2016 (6) TMI 1463 - HC - Income Tax

Recognition of provision - whether the stock has become obsolete or not? - only reason why the Assessing Officer has disallowed the claim of the assessee is on account that the provision is contingent liability cannot be allowed expenditure can be allowed only on payment basis - HELD THAT - ITAT having considered the adequate material placed before it thought it fit not to remit the matter to the AO. It is also noticed that the method of accounting followed by the assessee is mercantile wherein the income and expenditure is on accrual basis. We have examined this issue in the light of the Judgment pronounced by the Apex Court in Rotork Controls Case 2009 (5) TMI 16 - SUPREME COURT wherein the three tests are laid down to recognize a provision under the act. The ITAT being a last fact finding authority has held that all these ingredients which goes to the recognition of provision are satisfied and as such there is no need to remit the matter back to the AO - No ground made out by the revenue to remand the matter back to the Assessing Officer. The claim of expenditure being consistent with the method of accounting followed and the provision has been made on concluded transactions the order of the Assessing Officer is held to be incorrect. We do not see any reason to differ from this view which is in accordance with Section 145 of the Act. Deduction u/s 80HHE - HELD THAT - When no claim for deduction under Sec. 80HHE of the Act was made by the assessee the issue for consideration thereof was an academic exercise. CIT(A) as well as the Tribunal ought not to have made any further observations thereafter for giving treatment for the computation of the deduction under Sec. 80HHE. The observations can be said on hypothesis and surmises. CIT (A) as well as the Tribunal could observe for consideration of the claim of deduction u/s 80HHE in accordance with law. Under the circumstances we find that the observations made by the CIT (A) as well as the Tribunal for the deduction under Sec. 80HHE deserves to be expunged by observing to the extent that the claim if any can be made by the assessee for deduction under Sec. 80HHE is to be considered in accordance with law. Hence to that extent the order of the Tribunal is set aside. Question is answered accordingly to that extent in favour of the Revenue against the assessee.

Summary

Issues Involved:

1. Allocation of expenditure based on sales percentage.
2. Allowability of deduction for obsolete stock.
3. Provision for expenses as an allowable expenditure.
4. Provision for reserves for warranty as an allowable expenditure.
5. Computation of deduction under Section 80HHE of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Allocation of expenditure based on sales percentage:

The primary question was whether the Appellate Authorities were correct in accepting the allocation of expenditure by the assessee based on sales percentage, despite 31.2% of sales being made through franchisers, which did not necessitate the same level of expenditure. The Court noted that this issue was already covered by a previous decision in ITA 902/2008. The Court reiterated that the allocation of expenses for franchise sales, which differ from direct sales, was not properly considered by the CIT and ITAT. The methodology adopted by the Assessing Officer (AO) to exclude franchise sales from total sales was upheld as consistent with accepted accounting principles. Consequently, the matter was remanded to the AO for reassessment, affirming the Revenue's position.

2. Allowability of deduction for obsolete stock:

The second issue concerned the deduction of Rs. 1,18,69,458/- for obsolete stock. The AO had disallowed this deduction due to the lack of evidence regarding the date of purchase and obsolescence. The CIT(A) and the Tribunal, however, accepted the assessee's explanation that the stock was written off due to technological changes and lack of demand, supported by the advice of a technical team and auditors. The Court upheld the Tribunal's decision, emphasizing that the Tribunal is the ultimate fact-finding authority, and the sufficiency of evidence presented by the assessee was adequate. Thus, the deduction for obsolete stock was allowed, and no substantial question of law was found.

3. Provision for expenses as an allowable expenditure:

The third issue was whether the provision for various expenses transferred to a separate account was an allowable expenditure. The Court referred to the Supreme Court's decision in Rotork Controls India (P) Ltd., which laid down three conditions for recognizing a provision: a present obligation from a past event, probable outflow of resources, and a reliable estimate of the obligation. The ITAT had found that these conditions were met and that the method of accounting followed by the assessee was consistent. The Court saw no reason to remand the matter back to the AO and upheld the ITAT's decision, favoring the assessee.

4. Provision for reserves for warranty as an allowable expenditure:

Similar to the third issue, the provision for reserves for warranty was also contested. The Court found that this issue was covered by previous judgments in the assessee's favor, including the Supreme Court's decision in Rotork Controls India (P) Ltd. The ITAT had confirmed that the provision was based on past experience and scientific methods, and the Court upheld this finding, rejecting the Revenue's request for a remand.

5. Computation of deduction under Section 80HHE of the Income Tax Act:

The final issue was the computation of deduction under Section 80HHE, specifically whether expenses incurred in foreign currency and on freight, telecommunication charges, and insurance should be excluded from total turnover and export turnover. The CIT(A) and the Tribunal had directed that if any taxable business income was present before ALP adjustments, the deduction under Section 80HHE should be allowed in accordance with the Tribunal's previous orders. The Court found that since the assessee had not claimed the deduction, the issue was academic. The observations by the CIT(A) and Tribunal were expunged, and it was noted that any future claims should be considered in accordance with the law.

Conclusion:

The appeals were disposed of with the Court upholding the Revenue's position on the allocation of expenditure and remanding the matter for reassessment. The deduction for obsolete stock and provisions for expenses and warranty reserves were upheld in favor of the assessee. The computation of deduction under Section 80HHE was noted as academic, with future claims to be considered as per the law.