2016 (2) TMI 169 - AT - Income Tax

Revision u/s 263 - improper enquiry on provisions for warranty, excise duy,sales tax and liquidated damages - Held that - CIT has rightly invoked the provisions of section 263 of the Act as the A.O. failed to make proper enquiry, examination and verifications as warranted for the proper completion of the assessment, with respect to claim of deduction of ₹ 17.72 crores with respect to the provisions for warranty, excise duy,sales tax and liquidated damages. Regarding the contentions of the assessee company that the CIT should have set aside the orders passed by the AO after giving appeal effect to the orders of the tribunal in the first round has to be rejected as the basic facts remains that the AO has not made any enquiry, examination or verification of the claim of the assessee company with respect to claim of deduction of provision of ₹ 17.72 crores with respect to provisions for warranty, sales tax, excise duty and liquidated damages , the order of the Tribunal would have adjudicated issues arising out of the orders of the authorities below whereby the facts still remains that the AO has not made any enquiry, examination or verification of the claim of the assessee company with respect to claim of deduction of provision of ₹ 17.72 crores with respect to provisions for warranty, sales tax, excise duty and liquidated damages. The order of the Tribunal in the first round of litigation has not been incidentally enclosed by the assessee company in the documents/paper book filed with the Tribunal. It is an established principle under the Act that provisions and contingent expenses are not allowed as deduction while computing the income of the assessee. It is only an ascertained liability which has crystallized during the year and which is wholly and exclusively incurred for the purpose of business of the assessee company , is allowed as deduction while computing income under the Act. The A.O. was under duty to make necessary and proper enquiry, examination and verification s with respect to Provisions of ₹ 17.72 crores with respect to the claim of deduction of the assessee company for provisions for liquidity damages, warranty, sales tax and excise duty, while on perusal of the assessment orders u/s 143(3) of the Act dated 28.12.2010 and other documents filed before us, we have observed that the AO has not made any enquiry whatsoever with respect to the claim of deduction of expenses of ₹ 17.72 crores towards Provision for Warranty, Sales tax and excise duty and liquidated damages claimed by the assessee company while computing the income of the assessee company and the claim of the assessee company was accepted without any inquiry, examination or verification whatsoever by the AO and In the absence thereof of enquiry, examination and verification of the claim of the asssesee company for deduction of provisions for Warranty, Sales tax and excise duty and liquidated damages amounting to ₹ 17.72 crores , we find no infirmity in the order dated 06.02.2013 of the CIT passed u/s 263 of the Act setting aside the assessment order dated 28.12.10 passed u/s 143(3) of the Act as erroneous in so far as prejudicial to the interest of the Revenue and directing the AO to assess the income of the assessee company after making necessary enquiries, examination and verifications , which order of the CIT dated 06.02.2013 , we uphold . - Decided against assessee

Issues Involved:
1. Validity of revisionary proceedings under Section 263.
2. Violation of natural justice.
3. Claim for deduction of expenses on account of warranty, liquidated damages, sales tax, and excise duty.
4. Levy of interest under Section 234D.
5. Jurisdiction of the Tribunal to adjudicate appeals against orders passed under Section 143(3) read with Section 263.

Issue-wise Detailed Analysis:

1. Validity of Revisionary Proceedings under Section 263:
The assessee company challenged the legality and validity of the order dated 06.02.2013 passed by the CIT under Section 263 of the Income Tax Act, 1961. The CIT initiated revisionary proceedings on the grounds that the assessment order passed by the AO was erroneous and prejudicial to the interest of the revenue. The CIT observed that the AO failed to carry out necessary inquiries regarding the provisions for warranty, sales tax, excise duty, and liquidated damages, which were claimed as deductions by the assessee company. The CIT relied on various judicial precedents, including Malabar Industrial Co. Ltd. v. CIT, to support the invocation of Section 263. The Tribunal upheld the CIT's order, stating that the AO did not make any inquiry, examination, or verification regarding the claimed deductions, rendering the assessment order erroneous and prejudicial to the revenue.

2. Violation of Natural Justice:
The assessee company contended that the CIT completed the revisionary proceedings hastily without giving sufficient time and opportunity to present evidence and documents. The company argued that proper procedures were not followed, and the assessment was made in violation of natural justice. However, the Tribunal found that the CIT provided the assessee with an opportunity to be heard and made necessary inquiries before passing the order under Section 263. Therefore, the Tribunal dismissed the claim of violation of natural justice.

3. Claim for Deduction of Expenses on Account of Warranty, Liquidated Damages, Sales Tax, and Excise Duty:
The assessee company argued that the provisions for warranty, liquidated damages, sales tax, and excise duty were lawful business expenditures made in accordance with Accounting Standard 29 and were allowed by the AO after due consideration. The company emphasized that these provisions were based on past experience and were regularly accounted for in the financial statements. The CIT, however, directed the AO to disallow these claims, stating that the AO did not examine the basis for these provisions and whether the liabilities had crystallized during the relevant assessment year. The Tribunal upheld the CIT's order, noting that the AO failed to make necessary inquiries and verifications regarding the claimed deductions.

4. Levy of Interest under Section 234D:
The assessee company challenged the levy of interest under Section 234D, arguing that it was charged without giving an opportunity for a hearing and without a speaking order. The Tribunal did not specifically address this issue in detail but upheld the CIT's order under Section 263, which included directions for the AO to reassess the income after necessary inquiries.

5. Jurisdiction of the Tribunal to Adjudicate Appeals Against Orders Passed under Section 143(3) Read with Section 263:
The assessee company filed an appeal directly before the Tribunal against the order dated 24.02.2014 passed by the AO under Section 143(3) read with Section 263. The Tribunal observed that appeals against such orders should be filed before the CIT(A) under Section 246A(1)(a) of the Act. The Tribunal dismissed the appeal, stating that it did not have jurisdiction to adjudicate the appeal directly. The assessee company was advised to file an appeal before the CIT(A), who should consider the fact that the assessee was pursuing the appeal at the wrong forum.

Conclusion:
The Tribunal upheld the CIT's order under Section 263, directing the AO to reassess the income after making necessary inquiries and verifications regarding the provisions for warranty, liquidated damages, sales tax, and excise duty. The Tribunal also dismissed the appeal filed directly before it against the order passed under Section 143(3) read with Section 263, directing the assessee company to approach the CIT(A) for adjudication on merits.

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