2016 (5) TMI 1087 - AT - Income Tax

Addition on account of sales returns/warranty scraped at customers end - Held that - The goods at the customers end who scrapped out the same and the assessee receives the net consideration. In this regard, the assessee had furnished confirmation from M/s. Vee Three North America, USA. After verifying the explanation of the assessee, the Learned CIT(Appeals) found that certain items which were shown as sales return, not shown in RGI registers at the end of the assessee itself supports the claim of the assessee that such items were not physically returned to the assessee keeping in view the high cost of shipping of the goods that were found defective and rejected were not physically returned to the assessee. The Learned CIT(Appeals) also found strength in the claim of the assessee on the basis that as a prudent businessman, the assessee considered it appropriate to not incur freight expenses and instead allowed the overseas customers to scrap the goods returned by them. Since necessary confirmation was also furnished by the assessee in support, we are of the view that the Learned CIT(Appeals) was justified in deleting the addition in question - Decided against revenue Addition made on account of excess depreciation on certain assets - Held that - The claimed depreciation of the assessee was based upon its submission that it had not only installed but had also put to use the assets purchased in March 2009, which were considered as not having been used by the Assessing Officer while making the disallowance in question. The Learned CIT(Appeals) has, however, deleted the disallowance as the claim of user of the assets purchased in March 2009 was supported by copies of bills, GRN, PRR showing the testing and use of the assets. It was also submitted that the first appellate authority had already allowed the appeal on this ground in the assessment year 2006-07. We thus do not find infirmity in the first appellate order deleting the disallowance made on account of claimed depreciation. The same is upheld.- Decided against revenue Disallowance made under sec. 14A - Held that - As per provisions of sec. 14A(2), the Assessing Officer was firstly required to record his dissatisfaction with the working of the assessee with cogent reason. The Learned CIT(Appeals) found that the assessee itself had made disallowance through the mechanism of Rule 8D in its return of income as per the details furnished before him. The contention of the assessee remained that the investment which had not resulted in tax exempt income ought to have been excluded from the terms average investment for calculating the disallowance under Rule 8D. The Learned CIT(Appeals) was of the view that interest on various borrowings that were relatable to specific purposes (other than earning of dividend income) ought not to have been considered for making disallowance under Rule 8D (2)(ii). Accordingly, he held that for making disallowance under Rule 8D(2))(ii) interest expenses of ₹ 3,88,932 alone is to be considered. He observed further that for the purpose of average investment, an amount of ₹ 71 lacs which was towards making investment resulting in taxable income are also to be excluded. He accordingly worked out disallowance under sec. 14A at ₹ 2,49,843 giving relief of ₹ 1,03,912 in this regard to the assessee. We thus find that the first appellate order on the issue is comprehensive and reasoned one. - Decided against revenue

Summary

Issues:
1. Deletion of addition made on account of sales returns/warranty scrapped at customers end.
2. Deletion of addition made on account of excess depreciation on certain assets.
3. Deletion of disallowance made under sec. 14A of the Act.

Issue 1 - Sales Returns/Warranty Scrapped at Customers End:
The Revenue challenged the first appellate order, questioning the deletion of additions made on account of sales returns and warranty scrapped at customers' end. The Assessing Officer disallowed sales returns not recorded in the RGI registers, alleging lack of evidence to support the claim. However, the assessee provided confirmation from a customer in the USA regarding the rejection and destruction of goods at their premises. The CIT(A) accepted the explanation, considering the high shipping costs for returned goods. The ITAT upheld the CIT(A)'s decision, noting that the confirmation supported the claim, and the assessee acted prudently by allowing customers to scrap rejected goods to save on freight expenses.

Issue 2 - Excess Depreciation on Certain Assets:
The Revenue contested the deletion of disallowance of depreciation on assets purchased but allegedly not put to use. The CIT(A) overturned the disallowance, citing evidence such as bills and testing reports showing asset usage. The ITAT upheld the CIT(A)'s decision, emphasizing that the assets were indeed utilized, as evidenced by documentation, and previous years' assessments supported the claim.

Issue 3 - Disallowance under sec. 14A of the Act:
The Revenue challenged the deletion of disallowance made under sec. 14A of the Act. The Assessing Officer disallowed expenses, invoking Rule 8D, despite the assessee's initial disallowance in its return. The CIT(A) found fault with the AO's application of Rule 8D without justifying dissatisfaction with the assessee's working. The CIT(A) recalculated the disallowance, excluding certain interest expenses and investments, resulting in a reduced disallowance. The ITAT upheld the CIT(A)'s decision, emphasizing the need for the AO to justify deviations from the assessee's working and excluding certain expenses from the disallowance calculation.

In conclusion, the ITAT dismissed the appeal, upholding the CIT(A)'s reasoned decisions on all issues, emphasizing the importance of supporting evidence and proper application of tax rules.