INGERSOLL RAND (INDIA) LIMITED,BANGALORE vs. DCIT, BANGALORE

Per Shri Vijay Pal Rao, J.M. : This appeal by the Assessee is directed against the order dt.14.11.2011 of

Commissioner of Income Tax (Appeals) for the Assessment Year 2004-05.

2 IT(T.P)A No.272/Bang/2012 Ground 1 — Provision for replacement of spares and accessories – Rs.4,45,31,941. 1.1 The learned Commissioner of Income Tax (Appeal) hereinafter referred to as “CIT(A)” has erred in confirming the order of learned Assessing Officer (hereinafter referred to as the “AO”). 1.2 The learned CTT(A) erred in holding that the provision for replacement of stores and spares is not created on scientific basis. 1.3 The learned CIT(A) erred in not considering the fact that amount of provision has already been disallowed by the learned AO consistently and thereby charged to tax in the earlier assessment years in the year of creation of provision. 1.4 The learned CIT(A) erred in not considering the decision of the Hon’ble High Court and the Tribunal in Appellant’s own case. 1.5 Without prejudice to the above, the learned CIT(A) erred in not adjudicating on the inconsistency of disallowance by the learned AO during the year as compared to the earlier assessment years. Ground 2 – Addition of unutilized CENVAT credit – Rs.3,30,782 2.1 The learned CIT(A) erred in confirming the disallowance of unutilized CENVAT credit on closing stock amounting to Rs.3,30,782 on the ground that the appellant has not followed inclusive method of accounting.. 2.2 The learned CIT(A) erred in not following the decision of the Hon’ble Supreme Court in the case of CIT v. Indo Nippon Chemical Company [261 ITR 273]. 2.3 The learned CIT(A) erred in not considering the decision of Hon’ble Bangalore Tribunal in appellant’s own case. 2.4 Without prejudice to the above, the learned CIT(A) erred in considering even the CENVAT credit on capital goods in computing the addition of Rs. 3,30,782. Ground 3 – Disallowance of club expense – Rs.437,752 3.1 The learned C]T(A) erred in confirming the disallowance of Rs. 398,607 towards club entrance fees and Rs.39,145 towards club service fees.

3 IT(T.P)A No.272/Bang/2012 3.2 The learned CIT(A) erred in concluding that these expenses are not connected to the business of the appellant and are therefore not business expenses. Ground 4 – Disallowance of Electronic Data Processing Charges – Rs.92,52,120 4.1 The learned CIT(A) erred in confirming the disallowance of Rs.92,52,120 towards Electronic Data Processing (“EDP”) expenses on the ground that it is capital in nature. 4.2 Notwithstanding and without prejudice to the above, the learned CIT(A) erred in not adjudicating in granting depreciation on EDP expenses treated to be capital in nature. Ground 5 — Disallowance of Miscellaneous expenses Rs.20,00,000 5.1 The learned CIT(A) erred in confirming the adhoc disallowance made by learned AO. 5.2 The learned CIT(A) erred confirming the disallowance inter alia on the basis that the appellant had not submitted the details of the expenses, when the appellant had in fact submitted the details during the assessment proceedings. 5.3 The learned CIT(A) erred in not appreciating the fact that the entire expenditure incurred were for business purposes only. Ground 6 – Reduction in deduction under section 80HHC of the I.T. Act 6.1 The learned CIT(A) erred in confirming the lower deduction of Rs. 2,54.43,467 as against Rs. 2,84,82,759 claimed by the appellant. Non-Adjudication on the appeal filed 6.2 The learned CIT(A) erred in not adjudicating on the above grounds holding that the order tinder section 143(3) read with section 143(3) read with section 263 has been passed based on the order of the Commissioner of Income Tax-I under section 263 of the Act. Adjustments to total turnover

