2010 (11) TMI 984 - AT - Income Tax

Summary

Issues involved:
The judgment involves issues related to provision for slow moving finished goods, method of accounting for inventories, proceedings u/s 147 of the Income Tax Act, provision for warranty services, and book profit calculation under Minimum Alternate Tax Provision.

Provision for Slow Moving Finished Goods:
The Department filed appeals against the CIT(A) orders for various assessment years regarding the provision for slow moving finished goods made by the assessee. The AO had added the provision amount as not an actual expense. The assessee explained the consistent method of identifying slow moving inventory and creating provisions based on usability and saleability. The CIT(A) accepted the assessee's method, considering the nature of the business involving medical consumables. The Tribunal upheld the CIT(A)'s decision, stating that the method of accounting was consistent and in accordance with accepted principles.

Proceedings u/s 147 - Change of Opinion:
The assessee disputed the proceedings u/s 147 for AY 2001-02, arguing that it was based on a mere change of opinion by the AO. The Tribunal agreed with the assessee, citing the Supreme Court's ruling in CIT Vs Kelvinator of India, emphasizing the need for a live link between reasons and belief of income escaping assessment. The Tribunal held that the proceedings for AY 2001-02 were based on a change of opinion and allowed the cross objection, while dismissing the department's appeal for AY 2002-03.

Provision for Warranty Services and Book Profit Calculation:
In AY 2004-05, the AO disallowed the provision for warranty services as contingent liabilities for book profit calculation under Minimum Alternate Tax Provision. The CIT(A) upheld the addition based on the Explanation to Section 115JB of the IT Act. However, the Tribunal disagreed, stating that the provision for warranty claims did not fall under diminution in asset value and could not be disallowed. The Tribunal found no justification for the addition to book profit under the relevant provisions and partly allowed the cross objection for AY 2004-05.

The Tribunal dismissed the departmental appeals, upheld the CIT(A)'s decision on provision for slow moving finished goods, allowed the cross objection for AY 2001-02, and partly allowed the cross objection for AY 2004-05.