2022 (10) TMI 538 - AT - Income Tax

ITAT Chennai allows appeal, quashes PCIT order under Section 263. AO's assessment found not erroneous.

The ITAT Chennai allowed the appeal filed by the assessee, quashing the PCIT's order under Section 263. It held that the AO's assessment order was not ... Revision u/s 263 by CIT - applicability of 5th proviso to section 32(1) - depreciation claimed on goodwill arise out of amalgamation - HELD THAT:- As regards, the first issue of depreciation on goodwill arise out of amalgamation, we find that similar issue had been considered by the Tribunal in the assessee’s own case for the AY 2015-16 [2022 (7) TMI 160 - ITAT CHENNAI] where on identical set of facts and on identical reasons, PCIT has revised assessment order passed by the AO u/s.263 of the Act, on the issue of depreciation on goodwill in light of 5th proviso to sec.32(1) - Tribunal after considering relevant facts and also applicability of 5th proviso to sec.32(1) held that depreciation claimed on goodwill arose out of amalgamation, is not hit by 5th proviso to sec.32(1) of the Act and thus, set aside the order of the PCIT u/s. 263 on this issue. Thus we are of the considered view that the assessee has rightly claimed depreciation on goodwill arise out of amalgamation, because, 5th proviso to sec.32(1) has no application to the facts of the present case. Therefore, we are of the considered view that assumption of jurisdiction by the PCIT on this issue is fails. Disallowance of provision for warranty expenses - According to the PCIT, there is a five times increase in provision for warranty expenses for the AY 2014-15 when compare to AY 2013-14 - We find that the assessee is in the business of manufacturing diagnostic equipments is required to provide warranty on goods manufactured and sold to customers. The assessee is making provision for warranty expenses on the basis of past history and such provision has been made on scientific basis considering the facts including past history and experience and warranty provided to customers. In our considered view, provision for warranty expenses provided by the assessee in the books of accounts is on the basis of past history and further, such provision has been made on scientific basis. It is in accordance with the decision in the case of Rotork Controls India (P) Ltd. [2009 (5) TMI 16 - SUPREME COURT] wherein, it was held that provision for warranty expenses is ascertained liability and hence, allowable as business expenditure. AO after considering the relevant facts has rightly allowed the claim of the assessee. No doubt, there is no specific discussion on the issue in the body of the assessment order, however, just because there is no specific discussion on the issue in the assessment order, it does not mean that the AO has not carried out necessary enquiries. In this case, on the basis of details furnished by the assessee, what we noted that the issue has been thoroughly examined by the AO and has allowed the claim of the assessee. Therefore, we are of the considered view that assumption of jurisdiction by the PCIT on this issue also fails. Disallowance u/s.14A r.w.r.8D - Consequent to the merger effective from 01.04.2013, when both the assessee’s financials and M/s.Kiran Medical Systems’s financials are consolidated, the dividend income earlier received from amalgamating company losses its nature of dividend as no company can declare a dividend for itself and accordingly, the same cannot be treated as dividend for the purpose of s.14A - Tax Auditor has quantified higher disallowance u/s.14 in the case of the assessee, but such quantification has been made by taking into account dividend income received by the assessee and relevant expenditure incurred for the assessment year. Once after amalgamation dividend income becomes ‘nil’ and the question of disallowance expenditure relatable to dividend income does not arise. Therefore, in our considered view the AO has rightly accepted the claim of the assessee on the issue of disallowance u/s.14A and thus, we are of the considered view that assumption of jurisdiction by the PCIT on this issue also fails. We are of the considered view that assessment order passed by the AO u/s.143(3) of the Act dated 22.12.2016 is neither erroneous nor prejudicial to the interest of the Revenue. PCIT without appreciating the facts simply set aside the assessment order passed by the AO u/s.263 on three issues. Therefore, we quashed the order of the PCIT u/s.263 - Appeal filed by the assessee is allowed. Issues Involved:1. Depreciation on goodwill arising from amalgamation.2. Provision for warranty expenses.3. Disallowance under Section 14A read with Rule 8D.Issue-wise Detailed Analysis:1. Depreciation on Goodwill Arising from Amalgamation:The Principal Commissioner of Income Tax (PCIT) issued a show cause notice under Section 263 of the Income Tax Act, 1961, questioning the depreciation on goodwill claimed by the assessee, arguing that the Assessing Officer (AO) allowed such depreciation contrary to the 5th proviso to Section 32(1) of the Act. The PCIT referenced the ITAT Bangalore bench decision in the case of DCIT v. United Breweries Ltd., asserting that claiming depreciation on enhanced cost of goodwill in cases of succession or amalgamation is restricted by the said proviso.The assessee argued that the AO had thoroughly examined the issue and allowed the claim after considering the relevant facts and judicial precedents. The ITAT Chennai, referring to its own decision in the assessee's case for AY 2015-16, held that the 5th proviso to Section 32(1) does not apply to the facts of the present case. The ITAT concluded that the AO's order was neither erroneous nor prejudicial to the interests of Revenue, as the AO had taken a possible view supported by the Supreme Court decision in M/s. Smifs Securities Ltd. and other ITAT decisions. Therefore, the assumption of jurisdiction by the PCIT on this issue was invalid.2. Provision for Warranty Expenses:The PCIT observed a significant increase in the provision for warranty expenses and noted that the AO had allowed the claim without carrying out the necessary inquiries. The assessee contended that the provision was made based on past history and scientific methods, in line with the Supreme Court decision in Rotork Controls India (P) Ltd. v. CIT, which held that provision for warranty expenses is an ascertained liability and thus allowable as business expenditure.The ITAT found that the AO had issued a specific show cause notice on this issue during the assessment proceedings, and the assessee had provided a detailed response. The AO, after considering the relevant facts, allowed the claim. The ITAT concluded that the AO had thoroughly examined the issue, and the assumption of jurisdiction by the PCIT on this issue was also invalid.3. Disallowance under Section 14A read with Rule 8D:The PCIT noted that the Tax Auditor of the amalgamated company had quantified a higher disallowance under Section 14A, but the AO allowed a lower disallowance without verifying the relevant facts. The assessee argued that the dividend income was from the amalgamating company, which, after amalgamation, loses its nature of dividend. Therefore, the disallowance under Section 14A was correctly computed.The ITAT found that the AO had issued a specific questionnaire on this issue and the assessee had provided a detailed response. The AO, after considering the relevant facts, accepted the assessee's computation. The ITAT concluded that the AO had thoroughly examined the issue, and the assumption of jurisdiction by the PCIT on this issue was also invalid.Conclusion:The ITAT Chennai quashed the order of the PCIT under Section 263, holding that the assessment order passed by the AO was neither erroneous nor prejudicial to the interests of the Revenue. The AO had thoroughly examined all the issues during the assessment proceedings, and the PCIT's assumption of jurisdiction under Section 263 was invalid. The appeal filed by the assessee was allowed.