2011 (12) TMI 648 - AT - Income Tax

Issues Involved:
1. Deletion of addition made on account of provision for impairment of stock.
2. Deduction of custom duty deposited with Special Valuation Branch (SVB) loading.
3. Deduction on account of provision for warranty expenses.
4. Chargeability of interest under sec. 234B.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made on Account of Provision for Impairment of Stock:

The revenue contested the deletion of Rs. 18,19,034 out of Rs. 24,25,379 for A.Y. 2004-05 and Rs. 2,60,412 out of Rs. 3,47,216 for A.Y. 2005-06 by the CIT(A) regarding the provision for impairment of stock. The assessee's claim was based on valuing old/used stock at net realizable value. The AO disallowed the claim due to lack of evidence supporting the realizable value and considered the adjustment notional. The CIT(A) restricted the disallowance to 25% of the total disallowance, citing the ITAT Calcutta decision in JCIT vs. I.T.C. Calcutta.

The Tribunal found that the assessee had provided detailed inventory valuations and net realizable values, which were consistent with the method adopted in previous years. The AO had not pointed out any specific defects or irregularities in the valuations. The Tribunal concluded that the assessee's method of valuing stock at cost or net realizable value, whichever is lower, was acceptable and recognized by various courts. Consequently, the Tribunal deleted the 25% disallowance sustained by the CIT(A) and allowed the assessee's total claim.

2. Deduction of Custom Duty Deposited with Special Valuation Branch (SVB) Loading:

The revenue contested the deletion of Rs. 7,93,503 for A.Y. 2004-05 and Rs. 45,556 for A.Y. 2005-06 by the CIT(A) regarding custom duty deposited with SVB loading. The AO disallowed the claims, arguing that no actual payment was made during the relevant years. The CIT(A) directed the AO to verify the actual payment and allow the deduction if the payment was made for the relevant year.

The Tribunal upheld the CIT(A)'s order, noting that the assessee had no option but to make the payment as per the demand notice issued by the customs authorities. The Tribunal referenced the Delhi High Court decision in CIT vs. Hughes Escorts Communications Ltd., which supported the view that such payments fall within section 43B(a) of the Act.

3. Deduction on Account of Provision for Warranty Expenses:

The revenue contested the deletion of disallowance of Rs. 1,04,48,758 for A.Y. 2004-05 and Rs. 87,41,759 for A.Y. 2005-06 by the CIT(A) regarding the provision for warranty expenses. The AO disallowed the claims, arguing that the expenses were based on estimates and not actual liabilities incurred.

The CIT(A) allowed the claims, following the Tribunal's decision in the assessee's own case for A.Y. 2003-04. The Tribunal upheld the CIT(A)'s order, referencing the Supreme Court decision in Rotork Control India P. Ltd. vs. CIT, which held that warranty provisions are integral to the sale price and constitute a present obligation resulting in an outflow of resources. The Tribunal concluded that the assessee's provision for warranty expenses was justified and deductible under sec. 37 of the Act.

4. Chargeability of Interest Under Sec. 234B:

The assessee's ground regarding the chargeability of interest under sec. 234B was noted as consequential. The Tribunal directed the AO to recompute the interest based on the income finally determined in the case.

Conclusion:

The appeals filed by the assessee for both assessment years were allowed, and those filed by the revenue were dismissed. The Tribunal's decision was pronounced on 26th December 2011.

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