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Income Tax Appellate Tribunal, ‘C’ BENCH, BANGALORE
Before: SHRI SUNIL KUMAR YADAV & SHRI INTURI RAMA RAO
O R D E R Per INTURI RAMA RAO, AM :
These cross appeals filed by the revenue as well as the assessee directed against the order of the ld. CIT(A)-I, Bangalore, dated 31/10/2010 for the assessment year 2009-10.
& 225/Bang/2014 Page 2 of 11 2. The revenue raised the following grounds of appeal in 1. “The order of the Learned CIT (Appeals) is opposed to law and the facts and circumstances of the case.
2. The CIT(A) erred in deleting the disallowance of Rs 3,17,10,684 following the decision of the ITAT for the AY 2008-09 without appreciating the fact that the issue has not reached a finality as the decision of the TAT has not been accepted and an appeal u/s 260A is preferred against such decision and that the ITAT had allowed the appeal of the assessee holding that the revenue effect would be minimal whether the expenditure is treated as revenue or capital but not appreciating that the investment was in tools and not towards consumables and that investment in tools is a capital outlay.
3. The CIT(A) erred in deleting the disallowance of interest Rs 13,45,687 following the decision of the ITAT for the AY 2008-09 without appreciating the fact that the issue has not reached a finality as the decision of the ITAT has not been accepted and an appeal u/s 260A is preferred against such decision
4. The CIT(A) erred in deleting the disallowance of interest Rs 13,45,687 following the decision of the ITAT for the AY 2008-09 without appreciating the fact that the ITAT allowed the appeal holding that when there is no nexus between the interest beaming funds and the interest free advances, the presumption to be drawn is that the advances are out of the non-interest bearing funds without appreciating the fact that the assessee was reducing its profit margin by paying huge financial charges on loans taken from banks while simultaneously advancing interest free advances to its sister concerns out of its own funds
5. The CIT(A) erred in directing the AO to allow Rs a 1,37,34,846 of salary of engineers transferred to R&D expenses as revenue expenditure keeping in view the observations of the ITAT for the AY 2008- 09 without appreciating the fact that the issue has not reached a finality as the decision of the ITAT has not been accepted and an appeal u/s 260A is & 225/Bang/2014 Page 3 of 11 preferred against such decision
6. The CIT(A) erred in directing the AO to allow Rs 1,37,34,846 of salary of engineers transferred to R&D expenses as revenue expenditure keeping in view the observations of the ITAT for the AY 2008- 09 without appreciating that the salaries to the employees are towards R&D for creating own designs and therefore it is not in the nature of revenue expense
7. The CIT(A) erred in restricting the addition on account of negative work-in- progress to Rs 17,28,941 being 50% of the Rs 34,57,802 disallowed by the AO without appreciating the fact that the assessee could not ascertain the real value of such items of work nor could it reconcile or maintain ledger accounts and deletion of 50% on estimate basis was without any logic.
8. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A) be reversed and that of the Assessing Officer be restored.
9. The appellate craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal. The order of the Learned CIT (Appeals) is opposed to law and the facts and circumstances of the case.
The assessee raised the following grounds of appeal in ITA No.225/Bang/2014:
i. “That the CIT(A) erred in confirming the disallowance of Rs.28,10,905/- being 'provision for erection and commissioning'. ii. That the CIT(A) erred in holding that the provision created for erection and commissioning are only on an estimated basis and are contingent in nature. He has further failed to appreciate the settled legal position that if a business liability has definitely arisen in an accounting year, the deduction based on rational/reasonable estimates & 225/Bang/2014 Page 4 of 11 ought to be allowed in respect of the said year, although the liability may be exactly quantified and discharged at a future date. iii. That the CIT(A) ought to have appreciated that the provision was scientifically based and arrived at having regard to the past experiences and the claims made from time to time. iv. That the CIT(A) ought to have appreciated that the provision can only be a specified percentage of the sales which is arrived at on a rational basis. v. That the CIT(A) failed to appreciate that the Appellant added back the unutilized amount of provision at the end of the financial year 2008-09 and a fresh provision was created at the end of the year for machinery under installation. vi. Without prejudice to the above and in any case the CIT(A) ought not to have disallowed the provision for the year as the net amount under the head was in fact an addition of Rs.12,62,535/- to the income and not a claim for deduction. vii. That the order passed by the Commissioner of Income Tax (Appeal)-I to the extent questioned herein is otherwise bad and inoperative in law. Each of the foregoing grounds is without prejudice to the other and the Appellant craves leave to add to, amend or delete all or any of the foregoing either before or at the time of hearing of the appeal”
Briefly, facts of the case are that the assessee is a company engaged in the business of manufacture and sale of machine tool. Return of income for the assessment year 2009-10 was filed on 25/9/2009 declaring a total income of Rs.6,16,22,960/-. Against the said return of income, the AO completed the assessment u/s & 225/Bang/2014 Page 5 of 11 143(3) vide order dated at a total income of Rs.14,14,05,820/- after making several disallowances.
