2016 (5) TMI 1016 - AT - Income Tax

Addition of bad debts/advances written off - Held that - We find that the advances were given to the farmers before start of the farming season for buying back trial seeds produced by them in their farm lands. On perusal of the records and submissions of the assessee, the same seeds were not suitable for sale in the market and hence, were not procured from the farmers. Therefore, the assessee has written off to the advance in the ordinary course of business, relating to such non-saleable seeds at the end of the year. Therefore, it fit to be allowed as business expenditure of ₹ 6,59,193/-. However, as far as the remaining amounts of ₹ 6,01,457/-, ₹ 3,80,303/- and ₹ 3,09,503/- are concerned, it is evident from record that the AO has given sufficient opportunities to the assessee to furnish basic details as to in which year, the entries were passed to substantiate the claim. The books of account of the assessee are audited by the Chartered Accountant. Therefore, the assessee could substantiate its claim before the AO, but he failed to do so. Therefore, in our considered opinion, the AO has rightly disallowed these amounts out of the claim of assessee and the findings of the ld. CIT(A) in this regard are liable to be reversed. Depreciation on UPS - Held that - Computer accessories and peripherals such as, printers, scanners and server etc. form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, UPS are the part of the computer system, they are entitled to depreciation at the higher rate of 60%. 2010 (8) TMI 58 - DELHI HIGH COURT Provision for sale return - Held that - Accountancy principle of conservatism, which has been duly recognized by the Courts, mandates that anticipated losses are to be provided for in the computation of income but it does not permit anticipated profits to be taken into account till the profits actually arise. Even an anticipated loss, even if it may not have crystallized in the relevant previous year, is to be allowed as a deduction in the computation of business profits. There is no dispute that sales have been returned in the subsequent year and this fact is known before the date of finalization of accounts. Therefore, there is no point in first taking into account income on sales, which never reached finality, and then accounting for loss on sales return in the subsequent year i.e. in which sales return did take place. In our considered view, the approach of the assessee is in consonance with the well settled accountancy principles and the Assessing Officer was not justified in rejecting the same. The disallowance for provision for sales return is, accordingly, deleted. Allowable business expenditure - advances given - Held that - We find that the advance was given to A E Consultants for setting up a construction of green house. This project was not materialized and the advance given to the architects for setting up of the project, could not be recovered. In view of this, the assessee has written off the same in the books of account as bad debts/advances written off in the ordinary course of business. In presence of these facts this expenditure was allowable as business expenditure and cannot be treated as capital expenditure as observed by the ld. CIT(A) Expenditure towards payment as license fees - Held that - Once the addition made by AO of ₹ 25 lacs under reference, stands deleted by the ld. CIT(A) in appeal for A.Y. 2005-06, as submitted by assessee itself, the ground of assessee praying for accepting the same claim in the present appeal becomes infructuous.

Summary

Issues Involved:
1. Deletion of addition on account of provision for special discount.
2. Relief in respect of bad debts written off.
3. Allowance of depreciation on UPS.
4. Disallowance of provision on sales return.
5. Disallowance of bad debts/advances written off.
6. Claim for payment towards license fees.

Detailed Analysis:

1. Deletion of Addition on Account of Provision for Special Discount:
The Revenue challenged the deletion of the addition of ?1,13,30,942/- on account of provision for special discount. The assessee had provided this discount based on various market dynamics and actual sales status known post balance sheet date. The Assessing Officer (AO) disallowed this as it was considered a probable future expenditure. The CIT(A) allowed the claim, stating the liability was certain and only the exact calculation was finalized later. The Tribunal upheld the CIT(A)'s decision, referencing previous ITAT rulings and judicial precedents that supported the provision for special discount as a reasonable and allowable expense.

2. Relief in Respect of Bad Debts Written Off:
The AO disallowed a sum of ?26,40,456/- claimed as bad debts/advances written off, stating the assessee failed to provide necessary details. The CIT(A) provided partial relief, allowing ?19,50,453/- while disallowing ?6,90,000/- as capital expenditure. The Tribunal found that the advances to farmers were business expenses and allowed ?6,59,193/- as business expenditure. However, the Tribunal upheld the AO's disallowance of ?6,01,457/-, ?3,80,303/-, and ?3,09,503/- due to lack of substantiating details.

3. Allowance of Depreciation on UPS:
The AO allowed depreciation on UPS at 25% instead of the claimed 60%, treating it as plant and machinery rather than computer peripherals. The CIT(A) allowed the higher rate, and the Tribunal upheld this decision, referencing the Delhi High Court's ruling in CIT vs. Orient Ceramics and Inds. Ltd., which allowed 60% depreciation on UPS.

4. Disallowance of Provision on Sales Return:
The assessee claimed ?22,73,735/- as provision for sales return, which the AO disallowed, considering it uncertain and contingent. The CIT(A) upheld the AO's decision. The Tribunal, however, found that the provision was based on actual bills and details received post balance sheet date but before finalization of accounts, aligning with the ITAT Mumbai's ruling in the assessee's case for AY 2007-08. The Tribunal allowed the provision as a deductible expense.

5. Disallowance of Bad Debts/Advances Written Off:
The AO disallowed ?6,90,000/- given to A+E Consultants for a project that was discontinued, treating it as capital expenditure. The CIT(A) upheld this disallowance. The Tribunal, referencing judicial precedents, found that the advance was a business expenditure and allowed it as a business loss.

6. Claim for Payment Towards License Fees:
The assessee claimed ?25,00,000/- as license fees paid to Mahyco Monsanto Biotech (India) Ltd., which was disallowed by the AO for AY 2005-06, stating it pertained to AY 2004-05. The CIT(A) did not entertain the claim as it was not included in the original or revised return. The Tribunal dismissed this ground as infructuous since the CIT(A) had already deleted the addition for AY 2005-06.

Conclusion:
Both the Revenue's and the assessee's appeals were partly allowed. The Tribunal upheld the CIT(A)'s decisions on the provision for special discount, depreciation on UPS, and provision for sales return. It allowed the business expenditure on advances written off but upheld the disallowance of certain bad debts due to lack of details. The claim for license fees was dismissed as infructuous.