2024 (6) TMI 1130 - AT - Income Tax

Tribunal upholds disallowance of estimated provisions but deletes bogus purchase additions citing Article 370 communication issues

The ITAT Mumbai addressed multiple issues in this assessment case. The tribunal upheld disallowance of provisions for effluent disposal expenses and sales ... Disallowance of provisions for effluent/waste disposal expenses and processing charges - Provision for likely expenses - AO noted that the assessee has not furnished any documentary evidences to prove that provision has been written back in the subsequent year and these provisions are not ascertained liabilities and therefore they are not allowable expenses - HELD THAT:- It is seen that assessee has created a provision for likely incurring of expenses for treatment of disposal of effluent waste generated out of manufacturing carried out during the year. The assessee might have incurred expenditure in the earlier years under this head but those were actual expenses and paid to the third parties. From this year, assessee has installed its own plant. However, neither any details of expenses incurred prior 31st March, 2010 were filed nor any expenses which have been actually booked and have been shown to be paid immediately thereafter. Even there is no proper scientific basis for estimate for such an expense. Here, the provision made was not based on any scientific basis but on likely future event that also was not demonstrated that it was accounted for on some reasonable estimate, therefore even according to accounting standard AS-29 same cannot be allowed. Thus, the ld. CIT (A) was correct while upholding the disallowance on account of the provision made by the A.O. We find that the amount has been credited back in the subsequent assessment year for which copy of profit and loss account and other details have been filed which show that this amount has been credited back as income. Thus, even if the provision is to be disallowed in A.Y. 2010-11, then in the subsequent year once assessee has credited back and offered as income then same cannot be taxed again in A.Y.2011-12. Accordingly, the Assessing Officer is directed to verify the said account and if assessee has written back and credited to income then he should give consequential relief in the A.Y. 2011-12 and not to tax the same amount in next year. With these directions, ground no. 1 raised by the assessee is partly allowed for statistical purposes. Non-allowance of provision made for sales return - The brief facts are that the assessee has created a provision for sales return on estimate basis of Rs. 5,40,000/- on some perceived loss of sales return and some hypothetical assumption of principles of prudence. In the earlier year similar disallowance has been upheld by the Tribunal in A.Y. 2008-09 [2020 (5) TMI 20 - ITAT MUMBAI] wherein as evident, the amount in dispute is a provision made for likely loss on sales return. Therefore, it is quite clear that the expenditure has not crystallized during the year and is an anticipated loss. That being the case, it cannot be allowed. However, if such loss has actually arisen in the subsequent assessment year due to sales return, the AO is directed to verify and grant consequential relief. Decided against assessee. TDS u/s 195 - tds liability on expenses of advertisement, sales promotion and clinical trial incurred - HELD THAT:- We find in some case, the limit for TDS is less and in case of one party with regard to advertisement expenditure incurred in chemical magazine of foreign country paid to a foreign entity which it has been stated that it does not have any business connection in India, then ostensibly same cannot be subjected to TDS and therefore same should have removed from the disallowance. Regarding these details of expenses and also whether these parties have offered it for tax, the assessee has to comply with the conditions provided in proviso 201(1). Accordingly, entire matter of disallowance made u/s 40(a)(ia) is remanded back to the file of A.O. to examine applicability of proviso to section 201(1) and whether in few cases TDS was required to be deducted or not. Assessee shall substantiate its claim before the A.O. Accordingly, ground nos. 1 to 6 is set aside to the file of A.O. Bogus purchases - purchases made from all the 10 parties which included the four parties based in Jammu and Kashmir- notices sent u/s. 133(6) through ITBA portal was not responded - HELD THAT:- We find before the A.O., the assessee has given the details of addresses, GST No. PAN No., amount of purchases (Net of VAT), etc. These bill/voucher/challan issued by the parties mentions the details of the assessee, excise duty paid, details of truck/challan no., order No. etc. from all these parties. Further, all the items purchased were