Being aggrieved, assessee filed an appeal before the ld. CIT(A) who, following the earlier order, granted relief in respect of all the additions except provision for erection and commission charges of Rs.28,10,905/-.
Being aggrieved, revenue is in appeal against that part of order which is against them and the assessee is in appeal challenging the direction of the ld. CIT(A) upholding the addition on account of provision for erection and commission charges of Rs.28,10,905/-.
(Revenue’s appeal): 7. Ground Nos.1, 8 and 9 are general in nature and do not require any adjudication.
Ground No.2 relates to disallowance of expenditure on loose toolls etc., of Rs.3,17,10,684/-. The AO made addition of Rs.3,17,10,684/- on the ground that the assessee-company has not brought any evidence that these tools were used in the production. The CIT(A), however, allowed deduction following the order of the Tribunal for assessment year 2008-09 on this issue. The order of the CIT(A) reads as under: “4.3 I have considered the appellant's submissions and the reasons given by the AO in & 225/Bang/2014 Page 6 of 11 the assessment order. The AO discussed in detail and concluded that merely because the tools are issued and shifted from stores to shop floor to the custody of the worker does not change the situation and make them consumed. Further, the issue of the tools to the shop floor is not consumption. It is for the appellant to claim tools are of short span of life as depreciation and as expenses and others which have a long span of life as depreciable capital asset. Claiming deduction on ad hoc basis at 50% is not permissible and allowable as deduction under the Income-tax Act. The Hon'ble ITAT, Bangalore for the assessment year 208-09 decided the issue as under: "14. Having heard both the parties and having considered their rival contentions, we find that the Revenue has not disputed the incurring of expenditure by the assessee in purchase of the tools. The only reason for the disallowance is that it is not revenue in nature but is of capital in nature. It is also not disputed that the assessee is following the said method of accounting for the past 14 years and no disallowance has been made in the previous years. As rightly pointed out by the learned counsel for the assessee, the Revenue effect would be very minimal whether the expenditure is treated as revenue in nature or treated as capital in nature and depreciation allowed thereon. Therefore, taking the totality of the facts into consideration, we hold that revenue ought to have allowed the revenue expenditure claimed by the assessee. This ground of appeal is accordingly allowed."
The CIT(A) had followed the order of the Tribunal in the assessee’s own case for assessment year 2008-09 and it is also not the case of the revenue that the decision was reversed by the Hon’ble High Court. In the circumstances, following the rule of consistency, we dismiss the ground of appeal raised by the revenue. & 225/Bang/2014 Page 7 of 11
9. Ground Nos.3 and 4 relate to disallowance of interest of Rs.13,45,687/- on the ground that interest-free loan was granted to sister concerns of M/s.Excel Foundries Ltd., and M/s.Bangalore Agrotech Ltd., The CIT(A) deleted the addition following the order of the Tribunal in the assessee’s own case for assessment year 2008-09 wherein it was held that in absence of nexus between interest-bearing funds and advance-free advance, no disallowance was called for. The findings of the CIT(A) are contained in para.5.3 and 5.4 of his order which read as under: “5.3 I have carefully considered the appellant’s submissions and the reasons given by the AO in the assessment order. A similar issue is decided by the Hon'ble ITAT, Bangal ore in the app ell ant's ow n ca se for the assessment year 2008-09. The relevant portion is reproduced below: ‘18. Having heard both the parties and having considered their rival contentions, we find that there is no finding by the AO that there is nexus between the interest bearing funds of the assessee and the interest-free advances of the sister concerns. The only reason for the disallowance is that the assessee is paying interest on the loans taken by it, while it has given interest free advances to sister concerns, when there is no nexus between the interest bearing funds and the interest free advances, the presumption to be drawn is that the advances are out of the non interest bearing funds of the assessee as held by the Hon'ble supreme Court in the case of Reliance Utilities and Power Ltd. (cited supra) therefore, it has to be presumed that the interest free advances are out of the own funds of the assessee and, therefore, no disallowance of interest is called for. The assessee's contention of the commercial expediency of advancing the loans is not accepted for the reason that the sister concerns have not carried out any activities during the relevant previous year and the assessee also has not established the commercial expediency for the said advances. This ground of appeal is accordingly allowed for the above reasons.’ & 225/Bang/2014 Page 8 of 11 5.4 It is seen that the position in this regard is same in the year under appeal when compared with the assessment year 2008-09. Therefore, respectfully following the decision of the Hon’ble ITAT, Bangalore for the assessment year 2008-09 in the appellant’s own case, the appellant’s claim is allowed and the disallowance of Rs.13,45,687/-0 made by the AO is deleted.”
