2017 (7) TMI 1363 - AT - Income Tax

Bonus redemption expenses addition - liability incurred by the assessee was in the nature of contingent liability and fully dependent upon the uncertain future visit and option of the customers and is not a know liability - CIT deleted the addition - HELD THAT - As decided in own case 2017 (8) TMI 361 - ITAT CHENNAI we do not find any merit, the assessee has provided the liability as soon as the first customer made first purchase, 1% of the first purchase value and liability to give discount to the customer accrued as soon as the first purchase was made. The only passing of discount to the customers is only at second purchase. The assessee is legally bound to pass the reward or discount to the customer as soon as the first purchase was made and if the customer does not make claim for such a discount, the accrual liability not stopped, the assessee is bound to honour its claim. Being so, the quantification of such liability is already determined. There is no dispute regarding quantification of such liability. Case of Bharat Earth Movers Vs. CIT 2000 (8) TMI 4 - SUPREME COURT is directly applicable to the facts of the present case. Accordingly, we have no hesitation in confirming the order of the CIT(Appeals) on this issue. Hence, this ground of Revenue stands dismissed. Addition towards valuation of closing stock - HELD THAT - As decided in own case 2017 (8) TMI 361 - ITAT CHENNAI assessee has valued the unsold stock by discounting purchase price at fixed percentage considering the age of the stock. However, this method of reduction is not following year by year - There is no explanation for such kind of arbitrary reduction of either 25% or 50%. There is no consistency in the method followed by the assessee for valuing the closing stock. The closing stock is to be valued at market price or cost whichever is less and that should be consistent from year to year - assessee is not disputed that it has been followed the same method. Consequent to search action, the assessee wanted to change the method of stock valuation for the first time, which is nothing but an afterthought so as to reduce the income which cannot be permitted at this point of time. - Decided against assessee.

Summary

Issues:
1. Addition of bonus redemption expenses - Contingent liability
2. Valuation of closing stock - Adhoc basis

Issue 1: Addition of bonus redemption expenses - Contingent liability

The appeal involved cross appeals by different assessees and the Revenue against different orders of the CIT(Appeals) for the assessment year 2012-13. The Revenue contended that the CIT(A) erred in deleting the addition of a specific amount under the head of bonus redemption expenses, arguing that the liability incurred was contingent and dependent on uncertain future visits and options of customers. The Tribunal referred to a previous case within the assessee's group where it was held that the provision for bonus cards should be allowed if the liability was certain and quantifiable. The Tribunal emphasized that the liability to provide rewards to customers was certain as per the loyalty card terms, even if customers did not immediately claim them. The Tribunal also noted that the liability accrued in the accounting year under consideration, even if it needed to be quantified and discharged in a subsequent year. Relying on Supreme Court judgments, the Tribunal dismissed the Revenue's appeal, confirming the CIT(A)'s order to delete the addition.

Issue 2: Valuation of closing stock - Adhoc basis

The assessees raised a common ground challenging the confirmation of the assessing officer's addition towards the valuation of closing stock. The method adopted by the assessees involved valuing certain items at a reduced adhoc value, which was found to be incorrect based on sales data. The assessing officer disallowed a specific amount due to undervaluation of stock, which was upheld by the CIT(A) based on a previous Tribunal order. The Tribunal noted that the method of reducing stock value was inconsistent year by year, with arbitrary reductions of 25% or 50% without explanation. The Tribunal emphasized that closing stock should be valued at market price or cost consistently, which was not the case here. The Tribunal rejected the assessees' ground, dismissing all appeals by both the Revenue and the assessees.

In conclusion, the Tribunal's judgment addressed the issues of addition of bonus redemption expenses and valuation of closing stock for the assessment year 2012-13. The Tribunal upheld the deletion of the bonus redemption expenses addition based on the certainty and accrual of the liability. Additionally, the Tribunal dismissed the appeal related to the valuation of closing stock, emphasizing the need for consistent and market-based valuation methods.