subjected to excise duty and assessee had given entire details of the parties and their ledger account and that payment has been made through cheques. Further, it is seen from these invoices that the goods purchased have been delivered to various depots of the assessee across the country along with the delivery details. Once, assessee has submitted all these details, simply based on that notice u/s. 133(6) only on ITBA portal has not been responded cannot be the basis for disallowing the entire purchases when book results and trading account/ sales has not been disturbed. The assessee had submitted that that these notices were sent in December, 2019 and at that time there was no internet and communication was break down following revocation of Article 370 on 4th August, 2019. Thus, these parties were not aware of any such notices nor through ITBA portal. Till January, 2020 2G services were also not working, thus it was impossible for these parties to respond. Further, the assessee has purchase transaction from these parties in the past and subsequent years and all the assessment were completed u/s. 143(3) and no adverse inference has been drawn. Thus no reason to treat entire purchases as non-genuine simply because notices sent u/s. 133(6) through ITBA portal was not responded ignoring the other evidences and details available on record. Accordingly, entire addition is deleted. Decided in favour of assessee. Issues Involved:1. Disallowance of provisions for effluent/waste disposal and processing charges.2. Non-allowance of provision for sales returns.3. Disallowance under Section 40(a)(ia) for non-deduction of TDS.4. Addition of purchases from parties in Jammu and Kashmir.Detailed Analysis:1. Disallowance of Provisions for Effluent/Waste Disposal and Processing Charges:The assessee contested the disallowance of provisions made for effluent/waste disposal expenses (Rs. 84,96,600) and processing charges (Rs. 42,95,509). The Assessing Officer (AO) disallowed these provisions due to lack of documentary evidence proving that these were ascertained liabilities and had been written back in the subsequent year. The CIT(A) upheld the disallowance, noting the absence of a scientific basis for the provisions.The Tribunal observed that the assessee had installed its own plant for effluent treatment but had not provided details of expenses incurred before March 31, 2010, nor a reasonable estimate for the provision. Thus, the provision was not allowable under accounting standard AS-29. However, since the amount was credited back in the subsequent year, the AO was directed to verify and provide consequential relief in the next year. The ground was partly allowed for statistical purposes.2. Non-Allowance of Provision for Sales Returns:The assessee created a provision for sales returns (Rs. 5,40,000) based on estimated losses. The Tribunal noted that similar disallowance was upheld in the earlier year (A.Y. 2008-09) as the expenditure had not crystallized during the year and was an anticipated loss. The Tribunal dismissed this ground, affirming the CIT(A)'s decision that such provisions could not be allowed unless the loss actually arose in the subsequent year.3. Disallowance Under Section 40(a)(ia) for Non-Deduction of TDS:For A.Y. 2011-12, the AO disallowed Rs. 1,27,89,234 under Section 40(a)(ia) for non-deduction of TDS on certain expenses. The CIT(A) confirmed the disallowance. The assessee argued that some payments were to non-residents without a business connection in India, and others were below the TDS threshold. The Tribunal remanded the issue back to the AO to examine the applicability of the proviso to Section 201(1) and verify if the parties had offered the income for tax. The ground was set aside for further examination.4. Addition of Purchases from Parties in Jammu and Kashmir:For A.Y. 2017-18, the AO added Rs. 10,32,38,955 for purchases from four parties in Jammu and Kashmir, as these parties did not respond to notices under Section 133(6). The CIT(A) upheld the addition, noting the assessee's failure to provide supporting documents or reasons for non-verification.The Tribunal found that the assessee had provided detailed purchase information, including GST numbers, invoices, delivery challans, and payment details. The Tribunal accepted the assessee's explanation that the communication blackout in J&K following the revocation of Article 370 prevented the parties from responding. The Tribunal deleted the entire addition, finding no reason to treat the purchases as non-genuine based solely on non-response to notices.Conclusion:The appeals for A.Y. 2010-11 and 2011-12 were partly allowed for statistical purposes, with directions for verification by the AO. The appeal for A.Y. 2017-18 was allowed, and the addition of Rs. 10,32,38,955 was deleted.