2012 (10) TMI 369 - AT - Income Tax

ITAT affirms CIT(A)'s decisions, emphasizing reliable estimates, evidence for additions, revenue vs. capital, and income timing.

Deputy Commissioner Income Tax, Circle 3 (1), New Delhi Versus Bose Corporation India Pvt. Ltd.,

The ITAT upheld the CIT(A)'s decisions in the case, dismissing the Revenue's appeal and the assessee's cross-objection. The judgments highlighted the ... Addition on account of provisions of warranty expenses - CIT(A) deleted addition - Held that:- The assessee provided for the warranty expenses based on technical evaluation and past experience, warranty stood attached to the sale price of the product and a reliable estimate of the expenditure towards such warranty is allowable. Moreover, the ITAT have allowed a similar claim in the AYs 2001-02,2003-04 & 2005-06 - as the Revenue have not placed before us any material controverting the aforesaid findings of the ld. CIT(A) nor brought to our notice any contrary decision, so as to enable us to take a different view in the matter, no reason to interfere - in favour of assessee. Trading addition - assessee failed to adduce evidence in support of reasons for increase in expenses - CIT(A) deleted the addition - Held that:- The AO nowhere recorded any findings that the books of account maintained by the assessee were incorrect, rendering it impossible to deduce the profit and despite that he proceeded to estimate the profit and turnover , invoking the principles of best judgment. The CIT(A)on the other hand, concluded that the action of the AO to make estimated trading addition without pointing out any defects in the books of accounts, is totally unjustifiable and therefore, deleted the addition - The mere fact that the percentage of loss or gross profit is high or low in a particular year does not necessarily lead to inference that there has been suppression - in favour of assessee. Disallowance of capitalization of advertisement expenses - AO allowed only 1/5th claim treating the expenditure as deferred revenue - Held that:- The benefits arising therefrom are expected to be derived over a period of time, stretching sometimes over several accounting years, the assessees have been amortising the same over the expected time period over which the benefits are likely to accrue therefrom. Accordingly, only a proportion of such expenditure is amortised in the Profit and Loss Account. The expenditure which is treated as deferred revenue in the books, almost in all cases comprises of items, the benefits derived wherefrom are ephemeral and transitory in nature in as much as these are incurred as a part of a continuous process and need to be expended in order to generate and increase the brand recall and sustain it in the minds of customers. Moreover, the deferred revenue expenditure is essentially revenue in nature and the decision to treat the same as deferred revenue only represents a management decision taken in view of the magnitude of the expenditure involved - in favour of assessee. Addition on account of service charges received in advance - CIT(A) deleted the addition - Held that:- The assessee provided annual maintenance service to its customers in respect of their products for a time span of one year or six months & the time span for such service sometimes fell in between two financial years, accordingly, the services charges received were classified between current year fees and the fees received for next year, and the latter were accordingly, shown as income for the relevant financial year - there is nothing to suggest that the assessee has fully contributed to its accruing by rendering services so as to entitle him to receive the entire amount in the year under consideration. In view of the foregoing, especially when the Revenue have not placed any material nor brought to a contrary decision so as to enable us to take a different view in the matter not inclined to interfere - in favour of assessee. Purchase of stamp papers, stamp duty and registration charges for stores taken on lease - revenue or capital expenditure - Held that:- Following the view taken in Gobind Sugar Mills Ltd.Gobind Sugar Mills Limited Versus Commissioner Of Income-Tax, Central I, Calcutta [1978 (8) TMI 65 - CALCUTTA HIGH COURT ] that the expenditure incidental to the acquisition of the lease would also be an expenditure of capital nature - primary and dominant object of the assessee in incurring the said expenditure was to acquire benefits of a right to property under leaseholds no hesitation in upholding the findings of the CIT(A) - against assessee. Issues Involved:1. Deletion of addition on account of provisions for warranty expenses.2. Deletion of addition on account of low gross profit rate.3. Deletion of addition on account of capitalization of advertisement expenses.4. Deletion of addition on account of disallowance of service charges received in advance.5. Disallowance of expenditure incurred on stamp duty paid for stores taken on lease.Issue-wise Detailed Analysis:1. Deletion of Addition on Account of Provisions for Warranty Expenses:The Revenue challenged the deletion of Rs. 23,42,178/- added for warranty expenses, arguing the liability was contingent and not based on an actuarial valuation or scientific method. The assessee, engaged in trading sound/audio systems, made a provision for warranty expenses at 0.5% of annual sales based on past experience and technical evaluation. The CIT(A) allowed the claim, relying on previous decisions in the assessee's own case and the Supreme Court's ruling in Rotork Control India Ltd. vs. CIT, which recognized a provision as a liability measured by estimation if certain conditions are met. The ITAT upheld the CIT(A)'s decision, noting the provision was based on reliable estimates and attached to the sale price of products, thus allowable.2. Deletion of Addition on Account of Low Gross Profit Rate:The AO added Rs. 15,85,398/- due to a fall in the gross profit (GP) rate from 39.7% to 37.4%, suspecting unsubstantiated expenses. The CIT(A) deleted the addition, stating the AO did not point out defects in the books of accounts or justify the estimated addition. The ITAT agreed, emphasizing that a lower GP rate alone does not justify an addition without evidence of discrepancies in the books. It cited various judgments supporting that low profit rates do not necessarily indicate suppression of income, and the AO's rejection of book results without defects was unjustified.3. Deletion of Addition on Account of Capitalization of Advertisement Expenses:The AO treated Rs. 15,85,400/- of advertisement expenses as capital expenditure, allowing only 1/5th of it, based on the Supreme Court's decision in Madras Industrial Investment Corporation Limited. The CIT(A) reversed this, relying on the ITAT's earlier decision in the assessee's case, which treated such expenses as revenue in nature. The ITAT upheld the CIT(A)'s decision, noting that deferred revenue expenditure is an accounting concept not recognized by the Act, and the expenditure was revenue in nature, aimed at generating brand recall without creating a tangible asset.4. Deletion of Addition on Account of Disallowance of Service Charges Received in Advance:The AO added Rs. 7,45,000/- for service charges received in advance, arguing it should be taxed in the year received under the mercantile system. The CIT(A) deleted the addition, following ITAT decisions that such charges should be taxed when services are rendered. The ITAT upheld this view, stating income accrues when services are rendered, and the assessee had correctly classified the charges between current and next year based on service periods spanning two financial years.5. Disallowance of Expenditure Incurred on Stamp Duty Paid for Stores Taken on Lease:The AO disallowed Rs. 1,36,000/- spent on stamp duty for leased stores, treating it as capital expenditure. The CIT(A) upheld this, citing the Supreme Court's decision in Gobind Sugar Mills Ltd., which classified similar expenses as capital in nature. The ITAT agreed, noting the expenditure was for acquiring a leasehold right, thus creating a capital asset. The decision of the Hon'ble HP High Court in Gopal Estates, relied upon by the assessee, was not considered as it did not address the Supreme Court's ruling.Conclusion:The ITAT dismissed both the Revenue's appeal and the assessee's cross-objection, upholding the CIT(A)'s decisions on all issues. The judgments emphasized adherence to established legal principles regarding provisions for liabilities, treatment of revenue and capital expenditures, and the correct timing for recognizing income.