2016 (8) TMI 1080 - AT - Income Tax

Revision u/s 263 - Principal Commissioner was of the view that the AO merely allowed provision for warranty expenditure without looking into the aspect of whether such provision was made on a scientific basis as per guidelines laid down by the Hon ble Apex Court in the case of Rotork Control India Pvt.Ltd.(2009 (5) TMI 16 - SUPREME COURT OF INDIA ) - Held that - From perusal of the assessment order it is not discernable whether the AO had applied his mind on this aspect. No doubt once it is established that the AO had applied his mind on this issue and took one of the possible view, it is settled law that CIT cannot exercise jurisdiction u/s 263 of the Act, but in the present case, we have gone through the written submissions filed before the Addl.CIT as well as the ACIT during the course of assessment proceedings wherein the Addl.CIT has sought for details of the provisions made for warranty expenditure. The Addl.CIT, Range 11, in exercise of power vested with him u/s 144A had issued a notice dated 03/12/2012 calling upon the appellant to explain and justify warranty expenditure charges debited of ₹ 14.40 cores and how the same has been calculated on any scientific basis. The appellant only stated the policy being followed by it and also made a mere bald statement that provision was estimated following scientific method. Thus, nowhere the assessee-company has stated what is the scientific method followed by it. The AO, without looking into what scientific basis, merely accepted the submission and allowed deduction thereof. Therefore, it cannot be said that the assessee-company had followed the guidelines laid down by the Hon ble Apex Court in the case of Rotork Control India Pvt.Ltd (supra). Thus, in our considered opinion, constitutes nonapplication of mind on this aspect by the AO. The ratio laid down by the Hon ble Apex Court in the case of Malabar Industries Co. Ltd. (2000 (2) TMI 10 - SUPREME Court ) is squarely applicable to the facts of the case wherein the Hon ble Apex Court held that where AO merely accepted the claim of the assessee in absence of any supporting material without making any enquiry, exercise of jurisdiction by the CIT was held to be justified. - Decided against assessee.

Summary

Issues:
1. Validity of assumption of jurisdiction by Principal Commissioner under sec.263 of the Act.
2. Whether the assessment order passed by the Assessing Officer was erroneous and prejudicial to the interests of revenue.

Issue 1: Validity of assumption of jurisdiction by Principal Commissioner under sec.263 of the Act.

The appeal was filed against the order of the Principal Commissioner of Income-tax under sec.263 of the Income-tax Act, 1961. The Principal Commissioner issued a show cause notice to the assessee regarding the provision for warranty expenditure charged to the P&L account. The assessee contended that the AO had taken one of the possible views on this issue and that the assessment order was not erroneous. However, the Principal Commissioner held that the AO had not examined whether the provision for warranty was made on a scientific basis as required by the Supreme Court's guidelines. The Principal Commissioner set aside the issue for fresh assessment. The assessee challenged this decision, arguing that the AO had considered the issue during assessment proceedings. The Departmental Representative contended that the AO allowed the provision without applying the guidelines. The Tribunal noted that the AO did not apply his mind to the scientific basis of the provision, leading to nonapplication of mind. The Tribunal upheld the assumption of jurisdiction by the Principal Commissioner under sec.263 based on the lack of examination by the AO on the scientific basis of the provision.

Issue 2: Whether the assessment order passed by the Assessing Officer was erroneous and prejudicial to the interests of revenue.

The Tribunal analyzed the submissions made during the assessment proceedings regarding the provision for warranty expenditure. The AO accepted the provision without verifying the scientific basis, which was a requirement as per the Supreme Court's guidelines. The Tribunal referred to legal precedents where the jurisdiction of the CIT under sec.263 was upheld when the AO failed to make any enquiry and accepted the claim without proper examination. The Tribunal concluded that the AO did not take one of the possible views as he did not delve into the scientific basis of the provision. Therefore, the Tribunal dismissed the appeal, upholding the assumption of jurisdiction by the Principal Commissioner under sec.263.

In conclusion, the Tribunal dismissed the appeal, affirming the Principal Commissioner's decision to set aside the assessment order for fresh assessment due to the lack of examination by the Assessing Officer on the scientific basis of the provision for warranty expenditure.