2013 (5) TMI 275 - AT - Income Tax

Addition u/s 14A - CIT(A) deleted the addition - Held that - On one hand assessee claims that no expenditure was incurred for earning dividend income and on the other hand, disallows suo moto Rs.1 lac towards earning such income. AO has to reject the claim of assessee and apportion the expenditure on reasonable and acceptable method. Thus this issue required to be restored to the file of the Assessing Officer to decide afresh - revenue s appeal is allowed for statistical purposes. Provision for warranty expenses - CIT(A) deleted the addition - Held that - The assessee company is doing the business of computer software and trading of bought out products. The company also produces softwares to its customers as per their specifications. Thus, the assessee has to provide performance guarantee and for the same, the clauses for warranty is provided. Thus, the sales and warranty were inextricably related to each other. The assessee company is maintaining the accounts on the mercantile system. The liability for warranty expenses is a committed liability at the very initial stage of the sales. The amount of provision based on past experience exhibits a direct nexus between the claim for provision and obligation arising under the warranty clause. Thus it can be said that it is a liability which has arisen in the relevant year though its actual quantification and discharge is deferred to a future date. The facts on the record also do not show that such provision has been made for evading the tax - no fault in the order of CIT (A) - Against revenue.

Summary

Issues involved:
1. Deletion of addition under section 14A of the Income-tax Act, 1961.
2. Deletion of addition on account of provision for warranty expenses.

Analysis:

Issue 1: Deletion of addition under section 14A:
The appeal filed by the revenue challenges the deletion of an addition made by the Assessing Officer under section 14A of the Income-tax Act, 1961. The revenue argued that the assessee, a software company, earned substantial dividend income, implying possible administrative expenses related to such income. The Assessing Officer disallowed expenses based on Rule 8D, which mandates disallowances for exempt income. The revenue contended that the CIT (A) erred in deleting the disallowance. The assessee, on the other hand, claimed no expenditure for earning dividend income and had voluntarily disallowed a nominal amount for administrative expenses. The High Court precedent highlighted the need for the Assessing Officer to verify expenditure claims and adopt a reasonable method for disallowances. The Tribunal found merit in the revenue's argument, directing the issue to be reconsidered by the Assessing Officer for a fresh decision.

Issue 2: Deletion of addition for warranty expenses:
The second ground of appeal concerned the deletion of an addition made by the Assessing Officer for provision of warranty expenses. The revenue argued that the provision was for an unascertained liability, lacking proof of actual liability based on turnover percentage. Citing a High Court case, the revenue contended that the provision should not have been allowed without concrete evidence. The assessee, engaged in software development and trading, justified the warranty provision as a cost against sales, integral to the business transactions. The provision was based on technical estimates and past experience, reflecting a definite liability arising from sales agreements. The Tribunal upheld the CIT (A) decision, recognizing the warranty provision as a committed liability essential for business operations, accrued under the mercantile system. The Tribunal dismissed the revenue's appeal on this issue.

General Note:
The third ground of appeal, of a general nature, was dismissed without adjudication. The Tribunal partially allowed the revenue's appeal for statistical purposes, emphasizing the need for a fresh assessment on the section 14A issue while upholding the deletion of the warranty provision addition.