The CIT(A) had followed the order of the Tribunal in the assessee’s own case for assessment year 2008-09 and it is also not the case of the revenue that the decision was reversed by the Hon’ble High Court of Karnataka. In the circumstances, following the rule of consistency, we dismiss the ground of appeal raised by the revenue.
Ground Nos.5 and 6 relate to disallowance of salary expenses of R&D activity of Rs.1,37,34,846/-. The AO disallowed the same holding them to be capital in nature and allowed depreciation. The CIT(A) after considering details of salary expenses found to be revenue in nature allowed the same. The revenue had not brought any evidence controverting the findings of the CIT(A). In the circumstances, the grounds of appeal raised by the revenue are dismissed.
11. Ground No.7 relates to addition on account of work-in- progress of Rs.34,57,802/-. During the course of assessment proceedings, the AO found that there are negative balances aggregating to Rs.17,28,941/- in respect of certain production & 225/Bang/2014 Page 9 of 11 orders. The AO observed that in order to bring negative work-in- progress to zero, double amount should be debited to production account and therefore, made addition of Rs.34,57,802/- On appeal before the CIT(A), the CIT(A) restricted the addition to Rs.17,28,941 by holding as follows: “8.3 I have carefully considered the appellant’s submissions nd the reasons given by the AO in the assessment order. At the time of appeal hearing, the AR of the appellant was asked to produce copies of ledger account head-wise and item-wise of the work-in- progress. The appellant’s submission is that, since work-in-progress involved number of items, it is not practical to make ledger of the accounts of those items and not possible to reconcile also. However, the AR accepted that some human error is possible leading to some wrong/debt/credits and some order showing negative work-in-progress. Considering the totality of the issue, the addition is restricted to Rs.17,28,941/- being 50% of Rs.34,57,802/-, which will meet the ends of justice.”
The reasoning of the AO that on account of negative balance in work-in-progress, the addition of double of negative balance has to be made cannot be accepted. Therefore, the finding of the CIT(A) restricting to 50% of the addition is hereby upheld. In the circumstances, ground of appeal raised by the revenue is dismissed.
In the result, the appeal filed by the revenue is dismissed.
As regards the appeal filed by the assessee (ITA No.225/Bang/2014) on disallowance of provision for erection charges, the learned Senior Counsel submitted that the provisions are allowable as expenditure provided the expenditure can be & 225/Bang/2014 Page 10 of 11 estimated with reasonable accuracy. In support of this proposition, he relied on the following decisions:
i. Bharat Earth Movers vs. CIT (245 ITR 428) ii. Calcutta & Co.Ltd. vs. CIT (37 ITR 1)
The law settled by the Hon’ble Supreme Court in the above cases is that the provisions are allowable as deduction while computing income under profits and gains of business provided the liability can be estimated with reasonable accuracy and the liability has accrued even though payment of the liability is postponed to a future date. But in the present case, the assessee had failed to demonstrate either before the lower authorities or before us that the liability has accrued during the year and the fact that the substantial provision was reversed in subsequent years goes to prove that the liability was not estimated with reasonable accuracy. Therefore, the principle of law enunciated in the above cases is not applicable to the present case.
In the result, the appeal filed by the assessee is dismissed.