Case Law Details
Himenviro Environmental Engineering Co. Pvt. Ltd. Vs ACIT (ITAT Delhi)
Introduction: The case of Himenviro Environmental Engineering Co. Pvt. Ltd. vs ACIT before the ITAT Delhi involved crucial discussions on various aspects such as product development expenses, liquidated damages, and employees’ contributions to PF and ESI. This analysis provides an in-depth examination of the ITAT’s order and its implications.
Detailed Analysis: The appeal in the case stemmed from the order of the National Faceless Appeal Centre (NFAC), Delhi, concerning the assessment passed under section 143(3) of the Income-tax Act, 1961. The appellant, Himenviro Environmental Engineering Co. Pvt. Ltd., raised several grounds challenging the assessment order and the subsequent appellate order.
1. Product Development Expenses: The appellant contested the disallowance of product development expenses amounting to Rs. 69,90,965/-. The Assessing Officer (AO) and the CIT(A) deemed these expenses as capital expenditure, ineligible for deduction under section 37(1) of the Act. However, the ITAT held that the expenses were revenue in nature and thus deductible. Detailed documentation and explanations provided by the appellant supported the claim, demonstrating that the expenses were incurred for regular business operations rather than capital investments.
2. Liquidated Damages: The dispute also revolved around the disallowance of liquidated damages totaling Rs. 1,42,16,815/-. While the AO viewed these damages as contingent liabilities, the ITAT recognized them as actual expenses paid by the appellant due to contractual breaches. The ITAT emphasized that these payments were essential to fulfill contractual obligations and thus constituted allowable revenue expenditure.
3. Employees’ Contributions to PF and ESI: Grounds 7 to 9 of the appeal pertained to the disallowance of Rs. 91,117/- concerning employees’ contributions to PF and ESI. Citing the decision of the Supreme Court in the case of Checkmate, the ITAT upheld the disallowance, considering the contributions remitted beyond the due date prescribed under respective statutes.
Conclusion: The ITAT’s order in the case of Himenviro Environmental Engineering Co. Pvt. Ltd. vs ACIT underscores the significance of meticulous documentation and substantive justifications in tax matters. By providing comprehensive evidence and sound reasoning, the appellant successfully contested the disallowance of product development expenses and liquidated damages. However, the disallowance of employees’ contributions to PF and ESI serves as a reminder of the importance of timely compliance with statutory obligations. This analysis highlights the complexities of tax assessments and the critical role of thorough representation in achieving favorable outcomes.
FULL TEXT OF THE ORDER OF ITAT DELHI
1. The appeal in ITA No.2643/Del/2022 arises out of the order of National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as „ CIT(A)’, in short] in Appeal No. ITBA/MFAC/S/250/2022-23/1046271949(1) dated 12.10.2022 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 dated 12.12.2018 (hereinafter referred to as „the Act’) by ACIT, Circle-11(1), Delhi (hereinafter referred to as „ld. AO’).
2. The assessee has raised the following grounds of appeal:-
“1 The Assessment Order as well as Appellate Order are bad in law where their conclusion is contradictory to the factual.
2 The learned A.D. as well as CIT(Appeal had failed to appreciate the factual l represented by appellant, particularly the CIT (Appeal) has twisted the submission in his own manner to strengthen the dismissal of an appeal
3 In the circumstances and facts of the case the learned CIT(Appeal) was not Jusufied in treating the “Product Development Expenses” amounting to Rs.69.90,965/- as property of the appellant while in fact the expenses are related to “equipment structure which was to be displayed at the customer’s premises as a model, that in the same manner it will be installed at the demised premises within stipulated period lays down in agreement.
4. That the meaning of “Product Development” is a structure developed which was to be installed at the demised premises of the customer to be installed absolutely in the same manner and it will be remained the property of the customer who may destroy or keep it as model.
5. That in the light of paragraphs 3 and 4 an addition of Rs.69,90,965/- under the head “Product Development Expenses confirmed by the CIT(Appeal) is not justified.
6. The claim of “Liquidated Damages” is confined to the written clauses of the contract that where the installation will be belated there would be fixed charge of penalty per day, however, where it is belated on account of customer’s reason the credit has also been given by them. Thus, it is a sort of an expense which usually could have happened in completion of project.
The learned CIT (Appeal) has probably treated the “Liquidated Damages as criminal offence and has decided in the same manner.
That where the confirmation of the customer is on the record that they have charged the penalty and where the delay has had happened due to their own reasons the assessee company have been compensated.
7. The learned CIT (Appeal) was not justified in confirming the addition of Rs.91.117/-related to belated EPF and ESI. It is quite admittable that there is a nominal delay, it might have happened due to glitches in the bank’s server and thus the humble appellant should not be penalized for such reason.
8. The confirmation of disallowance is contrary to the well settled law that where the payment have been made in the same month/ financial year that should not be disallowed.
9. That the confirmation of disallowance by CIT(Appeal) in respect of belated EPF and ESI is bad in law and is not justified.
