2017 (12) TMI 1857 - AT - Income Tax

Disallowance of provision for obsolescence of spares - reliance on audit objection - addition made as not actual expenditure incurred by the assessee company; and two that this liability was unascertainable in the hands of the assessee company - CIT-A deleted the addition - HELD THAT - The coordinate Bench of the Tribunal in M/s. Jet Airways (I) Ltd. 2010 (10) TMI 1243 - ITAT MUMBAI while dealing with identical issue has held that the provision for obsolescence of spares is not an ad hoc claim for deduction rather it is a claim in respect of normal wear and tear acceptable in the aeronautic industry and as such, claim is based on provision of Schedule XIV of the Companies Act, 1956 which deals with the rate of depreciation. CIT (A) vide impugned order has thrashed the issue at length to reach at the conclusion that the provision for obsolescence of spares is not an ad hoc provision but on the basis of actual uses of aircraft on hourly basis and maintenance is due after the prescribed hours of uses. It is ascertained liability which is charged as per airline industry practice and standard norms. CIT (A) has rightly deleted an addition made by the AO on account of the provision for obsolescence of spares, being genuine expenditure to run the airline business. So, finding no illegality or perversity in the impugned order, present appeal filed by the Revenue is hereby dismissed.

Summary

Issues involved:
Appeal against deletion of addition on account of disallowance of provision for obsolescence of spares for assessment year 2006-07.

Detailed Analysis:

1. Background of the Case:
The Deputy Commissioner of Income-tax initiated proceedings under section 147 of the Income-tax Act after audit objection regarding provision for obsolescence of spares of Rs.3,49,38,968/- escaping assessment for the assessment year 2006-07.

2. Appeal Process:
The assessee appealed before the Commissioner of Income-tax (Appeals) who deleted the addition. The Revenue challenged this decision before the Tribunal.

3. Key Question:
The main issue was whether the addition made by the AO on account of disallowance of the provision for obsolescence of spares, which was not actual expenditure during the year, was sustainable.

4. Arguments Presented:
The Revenue argued that the deletion of the addition was erroneous. The assessee relied on a Tribunal order in a similar case to support their position.

5. Tribunal's Decision:
The Tribunal noted that the provision for obsolescence of spares was not an ad hoc claim but a legitimate expense related to normal wear and tear in the aeronautic industry. The Tribunal cited the Companies Act and international accounting standards to support the assessee's claim.

6. Comparison with Precedent:
The Tribunal found the facts of the current case similar to a previous case involving M/s. Jet Airways (I) Ltd., where the Tribunal had ruled in favor of the assessee regarding the provision for obsolescence of spares.

7. Conclusion:
The Tribunal upheld the decision of the Commissioner of Income-tax (Appeals) to delete the addition of Rs.3,49,38,968/-, considering it a genuine expenditure essential for running the airline business. The appeal filed by the Revenue was dismissed due to the absence of any legal or factual flaws in the impugned order.

In summary, the Tribunal's judgment favored the assessee by accepting the provision for obsolescence of spares as a legitimate expense, following established accounting standards and industry practices, ultimately dismissing the Revenue's appeal.