2011 (9) TMI 1104 - AT - Income Tax

Summary

Issues Involved:
1. Invocation of provisions u/s 263 by the CIT.
2. Disturbance in the computation of Long Term Capital Gains (LTCG).
3. Disallowance of provisions for warranty and discount.
4. Verification of set off of brought forward losses.

Summary:

1. Invocation of Provisions u/s 263:
The assessee contended that the CIT was not justified in invoking the provisions of s. 263 as the order of the AO was neither erroneous nor prejudicial to the interests of revenue. The CIT initiated proceedings u/s 263, stating that the assessment order was erroneous and prejudicial to the interests of revenue due to lower taxation of LTCG on mutual funds, allowance of contingent provisions for warranty and discount, and inadequate verification of set off of capital loss. The Tribunal upheld the CIT's invocation of s. 263, agreeing that the AO had not adequately considered the issues and that the CIT's actions were within his jurisdiction.

2. Disturbance in Computation of LTCG:
The CIT directed the AO to re-examine the computation of LTCG, suggesting that the tax on LTCG should be calculated at 10% without allowing the benefit of indexation as per s. 112 of the Act. The Tribunal found no infirmity in the CIT's direction, noting that the CIT had only asked for verification of the arithmetical accuracy of the LTCG computation in accordance with s. 112, and thus, the assessee's apprehension was unfounded.

3. Disallowance of Provisions for Warranty and Discount:
The CIT disallowed the provisions for warranty and discount, considering them contingent liabilities as per the Audit Report in Form 3CD. The Tribunal, however, noted that the provisions were based on consistent accounting practices and judicial precedents, and thus, were not contingent in nature. The Tribunal remitted the issue back to the AO for re-examination, directing the AO to consider the assessee's contentions and judicial rulings while making a decision.

4. Verification of Set Off of Brought Forward Losses:
The CIT directed the AO to verify the correctness of the set off of brought forward losses, as there was no evidence of such verification in the AO's order. The Tribunal found no abnormality in the CIT's direction, emphasizing the need for verification to ensure the accuracy of the assessee's claim.

Conclusion:
The Tribunal partly allowed the assessee's appeal, upholding the CIT's invocation of s. 263 and directions regarding LTCG and set off of losses, but remitting the issue of provisions for warranty and discount back to the AO for re-examination. The order was pronounced on 26th September 2011 at Bangalore.