2009 (11) TMI 933 - AT - Income Tax

Summary

Issues Involved:
1. Addition on account of warranty
2. Valuation of closing stock
3. Addition on account of Modvat element in the closing stock
4. Allowability of arbitration award granted
5. Disallowance under Rule 6D
6. Disallowance of gifts
7. Disallowance of obsolete/slow-moving items
8. Disallowance of traveling expenditure
9. Depreciation and investment allowance on technical know-how
10. Depreciation on leasehold improvements
11. Disallowance of provident fund u/s 43B
12. Disallowance of guest house expenses
13. Disallowance of Pooja expenses
14. Disallowance of bad debts
15. Disallowance of entertainment expenditure

Detailed Analysis:

1. Addition on account of warranty:
The assessee followed the proportionate completion of contract method, and the CIT(A) decided in favor of the assessee for AY 1991-92. The revenue opposed this, but the CIT(A) held that the warranty costs are an integral part of the sale price and should be recognized as per AS-9. The Tribunal restored the matter to the AO for quantification of allowability of expenses after considering all facts and circumstances.

2. Valuation of closing stock:
The AO added the difference between the value of inventory furnished to the bank and the closing stock in the balance sheet. The CIT(A) observed that the difference arose due to obsolete items not being netted off from the bank statement and directed the AO to verify and delete the addition. The Tribunal upheld this decision.

3. Addition on account of Modvat element in the closing stock:
The Tribunal, following its earlier decisions and the Supreme Court ruling in Berger Paints India Ltd. vs. CIT, upheld the CIT(A)'s decision to delete the addition made on account of Modvat to closing stock.

4. Allowability of arbitration award granted:
The AO initially agreed to allow the expenditure in AY 1991-92 but later disallowed it, considering it a capital expenditure. The CIT(A) treated the payment as revenue expenditure, similar to a sales commission, and the Tribunal upheld this decision.

5. Disallowance under Rule 6D:
The Tribunal, following its earlier decision, upheld the disallowance of traveling expenses under Rule 6D on a trip-basis rather than total trips undertaken by an employee.

6. Disallowance of gifts:
The CIT(A) deleted the disallowance of gifts made under Rule 6B, considering them customary gifts without the logo for advertisement purposes. The Tribunal upheld this decision.

7. Disallowance of obsolete/slow-moving items:
The AO disallowed 50% of the write-off of obsolete items, but the CIT(A) allowed the full amount, agreeing with the assessee's contention regarding the high rate of obsolescence in the computer market. The Tribunal upheld the CIT(A)'s decision.

8. Disallowance of traveling expenditure:
The AO treated the traveling expenses incurred for acquiring capital goods as capital expenditure, which was upheld by the CIT(A). The Tribunal agreed with this decision but directed the AO to allow depreciation as per law.

9. Depreciation and investment allowance on technical know-how:
The AO disallowed the claim of depreciation and investment allowance on technical know-how fees, applying sec.35AB of the IT Act. The CIT(A) upheld this, but the Tribunal, following its earlier decision, directed the AO to allow depreciation on technical know-how as claimed by the assessee.

10. Depreciation on leasehold improvements:
The AO disallowed depreciation on leasehold improvements, treating the expenditure as capital in nature. The CIT(A) upheld this, but the Tribunal, following its earlier decision, treated the expenditure as revenue in nature and directed the AO to allow it.

11. Disallowance of provident fund u/s 43B:
The AO disallowed certain amounts paid beyond the permissible period, upheld by the CIT(A). The Tribunal restored the matter to the AO to decide in light of the legal discussion and law available at the relevant time.

12. Disallowance of guest house expenses:
The CIT(A) disallowed the guest house expenses, following the Supreme Court decision in M/s Britania Industries Ltd. vs CIT. The Tribunal upheld this decision.

13. Disallowance of Pooja expenses:
The AO disallowed Pooja expenses, considering only a small amount reasonable, which was upheld by the CIT(A). The Tribunal directed the AO to delete the disallowance, considering Pooja expenses as routine business expenses.

14. Disallowance of bad debts:
The AO disallowed the claim for want of specific details, upheld by the CIT(A). The Tribunal restored the issue to the AO to decide after providing an opportunity for hearing to the assessee.

15. Disallowance of entertainment expenditure:
The AO disallowed a portion of the expenditure on Digital Day Celebrations, treating it as entertainment expenditure. The CIT(A) upheld this, but the Tribunal, following its earlier decision, directed the AO to allow the entire expenditure as staff welfare.

Conclusion:
All the appeals of the assessee and the revenue are partly allowed as indicated above.