4 IT(T.P)A No.272/Bang/2012 6.3 The learned CIT(A) erred in confirming the addition of Rs.42,61,50,000 in respect of excise duty and Rs. 99,35,000 in respect of sates tax to the ‘total turnover’ in arriving at the deduction under section 80HHC of the Act. 6.4 Notwithstanding and without prejudice to the above, the learned CIT(A) erred in not following the decision of the Hon’ble Supreme Court in the case of CIT v. Lakshmi Machine Works [290 ITR 667]. Adjustments to business profits 6.5 The learned CIT(A) erred in confirming the reduction in profits of the business for the deduction under section 80HHC of the Act by reducing 90% of the following income: a. Sundry income (Cash discount on purchases) – Rs. 1,20,000 b. Recovery of freight and insurance and packing expenses – Rs.1,76,90,000 c. Income from services rendered – Rs.2,92,60,000 d. Income from long term investments being dividend income – Rs.2,69,30,000. 6.6 The learned CIT(A) erred in confirming the erroneous finding of the learned AO that the company had earned income from long-term investments amounting to Rs.2,69,30,000 whereas the actual income from long term investment amounted to Rs.11,88,000. Ground 7 – Reduction in deduction under section 80HHE of the I.T. Act 7.1 The learned CIT(A) erred in not adjudicating on the above grounds holding that the order under section 143(3) read with section 263 has been passed on the order by the Commissioner of Income Tax-I under section 263 of the Act. Non-Adjudication on the appeal filed 7.2 The learned CIT(A) erred in not adjudicating on the above grounds holding that the order under section 143(3) r.w.s. 263 has been passed on the order by the Commissioner of Income Tax-1 under section 263 of the Act. 7.3 The learned CIT(A) erred in confirming the addition of Rs.42,61,50,000 in respect of excise duty and Rs.99,35,000 in respect of

5 IT(T.P)A No.272/Bang/2012 sales tax to the ‘total turnover’ in arriving at the deduction under section 80HHC of the Act. 7.4 Notwithstanding and without prejudice to the above, the learned CIT(A) erred in not following the decision of the Hon’ble Supreme Court in the case of CIT v. Lakshmi Machine Works [290 ITR 667]. Adjustments to business profits 7.5 The learned CIT(A) erred in confirming the reduction of 90% of the amounts contemplated under clause 1 of explanation (4) of section 80HHE(5) of the Act. The learned AO. erred in reducing the following: a. Sundry income (Cash discount on purchases) – Rs. 1,20,000 b. Recovery of freight and insurance and packing expenses – Rs.1,76,90,000 c. Income from services rendered – Rs.2,92,60,000 d. Income from long term investments being dividend income – Rs.2,69,30,000. 7.6 The learned CIT(A) erred in confirming the erroneous finding of the learned AO that the company had earned income from long-term investments amounting to Rs.2,69,30,000 whereas the actual income from long term investment amounted to Rs.11,88,000. 7.7 The learned AO erred in reducing an amount of Rs.21,92,19,000 without providing any basis for such reduction.” Ground 8 – Levy of Interest under section 234B The learned AO and CIT(A) erred in levying interest under section 234B of the Act.”

accessories.

material on record. At the outset, we note that this issue has been considered

6 IT(T.P)A No.272/Bang/2012 by this Tribunal in assessee's own case for Assessment Year 1998-99 and 2001-

ITA No.3952/MUM/2005 decided this issue in paras 40 to 42 as under :-

“40. The second ground raised by the assessee is that the Commissioner of Income-tax(A) has erred in upholding the action of the Assessing Officer in not considering the deduction of Rs.1,66,81,000/-, being the provision for replacement of spares and accessories transferred to Dresser-Rand India P. ltd., while computing the profits of the business. The Commissioner of Income-tax(A) has confirming the disallowance made by the Assessing Officer following the order passed for the earlier assessment years 1998-99 and 1999-00 and directed the Assessing Officer to give deduction for the actual expenditure incurred during the relevant previous year. 41. We do not accept the above short-cut method adopted by the Commissioner of Income-tax(A). If the assessee company is making sales along with a binding contract for undertaking future repairs and maintenance under an enforceable warranty, the assessee is entitled to provide for appropriate amount towards meeting such future liabilities. This is because the liability is undertaken by the assessee company not at the time of actual repair or replacement but at the time of concluding the sales-contract itself. The liability of the assessee company for meting the obligation towards repairs and replacement through warranty scheme is arising simultaneously with the generation of income by way of sales. Therefore, both in law and in fact, i.e., both on the basis of the point of commencement of the liability and the matching principle, it is necessary to see that the assessee has to provide for such warranty obligation in the year when the sales were made and not at the time when actual services towards repair and replacements are rendered. A deviation from the above stated position can be adopted only when the Assessing Officer on examining the provisions and expenses accounts of the assessee comes to a conclusion that the assessee is using the provision accounts to manipulate/understate its profits from year to year. The question of disallowance shall arise only when the provision for warranty is used as a tool for tax evasion/tax avoidance/tax deferment. The case of the assessee has to be examined in the above perspective. A perusal of the statement of accounts of the assessee shows that the assessee is providing for the provision of warranty obligation in a consistent manner on the basis of the

