2013 (9) TMI 4 - AT - Income Tax

Disallowance of warranty provision - Held that - Expenditure incurred by an assessee for warranty liability is allowable expenditure, provided it is covered by the principles enumerated by the Courts, from time to time, in this regard. As per the established law warranty liability can be considered part and parcel of the sale and might be allowed in computing the taxable income. But, for claiming the allowance one has to furnish a fair, scientific and reasonable basis to the AO - company has not scrutinised the historical trend of warranty provisions made and compared it with the actual expenses incurred. Appellant has failed to prove that figures furnished by it are based on a sensible estimate - appellant has not maintained data systematically .assessee has claimed that gross sales had increased over the years. Assessee in not only dealing in computer peripherals, but it is also engaged in the business of exporting of chemicals and dye stuff, bulk pharmaceuticals and intermediaries. It is not known whether the increase in sales was result of selling of computers or other items - scientific data is not available - there is no need to interfere with the order of the FAA - Decided against assessee. Disallowance u/s 14A - Held that - AO has not mentioned anywhere as how much exempt income was declared by the assessee-company for the year under consideration. He has also silent about the expenditure incurred by the assessee for earning such income. He has disallowed Rs. 23.83 lacs on the assumption that assessee had made investment in shares of two companies and must have earned exempt income. AO/FAA has not enquired about the investments made by the assessee and the availibility of funds with it. Both of them have discussed the legal principles, but have totally missed the facts. In our opinion, if no exempt-income was shown by the assessee in the return of income and no expenditure was claimed by it to earn said income, provisions of section 14A as well as Rule 8D would not be applicable. As the FAA has not discussed these vital issues before rejecting the claim of the assessee, so, we are unable to endorse his views. In short, the basic facts of claim of exempt income and incurring expenses for earning the said income are missing in the matter under consideration - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of provision for warranty for After Sales Service.
2. Addition under Section 36(1)(va) of the Income Tax Act for delayed payment of employees' contribution to Provident Fund.
3. Disallowance under Section 14A of the Income Tax Act as per Rule 8D of the Income Tax Rules.
4. Addition due to difference in reconciliation of AIR report.

Detailed Analysis:

ITA No.8725/Mum/2010 - AY 2005-06

1. Disallowance of Provision for Warranty for After Sales Service:
The Commissioner of Income Tax (Appeals) confirmed the disallowance of Rs.10,10,378/- for warranty provision. The Assessing Officer (AO) found that the amount was a provision for future expenditure, not incurred during the year, and thus not allowable under Section 37(1). The First Appeal Authority (FAA) upheld this, stating that contingent liabilities do not constitute expenditure and cannot be deducted. The assessee's argument that the provision was reasonable considering increased sales was rejected due to lack of scientific basis and historical data. The tribunal upheld the FAA's order, noting the absence of systematic data and sensible estimates.

2. Addition under Section 36(1)(va) for Delayed Payment of PF:
The AO disallowed Rs. 4,032/- for delayed payment of employees' Provident Fund contribution. The FAA upheld this, noting the payment was not made within the grace period. The tribunal reversed this decision, stating that courts allow such payments if made before the due date of filing the return, thus deciding in favor of the assessee.

ITA No.5671/Mum/2011 - AY 2008-09

1. Disallowance under Section 14A as per Rule 8D:
The AO disallowed Rs. 23.83 lakhs under Section 14A, stating the assessee made investments without corresponding disallowance. The FAA upheld this, referencing the Godrej and Boyce Mfg. Ltd. case. The tribunal reversed this, noting the AO did not ascertain exempt income or incurred expenditure, thus deciding in favor of the assessee.

2. Disallowance of Provision for Warranty:
The FAA confirmed the disallowance of Rs. 53,066/-. The tribunal upheld this, following its decision in the previous assessment year, noting the lack of new facts.

3. Addition under Section 36(1)(va) for Delayed Payment of PF:
The AO disallowed Rs. 21,333/- for delayed PF payment. The tribunal reversed this, consistent with its decision for AY 2005-06, deciding in favor of the assessee.

4. Addition due to Difference in Reconciliation of AIR Report:
The FAA confirmed the addition of Rs. 704/-. The tribunal dismissed this ground as it was not pressed by the assessee.

ITA No.3523/Mum/2012 - AY 2009-10

1. Disallowance under Section 14A as per Rule 8D:
The AO disallowed Rs. 31.61 lakhs. The tribunal reversed this, consistent with its decision for AY 2008-09, noting the absence of claimed expenditure or exempt income, thus deciding in favor of the assessee.

2. Disallowance of Provision for Warranty:
The FAA confirmed the disallowance of Rs. 2,51,179/-. The tribunal upheld this, following its decision in earlier years, noting no new facts were presented.

Conclusion:
The appeals filed by the assessee for AY 2005-06, AY 2008-09, and AY 2009-10 were allowed in part, with significant decisions favoring the assessee on delayed PF payments and disallowance under Section 14A, while disallowance of warranty provisions was upheld.