10. That the appellant craves their right to amend, delete or add any grounds of appeal at or before the time of hearing. ”
3. Ground Nos. 1, 2 and 10 raised by the assessee are general in nature and does not require any specific adjudication.
4. Ground Nos. 3 to 5 raised by the assessee are challenging the disallowances of product development expenses of Rs. 69,90,965/-.
5. We have heard the rival submission and perused the material available on record.
6. The assessee company is engaged in the business of manufacturing, supply, erection and commissioning of pollution control equipment’s/ PART viz. bag filter and electrostatic precipitator to various industrial houses mainly in iron and steel, power and cement sector. The return of income for AY 2016-17 was field by the assessee company on 30.11.2016 declared total income of Rs. 1,14,63,420/- under normal provisions of act and book profit of Rs. 1,58,97,377/- u/s 115JB of the Act.
7. During the year under consideration the assessee company claimed that the expenses of Rs. 69,90,965/- under the head product development expenses. The assessee was asked to submit justification of allowability of the same. In response the assessee submitted the ledger copy of product development expenses. The ld AO observed that no supporting documents were furnished by the assessee. The assessee submitted that the assessee company had incurred Rs. 69,90,965/- in developing the various products during the year, out of which Rs. 13,98,193/- was showing as return during the year in profit and loss account and remaining sum was shown under the head none current asset in the balance sheet. It was explained that for developing the products, the assessee company was using its material purchased for manufacturing; using its own employee and workers for doing work like designing and development of these products. Accordingly, the cost of material used and employees cost and other expenses like travelling etc were allocated for total expenses booked under the respective head and claimed as deduction under product development expenses. It was specifically pointed out that in the books of account said expenditure was treated as deferred revenue expenses but for the purpose of income tax act, the entire expenses amounting to Rs. 69,90,965/- were claimed as revenue expenditure. The assessee also furnished the details of materials used, details of employee cost, details of wages and salary and details of travelling cost of employees. The details of product development expenses incurred during the year are as under:-
| Material cost- purchase UP | Rs. 2,491,646/- |
| Salary to employee of Kolkata unit | Rs. 30,19,224/- |
| Wages & salary of Noida Unit | Rs. 8,35,135/- |
| Travelling cost of employees | Rs. 6,44,960/- |
| Total | Rs. 69,90,965/- |
8. Since, the assessee’s accounting policy is to treat the aforesaid expenses as deferred revenue expenditure over a period of 5 years, a sum of Rs. 13,98,193/- (20% thereon) was claimed as expenditure in the profit and loss account and remaining sum of Rs. 55,92,772/- was shown under the head non-current asset in the balance sheet. However, for the purpose of the income tax since the entire expenses incurred are revenue in nature and in view of the fact there is concept of deferred revenue expenditure under the income tax Act except as provided u/s 35AB, 35ABB, the assessee choose to claim the entire expenditure of Rs. 69,90,965/- as deduction in the return of income. The assessee had maintained separate product development expenses register comprising of date, name of the party, invoice no, invoice amount and percentage of portion attributable from the materials to the products development expenditure in respect of materials purchased; details of employees together with month-wise salary thereon who are involved in the product development; details of wages paid to employees and workers to month-wise who are involved in product development and employee-wise details of travelling expenses containing the date, name of the employee, travelling expenditure and together with the nature of expenses thereon. All these details were duly furnished by the assessee before the ld AO. These details are also enclosed in pages 184 to 238 of the PB filed before us. The ld AO merely completely disregard the aforesaid explanation with documentary evidences furnished by the assessee and stated with these expenses were incurred for product development which will give enduring benefit to the assessee and accordingly not allowable as deduction u/s 37(1) of the Act and disallowed the same. This action of the ld AO was upheld by the ld CIT(A). In other words, the case of the revenue is that the expenditure incurred by the assessee towards product development are in nature of capital expenditure given enduring benefit to the assessee. We have gone through the entire list of expenditure which has been tabulated hereinabove together with the product development expenditure register enclosed in the PB in pages 184 to 238 thereon. We find none of the expenditure incurred thereon would give any enduring benefit to the assessee. All these expenditure are genuine regular revenue expenditure incurred by the assessee. As stated earlier the assessee has been using its own employees and the material regularly purchase for its manufacturing facilities on proportion basis for the purpose of development of new product. This are only in the nature of revenue expenditure for the assessee. We are in complete agreement with the ld AO that there is no concept of deferred revenue expenditure under the income tax Act as specifically provided in section 35AB, 35ABB etc. Considering the nature of expenditure incurred by the assessee towards product development we hold that the entire expenditure thereon are purely revenue in nature and accordingly would be eligible for deduction as revenue in nature and accordingly would be eligible for deduction as revenue expenditure in the year of incurrence. However, we find that similar list of expenditure incurred by the assessee for AY 201819 were allowed by the ld AO himself u/s 143(3) of the Act dated 26.02.2021. Accordingly, Ground Nos. 3 to 5 raised by the assessee are allowed.
