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Income Tax Appellate Tribunal, RANCHI BENCH, RANCHI
Before: Shri S. S. Godara, J.M. & Dr.A.L.Saini, A.M.)
IN THE INCOME TAX APPELLATE TRIBUNAL RANCHI BENCH, RANCHI (Before Shri S. S. Godara, J.M. & Dr.A.L.Saini, A.M.)
ITA No. 231/Ran/16 : Asstt. Year : 2006-07
Heavy Engineering Corporation Vs ACIT, Cir-1, Ranchi Ltd. PAN AAACH 4534P (APPELLANT) (RESPONDENT) ITA No. 95/Ran/17 : Asstt. Year : 2007-08
DCIT, Cir-1, Ranchi Vs Heavy Engineering Corporation Ltd. (APPELLANT) (RESPONDENT) ITA No. 232/Ran/16 : Asstt. Year : 2008-09
Heavy Engineering Corporation Vs DCIT, Cir-1, Ranchi Ltd. PAN AAACH 4534P (APPELLANT) (RESPONDENT) ITA No. 222/Ran/16 : Asstt. Year : 2009-10
DCIT, Cir-1, Ranchi Vs Heavy Engineering Corporation Ltd. (APPELLANT) (RESPONDENT) ITA No. 233/Ran/16 : Asstt. Year : 2009-10
Heavy Engineering Corporation Vs ACIT, Cir-1, Ranchi Ltd. PAN AAACH 4534P (APPELLANT) (RESPONDENT) Page1 ITA No. 59/Ran/118 : Asstt. Year : 2010-11
1 ITA Nos. 59 & 60/Ran/18, 95/Ran/17, 222,223,231,232 & 233/Ran/2016 M/s. Heavy Engineering Corporation Ltd
ACIT, Cir-1, Ranchi Vs Heavy Engineering Corporation Ltd. (APPELLANT) (RESPONDENT) ITA No. 223/Ran/16 : Asstt. Year : 2011-12
DCIT, Cir-1, Ranchi Vs Heavy Engineering Corporation Ltd. (APPELLANT) (RESPONDENT) ITA No. 60/Ran/18 : Asstt. Year : 2013-14
ACIT, Cir-1, Ranchi Vs Heavy Engineering Corporation Ltd. (APPELLANT) (RESPONDENT)
Appellant/assessee by : None appeared Respondent/department by : Shri Indrajit Singh, CIT/ld.DR
Date of Hearing : 11-01-2019 Date of Pronouncement: 05 -04-2019 ORDER PER BENCH: The captioned three appeals filed by the assesee and five appeals by the revenue, are directed against separate orders passed by the ld. Commissioner of Income-tax (Appeals), Ranchi, which in turn arise out of separate assessment orders passed by the Assessing Officer u/s. 143(3)/147 of the Income-Tax Act, 1961 (in short, the Act). Page2
2 ITA Nos. 59 & 60/Ran/18, 95/Ran/17, 222,223,231,232 & 233/Ran/2016 M/s. Heavy Engineering Corporation Ltd
In these appeals, the assessee as well as the revenue have raised multiple grounds of appeal, but at the time of hearing the main grievance of the assessee and the revenue year-wise are concized and summarized as follows:- i) In the assessee’s appeals in ITA Nos 231/Ran/2016 & 232/Ran/2016 for the A.Ys 2006-07 & 2008-09, the issue relates to re-opening of assessment u/s. 147/148 of the Act on the ground of overlooking of Leave Travel Assistance (LTA) by the DCIT in the past years. ii) In the assessee’s appeal in ITA No. 233/Ran/2016 for the A.Y 2009-10, which relates to the issue of expenditure of Rs.35.01 lakhs on account of technical know-how written off and allowed u/s. 37(1) of the Act. iii) In the revenue’s appeals in ITA No. 59/Ran/18 for the A.Y 2010-11, 222/Ran/16 for the A.Y 2009-10, 223/Ran/16 for the A.Y 2011-12 & 60/Ran/2018 for the A.Y 2013-14, common issue raised by the revenue relates to deletion of provision for warranty expenses.
iv) In the revenue’s appeal in ITA No. 95/Ran/17 for the A.Y 2007-08, ground no. 2 raised by the revenue relates to tax deduction at source (TDS) on sales promotion expenses & (v) Liquidated damages, Misc. Provision and Provision for LTA vi) in ITA No.222/Ran/16 for the A.Y 2009-10, ground no. 2 raised by the revenue relates to expenditure on horticulture, not related to business expenditure.
