2022 (6) TMI 1401 - AT - Income Tax

Allocation of the common expenses - CIT(A) accepting the cost of goods sold as the basis for allocation of the common expenses - assessee claiming deduction under section 10 (1) as engaged in the business of seed production, research, marketing of field and vegetable crops and wind power generation - HELD THAT - It is pertinent to note that as rightly observed by the Ld. CIT(A) every methodology of estimation suffers from limitation and such limitations causing variations how to be smooth and on consistent application of the same principle. CIT(A) was of the opinion that inasmuch as for the earlier assessment years the assessee adopted the basis of cost of goods sold as a reasonable method of apportionment of the agricultural and non-agricultural expenses out of the common expenses. As both the cost of goods sold and also the turnover of different activities, to be the basis for allocation of the common expenses to have their own way and cess and variations, what is required is the following of the consistent method. Inasmuch as there is no dispute that the assessee has been consistently following the method by forgetting the common expenses on the basis of cost of goods sold, the rule of consistency demands that the same shall not be disturbed for a particular assessment year because it goes against the interest of Revenue. We, therefore, accept the reasoning adopted by the Ld. CIT(A) and hold that there is nothing wrong in the Ld. CIT(A) accepting the cost of goods sold as the basis for allocation of the common expenses. Allowing the provision for sales returns - It is a fact that the assessee supplies seeds to its distributors located in the states of Kerala, Andhra Pradesh and Karnataka and after the season is complete the sales distributors identify the stock of seeds of various varieties which are not sold by the end of Ruby season of plantation. No perversity in the findings of the Ld. CIT(A). In view of the seasonal nature of the business and also the short shelf life of the seeds, it is imperative for the assessee to take into account the quantity of unsold seats at the end of the year and the need to revalidate their further utility and to take them into stock in the next season. In the circumstances it cannot be said that the provision for sales returns is unascertained or unreasonable. With this view of the matter, we allow the contentions of the assessee and uphold the findings of the Ld. CIT(A). Decided against revenue.

Summary

Issues:
1. Allocation of common expenses based on cost of goods sold vs. turnover of different activities.
2. Disallowance of provision for sales returns.

Allocation of Common Expenses:
The Revenue challenged orders passed by the Commissioner of Income Tax (Appeals) regarding the allocation of common expenses for the assessment years 2012-13 to 2014-15. The Assessee, engaged in seed production and trading, claimed deductions under section 10(1) of the Income Tax Act for income from seed production. The Assessing Officer disagreed with the Assessee's allocation of common expenses based on cost of goods sold, preferring to locate expenses using turnover of different activities. The Commissioner held that the Assessee's method was reasonable as it reflected appropriate allocation of common costs. The Tribunal agreed, emphasizing the need for consistent application of the chosen method, ultimately dismissing the Revenue's appeal.

Provision for Sales Returns:
Regarding the provision for sales returns disallowed by the Assessing Officer for the assessment year 2014-15, the Commissioner noted that all sales returns were accounted for in the books and thus could not be treated as an asset or liability. The Revenue argued that the provision was not allowable as revenue expenditure due to being created for an unascertained liability. However, the Assessee explained that the provision was based on industry practice, considering uncertainties in predicting sales returns due to seasonal business nature. The Tribunal upheld the Commissioner's decision, stating that the provision for sales returns was necessary due to the seasonal and short shelf life nature of the business, dismissing the Revenue's appeal.

In conclusion, the Tribunal dismissed all appeals of the Revenue, affirming the Commissioner's decisions on both the allocation of common expenses and the provision for sales returns.