsel further pleaded that the decision of the Bangalore Bench of the Tribunal in the case of M.N. Dastur & Co. Ltd. vs. Dy. CIT (1997) 58 TTJ (Bang) 748 : (1997) 62 ITD 113 (Bang) has been upheld by the Ka....
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....penses is concerned. He submitted, that the same was done in the absence of proper information furnished by the assessee. 38. We have carefully considered the contentions of the rival parties on the issues at length and find that in any event, on merits, the issue has to be decided in favour of the assessee in the light of the Karnataka High Court decision. Further, the same issue was considered in detail by the Tribunal in the case of Wipro Ltd. in ITA Nos. 651/Bang/94, 521 to 523/Bang/97, etc. The Bangalore Bench of the Tribunal in the case of M.N. Dastur & Co. has held that deduction under s. 80-O is admissible after reducing expenses incurred abroad to earn the income and the proportionate expenses incurred in India is not required to be deducted for computing the income of the nature referred to in s. 80-O of the Act. What s. 80AB requires is that for the purpose of computing deduction under s. 80-O the amount of income of that nature computed in accordance with the provisions of the Act shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee. Thus, in our opinion, only the direct expenses incurred by the assessee in earn....