i) In the assessee’s appeals in ITA Nos 231/Ran/2016 & 232/Ran/2016 for the A.Ys 2006-07 & 2008-09, the issue relates to re-opening of assessment u/s. 147/148 of the Act on the ground of overlooking of Leave Travel Assistance (LTA) by the DCIT in the past years. 4. In the first issue the appellant has challenged the reopening of the assessment which had been completed u/s.143(3) of the Income Tax Act, 1961 by issuance of notice u/s.148 of the Income Tax Act, 1961. The appellant has submitted that the Page3 assessment was reopened by the Ld. Assessing Officer without having any fresh material on record. The appellant had produced all records, audited Balance Sheet 3 ITA Nos. 59 & 60/Ran/18, 95/Ran/17, 222,223,231,232 & 233/Ran/2016 M/s. Heavy Engineering Corporation Ltd
etc. before Ld. DCIT/ACIT at the time of scrutiny assessment and no fresh document was required/available with Ld. ACIT which could lead to reopening of the scrutiny assessment. Moreover, the the fact that appellant is a Govt. of India undertaking and its accounts are subject to audit by Statutory Auditors as well as by of CAG - New Delhi. The Ld. Assessing Officer, in this regard has noted that the case was reopened after the recording of the reasons for the purpose of Section 147 of the Income Tax Act, 1961. The reasons recorded were as follows : - "In this case, Assessee Company filed return of income for Assessment Year- 2008-09 on 27.03.2009 through e-filing and has declared total income of Rs. NIL. Further this case was selected for scrutiny and assessment was completed on 30.12.2010 raising total demand of Rs. NIL. On going through the records, it is noted that the assessee company debited an amount of Rs.7,245.20 lakhs as "Employees' Remuneration and Benefits" (the details of which are furnished in Scheduls-18 of the Balance Sheet), the amount includes LTA provision of 32.16 lakhs made on estimate basis. As the liability on LTA was determined on estimated basis and was not an ascertained liability, therefor, the provision for this was not an allowable expense. The allowance of provision of LTA has escaped from taxation. Keeping in view of the above facts and circumstances, I have reasons to believe that income chargeable to tax to the amount of 32.16 lakhs in the case of M/s. H.E.C Ltd. has escaped. Therefore, the case is being reopened u/s147 of the Income Tax Act, 1961. Notice u/s.148 of the Income Tax Act, 1961 is being issued accordingly. "
We have heard ld. DR and considered the written submissions of the appellant, which is on record and have also perused the assessment order. Before the issue is discussed and view is taken on the submission of the appellant, it would be Page4 worthwhile to examine the issue for which the assessment had to be reopened. We
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note that Schedule-18 of the Balance Sheet of the appellant company for the impugned issue reads as under:-
“EMPLOYEE'S REMUNERATION & BENEFITS
Workmen and Staff Welfare Expenses 305.56 (includes LTA provision 32.16 lakh (prev. Years 41.37 lakhs) made on estimated basis)” From the above Schedule 18 of the Balance Sheet, we note that, the information about LTA Provision, was there in the audited books of accounts. Hence, it is not a new tangible material to re-open assessment u/s. 147/148 of the Act. Therefore, re- opening of assessment u/s. 147/148 is not valid and hence we allow the grounds raised by assessee.
ii) In the assessee’s appeal in ITA No. 233/Ran/2016 for the A.Y 2009-10, which relates to the issue of expenditure of Rs.35.01 lakhs on account of technical know-how written off and allowed u/s. 37(1) of the Act. 7. We have heard ld.DR and perused the material available on record. We note that the issue pertains to write off of technical know how expenses. The appellant company, in this regard has submitted that consequent to signing of contract for technology transfer of 4 types of special purpose Railway machine tools an amount of Rs. 43,76,527.00 including taxes (EURO 66666.00 in net) was paid by the Company to M/s. Hegenschedit, Germany towards first installment for Technology transfer fee for CNC Surface Wheel Lathe Machine, Machine type SWL 2000, i.e. one third of EURO 200000 ( one EURO is equal to 59 approx.) This amount was Page5 required to be paid to operationalize the contract. After initialization of contract HEC could fetch order for supply of seven numbers of CNC Under Floor Wheel Lathe 5 ITA Nos. 59 & 60/Ran/18, 95/Ran/17, 222,223,231,232 & 233/Ran/2016 M/s. Heavy Engineering Corporation Ltd
Machine type U2000-400 and not the CNC Surface Wheel Lathe Machine, type SWL 2000. Therefore the balance amount of Technology transfer fee towards CNC Surface Wheel Lathe Machine, type SWL 2000 was not paid and as a result, complete Technology transfer for this machine was not accomplished. As the complete technology was not acquired for Surface Wheel Lathe Machine, type SWL 2000 and its technology transfer lost its usefulness due to non-availability of orders in the market, the appellant company had to write off the balance amount of the technology transfer fee so paid. This was an admissible business expenditure u/s. 37(1) of the Income Tax Act, 1961. Hence we allow the appeal of the assessee.
iii) In the revenue’s appeals in ITA No. 59/Ran/18 for the A.Y 2010-11, 222/Ran/16 for the A.Y 2009-10, 223/Ran/16 for the A.Y 2011-12 & 60/Ran/2018 for the A.Y 2013-14, common issue raised by the revenue relates to deletion of provision for warranty expenses.