7 IT(T.P)A No.272/Bang/2012 study made of its past experiences and the provision as well as the actual expenditure are in fact highly comparable from assessment year to assessment year. It is also stated that the assessee has offered the yearwise balance available in the provision account for which liability has been expired, as income of that assessment year u/s. 41(1). 42. In the facts and circumstances of the case, the decisions of the lower authorities on this point are set aside and the issue is remitted back to the Assessing Officer for fresh consideration in the light of the above directions and also after providing an opportunity to the assessee of being heard and producing necessary materials before the assessing authority.”

Following the earlier order of this Tribunal in assessee's own case (supra), we

set aside this issue to the record of Assessing Officer for fresh consideration in

the light of the directions given by the Tribunal in the said order.

5.1 Ground No.2 is regarding addition of utilized CENVAT Credit.

5.2 We have heard the rival submissions as well as considered the relevant

material on record. At the outset, we note that an identical issue has been

considered and decided by this Tribunal in assessee's own case for the

Assessment Year 2001-02 vide order (supra) in paras 43 & 44 as under :-

“43. The third ground raised by the assessee is that the Commissioner of Income-tax(A) has erred in enhancing the value of closing stock of the assessee to Rs.2,41,83,367/-, as against the addition of Rs.1,31,07,285/- made by the Assessing Officer on account of MODVAT credit. 44. The Hon’ble Supreme Court in the case of Commissioner of Income- tax v. Indo Nippon Chemicals Co. Ltd., (2003) 261 ITR 275 has held that whatever method the Assessing Officer adopts after invoking section 145, it

8 IT(T.P)A No.272/Bang/2012 has to be sustained with the accepted principles of accountancy. The Court held that it is not permissible to use gross methods for the purposes and net method for the unconsumed stock at the end of the year. Accordingly, it was held that MODVAT credit available to assessee could not be liable to be taxed. Affirming the judgment of the Bombay High court in this regard the Supreme Court held that merely because the MODVAT credit was an irreversible credit available to manufacturers upon purchase of duty-paid raw material, that would not amount to income that would be taxed under the Act. In the light of the above judgments, we hold that enhancement of the addition to Rs.2,41,83,367/- has to be deleted. Order accordingly. This ground of the assessee is allowed.”

Following the earlier order of this Tribunal in assessee's own case, we decide

this issue in favour of the assessee and consequently the addition made by the

Assessing Officer on this account is deleted.

6.1 Ground No.3 is regarding disallowance of club expenses.

6.2 We have heard the rival submissions as well as considered the relevant

material on record. This issue has been considered by this Tribunal for the

Assessment Year 1997-98 as well as for A.Y. 2000-01. The appeal for the

Assessment Year 1997-98 was decided by the Mumbai Bench of this Tribunal in

favour of the assessee whereas this issue has been decided against the

assessee for the Assessment Year 2000-01 vide order dt.30.8.2010 in ITA

No.7254/Bang/2003 by the Bangalore Bench of this Tribunal. It is pertinent to

note that the Bangalore Bench of the Tribunal has followed the decision of the

9 IT(T.P)A No.272/Bang/2012 Hon'ble jurisdictional High Court while deciding this issue which is binding on

the Bangalore Benches of this Tribunal. Therefore, the decision of the

Bangalore Benches of this Tribunal is the latest decision and has been passed by

the following binding decision of the Hon'ble jurisdictional High Court and

consequently the said decision is now binding on the co-ordinate bench at

Bangalore. The Tribunal for the Assessment Year 2000-01 decided this issue in

para 16 as under :

“16. In the case considered by the Hon’ble High Court of Kerala, the amount claimed by way of deduction by the assessee was towards institutional membership fee. The court held that expenditure was in the nature of capital expenditure. As the payment was made for once and for all resulting in an enduring benefit, the same cannot be allowed as a deduction. The Hon’ble Kerala High Court has relied on the judgment of the Hon’ble Supreme Court in the case of Punjab State Industrial Development Corpn. Ltd. v. Commissioner of Income-tax (1997) (225 ITR 792). In the present case also, we find that except for certain nominal amounts ,the major payments were made for procuring/retaining the corporate membership of the assessee. In the light of the judgment of the Hon’ble Kerala High Court, we hold it as capital in nature. Therefore, the order of the Commissioner of Income-tax(A) on this point is reversed and the disallowance is restored.”

