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Facts
The assessee, engaged in manufacturing tractors and components, filed its return of income. The Assessing Officer made various additions, leading the assessee to appeal to the CIT(A), who partly allowed the appeal. Both the Revenue and the Assessee filed cross-appeals against the CIT(A)'s order.
Held
The Tribunal decided various grounds of appeal concerning depreciation on UPS, software expenses, research and development expenses, deduction under Section 80JJAA, prior period expenses, depreciation on energy-saving devices and commercial vehicles, provision for warranty, and disallowance under Section 14A. The Tribunal affirmed the CIT(A)'s actions in most cases, dismissing some Revenue grounds and allowing others.
Key Issues
Whether depreciation on UPS is allowable at 60%, whether annual maintenance charges for software are revenue expenditure, allowability of R&D expenses, validity of disallowances/deductions under various sections including 80JJAA, 35(2AB), 14A, and treatment of prior period expenses and warranty provisions.
Sections Cited
60, 1931438, 14552066, 37, 35(2AB), 31198481, 34439377, 80JJAA, 143(1), 143(2), 143(3), 115JB, 2(s), 35(2AB), 37(1), 271(1)(c), 14A, 35(2AB), 37
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Income Tax Appellate Tribunal, DELHI BENCH ‘F’’ : NEW DELHI
Before: SHRI ANUBHAV SHARMA & SHRI KRINWANT SAHAY, ACCOUTANT MEMBER
ORDER PER KRINWANT SAHAY, AM: These 07 appeals filed by the Revenue and Assessee in quantum addition as well as penalty, relating to aforesaid assessment years. Since the issues involved in these appeals are inter-connected, hence, the appeals were heard together and are being consolidated and disposed of by this common order for the sake of convenience., by dealing with the facts of Revenue’s (AY 2010-11) wherein following grounds have been raised :-
1. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the disallowance of Rs. 2,01,376/- holding that the depreciation on UPS is allowable @ 60.
2. On the facts and circumstance of the case and in law, the Ld. CIT(A) has erred in directing the AO that out of the addition of Rs. 19,31,438/- on account of disallowance of software expenses treated as capital expenditure, annual maintenance charges be treated as revenue expenditure whereas the annual maintenance charges are inseparable part of software expenses.
3. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in directing the AO to allow expenses amounting to Rs. 1,45,52,066/- under section 37, whereas AO has made specific disallowance u/s. 35(2AB) of the Act.
4. On the facts and circumstances of the case and in law, the CIT(A) has erred in reducing the disallowance to Rs. 3,11,98,481/- as 2 against total disallowance of Rs. 3,44,39,377/- made by the AO u/s. 80JJAA.
Brief facts of the case are that assessee filed its return of income declaring total income of Rs.2,81,31,40,320/- under the normal provision of the Act and an income of Rs. 2,76,47,08,926/- u/s. 115JB of the Act, ITR was e-filed on 28.9.2010 and the same was processed u/s. 143(1) of the Act and subsequently selected for scrutiny. Notice u/s. 143(2) of the Act was issued on 06.09.2011. Assessee filed its reply. The assessee company was engaged in the business of manufacturing tractors and tractor parts and components. AO assessed the income at Rs. 291,20,49,100/- u/s 143(3) of the Act by making various additions. Aggrieved with the aforesaid action, assessee preferred appeal before the Ld. CIT(A), who vide his impugned order dated 20.02.2015 partly allowed the appeal of the assessee. Aggrieved with the CIT(A)’s order Revenue as well as Assessee both have filed their respective cross appeals.
Heard the rival contentions and perused the records.
As regards ground no. 1 relating to deletion of addition of Rs. 2,01,376/- holding that the depreciation on UPS is allowable @60%. Both the parties have agreed that this issue is squarely covered in favour of the assessee by the various decision including the BSES Yamuna Power Ltd. 2010 TIOL 636 wherein, it has been held that depreciation @ 60% on the assets eligible to be treated as computer accessories. Respectfully following the above precedent, we affirm the action of the CIT(A) and accordingly the Ground no. 1 raised by the Revenue stands dismissed.
As regards ground no. 2 relating to addition of Rs. 19,31,438/- for software expenses treated as capital expenditure, annual maintenance charges be treated as revenue expenditure whereas the annual maintenance charges are inseparable part of software expenses. We note that Ld. CIT(A) by following the precedent of earlier year i.e. AY 2009-10 has held that the new software items, and development charges should be treated as capital in nature and only it should be treated as capital in nature and depreciation is to be allowed on this amount. Further, we note that as far as allowability of annual maintenance charges as revenue expenditure is a covered mater by the decision of the ITAT in assessee’s own case for AY 2009-10, for which both the parties agreed. Hence, we affirm the action of the CIT(A) and dismiss the ground no. 2 raised by the revenue.
