2018 (1) TMI 893 - AT - Income Tax

Revision u/s 263 - whether twin conditions viz. erroneous and prejudicial to the interest of the revenue as envisaged by the provisions of Section 263 are, prima-facie, fulfilled or not? - Held that - The perusal of the quantum order reveals that AO has nowhere discussed the allowability / admissibility of the six items as enumerated by Ld. CIT in the show-cause notice - CIT, after perusal of Tax Audit Report, noted that these items were required to be disallowed or added back to the income of the assessee but Ld. AO omitted to do so. After perusing the quantum order, show-cause notice, we are of the opinion that Ld. AO has omitted to note those six points as reported in the Tax Audit Report while framing the quantum assessment order. The Ld. AR could not show any evidence to demonstrate that discussions on any of these items were, at all, made during quantum assessment proceedings and they same were duly noted by Ld. AO. - Decided against assessee Allowability of share issue Expenses - Held that - As these expenses are incurred by the assessee are capital in nature being incurred to expand the capital base of the company and hence, disallowable. Therefore, additions to that extent stand confirmed. Similarly, the Ld. Sales Tax Penal charges Allowability - Held that - Since Ld. AR could not produce any documentary evidence to prove the same, the matter being factual one, is being restored to Ld. AO for the limited purpose of verification of the stated fact as contended by Ld. AR Advances written off - write-off of certain advances given to various employees to incur expenditure on tours, miscellaneous advances etc. and write-off of earnest money deposits while making tender / bid to a potential customer - Held that - We find that these expenses are routine business expenditure for the assessee and incurred to ensure day-to-day running of assessee s business and therefore, allowable Commission on warranty income - as contended that the assessee undertakes the warranty of the equipment supplied by the foreign group companies - Held that - It is uncontroverted fact that the assessee is consistently following the same method of accounting for recognition of commission income over past several years. A perusal of detailed working of the same as placed on Page No. 151 reveals that the said income has been apportioned on the basis of number of expired and unexpired warranty days, which lends strength to various arguments of Ld. AR. Therefore, without delving much deeper into the issue, the impugned addition stands deleted subject to verification of the fact by Ld. AO that this impugned income has been offered by the assessee to tax in subsequent years. Addition on account of provision for gratuity - Held that - It is settled proposition that deduction could be allowed to assessee only against ascertained liabilities and not mere provision. The Ld. AR could not demonstrate the working of arriving at the said provision. It is also noted that the assessee did not produce any evidence in this regard before any of the lower authorities and the documents being presented before us in the form of actuarial valuation report constitute additional evidences. Hence, without delving much deeper into the issue, we restore the same to the file of Ld. AO for re-appreciation of assessee s contention & documentary evidences and decide as per law. The assessee, in turn, is directed to substantiate his claim in this regard before Ld. AO and also demonstrate the crystallization / accrual of the liability failing which Ld. AO shall be at liberty to dispose-off the same on the basis of material available on record. This ground stands allowed for statistical purposes.

Summary

Issues:
1. Jurisdiction under Section 263 challenged in ITA 4288/Mum/2011
2. Quantum additions contested in ITA 3550/Mum/2012

Analysis:

Issue 1: Jurisdiction under Section 263 (ITA 4288/Mum/2011)
The appeal challenged the invocation of revisional jurisdiction under Section 263 by the Ld. CIT. The Ld. CIT directed the Ld. AO to frame a fresh assessment for the AY 2006-07 after noting certain omissions in the Tax Audit Report. The omissions included items like Share Issue Expenses, Sales Tax Penal Charges, Provision for Gratuity, Advances Written Off, Provision for Doubtful Debts, and Commission on Warranty Income. The ITAT found that the Ld. AO had not discussed the allowability of these items during the assessment proceedings. As a result, the ITAT agreed with the revenue that the quantum assessment order was erroneous and prejudicial to the revenue's interest, justifying the invocation of revisional jurisdiction under Section 263. Therefore, the ITAT dismissed the assessee's appeal.

Issue 2: Quantum Additions (ITA 3550/Mum/2012)
In this appeal, the assessee contested the quantum additions made by the Ld. AO in the consequential order passed under Section 143(3) read with Section 263. The additions totaled ?90,94,642 across six items. The ITAT examined each item individually. It confirmed the disallowance of Share Issue Expenses as capital in nature and directed verification of Sales Tax Penal Charges to ascertain if they represented additional sales tax liability. The ITAT deleted the additions for Advances Written Off and Earnest Money Deposits, considering them as routine business expenditures. Regarding Commission on Warranty Income, the ITAT found that the method of accounting followed by the assessee over several years was acceptable, and the income had already been offered in subsequent years, leading to the deletion of the addition subject to verification by the Ld. AO. The provision for gratuity was also contested, with the ITAT directing the Ld. AO to re-examine the claim based on substantiated evidence. Consequently, the ITAT partially allowed the assessee's appeal.

In conclusion, ITA No. 4288/Mum/2011 was dismissed, while ITA No. 3550/Mum/2012 was partly allowed based on the detailed analysis and findings for each issue presented before the ITAT.