Following the earlier order of this Tribunal, we decide this issue against the

assessee.

7.1 Ground No.4 is regarding disallowance of Electronic Data Processing

(EDP) charges.

10 IT(T.P)A No.272/Bang/2012 7.2 We have heard the rival submissions as well as considered the relevant

material on record. This issue has been considered by this Tribunal in

assessee's own case (supra) for the Assessment Year 2000-01 in para 31 as

under :

“31. W considered the matter. The assessee has claimed this expenditure as revenue for the purpose of deduction whereas the Revenue has treated the same as capital expenditure and allowed appropriate depreciation allowance. The assessee has spent a huge amount of more than Rs.60 lakhs to set up its EDP system. The contention of the assessee is that a major part of the expenses related to the payments made for the consultancy works involved in installing this EDP system. EDP system is not a facility for overnight. The EDP system of a company is a sold information system having endurance value in helping to smooth working of the enterprise. The consultations availed for erecting the EDP system was in the nature of services rendered for establishing a regular and permanent system in the nature of valuable asset in monitoring the operations of the enterprise. Therefore, the consultancy expenses incurred for establishing a capital facility cannot be treated as in the nature of a revenue expenditure. In the facts and circumstances of the case ,we find that the expenditure incurred by the assessee company in this regard was in the nature of a capital expenditure and the lower authorities have rightly disallowed the wholesale deduction, but alternatively granting the statutory depreciation allowance. This ground of the assessee is rejected.”

Following the earlier order of this Tribunal in assessee's own case, we decide

this issue against the assessee. However, on the assessee's alternate plea that

depreciation on capitalized amount may be allowed we direct the Assessing

Officer to consider the depreciation on capitalized amount.

11 IT(T.P)A No.272/Bang/2012 8.1 Ground No.5 is regarding disallowance of miscellaneous expenses.

8.2 We have heard the rival submissions as well as considered the relevant

material on record. We note that an identical issue has been considered and

decided by this Tribunal in assessee's own case for the Assessment Year 2000-

01 vide order (supra) in paras 20 to 23 as under :

“20. The third ground raised by the Revenue is that the Commissioner of Income-tax (A) has erred in deleting the disallowance of Rs.10 lakhs made on estimate basis out of entertainment, business meals, gifts, membership fees and miscellaneous expenses without appreciating the fact that the Assessing Officer had to resort to estimate the disallowance as the assessee did not file the exact details in respect of these expenses. It is the case of the Revenue that the genuineness of these expenses had not been established. 21. The assessee is relying on the decision of the Tribunal in ITA 1863/Mum/2003 rendered in assessee’s own case deleting such adhoc disallowance. The assessee has also placed reliance on the decisions of the Hon’ble Supreme Court in the case of Commissioner of Income-tax, Bombay v. M/s. Walchand & Co. P. Ltd., (1967) 65 ITR 381 and Commissioner of Income-tax v. M/s. Edward Keventer P. Ltd., (1978) 115 ITR 149 and also on the judgment of the Hon’ble Delhi High Court in the case of Commissioner of Income-tax v. Dalmia Cement P. Ltd. (2002) (254 ITR 377). 22. We have considered the issue in the light of the above judgments and in the light of the ITAT order passed in assessee’s own case for earlier assessment year. But this is not a case of ad-hoc disallowance per se as strenuously argued by the assessee company. Apart from proving the genuineness of the expenses and the availability of details and evidences relating thereto, there is another question whether certain expenses are deductible as such in computing the taxable income of the assessee. The question is very relevant in matters of entertainment, gifts and membership fees. Therefore, it is not possible to hold that the disallowance of Rs.10 lakhs has been made by the assessing authority only on the ground of vouching of these expenses. We have to consider the statutory disallowability also.