After hearing ld. DR for the Revenue, we note that the issue under consideration, relating to warranty expenses is no longer res-integra. We note that the appellant has submitted before ld. CIT(A) that Heavy Engineering Corporation Limited ( In short ‘HEC’ a Govt. of India undertaking engaged for manufacturing of heavy machines, equipment etc., and registered under the provisions of Indian Companies Act, 1956. The appellant company manufactures and sells capital goods/heavy equipment for customers. In compliance with its contractual obligation . Warranty' for replacement of spare parts and maintenance for certain specified period at free of cost are provided. Based on its past experience and technical estimate for warranty, expenses are provided in accounts. This is done while crediting Profit & Loss Account for it Sales Revenue and along with this manufacturing & other Page6 expenses and Warranty Expenses are charged in the accounts as expenses. We note that providing after sale service is an obligation under any contract of sale for the 6 ITA Nos. 59 & 60/Ran/18, 95/Ran/17, 222,223,231,232 & 233/Ran/2016 M/s. Heavy Engineering Corporation Ltd
appellant company. Incurring of the liability therefore is certain. Therefore, the appellant company provides for its' After Sale Service/Warranty' obligation on accrual basis in its Profit & Loss Account. The Company provides for 0.5% on Sale for liabilities under contractual obligations/warranties. This was stated at Clause 6 of the Statement of Accounting Policies of the Company forming part of the Balance Sheet and Profit & Loss Account. The Company follows this policy uniformly and consistently every year in the preparation of the Balance Sheet and Profit & Loss Account. The company has worked out the percentage on Sale on the basis of past factor of actual expenses incurred by it towards warranty liability. This provision of 'After Sale Service' is then reversed back by the Company on the expiration of the Guarantee/Warranty Period and the amount of such expiration is then offered for taxation as income. The appel1ant, therefore, submitted that it is well settled that a business liability had definitely arisen in the accounting year and incurring of the liability was certain. The liability so accrued was estimated scientifically. For that we rely upon and by the ratio of judgment of the Hon'ble ITAT in the following cases: -
a. Haden International Group India (P) Ltd. Vs. Assistant Commissioner of Income Tax, Circle-3, Thane (2008) 20 SOT 305 (Mum) - IT AT Mumbai Bench 'H b. Siemens Public Communication Networks Ltd. Vs. CIT, Bangalore-III. Bangalore (2010) 126 SOT 141 (Bang) - ITAT Banglore Bench 'B' c. Deputy Commissioner of Income Tax, Circle-4(l), New Delhi vs. LG Electronics (1) Ltd. [2009J 29 SOT 167 (Delhi) - ITAT Delhi Bench 'D’ Therefore, relying on the Judgment of the Co-ordinate Benches of ITAT, as mentioned above, we dismiss the appeals of Revenue relating to warranty expenses. Page7 10. iv) In the revenue’s appeal in ITA No. 95/Ran/17 for the A.Y 2007-08, ground no. 2 raised by the revenue relates to (i) tax deduction at source 7 ITA Nos. 59 & 60/Ran/18, 95/Ran/17, 222,223,231,232 & 233/Ran/2016 M/s. Heavy Engineering Corporation Ltd
(TDS) on sales promotion expenses & (ii) Liquidated damages, Misc. Provision and Provision for LTA
After hearing ld.DR for the Revenue, we note that the Ld. Assessing Officer during the course of assessment proceedings had observed that the appellant company in the Profit & Loss Account had debited 220.29 lakhs under the head sales promotions. In absence of reply of the appellant company, the Ld. Assessing Officer observed that no TDS was deducted on the various amounts paid under this head. Accordingly, Rs.220.29 lakhs on account of sales promotions expenses was disallowed u/s 40(a) of the Income Tax Act, 1961 and added back to the total income of the assessee.
We note that the appellant during the course of appellate proceedings has argued that the company has deducted TDS wherever applicable. The company has also added back the entire expenses in cases where non deduction of TDS was reported. Therefore, disallowance under this head resulted in addition of the same amount twice.
