2014 (9) TMI 278 - AT - Income Tax

Tribunal Decisions: Deductions Allowed for Specific Issues

The Tribunal partly allowed the appeals, permitting deductions for specific issues based on legal precedents and detailed factual examination. The ... Deduction on written off irrecoverable advances and other debit balances disallowed – Held that:- Majority of the amounts are stated to be towards EMDs of which the earliest amount outstanding is from the year 1997 and the last being outstanding from the year 2001 - the list also includes an amount shown against Amtrex Employees’ Welfare Trust, for which no details have been furnished in the statement - As far as EMD deposits are concerned, the submission of the assessee has not been controverted by the Revenue – relying upon Commonwealth Trust (India) Ltd. Versus Commissioner Of Income-Tax [1999 (11) TMI 58 - KERALA High Court] - the amounts towards EMDs., was having nexus with the business of the assessee and it needs to be allowed - with respect to the “Employees’ Welfare Trust” in the absence of any details, it has rightly been disallowed by the AO - with respect to the balance written amount, it contained various amounts which are shown to be not recoverable from the parties - it also includes certain amounts like provision for gratuity, salary payable, PF payable, staff loan etc. from which the full details thereof not placed – Decided partly in favour of assessee. Amount of donation disallowed while making computation – Held that:- The assessee pointed out to the break-up of the donation – and the amount was given to the society to comply with the social responsibility towards society and was not in the nature of donation - the payments were made on account of business expediency and social responsibility, and hence allowable as deduction - the major amount of donation is to the Red Cross society, and therefore, claimed as business expenditure –revenue did not controvert the submissions of the assessee – Decided in favour of assessee. Adjustment of royalty payment being international transaction – Held that:- The CIT(A) while deleting the addition has noted that facts of the case of the assessee in this year are identical to the earlier years and rightly held that the issue regarding payment of royalty at the rate of 3.75% to the AE by the assessee, as against the royalty at the rate of 3% by other group entities, it was explained by the assessee before the AO that the royalty at 3.75% was applied after reducing various expenses from ex-factory sale value of the concerned products - if the effective rate is considered, then the effective rate of royalty is less than the royalty paid by other AEs to Hitachi Limited i.e. parent company - only stated rate is not decisive and effective rate has to be considered, and when the amount of royalty paid by the assessee is considered with ex-factory sale value, without deducting various expenses, such as dealer commission, special commission, warranty etc., as has been noted by the CIT(A), then the effective rate worked out is only 2.3% on sale, as against 3% paid by other group entities – the order of the CIT(A) is upheld – Decided against revenue. Provision of obsolescence of inventory disallowed – Held that:- As decided in assessee’s own case for the earlier assessment year, it has been rightly held that the assessee has claimed the amount as per the normal practice of valuation of closing stock as per the audited accounts and it is an omission on the part of the AO not to have dealt with this issue - CIT(A) has directed the AO to allow the claim of the assessee subject to the assessee furnishing the complete particulars in this regard, if necessary, with adequate proof - no interference is called for in the order of the CIT(A) because he has taken proper care to ensure that all the details and evidences are obtained and are examined by the AO and only thereafter, deduction is to be allowed, if the assessee is able to establish before the AO that such write off in respect of provision for obsolescence of inventory claimed by the assessee is in line with the accepted method of valuation of stock, i.e. at cost or market price, whichever is lower – Decided against revenue. Warranty expenses disallowed – Held that:- As decided in assessee’s own case for the earlier assessment year, it has been rightly held that the assessee-company should scrutinise the historical trend of warranty provision made and the actual expenses incurred against it, and on this basis, a sensible estimate should be made - the expenses provided for by the assessee in respect of warranty should be allowed to the extent the provision is made on a scientific basis, as decided in M/s. Rotork Controls India (P) Ltd. Versus Commissioner of Income Tax, Chennai [2009 (5) TMI 16 - SUPREME COURT OF INDIA] – thus, the matter is to be remitted back to the CIT(A) for fresh decision – Decided in favour of