2016 (9) TMI 863 - HC - Income Tax

Addition on account of disallowance of quality claim expenses - failure to furnish evidence - ITAT allowed the claim - Held that - Commissioner as well as the Tribunal concurrently held that there was sufficient evidence on record to establish that the assessee had, in fact, suffered a loss of ₹ 2.90 crores on account of quality claim. The assessee pointed out that some of the exports suffered from total rejection or objection of inferior quality. Instead of re-importing such goods and selling in India which would be economically unviable, the assessee sold it to traders in the country of export for which the assessee was forced to give huge discounts. The purchasers had raised debit note, and thus charged such discounts to the assessee. This was thus, neither a case of unascertained nor a case of contingent liability. Merely because the assessee in the accounts, mentioned as a provision would not be conclusive of a nature of claim. This is precisely what the Commissioner held and observed. In fact, the assessee had charged such sum to the profit and loss account thereby deducting the expenditure for all practical purpose. In the present case the liability was not only certain, it was also discharged presently and not differed for a later date. The assessee had received debit notes from the buyers and accepting such liability, had debited a sum of ₹ 2.90 crores in the P & L account. - Decided against revenue

Summary

Issues:
Assessee's claim of deduction of quality claim expenses - Justification of claim based on evidence - Disallowance by Assessing Officer - Appeal before Appellate Commissioner - Commissioner's acceptance of claim - Tribunal's rejection of Revenue's appeal.

Analysis:
The judgment revolves around the assessee's claim of deduction of quality claim expenses amounting to ?2.90 crores. The Assessing Officer disallowed the claim, stating it was made on an estimation basis without proper evidence. The Appellate Commissioner, however, accepted the claim after detailed examination. The Commissioner noted that the claim was based on specific material on record, including debit notes raised by buyers for defective goods exported by the assessee. The claim was determined through a technical and scientific process, not as a provision for bad debts. The Commissioner emphasized that the true nature of the transaction determines its allowability, not just the accounting entry. The Tribunal upheld the Commissioner's decision, stating that the claim was not contingent or unascertained, as evidenced by the quantification and material on record.

The Tribunal referenced the Supreme Court's decision in Bharat Earth Movers Ltd. vs. CIT, emphasizing that if a business liability has definitely arisen in the accounting year and can be estimated with reasonable certainty, the deduction should be allowed. In this case, the liability of ?2.90 crores was certain and discharged presently, as evidenced by the debit notes received from buyers. The Tribunal concluded that the assessee had suffered a loss on account of quality claim, which was not unascertained or contingent. Therefore, the Tribunal rejected the Revenue's appeal, affirming the Commissioner's decision to allow the deduction.

In summary, the judgment highlights the importance of substantiating claims with evidence, the significance of the true nature of transactions, and the criteria for allowing deductions for certain liabilities incurred during the accounting year. The decision underscores the need for proper documentation and material to support claims, as well as the application of legal principles to determine the allowability of deductions in tax matters.