2013 (11) TMI 181 - AT - Income Tax

Allowance of expenditure on the warranty/guarantee Addition of claim of loss of Rs. 2016607/- - Held that - Claim of loss of Rs. RS.2016607/- was sustained by the assessee company in the normal course of business - It is an established business practice that in cases of setting up of plant and machinery/ manufacturing units, normally, performance guarantee and warranty agreements are executed between the supplier of plant and machinery and the buyer. Therefore, any defects/mistakes pointed out/detected during the currency of warranty/performance guarantee, it is the contractual obligation on the part of the supplier to remove those defects. In the present case, the loss of RS.20,16,607/- was sustained by the assessee company on account of rectifications carried out with respect to the palm oil mill established at Pothapalli (Andhra Pradesh) and supply of Hydraulic Bunch Hopper and skid steer system Decided against the Revenue. Classification of expenditure as Revenue expenditure or capital expenditure Expenditure of Rs. 10.12 lacs on account of payment of membership fee and registration fee to Bio Diesel Association Held that - Expenditure in this case has been incurred in connection with enabling engineers and other technical staff to participate in conferences and discussions organized by the Bio Diesel Association of India. The discussion held in the conferences were academic in nature and highlight the constraints faced by the industry and the new technologies and trends emerging as a result of globalization of economy. The problem faced in day to day working of bio diesel industry also come up from discussions and suggestions made during such discussions help the technical staff in solving the day to day problems The expenditure is held as Revenue expenditure Decided against the Revenue.

Summary

Issues Involved:
1. Initiation of Reassessment Proceedings
2. Deletion of Addition on Account of Bad Debts Written Off
3. Deletion of Disallowance on Account of Loss in Contract Receipts
4. Deletion of Disallowance of Expenditure on Gold Sponsorship Fee and Registration Fee
5. Disallowance of Interest in Respect of Sister Concerns

Issue-Wise Detailed Analysis:

1. Initiation of Reassessment Proceedings:
The Revenue appealed against the Ld. Commissioner of Income Tax (Appeals) [CIT(A)]'s decision that the initiation of reassessment proceedings was not sustainable in law. The assessee had filed its return of income, and the original assessment was completed without adding back the bad debts written off. The case was reopened under Section 147 of the Income Tax Act. The assessee objected, stating that all material facts had been disclosed during the original assessment. The CIT(A) noted that the reopening was based on the tax audit report, which had already been considered during the original assessment. The CIT(A) concluded that the reopening was based on a change of opinion, which is not permissible. The Tribunal agreed with the CIT(A) and held that the reassessment proceedings were not sustainable in law, citing the Supreme Court decision in Foramer France (264 ITR 566).

2. Deletion of Addition on Account of Bad Debts Written Off:
The CIT(A) deleted the addition of Rs. 78,10,046/- on account of bad debts written off, which the Assessing Officer (AO) had added back during reassessment. The CIT(A) found that the bad debts had been fully disclosed and justified during the original assessment, and the AO had made detailed inquiries at that time. The Tribunal upheld the CIT(A)'s decision, agreeing that the reassessment was based on a change of opinion without any fresh material.

3. Deletion of Disallowance on Account of Loss in Contract Receipts:
The Revenue appealed against the deletion of disallowance of Rs. 20,16,607/- claimed as a loss in contract receipts. The assessee explained that the loss was due to rectification work for a project completed for M/s. Godrej Agrovet Limited. The CIT(A) found that the loss was incurred in the normal course of business and was justified by the performance guarantee and warranty agreements. The Tribunal agreed with the CIT(A), noting that the loss was a contractual obligation and was incurred during the normal business activities.

4. Deletion of Disallowance of Expenditure on Gold Sponsorship Fee and Registration Fee:
The Revenue challenged the deletion of disallowance of Rs. 10,12,000/- incurred on gold sponsorship fee and registration fee for a conference. The AO had treated this expenditure as capital in nature. The CIT(A) held that the expenditure was recurring and did not result in any enduring benefit, thus qualifying as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, agreeing that the expenditure was for updating the knowledge of the assessee's technical staff and was therefore revenue in nature.

5. Disallowance of Interest in Respect of Sister Concerns:
The assessee filed a cross-objection against the disallowance of interest of Rs. 87,448/- related to advances to sister concerns. The AO had disallowed the interest, assuming that the advances were not for business purposes. The CIT(A) deleted the disallowance related to one sister concern but upheld it for others. The Tribunal found that the assessee had sufficient surplus funds and there was no direct nexus between borrowed funds and the advances. Citing the Delhi High Court judgment in C.I.T. vs. Tin Box Co. (260 ITR 634), the Tribunal allowed the cross-objection, holding that the interest was properly allowable.

Conclusion:
The Tribunal dismissed the Revenue's appeals for both assessment years and allowed the assessee's cross-objection, upholding the CIT(A)'s decisions on all issues.