9. Ground No. 6 raised by the assessee is challenging the disallowance liquidated damaged of Rs. 1,42,16,815/-.
10. We have heard the rival submission and perused the material available on record.
11. The ld AO observed that on perusal of the details furnished by the assessee that a sum of Rs. 1,42,16,815/- was debited in the profit and loss account under the head liquidated damages and asked the assessee to explain justification for allowability of the same. The assessee furnished the entire details of party-wise together with purchase order, the details thereon and stated with it had to pay liquidated damages to its customers if for the delayed supply of goods or delayed completion of projects according to agreements. The assessee furnished the entire ledger accounts liquidated damages party wise before the ld AO. The ld AO however held that this merely a provision made for liquidated damages which is primary agreed upon settlement of the accepted actual damages arising from a few breach of contract accordingly he held that the same is contingent in nature and not allowable in nature but factually does not provision made by assessee and said liquidated damages were actually deducted by the customers while making payments to the assessee due to certain delays or breach of contractual terms of the assessee.
12. For the sake of convenience the list of customers who had claimed liquidated damages from the assessee which tabulated as under:-
| S No. | Customer Name | PO Name | PO Name | LD AMOUNT |
| 1 | Ambuja Cements Limited | 2800495980/NEOS/ UDKIN1 | 29,50,000 | 1,47,500 |
| 2 | Shree Cement Ltd. | SCL/UPGU/14-15/PO-087 | * 2,26,62,760 | 11,34,321 |
| 3 | Shree Cement Ltd. | SCL/BCP/15-16/PO 298 | 12,59,700 | 6,29,849 |
| 4 | Shree Cement Ltd. | SCL/RAS/15-16/PO
001 |
5,42,00,000 | 77,10,000 |
| 5 | Shree Cement Ltd. | SCL/BWR/15-16/ PO-OO1′ | 58,00,000 | 17,90,000 |
| 6 | Shree Cement Ltd. | SCL/RNCU/14-15/PO-171 | 48.50,000 | 2,42,500 |
| 7 | Shree Cement Ltd. | 277176 | 3,31,500 | 16,250 |
| 8 | Shree Cement Ltd. | 287889 | 9.00,000 | 50,000 |
| 9 | Shree Cement Ltd. | SCL/RAS/15-16/P0- 17 | 42,00,000 | 2,10,916 |
| 10 | Shree Cement l td. | SCL/UPGU/15- 16/PO-148 | 6,53,000 | 32,649 |
| 11 | Shree Cement Ltd. | SCL/ BCP / 15-16/ PO-240 | 13,00,000 | 65,000 |
| 12 | Shree Cement Ltd. | SCL/RNCU/15-16/PO-202 | 7.39.700
; |
36,985 |
| 13 | Filters Intensiv S.A.R.l (France) | Credit Note | 26,74,980 | |
| 14 | OCL India Ltd | Ledger Entry Pg. 448 |
13. The ld AO observed that primary liquidated damages were claimed by 2 parties viz Shree Cement Ltd and M/s. Ambuja Cement. These cement plants are bound to install pollution control system as a pre requisite for carrying out their operation anywhere in India in accordance with the environments Acts and regulation notified Ministry of Environment and Forest (MOEF) the ld CIT(A) observed that obtaining no object certificate (NOC) from pollution control board is prerequisite. Since, there was a delay in obtaining the same by the assessee the assessee could not fulfill the supply of goods are deliver this obligation in accordance with contract with its customers. Accordingly, these liquidated damages are effectively incurred by the assessee for violation of law in force and hence the provision of explanation 1 to section 37(1) of the Act would come into operation. With these observation the ld CIT(A) upheld the action of the ld AO.
14. At the outset, it is important to note that no penalty of any amount whatsoever has been levied by any regulatory board such as pollution control board or by MOEF on the assessee for not alleged violation. The present liquidated damages as tabulated above were incurred by the assessee as part of its contractual obligation with the customers. In fact the customers had deducted the said amount while making payments to the assessee for some breach of contractual terms by the assessee. Hence, this is no provision at all as stated by the ld AO are its actual payment of expense by the assessee. The assessee having incurred these liquidated damages as part of contractual obligation with the customers on claims the same as a revenue expenditure. We are not in complete agreement with the contentions raised by the assessee. There is no dispute with these liquidated damages were indeed paid by the assessee only to its customers and not to any other 3rd There is no dispute that these liquidated damages were paid by the assessee only as part of the non fulfillment of contractual obligation as per terms of contract with the customers. Hence, it clearly becomes allowable expenditure in the hands of the assessee. Accordingly, Ground No. 6 raised by the assessee allowed.
15. Ground Nos. 7 to 9 raised by the assessee are with regard to disallowances made on account of employees contribution to PF and ESI amounting to Rs. 91,117/-. This issue is no longer res integra in view of the recent decision of the Hon’ble Supreme Court in case of Checkmate reported in 178 taxman.com 178 wherein, it has been held that if the employees contribution to PF and ESI were remitted beyond the due date prescribed under respective dates the same would not be allowable in the case of the assessee if it is remitted before due date of filing of income u/s 139(1) of the Act. Respectfully following the said decision ground No. 7 to 9 raised by the assessee are dismissed.
16. In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 08/01/2024.
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