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:-