12 IT(T.P)A No.272/Bang/2012 23. Taking into consideration all these aspects of the issue, we restore an addition ofRs.5 lakhs against the original addition of Rs.10 lakhs made by the assessing authority. The order of the Commissioner of Income-tax(A) on this issue is partly reversed and the ground raised by the Revenue is partly allowed.”

It is clear that the Tribunal has restricted the addition from Rs.10 lakhs to Rs.5

lakhs for the Assessment Year 2000-01 vide its order (supra).

8.3 Following the earlier order of the Tribunal and to maintain the rule of

consistency, we restrict the disallowance to Rs.10 lakhs as against the

disallowance made by the Assessing Officer of Rs.20 lakhs.

9.1 Ground No.6 is regarding reduction in deduction under Section

80HHC/80HHE of the Income Tax Act, 1961 (in short 'the Act'). The original

assessment was passed by the Assessing Officer under Section 143(3) vide

order dt.27.12.2006. Subsequently, the CIT vide its order dt.18.3.2009 passed

under Section 263 set aside the assessment on this issue of allowing excess

deduction under Section 80HHC/80HHE of the Act. Consequently, the

Assessing Officer passed an assessment order dt.30.9.2009 under Section

143(3) rws 263 and restricted the deduction under Section 80HHC and 80HHE

in terms of revision order passed under Section 263. The assessee challenged

13 IT(T.P)A No.272/Bang/2012 the action of the Assessing Officer before the CIT (Appeals). The CIT (Appeals)

decided the issue in paras 13.1 and 13.2 as under :-

“13. Issue NO.6 Reduction in deduction LI/ss.8OHHC&8OEIHE of 1.T.Act (Ground Nos. 16 &17) 13.1. The assessee has claimed deduction u/s.8OHHC of 1.T.Act at Rs.28,482,759/-. In the original assessment order, it was determined at Rs.2,60,42,343/-. However, the CIT-I, Bangalore found such computation prejudicial to the interest of Revenue and set aside the order u/s.263 of I.T. Act vide F.No27/47/2E33/CIT-I dated 18-3-2009. The AO has recomputed the deduction now at Rs.25,443,467/- thus making disallowance of Rs.3,039,292/-. Appeal has been preferred against such reduction before me. But admittedly no appeal has been preferred against the order passed u/s.263 of I.T.Act by the CIT-I, Bangalore. Under such circumstances, it has been held by me in the case of - Vide ITA No.266/AC-11(4)/A-I/IQ-II dated I8-IO2O1I in the case of M/s Hewlett Packard Global Soft Pvt. Ltd. (AY 2005-06) that I have no authority to trod upon such issue. The relevant portion of the above decision is extracted below for ready reference- Reliance is placed on the ratio of cases of - “Season Rubber Ltd. Vs. CIT (2003) 263 ITR 385 (Ker) and Dr A. Naresh Babu Vs. ITO (2009) 123 TTJ (Hyd –Trib) 836

In these cases the assesses have not preferred any appeal against such direction of the learned CIT to the ITAT. It had been held therein that, therefore it has reached finality. Therefore I have no authority to disturb the same. The ratio of case of – Sadhuram Patel & Sons v. ITO (2009) 120/712291 (Mum) is not applicable here because in that case the direction of the CIT u/s. 263 of I. T Act was not in certain terms. The learned CIT therein had directed the AO to examine whether short term capital gains liable for taxation had been

14 IT(T.P)A No.272/Bang/2012 omitted or not? while completing the original assessment and to add the same in the set aside assessment, if omitted, thus giving a latitude to the AO., which is capable of being questioned in an appeal before the CIT(A). In this case it can be inferred, from the learned CIT’s order u/s. 263 quoted in the assessment order vide para 1, 2 cc 3 (pages 2 & 3) that he is not providing any such freedom to the A.O. and also had decided some of the grounds of appeal raised before me herein, against the assessee. In view of the above I hold that I have no authority to adjudicate the issue involved at (i) (ii) and (iii) vide para 2 page 2 above. In toto it is held that the issue decided in a order passed u/s. 263 of I.T. Act cannot be decided by a CIT(A) u/s.246A of I. T. Act. 13.2. Hence, grounds of appeal is decided against the assessee.”