revenue. Deduction for debit balance written off – Sum due from different parties allowable u/s 28 or 37 – Held that:- The Revenue authorities have disallowed the claim of the assessee for deduction for the debit balances written off which were due from different parties, on the ground that the same were not arising out of the sales made by the assessee - the loss incurred during the course of business and that the assessee has written off the amount from its accounts, as the same became irrecoverable – relying upon T.R.F. Ltd. Vs. CIT [2010 (2) TMI 211 - SUPREME COURT] - in order to obtain a deduction in relation to bad debts, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable; it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee – Decided in favour of assessee. Deduction u/s 40(a)(ia) – Effect of amendment w.e.f. 1.4.2005 – Held that:- The claim of the assessee for further deduction was not before the CIT(A) or the AO, before passing their respective orders – thus, the matter is to be remitted back to the AO for considering admissibility or otherwise of the claim of the assessee – Decided in favour of assessee. Issues Involved:1. Disallowance of deduction for irrecoverable advances and other debit balances.2. Disallowance of donation as business expenditure.3. Adjustment in respect of international transaction of royalty payment.4. Disallowance of provision for obsolescence of inventory.5. Disallowance of warranty expenses.6. Deduction for debit balances written off.7. Deduction under section 40(a)(ia) for TDS paid.Issue-wise Detailed Analysis:1. Disallowance of Deduction for Irrecoverable Advances and Other Debit Balances:The assessee claimed deductions for writing off advances and debit balances amounting to Rs. 14,83,037 and Rs. 30,48,835, respectively. The AO disallowed these claims, stating they did not fall under section 36(1)(vii) of the Act as they were not bad debts from sales. The CIT(A) upheld the AO's decision, but allowed the bad debts written off amounting to Rs. 42,51,367 based on the Supreme Court's decision in TRF Limited Vs. CIT. The Tribunal partially allowed the assessee's appeal, permitting the deduction for EMDs related to business but disallowing Rs. 7,31,425 for lack of details. The disallowance for debit balances was restricted to Rs. 1,00,000.2. Disallowance of Donation as Business Expenditure:The AO disallowed Rs. 46,247 claimed as donations, which was upheld by the CIT(A), stating donations are applications of income, not diversions. The Tribunal allowed the major amount of Rs. 42,320 donated to the Red Cross Society, recognizing it as business expenditure due to social responsibility, and allowed the remaining small amounts aggregating to Rs. 3,900.3. Adjustment in Respect of International Transaction of Royalty Payment:The AO made an adjustment of Rs. 16,64,667, reducing the royalty rate from 3.75% to 3% as per the TPO's suggestion. The CIT(A) deleted the addition, following the decision for A.Y. 2004-05. The Tribunal upheld the CIT(A)'s decision, referencing the ITAT's decision for A.Y. 2004-05, which found the effective royalty rate to be lower than 3%.4. Disallowance of Provision for Obsolescence of Inventory:The AO disallowed Rs. 1,33,36,786 as a provision for slow-moving/obsolete stock, considering it contingent. The CIT(A) allowed the claim, following the decision for A.Y. 2004-05. The Tribunal upheld the CIT(A)'s decision, referencing the ITAT's decision for A.Y. 2004-05, which allowed such provisions if they aligned with the accepted method of stock valuation.5. Disallowance of Warranty Expenses:The AO disallowed Rs. 1,55,65,120 of warranty expenses, considering the provision excessive without detailed working. The CIT(A) deleted the disallowance, following the decision for A.Y. 2004-05. The Tribunal restored the issue to the CIT(A) for fresh decision, following the Supreme Court's decision in Rotork Control India P. Ltd. Vs. CIT, which allowed provisions for warranty expenses if made on a scientific basis.6. Deduction for Debit Balances Written Off:The AO disallowed Rs. 1,58,529 written off as advances, which was upheld by the CIT(A). The Tribunal allowed the claim, referencing the Supreme Court's decision in T.R.F. Ltd. Vs. CIT, which stated that writing off bad debts in accounts is sufficient for deduction.7. Deduction Under Section 40(a)(ia) for TDS Paid:The assessee claimed a deduction of Rs. 1,21,39,516 for TDS paid during the subsequent year, which was not considered by the AO or CIT(A). The Tribunal restored the issue to the AO for fresh consideration, directing the assessee to furnish necessary details.Conclusion:The appeals were partly allowed, with specific issues remanded for fresh consideration or allowed based on precedents and detailed examination of facts. The Tribunal emphasized adherence to judicial principles and factual evidence in determining the allowability of deductions and provisions.