As regards ground no. 3 relating to disallowance of expenditure u/s. 37 of the Act amounting to Rs. 1,45,52,066/-. Out of which Ld. CIT(A) confirmed the addition amounting to Rs. 48,50,689/-. Assessee claimed a deduction of Rs. 7,27,44,602/- with reference to expenses in Research and Development and AO held that only the expenses incurred on in–house research and development are eligible for deduction and expenses incurred on testing activities outside the approved facilities are not admissible. However, Ld. CIT(A) has not disputed the genuineness of the expenses but has disallowed them u/s. 35(2AB) of the Act. The claim for weighted deduction is not justified, hence, the addition was confirmed to the extent of Rs. 48,50,689/- which in our considered opinion do not require any interference, hence, we affirm the same and dismiss the ground no. 3 raised by the revenue.
As regards ground no. 4 relating to disallowance of deduction u/s. 80JJAA amounting to Rs. 3,44,39,377/-. Out of which was the CIT(A) confirmed the addition amounting to Rs. 32,40,896/-. AO noted that additional salary paid to workers who do not quality as workmen as per section 2(s) clauses (iii) and (iv) of the Industrial Dispute Act cannot be considered for calculation of 80JJAA deduction. AO further noted that the claim u/s. 80JJAA for earlier years (AY 2008-09 & 2009-10) cannot be accepted as they were rejected in earlier years. However, Ld. CIT(A) has noted that the discrepancies pointed out in the claim of the assessee, have not been controverted by the Assessee’s AR thus, no interference with the confirmation made by the AO amounting to Rs. 32,40,896/- is required. Hence, addition confirmed to the extent of Rs. 32,40,896/-, in our considered opinion do not require any interference, thus, we affirm the same and dismiss the ground no. 4 raised by the revenue. Resultantly, the appeal of the Revenue is dismissed. ASSESSE’S (AY 2010-11) 9. As regards Ground No. 1 relating to addition of Rs. 49,44,085/- towards prior period expenses is concerned, AO observed that allowability of prior period expenses is a matter of fact which defers from year to year, hence, he made the addition of Rs. 49,44,085/-. However, Ld. CIT(A) observed that the assessee has been unable to discharge its onus to establish that expenses have been crystalized during the relevant assessment year and has claimed many expenses at its own convenience. Ld. CIT(A) did not find any reasons to interfere with the disallowance made by the AO. CIT(A) confirmed the disallowance. Our attention was drawn towards page no. 255-256 of the PB which are the detailed bifurcation of the prior period expenses alongwith posting date in the books of account in previous year (2009-10). Further our attention was drawn towards Page No. 257-259 which are the copy of expensewise justification of claim of prior period expenses as claimed before the CIT(A). We find pages 263-265 of PB are the copies of lease agreement pertaining to office (godown) rent and majority of invoices are dated in FY 2009-10 which were received during this year, hence, paid in this year itself. We note that there are no finding by the lower authorities that the said expenses are not incurred for business. They are revenue expenditure in nature. It is also noted that this issue is covered by the order of the Tribunal in assessee’s own case for AY 2009-10 vide order dated 05.03.2024 wherein, the Coordinate Bench has affirmed the action of the CIT(A) for allowing such deduction. In view of above facts and circumstances and respectfully following the precedent, as aforesaid, this ground of appeal
raised by the assessee is allowed.