Thus the CIT (Appeals) has held that he has no authority to entertain such issue

which has been decided by the Commissioner of Income Tax while passing the

revision order under Section 263 of the Act.

9.2 Before us, the learned Authorised Representative of the assessee has

submitted that this Tribunal in the case of State Bank of Mysore Vs. ACIT in ITA

Nos.21 & 22/Bang/2006 dt.29.3.2010 has held that even though the

assessments were revised as a result of order passed under Section 263, the

assessment orders are subject to appellate jurisdiction of the Commissioner

(Appeals).

9.3 On the other hand, the learned Departmental Representative has

submitted that the revision order under Section 263 has attained the finality as

15 IT(T.P)A No.272/Bang/2012 the assessee did not challenge the said revision order. Therefore, the issue

settled and decided by the CIT in the revision order cannot be agitated before

the Tribunal.

9.4 Having considered the rival submissions and the relevant material on

record, we note that the Assessing Officer has reproduced the gist of the

findings of the CIT in the revision order passed under Section 263 in para 2 as

under :

“2. As the Assessing Officer while working out the qualifying business profits for arriving at the deduction u/s 80HHC had wrongly deducted Rs. 11,49,213/- being the deduction allowed u/s. 80HHE instead of the profits of Rs.38,30,713/- in respect of which deduction u/s 8OHHE is allowable, as required under sub-section (5) of Section 80HHE. This resulted in excess allowance of deduction u/s 80HHC of the IT Act 1961. Further, the deduction u/s 80HHC had also been allowed on the export proceeds that have not been realized within the period of 12 months from the date of shipment and the assessee also did not furnish any permission from the RBI for extension of time for realizing the sale proceeds beyond the period of 12 months. The Assessing Officer had failed to exclude the ineligible export proceeds of Rs.1,95,25,246/-, while computing the deduction allowable u/s 80HHC of the I.T. Act. In addition to the above, the dividend income of Rs.11,88,000/- which is entirely exempt u/s 10(34) had not been excluded from the total business profits of Rs.69,10,29,072/- and the business profits was wrongly taken at Rs.69,10,29,072/- instead of Rs..68,,98,41,072/- for the purpose of computing the deductions allowable u/s 8OHHC and 80HHE. This has resulted in the excess allowance of deductions u/s 80HHC and 8OHHE of the I.T. Act.. 1961.”

16 IT(T.P)A No.272/Bang/2012 Thus it is clear that in the revision proceedings, the CIT has adjudicated the

issue even by giving the quantum of profit to be considered for the purpose of

computing the deduction allowable under Section 80HHC and 80HHE of the

Act. Thus in the assessment order passed in pursuant to the revision order

passed under Section 263, the Assessing Officer had no discretion or choice to

take his own decision but has to follow the order of the CIT passed under

Section 263 of the Act. There is no dispute that if the CIT simply revised the

assessment order with a direction to the Assessing Officer to re-adjudicate the

issue, then so far as the issue which was not finally settled in the revision order,

the same can be challenged in the appeal proceedings before the CIT (Appeals).

However, when an issue has been settled by the CIT in the revision order

passed under Section 263 and the assessee did not prefer any appeal against

the revision order, then the assessee is not permitted to challenge the

assessment order on the said issue having attained finality as per the revision

order. The CIT (Appeals) has relied upon various judgments on this point that it

has no authority to entertain or decide such an issue which has been decided

by the CIT in the revision order under Section 263. Therefore, in view of the fact

that the issue was decided by the CIT in the revision order passed under Section

17 IT(T.P)A No.272/Bang/2012 263 and attained finality cannot be re-agitated in the appeal proceedings

before the CIT (Appeals). Accordingly this ground of appeal is decided against

the assessee.

which is consequential in nature and mandatory.

Sd/- Sd/-

(ABRAHAM P GEORGE) (VIJAY PAL RAO) Accountant Member Judicial Member Dated, the 30th March, 2016.

*Reddy gp / DS /

Copy to : 1. Appellant 2. Respondent 3. C.I.T. 4. CIT(A) 5. DR, ITAT, Bangalore. By order 6. Guard File.

Asst. Registrar, ITAT, Bangalore.