We note that the assessee company incurred expenditure under the head sales promotion. It is also noted that the assessee company deducted TDS and wherever TDS was not deducted the company has added back the entire expenses which is evident from Tax Audit report in Form 3CD (clause 27(a)). The details were available in the schedules to the Audit Report. It is also not correct to say that any and every expense for sales promotion would be of such nature as to require deduction of tax at source. No such enquiry has been conducted by the Ld. Assessing Officer. Sales promotion expenses include Rs.87.86 lakhs as 'freight and incidental Page8 charges' and Rs.127.60 lakhs as 'warranty period expenses'. Exhibition and publicity expenses were Rs. 1.47 lakhs and Rs. 0.67 lakhs respectively. The
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disallowance is completely against the pronouncement of the Apex Court in the case of Dhakeshawari Cotton Mills Ltd. V CIT 26 ITR 775 (SC) wherein it has ruled that "although ITO is not fettered by technical rules of evidence and pleadings, and that he is entitled to act on material which may not be accepted as evidence in a court of law, but there the agreement ends; because it is equally clear that in making the assessment under section 23 (3) he is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all and there must be something more than bare suspicion to support the assessment under section 23 (3)." The order has also ignored the fact that the sales promotion expenses so purported to be added back already includes Rs.127.60 lakh on account of warranty period expenses which has also been added back in the order. Therefore, it tantamounts to addition of the same amount twice and hence, addition made by the Ld. Assessing Officer cannot sustained in appeal. Liquidated damages, misc. Provisions and Provisions for LTA are made as per basis of accounting practice followed by company, hence addition on these heads should not sustain. Therefore, we dismiss the appeals of Revenue.
vi) in ITA No.222/Ran/16 for the A.Y 2009-10, ground no. 2 raised by the revenue relates to expenditure on horticulture, not related to business expenditure.
After hearing ld.DR for the Revenue, we note that the disallowance of expenses booked under the head 'horticulture' were incurred for maintaining horticulture/floriculture in its plant, township/administrative bloc/laboratory and other utilities as a part of environmental requirement and are essential for company’s business operation. This was a normal business expenses deductible u/s.37(l) of the Page9 Income Tax Act, 1961.
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We note that it is for the assessee to decide whether any expenditure should be incurred in the course of its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under the relevant provision, even though there is no compelling necessity to incur such expenditure. We note that for the allowance under section 37(1), following conditions are to be satisfied, i.e., (a) there must be expenditure, (b) such expenditure must not be of the nature described in sections 30 to 36, (c) the expenditure must not be in the nature of capital expenditure or personal expenses of the assessee, (d) the expenditure must have been laid out or expended wholly and exclusively for the purposes of the business or profession. (d) that it should not be for a purpose which is considered to be an offence or which is prohibited by law. The word 'wholly' refers to the quantum of expenditure, while the word 'exclusively' refers to the motive, objective and purpose of the expenditure. An expenditure to which one cannot apply an empirical or subjective standard is to be judged from the point of view of a businessman and it is relevant to consider how the businessman himself treats a particular item of expenditure. It means everything that serves, to promote commerce and includes every means suitable to that end. In applying the test of commercial expediency, for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business; reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the revenue.
We note that in CIT V Malayam Plantations Ltd 53 ITR 140 (SC) the Hon’ble Supreme Court has held that “The expression ‘for the purpose of the business’ is wider in scope than the expression ‘for the purpose of earning profits’. Its range is Page10 wide; it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may
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include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre- condition to commence or for carrying on of a business.” In Madhav Prasad Jatia v. CIT AIR 1979 SC 1291, the Supreme Court held that the expression ‘for the purpose of business’ occurring under the provision of section 36(1)(iii) is wider in scope than the expression’ for the purpose of earning income, ‘profits or gains’, and this has been the consistent view of the Supreme Court.
Considering the factual position discussed above, and relying on the Judgment of the Hon’ble Supreme Court in the case of Malayam Plantations Ltd (supra), we dismiss the appeal of Revenue.
In the result, all appeals filed by the Revenue are dismissed and all appeals filed by the Assessee are allowed. Order Pronounced in the Open Court on 05-04-2019
Sd/- Sd/- (S. S. Godara) (Dr. A.L.Saini) Judicial Member Accountant Member Dated: 05-04-2019 *PRADIP (Sr.PS) Copy of the order forwarded to: 1. The Appellant/Assessee: M/s. Heavy Engineering Corporation, Finance & Accounts Department, Administrative Building (HQ), Plant Plaza Road, Dhurwa, Ranchi-834004. 2 The Respondent/Department : ACIT/DCIT, Cir- 1, Ranchi Page11 3. The CIT-, 4. The CIT(A)-, 5. DR, Ranchi Benches, Ranchi True Copy, By order, Assistant Registrar /Senior P.S ITAT, Ranchi Benches 11 ITA Nos. 59 & 60/Ran/18, 95/Ran/17, 222,223,231,232 & 233/Ran/2016 M/s. Heavy Engineering Corporation Ltd