2015 (7) TMI 1261 - AT - Income Tax

Provision for warranty disallowed - there is no consistency in the formula on the basis of which provision is made and there is no reasonable basis behind making estimate for provision for warranty - Held that - The provision of warranty expenses has been made by the assessee on the basis of past experience and on a scientific basis. Even the actual expenditure incurred on subsequent years is more than that for which the provision was made. We, therefore, do not find any justification on the part of the lower authorities in disallowing the claim of the assessee on this issue. The orders of the lower authorities are hereby set aside and the claim of the assessee on this issues is allowed. Claim for deduction of prior period expenses - CIT-A rejecting the claim for deduction on the ground that the relief can be claimed only by filing the revised return - Held that - The taxing authorities should charge the legitimate taxes from the tax payers. They are not supposed to punish them for their bonafide mistakes of not claiming a deduction to which they are otherwise eligible under the provisions of relevant laws. The ld. CIT(A) in appeal was supposed to look into the claim of the assessee and if found genuine then to allow the same as while adjudicating the appeal, he also acts as a quasi-judicial authority . He therefore has also failed to exercise his jurisdiction in the right manner - the order of the Ld. CIT(A) on this issue is set aside and the matter is again restored to him with a direction to look into and consider the claim of the assessee and if the assessee is found eligible for the said claim, then to allow the same accordingly.

Summary

Issues:
1. Disallowance of provision for warranty.
2. Disallowance of prior period expenses.

Issue 1: Disallowance of provision for warranty:
The assessee appealed against the disallowance of provision for warranty amounting to Rs. 45,60,347. The dispute centered around the authenticity and basis of the estimate made for the provision. The CIT(A) upheld the AO's decision, citing lack of consistency and reasonable basis in the formula used for provisioning. However, the assessee argued that the provision was made based on past experience, varying 2-3% of sales value, supported by expert guidance and accounting policy compliance. The ITAT Mumbai found the provision to be reasonable and allowable, created on a scientific and consistent approach. It noted that actual expenses exceeded the provision, indicating prudence. The ITAT set aside the lower authorities' decision, allowing the assessee's claim.

Issue 2: Disallowance of prior period expenses:
The appeal contested the disallowance of expenses totaling Rs. 10,71,714 booked as prior period expenses for FY 2006-07 in the assessment year 2007-08. The AO rejected the claim, emphasizing the need for a revised return for such deductions. The CIT(A) upheld this decision, referring to a Supreme Court case. The assessee argued that the expenses were inadvertently not claimed in the original return and should be allowed based on legal precedents permitting claims before appellate authorities. Citing the Bombay High Court's stance on the powers of appellate authorities, the ITAT Mumbai concluded that the CIT(A) failed to exercise jurisdiction properly. The ITAT directed the CIT(A) to reconsider the claim, emphasizing the right of taxpayers to legitimate deductions. Consequently, the ITAT set aside the CIT(A)'s order and remanded the matter for further consideration.

In conclusion, the ITAT Mumbai allowed the assessee's appeal on both issues, overturning the decisions of the lower authorities and emphasizing the importance of legitimate deductions and proper exercise of jurisdiction by appellate authorities.