10. As regards Ground No. 2 relating to addition of 94,811/- relating to depreciation @80% on Energy Saving Devices is concerned, AO noted that UPS is neither computer nor a part of computer and is not entitle to a higher depreciation rate of 60% as applicable to computers and will fall in the category of plant and machinery with 15% depreciation applicable. However, assessee has claimed depreciation at 80% on energy savings device. As the said UPS are assets which fall under category plant and machinery eligible for depreciation @15%, the excess depreciation of Rs. 94,811/- claimed by applying rate of depreciation at 80% on WDV of Rs. 1,45,863/- was disallowed, which was confirmed by the Ld. CIT(A). Ld. AR has submitted that there has been no addition in the block of assets in relation to energy savings devices during the year under consideration and 6 the claim of 80% depreciation on energy saving devices was not pressed before the ITAT in the preceding year i.e. AY 2009-10. It was submitted by the Ld. AR that he is not pressing for 80% depreciation in the current assessment year as well, but the disallowance computed by the AO is incorrect which needs to be corrected. The calculation of depreciation on energy saving devices as per the AO order alongwith the correct calculation is given below:- WDV of asset as on 01.04.2019 (as Rs. 1,45,863/- adopted by the AO) Depreciation @ 15% Rs. 21,880/- Depreciation claimed by the Rs, 27,457/- assessee for AY 2010-11 @80% (as per computation of income) Amount of disallowance Rs. 5,577/- Disallowance proposed by the AO Rs. 94,811/- and confirmed by CIT(A)
Hence, the disallowance should be restricted to Rs. 5,577/- and the additional disallowance of Rs. 89,234/- deserve to be deleted. In view of the aforesaid factual matrix, we direct the AO to verify the mistake if any in the aforesaid calculation, and correct the same, in accordance with law and decide the issue accordingly. Accordingly, this ground is allowed for statistical purposes.
Ground No. 3 relating to disallowance of Rs. 87,19,240/- on account of Higher Depreciation on Commercial vehicles is concerned, AO noted that as per Motor Vehicle Act the vehicles purchased by the assessee do not satisfy the conditions to be called ‘commercial vehicles’ eligible for 7 50% depreciation, as claimed. He further noted that Assessee has not been able to furnish any evidence in support of its claim, hence, 15% depreciation on non-commercial vehicles is applicable. Whether a vehicle is commercial or non-commercial is decided by the RTO at the time of registration. Ld. CIT(A) confirmed the addition made by the AO. During the hearing, Ld. AR submitted and drew our attention towards page no. 332 of the paper book which is the copy of working of depreciation on commercial vehicles. It was submitted that the vehicles for which the depreciation at 50% is disallowed were all purchased between 01.01.2009 to 01.10.2009. It was further submitted that the AO has misinterpreted the conditions attached to the claim of higher rate of depreciation on commercial vehicles to conclude that the claim is only available when the assessee is involved in the business of running them on hire, etc. During the proceedings, before us, Ld. DR has submitted the brief written submissions on this issue, which has been duly considered. We find that the matter is already covered by the order of the ITAT in assessee’s own case for AY 2009-10 where it considered the same facts and held that “In view of the aforesaid observation considering the chart given above, considering the definition of light motor vehicle under the Motor Vehicle Act and considering the definition of Commercial Vehicle under the Income Tax Depreciation Schedule, we hold that vehicles bought by assessee between 01.01.2009 to 01.10.2009 being eligible for depreciation @50%.” In view of above facts and circumstances and respectfully following the precedent, as aforesaid, this ground of appeal
raised by the assessee is allowed.
12. As regards ground no. 4 relating to capitalization of software expenses is concerned. We have already decided this issue in the 8 Revenue’s appeal, as aforesaid while dealing with ground no. 2 by upholding the action of the Ld. CIT(A), hence, this ground is dismissed as such.
As regards ground no. 5 relating to provision for warranty is concerned, we note that before the AO it was the contention of the assessee that the provision for warranty is not a contingent liability is ab- initio incorrect. The liability crystallizes in the event of any manufacturing defect occurring in the product and the same being accepted. Such liability is allowable if the determination of the same is based on a scientific method and is consistently followed by the assessee. The figures of warranty paid to total sales defy the logic of being scientific. The wide fluctuations in percentage terms to total turnover defy any scientific method used to create the provision for warranty. Hence, the provision made in respect of warranty was disallowed and CIT(A) confirmed the same. During the hearing, ld. AR has drawn our attention towards the schedule of provision for warranty in audited financial statements. The CIT(A) has erred in contending that the assessee has failed to establish that a scientific consistent system was being followed for creation of provision. At page no. 96 of the Paper Book working of provisions of Rs. 3.10 cr has been given. It was submitted that the incremental provision amount of Rs. 20 lacs to incremental sales (Rs. 337.36 cr) is just 0.059% and this ratio clearly shows that provision has been made on a very conservative basis. It was further contended that the issue of allowability of provision for warranty is squarely covered by the order of the ITAT in assessee’s own case for AY 2009-10 wherein, the identical issue has been decided in favour of the assessee and against the department. In view of above facts and circumstances and respectfully following the precedent, as aforesaid, this ground of appeal
raised by the assessee is allowed.
14. As regards ground no. 6 relating to disallowance of deduction u/s. 80JJAA amounting to Rs. 3,44,39,377/- is concerned, We have already decided this issue in the Revenue’s appeal, as aforesaid while dealing with ground no. 4 by upholding the action of the Ld. CIT(A), hence, this ground is dismissed as such.
