2015 (12) TMI 822 - AT - Income Tax

Disallowance on account of entrance fees u/s.37 - CIT(A) deleted the addition - Held that - CIT(A) while deleting the addition has given a finding that the payment of entrance fees to the club was incurred for the purpose of business and was for smooth and efficient running of business enterprises and that the expenditure was wholly and exclusively for the purpose of business. Before us, Revenue has not brought any material on record to controvert the findings of ld. CIT(A). We therefore find no reason to interfere with the order of ld. CIT(A) and thus the ground of Revenue is dismissed. - Decided against revenue. Disallowance on account of provisions for replacement & warranty charges u/s. 37 - Held that - While deleting the addition ld. CIT(A) has accepted the contention of the Assessee that it was having present obligation as a result of past events resulting in a outflow of resources. Ld. CIT(A) has further given a finding that the method of accounting followed by the Assessee in respect of warranty provisions is consistent and is based on definite scientific method and that the provision of warranty made by the Assessee was not a contingent liability. Before us, Revenue could not controvert the findings of ld. CIT(A) and we therefore find no reason to interfere with the order of ld. CIT(A) and thus the ground of Revenue is dismissed.- Decided against revenue.

Summary

Issues:
1. Disallowance of entrance fees under section 37 of the Act.
2. Disallowance of provisions for replacement & warranty charges under section 37 of the Act.

Issue 1: Disallowance of Entrance Fees
The Revenue appealed against the CIT(A)'s order deleting the disallowance of entrance fees of Rs. 2,81,900 paid by the Assessee to a golf course society. The A.O. disallowed the expense, but the CIT(A) allowed it as a revenue expenditure under section 37 of the Act, stating it was for commercial expediency and business purposes. The CIT(A) ruled that the entrance fee for corporate membership was for the welfare and recreation of employees, essential for efficient business operation. The Revenue failed to provide evidence to challenge this finding. Consequently, the Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal.

Issue 2: Disallowance of Warranty Expenses
The A.O. disallowed the Assessee's provision of Rs. 13,00,000 for replacement and warranty charges, considering it a contingent liability. The CIT(A) reversed this decision, accepting the Assessee's argument that the provision was based on reliable estimates and not contingent. The Assessee's method of accounting for warranty provisions was found consistent and scientifically based. The Tribunal noted that the provision was integral to sales, not a contingent liability, and therefore allowable under section 37 of the Act. The Revenue failed to refute these findings, leading to the Tribunal affirming the CIT(A)'s decision and dismissing the Revenue's appeal.

In conclusion, the Tribunal upheld the CIT(A)'s decisions in both issues, allowing the entrance fees and warranty expenses as legitimate deductions under section 37 of the Act. The Revenue's appeal was dismissed, and the judgments were pronounced on 13-08-2015.