15. As regards ground no. 7 relating to disallowance u/s. 14A is concerned, it is noted that assessee has only earned capital gain on its investment which is a taxable income under the Act and therefore, section 14A cannot be brought to services in relation to such investments. Working of capital gain /loss in relation to mutual fund has been given at page no. 358 of the Paper Book. In our view, the disallowance u/s. 14A cannot be attracted in the absence of exempt income in the hands of the assessee. However, this issue is squarely covered by the order of the ITAT in assessee’s own case for AY 2009-10 wherein, the identical issue has been decided in favour of the assessee and against the department. In view of above facts and circumstances and respectfully following the precedent, as aforesaid, this ground of appeal raised by the assessee is allowed. Resultantly, Assessee’s appeal is partly allowed. Assessee’s appeals (AY 2011-12); 160/Del/2017 (AY 2012-13) and (AY 2013-14)
16. Some of the issues viz. Prior Period Expenses; Disallowance of Provision for Warranty; Disallowance of Claim u/s. 80JJAA; Denial of Higher Deprecation @50% in respect of high-end vehicles and Disallowance u/s. 14A raised in these three appeals of the assessee, have already been decided in favour of the assessee in Assessee’s ITA NO. 10 2619/DEL/2015 (AY 2010-11). Following the consistent view, as aforesaid, these grounds are also allowed in favour of the assessee.
Issue relating to depreciation of electrical installation raised in assessment years 2011-12 & 2012-13 are concerned, AO noted that electrical fittings are attached with plant and machinery and are part thereof and hence, eligible for depreciation @15% applicable to plant and machinery is not acceptable because electrical fittings have maintained their individual identity inspite of being attached to plant and machinery and CIT(A) confirmed the same. During the hearing, Ld. AR submitted that the asset falling under the head ‘plant and machinery-electrical’ comprises mainly of generator, DG set, invertors and batteries installed in the factory located at Hoshiarpur. AO has incorrectly observed that electrical fittings have maintained their individual identity in spite of being attached to plant and machinery. He submitted that it is a settled law that if electric fittings are integral part of plant and machinery, depreciation is to be allowed at the same rate which is applicable to plant and machinery. In the present case, the electrical installation is installed in the factory and forms an integral part of the machinery at the factory. Hence, depreciation is to be allowed @ 15%. In view of above facts and circumstances as aforesaid, this ground of appeal
raised by the assessee in all the two appeal is allowed.
19. Issue relating to disallowance of deduction u/s. 35(2AB) involved in assessment years 2011-12, 2012-13 & 2013-14 is concerned, we note that Ld. CIT(A) observed that the deduction under section 35(2AB) is to be limited to expenditure approved by the prescribed authority and the alternative claim of deduction u/s. 37(1) made by the appellant also cannot be approved meaning that the expenditure has not been wholly and exclusively incurred for the stated purposes of the assessee. Ld. AR submitted that it is not mandatory to take approval for the entire amount for which deduction has been claimed. The only mandatory condition is approval of the research facility by the prescribed authority. He further submitted that mandate of approval of quantum of expenditure had been put in place only with effect from 1.7.2016, hence, non-approval of quantum of expenditure for assessment year 2012-13 did not entitle AO to make disallowance under section 35(2AB), however, the expenses was taken wholly and exclusively for the purpose of business therefore, the deduction should be allowed under section 37(1) of the Act. It was also submitted that the expenditure incurred on research and development are wholly and exclusively for business purposes and hence, are allowable as business expenditure in the current year. In this behalf he relied upon the decision of the Hon’ble Delhi High Court in the case of CIT vs. JCB India Ltd. (2016) 71 taxmann.com 30 (Delhi High Court) wherein it has been held that the research and development charges should be allowed as revenue expenditure u/s. 37 of the Act. In view of above discussions, we find force in the contention of the Ld. AR and the decision relied upon by him, hence, this ground of appeal raised by the assessee in all the three assessment years is allowed.
20. Revenue’s appeal Nos. 8974/Del/2019 (AY 2011-12) & 8975/Del/2019 (AY 2012-13) are relating to penalty appeals u/s. 271(1)(c) of the Act, since we have already allowed the quantum appeals of the assessee in both the assessment years, as aforesaid, hence, we affirm the action of the Ld. CIT(A) in deleting the penalty in dispute. Accordingly, both the Revenues’ appeals are dismissed. 12